<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
FUTURE MEDIA PRODUCTIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 3652 95-4486758
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
25136 ANZA DRIVE
VALENCIA, CALIFORNIA 91355
(805) 294-5575
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
--------------------------
ALEX SANDEL, PRESIDENT
FUTURE MEDIA PRODUCTIONS, INC.
25136 ANZA DRIVE
VALENCIA, CALIFORNIA 91355
(805) 294-5575
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
--------------------------
COPIES TO:
MURRAY MARKILES, ESQ. ROBERT K. MONTGOMERY, ESQ.
SCOTT D. GALER, ESQ. STANLEY SZE, ESQ.
Troop Steuber Pasich Reddick & Tobey, Gibson, Dunn & Crutcher LLP
LLP
2029 Century Park East 2029 Century Park East
Los Angeles, California 90067 Los Angeles, California 90067
(310) 728-3200 (310) 557-8022
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered in this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, no par value........................................................ $50,000,000 $14,750
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee,
pursuant to Rule 457(o) under the Securities Act of 1933.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION--SEPTEMBER 11, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
Shares
[LOGO
TO
FUTURE MEDIA PRODUCTIONS, INC.
COME]
Common Stock
- --------------------------------------------------------------------------------
Of the shares offered in the initial public offering of Future Media
Productions, Inc., are being sold by Future Media and shares are
being sold by certain shareholders. See "Principal and Selling Shareholders."
Future Media will not receive any proceeds from the shares sold by the selling
shareholders.
Prior to this offering, there has been no public market. The anticipated
offering price will be between $ and $ . The shares of Future Media will be
quoted in the Nasdaq National Market under the symbol "FMPI."
SEE "RISK FACTORS" ON PAGES 8 TO 12 FOR FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE SHARES OF FUTURE MEDIA.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
- Public Offering Price................................................................................... $ $
- Underwriting Discounts and Commissions.................................................................. $ $
- Proceeds to Future Media................................................................................ $ $
- Proceeds to Selling Shareholders........................................................................ $ $
</TABLE>
Over--allotment options have been granted to the Underwriters by Future Media
for shares and by the selling shareholders for shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
PRUDENTIAL SECURITIES INCORPORATED
ING BARING FURMAN SELZ LLC
September , 1998
<PAGE>
DESCRIPTION OF PHOTOGRAPHS:
- Photographs of Future Media's headquarters, mastering facility,
replication machines and printing machines.
- Collage of manufactured CDs.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 8
Termination of S Corporation Status........................................................................ 13
Use of Proceeds............................................................................................ 14
Dividend Policy............................................................................................ 14
Dilution................................................................................................... 15
Capitalization............................................................................................. 16
Selected Financial Data.................................................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 19
Industry Overview.......................................................................................... 27
Business................................................................................................... 30
Management................................................................................................. 39
Certain Relationships and Related Transactions............................................................. 45
Principal and Selling Shareholders......................................................................... 47
Description of Capital Stock............................................................................... 48
Shares Eligible For Future Sale............................................................................ 49
Underwriting............................................................................................... 50
Legal Matters.............................................................................................. 52
Experts.................................................................................................... 52
Additional Information..................................................................................... 52
Index to Financial Statements.............................................................................. F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION FROM THIS PROSPECTUS. IT IS NOT COMPLETE
AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT INVESTORS SHOULD CONSIDER BEFORE
INVESTING IN THE COMMON STOCK. TO UNDERSTAND THIS OFFERING FULLY, INVESTORS
SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS"
SECTION, THE FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS. EXCEPT AS
OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTIONS WILL NOT BE EXERCISED. ALSO, EXCEPT AS
OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE
EFFECT TO A 600-FOR-1 STOCK SPLIT OF THE OUTSTANDING SHARES OF COMMON STOCK,
EFFECTED IN AUGUST 1998, AND TO THE CHANGE OF THE STATUS OF FUTURE MEDIA FROM AN
S CORPORATION TO A C CORPORATION FOR INCOME TAX PURPOSES.
THE COMPANY
Future Media is a leading vertically integrated manufacturer and supplier of
compact discs ("CDs") to the computer hardware, software, on-line and publishing
industries, providing mastering, replication and a full range of services,
including printing, packaging and fulfillment. Future Media targets businesses
with continuing high volume production requirements in the CD read-only memory
("CD-ROM") market such as America Online, Inc.; Packard Bell NEC, Inc.; Cendant
Corporation; GT Interactive Software; Interplay Productions; 3Com Corporation;
and InfoUSA, Inc. (formerly American Business Information). Future Media
believes that due to its technologically advanced manufacturing equipment, plant
design and workflow techniques, it is one of the most efficient high volume, low
cost CD manufacturers and is well positioned to capitalize on the continued
near-term growth in the CD-ROM market, as well as anticipated long-term growth
in the digital versatile disc ("DVD") market.
Future Media believes that the principal competitive factors in CD
replication are price, turnaround time, capacity, service, quality and
reliability, with price and turnaround time typically being the most important.
Future Media believes that it competes favorably with respect to each of these
factors and distinguishes itself from its competitors through an operating
strategy founded on the following key principles:
- maintaining high capacity manufacturing facilities at a single location;
- continuing to invest in technologically advanced manufacturing equipment,
supported by strong in-house engineering capabilities;
- focusing on large production runs in order to maximize operational
efficiency; and
- marketing the Company's services directly to senior executives of
companies with high volume production requirements.
Future Media plans to increase sales and profitability through a growth
strategy based on the following initiatives:
- expanding its position as a leading low cost CD manufacturer within the
computer hardware, software, on-line and publishing industries;
- capitalizing on the growing DVD market; and
- geographically expand its market presence, with particular emphasis on the
eastern United States and Europe.
Management believes that the DVD format will become the accepted medium for
home video and software distribution and will represent a significant growth
opportunity for Future Media. DVDs are similar to CDs and are manufactured using
the same materials. However, DVDs are currently capable of storing nearly seven
times as much data as CDs and can store such data for a variety of applications,
including video, interactive games, software and audio. Future Media intends to
use a portion of the net proceeds from this Offering to purchase DVD
manufacturing equipment and intends to commence DVD production in 1999. In
addition, half of its current CD production lines may be cost effectively
adapted to the manufacture of DVDs as warranted by market demand.
4
<PAGE>
Future Media is a California corporation. Its executive offices are located
at 25136 Anza Drive, Valencia, California 91355, and its telephone number is
(805) 294-5575.
THE OFFERING
<TABLE>
<CAPTION>
Shares Offered by Future Media.............. shares
<S> <C>
Shares Offered by the Selling
Shareholders.............................. shares
Total Shares Outstanding after the
Offering.................................. shares (1)
Use of Proceeds by Future Media............. To repay all existing bank debt, estimated to
be $18.5 million at closing, to purchase
approximately $10.5 million of capital
equipment, to distribute approximately $3.5
million to Existing Shareholders for the
purpose of paying income taxes on 1998 S
Corporation earnings and for general corporate
purposes, including potential acquisitions of
companies providing packaging or fullfillment
services. The Company will not receive any
proceeds from the sale of shares by the
Selling Shareholders. See "Use of Proceeds."
Shares Offered in the Underwriters'
Over-Allotment Options.................... shares by the Company and shares by the
Selling Shareholders, for a total of shares.
Proposed Nasdaq National Market Symbol...... FMPI
</TABLE>
- ------------------------
(1) Excludes (i) 1,200,000 shares of Common Stock available for issuance
pursuant to the Company's 1998 Stock Incentive Plan of which 828,000 shares
were subject to outstanding options as of the date of this Prospectus and
(ii) 366,600 shares of Common Stock issuable upon exercise of certain
warrants issued to David Moss, Vice President--Operations.
RISK FACTORS
See "Risk Factors" on pages 8 to 12 for factors that should be considered in
connection with an investment in the shares of Future Media.
5
<PAGE>
SUMMARY SELECTED FINANCIAL AND OTHER DATA
The table below summarizes certain financial and operating data contained in
the financial statements and elsewhere in this Prospectus. Investors should read
the summary data below along with the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section and the financial
statements and the notes to those statements. The financial data below are
derived from the Company's audited financial statements, with the exception of
the data for the year ended December 31, 1994 and the six months ended June 30,
1997. The data for these periods are derived from the Company's unaudited
financial statements, which, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
statement of the results for the unaudited periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- ----------------------
1994(1) 1995 1996 1997 1997 1998
------------- --------- --------- --------- ----------- ---------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales......................................... $ 2,223 $ 26,972 $ 25,814 $ 36,042 $ 16,442 $ 16,709
Cost of goods sold................................ 1,460 14,875 12,113 23,140 10,330 11,023
------ --------- --------- --------- ----------- ---------
Gross profit...................................... 763 12,097 13,701 12,902 6,112 5,686
Selling, general and administrative expenses...... 345 6,093 2,537 4,214 1,891 2,040
Stock warrant compensation expense(2)............. -- -- -- -- -- 3,055
------ --------- --------- --------- ----------- ---------
Income from operations............................ 418 6,004 11,164 8,688 4,221 591
Interest expense.................................. 113 957 1,108 818 428 448
Other income (expense), net....................... (52) 66 393 50 33 47
Change in accounting estimate for royalties(3).... -- -- 3,770 -- -- --
------ --------- --------- --------- ----------- ---------
Income before state income taxes.................. 253 5,113 14,219 7,920 3,826 190
Provision for state income taxes.................. 4 72 223 120 57 3
------ --------- --------- --------- ----------- ---------
Net income........................................ $ 249 $ 5,041 $ 13,996 $ 7,800 $ 3,769 $ 187
------ --------- --------- --------- ----------- ---------
------ --------- --------- --------- ----------- ---------
PRO FORMA STATEMENT OF INCOME DATA (UNAUDITED)(4):
Income before provision for income taxes.......... $ 7,920 $ 190
Pro forma income tax provision.................... 2,909 76
Pro forma net income.............................. 5,011 114
Pro forma basic earnings per share................ .56 .01
Pro forma diluted earnings per share.............. .54 .01
Weighted average shares outstanding--basic........ 9,000,000 9,000,000
Weighted average shares outstanding--diluted...... 9,233,333 9,643,133
OTHER DATA:
Capital expenditures.............................. $ 6,797 $ 6,277 $ 1,585 $ 7,477 $ 1,011 $ 3,775
Depreciation and amortization..................... 131 1,053 1,389 1,950 874 1,286
Number of full-time employees at period end(5).... 25 44 57 75 68 77
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1998
------------------------------------
ACTUAL AS ADJUSTED(6)
--------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Current assets................................................................ $ 7,552 $ 30,384
Property and equipment, net................................................... 20,128 20,128
Total assets.................................................................. 28,076 50,908
Current liabilities........................................................... 17,539 13,783
Long-term debt, less current portion.......................................... 10,987 23
Total shareholders' equity (deficit).......................................... (526) 34,974
</TABLE>
- ------------------------
(1) Reflects financial information for the period beginning June 8, 1994, the
date of the Company's inception, through December 31, 1994. The Company
commenced operations in October 1994.
(2) On January 1, 1998, the Company granted to one of its officers warrants to
purchase 366,600 shares of stock at $0.0017 per share, with the warrants
expiring on December 31, 2007. In connection with these warrants, the
Company recognized compensation expense in the amount of $3,055,000
representing the excess of the estimated fair value of the shares over the
exercise price.
6
<PAGE>
(3) The Company executed license agreements with two developers of CD technology
effective June 1, 1996 and October 1, 1996, respectively. The agreements set
forth royalty rates payable to the licensors for the license to manufacture
and sell CDs. Settlements totaling $70,000 for CD sales occurring prior to
the effective dates of the agreements were reached. As a result of the
settlement amounts, the Company's prior estimates of royalty liabilities
were overstated by approximately $3,470,000 in 1995 and $300,000 in 1994.
(4) The Company has been exempt from paying federal income taxes and has paid
certain state income taxes at a reduced rate as a result of its S
Corporation status. Upon the completion of this Offering, the Company's S
Corporation status will terminate. Pro forma statement of income data
reflect the income tax expense that would have been recorded had the Company
not been exempt from paying taxes under the S Corporation election. As a
result of the termination of the Company's S Corporation status, the Company
will be required to record a one-time, non-cash charge against historical
earnings for additional deferred taxes based upon the increase in the
effective tax rate from the Company's S Corporation status (1.5%) to C
Corporation status (approximately 40%). This charge will occur in the
quarter during which the Company's S Corporation status is terminated. If
this charge were recorded at June 30, 1998, the amount would have been
approximately $1,800,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes 1 and 7 to the June
30, 1998 financial statements.
(5) Excludes temporary employees that are hired primarily to service seasonal
packaging requirements of the Company's customers. The Company's temporary
staffing levels ranged from 100 to 300 employees during 1997, as measured at
the end of each month.
(6) As adjusted to reflect receipt of the net proceeds to the Company of $40.8
million from this Offering, repayment of existing bank debt of $14.7 million
at June 30, 1998 (of which $11.0 million was classified as long-term debt),
the distribution by the Company of $3.5 million to its Existing Shareholders
for the purpose of paying income taxes on 1998 S Corporation earnings and
the recording of additional deferred taxes based on the increase in the
effective tax rate upon the anticipated change of the Company's S
Corporation status to C Corporation status.
7
<PAGE>
RISK FACTORS
Investors should carefully consider the following risk factors, in addition
to the other information set forth in this Prospectus, in connection with an
investment in Future Media. Each of these risk factors could adversely affect
the Company's business, operating results, and financial condition, as well as
adversely affect the value of an investment in the Company's Common Stock.
DECLINING CD PRICES. The growth of the CD replicating business since the
introduction of CD media in 1982 has attracted numerous entrants and resulted in
increased worldwide CD production capacity. As a result of this increased
competition, wholesale CD prices have historically declined. Although management
believes prices have stabilized during 1998, the Company cannot assure investors
that such prices will remain stable. If CD prices decline further, the Company
may not be able to reduce its costs or increase its volume to offset such price
declines.
CONCENTRATION OF CUSTOMER BASE. The Company's operating model is based on
the strategy of replicating CDs for high volume customers in order to reduce
marginal production costs. Risks associated with customer concentration are
inherent in this strategy. The Company's top three customers, America Online,
Inc. ("AOL"), Packard Bell NEC, Inc. ("Packard Bell NEC") and Cendant
Corporation ("Cendant"), accounted for approximately 71% of the Company's net
sales for the six months ended June 30, 1998. As is typical in the CD
replication industry, the Company generally does not have any agreements with
its customers, containing purchase commitments or guaranteeing an ongoing
business relationship, with the exception of short-term agreements with Packard
Bell NEC and Cendant.
DEPENDENCE ON KEY PERSONNEL. The Company's success has depended and will
continue to depend to a significant extent upon its executive officers,
including Alex Sandel, Chief Executive Officer, and David Moss, Vice
President--Operations. The Company has entered into employment agreements with
each of Messrs. Sandel and Moss. Mr. Sandel may terminate his agreement for any
reason upon 180 days prior written notice to the Company. The Company plans to
purchase $3 million of "key person" life insurance on each of Messrs. Sandel and
Moss, of which the Company will be the sole beneficiary. The proceeds of such
insurance may not be sufficient to offset the loss to the Company in the event
of the death of either of these executive officers.
COMPETITION. The CD replication industry is highly competitive and is
experiencing consolidation. The Company faces its primary competition from
independent CD replication companies, including Cinram International, Inc.,
Carlton Communications PLC (which recently acquired Nimbus CD International),
KAO Infosystems Company, Zomax Optical Media, Inc., DOCdata N.V., Denon
Electronics, Inc., Disctronics, Inc. and JVC Corporation. Certain of these
companies have the ability to handle large volume requirements and offer
services such as graphic design not currently offered by the Company. To a
lesser extent, the Company competes with large service providers which are
affiliated with major music and entertainment companies and have significantly
greater resources than the Company. Many of the Company's competitors are, and
future potential competitors may be, larger and more established with greater
financial and other resources than the Company, and certain of these companies
have already begun manufacturing DVDs. As a result, such competitors may be able
to respond more quickly to market demands, or devote greater resources than the
Company, to the manufacture, promotion and sale of their products.
DEPENDENCE ON COMPUTER HARDWARE AND SOFTWARE INDUSTRIES. A substantial
portion of the Company's sales are currently to customers in the computer
hardware and software industries. The Company is therefore dependent upon the
continued growth and financial stability of customers in these industries, which
may be affected by general economic conditions, changing consumer trends, sales
of personal computers, the installed base of CD-ROM and DVD drives in computers
and other interactive disc players, as well as the ability of software
publishers to create commercially successful content.
8
<PAGE>
DVD ACCEPTANCE. The Company believes that DVD technology is positioned to
become the accepted medium for home video and software distribution. The Company
plans to commence replication of DVDs in 1999 and anticipates that DVD
replication will become a significant part of the Company's business. However,
several issues could prevent DVD technology from enjoying widespread consumer
acceptance, including inadequate copyright protection, competing DVD formats,
potentially high costs of switching from video cassettes to DVD, and the
availability of pay-per-view and other forms of on-line transmission as
alternatives to DVD.
CHALLENGES OF DEVELOPING DVD CUSTOMER BASE. The Company does not currently
manufacture DVDs. The Company believes DVD sales will be primarily driven by
motion picture producers and distributors, computer hardware manufacturers and
producers of computer software and games. In addition to expanding its customer
relationships with computer hardware manufacturers and producers of computer
software and games, the Company intends to develop new relationships with motion
picture producers and distributors because of the strong demand for DVDs that
may come from the motion picture industry. The Company's success in the DVD
market will depend on its ability to attract DVD customers.
QUARTERLY FLUCTUATIONS. The Company's results of operations have fluctuated
from quarter to quarter, and the Company expects these fluctuations to continue
in the future. The Company may experience variability in its net sales and net
income on a quarterly basis as a result of many factors, including the risk
factors described in this Prospectus, the timing of new product releases and the
commercial success of products offered by the Company's customers and general
changes in economic and industry conditions. Also, the demand for CDs and other
multimedia consumer products is usually highest in the second half of the year,
concurrent with the new school year and holiday gift purchases. This seasonality
could result in significant quarterly variations in financial results, with the
third and fourth quarters generally being the strongest. The Company may not be
able to adequately reduce its costs on a timely basis if revenues do not meet
expectations in any given quarter.
DEPENDENCE ON TECHNOLOGY LICENSES. The Company manufactures CDs using
patented technology primarily under nonexclusive licenses from U.S. Philips
Corporation ("Philips") and Discovision Associates ("DVA"). These licenses
generally provide for the payment of royalties based upon the number, type and
size of CDs sold. The Company's licenses from Philips and DVA continue until the
expiration of the last patent covered by the respective licenses. The Company
may also be required to obtain licenses from the owners of DVD technology to
manufacture DVDs. Although the Company expects to obtain such licenses as they
are made available to industry participants, the Company cannot assure investors
that such licenses will be obtained and cannot predict the amount of any royalty
that may be payable under any such licenses. Also, the Company cannot assure
investors that holders of other patents will not bring suit for patent
infringement against the Company and obtain injunctive relief enjoining the
Company from utilizing the licensed technologies.
AFFILIATION WITH MAJOR CUSTOMER. The Existing Shareholders hold a
significant minority interest in Packard Bell NEC and Alex Sandel serves as a
director of Packard Bell NEC. The Company has a one-year manufacturing agreement
with Packard Bell NEC pursuant to which Packard Bell NEC commits to use the
Company's replication services for substantially all of its United States CD
replication needs subject to certain conditions. The Company cannot guarantee
that the Existing Shareholders will continue their relationship with Packard
Bell NEC, that Packard Bell NEC will renew its agreement with the Company, or
that Packard Bell NEC will continue to be a major customer of the Company.
NEED TO RESPOND TO TECHNOLOGICAL CHANGE. The industries served by the
Company are characterized by rapidly changing technologies. Competing
technologies, such as broadband data delivery systems, may render the Company's
existing and/or planned products and services obsolete. Also, the Company cannot
assure investors that it will be able to successfully adapt its manufacturing
processes to new technologies,
9
<PAGE>
that it will have the financial resources to make the capital expenditures
necessary for such adaptations or that it will be able to generate sufficient
sales to recover these capital expenditures.
OPERATIONAL DOWNTIME. Because the Company's business model is based on
operating replicating facilities at a single geographic location in order to
achieve efficiencies associated with high volume, the Company will not be able
to move production quickly to another facility when experiencing operational
downtime or capacity reduction. Such operational downtime or capacity reduction
could be caused by earthquakes, power outages or other events outside the
Company's control. Any operational downtime or capacity reduction could result
in the loss of major orders or customers and have a disproportionate adverse
impact on the Company's business, financial condition and results of operation.
POTENTIAL INABILITY TO MANAGE GROWTH. Any future expansion, internally or
through acquisitions, may place significant demands on the Company's management,
operational, administrative and financial resources. The Company's future
performance and profitability will depend on a number of factors, including its
ability to recruit, motivate and retain qualified personnel, and the
implementation of enhancements to the Company's operational and financial
systems, including public company reporting obligations.
CONTROL BY FOUNDERS. Upon completion of the Offering, the Company's
founders, Alex Sandel, Beny Alagem and Jason Barzilay, will beneficially own
approximately % ( % if the Underwriters' Over-Allotment Options are
exercised in full) of the Company's outstanding shares. As a result of such
ownership, the founding shareholders have the ability, if acting in concert, to
determine the outcome of elections and matters presented for approval by the
shareholders of the Company, including the ability to elect or remove all
members of the Board of Directors and thereby control the affairs and management
of the Company. Such concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of the Company, could adversely
affect the voting and other rights of the other holders of Common Stock and
could depress the price of the Common Stock.
BENEFITS OF OFFERING TO CERTAIN EXISTING SHAREHOLDERS. The Existing
Shareholders will receive substantial benefits from the sale of Common Stock in
the Offering which are not afforded to investors generally. Specifically, the
Company expects to use approximately $18.5 million of the net proceeds from the
Offering to repay Company borrowings personally guaranteed by the Existing
Shareholders. Such guarantees may be released upon the repayment of such Company
borrowings. The Company expects to distribute approximately $3.5 million of the
net proceeds from the Offering to Existing Shareholders for the purpose of
paying income taxes on 1998 S Corporation earnings. The Selling Shareholders
will also receive net proceeds of $ in the aggregate, and may benefit from
increased liquidity of their remaining investment in the Company resulting from
the Offering. As a result, these shareholders will receive immediate benefits
from the Offering.
ENVIRONMENTAL REGULATIONS. The Company uses hazardous materials in its
mastering operations. As a result, the Company is subject to federal, state and
local regulations governing the storage, use and disposal of such materials. The
storage, use and disposal of hazardous materials involves the risk that the
Company could be required to incur substantial expenditures for preventive or
remedial action, reduction of chemical exposure, or waste treatment or disposal.
Although the Company has had no contamination accidents, believes it is in
compliance with applicable regulations and maintains insurance coverage against
environmental liability, the liability in the event of an accident or the costs
of remediation could exceed the Company's resources or insurance coverage.
YEAR 2000 ISSUE. The Company has commenced a year 2000 date conversion
project to address necessary testing, code changes, and implementation with
respect to its information systems. The Company does not presently anticipate
any significant expenses from the conversion of its own information systems,
manufacturing equipment, databases or programs. The Company is in the process of
developing a plan to assess the effect that non-year 2000 compliant third
parties may have on the Company.
10
<PAGE>
ABSENCE OF DIVIDENDS. Although the Company has historically paid cash
dividends when operating as an S Corporation, it has no current intention
following its conversion to C Corporation status to declare or pay dividends on
its Common Stock, other than the approximately $3.5 million distribution out of
the proceeds of the Offering to its Existing Shareholders for the purpose of
paying income taxes on 1998 S Corporation earnings, and intends to follow a
policy of retaining earnings to finance the growth of its business. Any future
determination to declare or pay dividends will be at the discretion of the Board
of Directors of the Company and will be dependent on the Company's results of
operations, financial condition, contractual and legal restrictions and other
factors deemed relevant by the Board of Directors. Pursuant to the Company's
current loan agreement, the Company may not declare or pay any dividends or make
any distribution without the prior written consent of its commercial bank.
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock offered
hereby will experience an immediate and substantial dilution in the pro forma
net tangible book value of the Common Stock from the initial public offering
price. Investors will sustain an immediate and substantial dilution of $ per
share (assuming an initial public offering price of $ per share) based on the
pro forma deficit at June 30, 1998 of $5.8 million. Additional dilution may
occur upon the exercise of outstanding stock options and warrants.
ABSENCE OF PRIOR PUBLIC MARKET. Prior to the Offering, there has been no
public market for the Common Stock, the Company cannot assure investors that an
active trading market for the Common Stock will develop as a result of the
Offering or, if developed, that it will continue.
POSSIBLE VOLATILITY OF STOCK PRICE. The trading price of the Common Stock
could be subject to wide fluctuations in response to variations in operating
results, news announcements relating to the Company's business (including new
product introductions by the Company or its competitors), changes in financial
estimates by securities analysts, operating and stock price performance of other
companies that investors may deem comparable to the Company, as well as other
developments affecting the Company or its competitors. In addition, the trading
price of the Common Stock could be subject to wide fluctuations in response to
general market trends, changes in general conditions in the economy, the
financial markets or the manufacturing or retail industries and other factors
which may be unrelated to the Company's performance.
DETERMINATION OF OFFERING PRICE. The initial public offering price of the
shares of Common Stock is determined by negotiations among the Company, the
Selling Shareholders and the Underwriters and does not necessarily bear any
relationship to the Company's book value, assets, past operating results,
financial condition or any other established criteria of value. The Company
cannot assure investors that the shares offered hereby will trade at market
prices in the range of the initial public offering price.
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have shares of Common Stock outstanding ( if the
Underwriters' over-allotment options are exercised in full). Of those shares, a
total of shares (plus additional shares if the Underwriters exercise
their over-allotment options in full) will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as
amended, unless purchased or held by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act. Under Rule 144, sales of Common
Stock by affiliates of the Company are subject to the volume limitations, manner
of sale, and notice requirements of Rule 144. The Company, its executive
officers, directors and shareholders, including the Selling Shareholders, will
execute lock-up agreements under which they will agree that they will not offer
or sell any shares of Common Stock for a period of 180 days after the date of
this Prospectus without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, except for options granted pursuant
to the Company's 1998 Stock Option Plan. Prudential Securities Incorporated may,
in its sole discretion, at any time and without notice, release all or any
portion of the shares of Common Stock subject to such lock-up agreements. Sales
of substantial amounts of Common Stock in the public market, or the perception
that such sales could occur, could adversely affect the
11
<PAGE>
prevailing market price for the Common Stock and could impair the Company's
ability to raise capital through an additional public offering of equity
securities.
POSSIBLE ANTI-TAKEOVER EFFECTS. The Company's Board of Directors has the
authority to issue up to 5,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the shareholders.
The Preferred Stock could be issued with voting, liquidation, dividend and other
rights superior to those of the Common Stock. Following the Offering, no shares
of Preferred Stock of the Company will be outstanding, and the Company has no
present intention to issue any shares of Preferred Stock. However, the rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, which may depress the
market value of the Common Stock.
ELIMINATION OF CUMULATIVE VOTING. The Articles of Incorporation of the
Company provide that at such time as the Company has 800 or more holders of its
Common Stock as of the record date of the Company's most recent annual meeting
of shareholders, the cumulative voting rights of shareholders will cease. This
provision will have the effect of making it more difficult for minority
shareholders to obtain representation on the Board of Directors.
12
<PAGE>
TERMINATION OF S CORPORATION STATUS
Future Media Productions, Inc. ("Future Media" or the "Company") has been
treated as an S Corporation since its inception. As a result, through the date
immediately preceding the date of termination of its S Corporation status (the
"Termination Date"), its earnings have been and will be taxed for federal income
tax purposes directly to Alex Sandel, Beny Alagem and Jason Barzilay, the
holders of all of the currently outstanding shares of Common Stock (the
"Existing Shareholders"), rather than to the Company. Other than a tax imposed
on S Corporations by the State of California (currently 1.5% of income), state
income taxes on earnings also have been the responsibility of the Existing
Shareholders. The Termination Date will occur immediately prior to the closing
of the Offering. On the Termination Date, the Company will become a C
Corporation for federal tax purposes and be subject to federal and state
corporate income taxes. See Notes 1 and 7 of Notes to the June 30, 1998
financial statements.
The Company paid an aggregate of $13.7 million in dividends to the Existing
Shareholders from January 1, 1998 through the date of this Prospectus. These
dividends were paid to Existing Shareholders to pay their income taxes and as a
return of their investment. The Company intends to pay a cash dividend
(estimated to be $3.5 million in the aggregate) to the Existing Shareholders for
the purpose of paying income taxes on S Corporation earnings.
Immediately prior to the Offering, the Company and the Existing Shareholders
will enter into a tax indemnification agreement (the "Tax Agreement") relating
to their respective income tax liabilities. The Tax Agreement is intended to
assure that taxes are borne by the Company on the one hand and the Existing
Shareholders on the other only to the extent that such parties received the
related income giving rise to such taxes. The Tax Agreement generally provides
that, if an adjustment is made to the taxable income of the Company for a year
in which it was treated as an S Corporation, the Company will indemnify the
Existing Shareholders and the Existing Shareholders will indemnify the Company
against any increase in the indemnified party's income tax liability (including
interest and penalties and related costs and expenses), with respect to any tax
year to the extent such increase results in a related decrease in the income tax
liability of the indemnifying party for any year. The Company will also
indemnify the Existing Shareholders for all taxes imposed upon them as the
result of their receipt of an indemnification payment under the Tax Agreement.
Any payment made by the Company to the Existing Shareholders pursuant to the Tax
Agreement may be considered by the Internal Revenue Service or state taxing
authorities to be non-deductible by the Company for income tax purposes. See
"Certain Relationships and Related Transactions."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to Future Media from the sale of the shares (at an
assumed initial public offering price of $ per share), after deducting the
underwriting discounts and commissions and estimated Offering expenses, are
estimated to be approximately $40.8 million ($ million if the Underwriters'
over-allotment option by Future Media is exercised in full).
The Company expects to use a portion of the net proceeds to repay all
existing bank debt to Greyrock Business Credit, a division of NationsCredit
Commercial Corporation ("Greyrock"), in an amount estimated to be $18.5 million.
The bank debt was used to pay a distribution to the Existing Shareholders of
$11.1 million and for general corporate purposes. The Existing Shareholders have
personally guaranteed repayment of the bank debt; and upon repayment of the loan
from Greyrock, the shareholder guarantee will terminate. See "Certain
Relationships and Related Transactions." The Company also expects to use $10.5
million of the net proceeds to purchase capital equipment and $3.5 million to
distribute to the Company's Existing Shareholders for the purpose of paying
income taxes on 1998 S Corporation earnings. The balance of the net proceeds
will be used for working capital and general corporate purposes, including the
potential acquisitions of companies providing packaging or fulfillment services.
Pending such uses, the Company intends to invest the net proceeds in United
States government short-term interest bearing securities or other guaranteed
obligations of the United States government.
DIVIDEND POLICY
Although the Company has historically paid cash dividends when operating as
an S Corporation, it has no current intention following its conversion to C
Corporation status to declare or pay dividends on its Common Stock, other than
the approximately $3.5 million distribution out of the net proceeds of the
Offering to its Existing Shareholders for the purpose of paying income taxes on
1998 S Corporation earnings and intends to follow a policy of retaining earnings
to finance the growth of its business. Any future determination to declare or
pay dividends will be at the discretion of the Board of Directors of the Company
and will be dependent on the Company's results of operations, financial
condition, contractual and legal restrictions and other factors deemed relevant
by the Board of Directors. Pursuant to the Company's current loan agreement, the
Company may not declare or pay any dividends or make any distribution without
the prior written consent of its commercial bank.
14
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the pro forma net tangible book value of the Common
Stock from the initial public offering price. The pro forma deficit of the
Common Stock as of June 30, 1998 was $5.8 million. Pro forma net tangible book
value per share is equal to the total tangible assets of the Company, less total
liabilities, divided by the number of shares of Common Stock outstanding, after
giving effect to (i) the distribution by the Company of approximately $3.5
million to its Existing Shareholders for the purpose of paying income taxes on
1998 S Corporation earnings and (ii) the recording by the Company of additional
deferred taxes as if the Company were treated as a C Corporation at June 30,
1998. After giving effect to the sale of shares of Common Stock offered by
the Company hereby and the receipt and the application of the estimated net
proceeds therefrom (at an assumed initial public offering price of $ per
share, after deducting the underwriting discounts and commissions, and estimated
offering expenses), the pro forma net tangible book value of the Company as of
June 30, 1998 would have been approximately $ or $ per share. This
represents an immediate increase in net tangible book value of $ per share to
the Company's current shareholders and an immediate and substantial dilution of
$ per share to new shareholders purchasing shares in the Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................. $
Pro forma deficit as of June 30, 1998......................... $ (0.65)
Increase attributable to new shareholders.....................
---------
Pro forma net tangible book value as of June 30, 1998 after the
Offering........................................................
---------
Dilution to new shareholders...................................... $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1998
(after giving effect to the distribution of approximately $3.5 million to
Existing Shareholders for the purpose of paying income taxes on 1998 S
Corporation earnings), a comparison of the number of shares of Common Stock
acquired from the Company, the percentage ownership of such shares, the total
consideration, the percentage of total consideration and the average price per
share paid by the Existing Shareholders and by the investors purchasing shares
of Common Stock in the Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Current shareholders.................... % $ % $
New investors........................... $
--------- ----- ---------- ----- ----------
100.0% $ 100.0%
--------- ----- ---------- ----- ----------
--------- ----- ---------- ----- ----------
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options under the Company's 1998 Stock Incentive Plan (the "Stock Plan") and no
exercise of the warrants granted to David Moss (the "Moss Warrants"). At the
date of this Prospectus, 828,000 shares of Common Stock were subject to
outstanding options under the Stock Plan at a weighted average exercise price of
$11.35 per share and 366,600 shares of Common Stock were issuable upon exercise
of the Moss Warrants at an exercise price of $0.0017 per share. To the extent
options or warrants are exercised, there will be further dilution to new
investors. See "Description of Capital Stock--Warrants."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 and as adjusted to give effect to the recording of the Company of
additional deferred taxes as if the Company were treated as a C Corporation at
June 30, 1998 and the movement of retained earnings (accumulated deficit) to
paid in capital upon conversion from an S Corporation to a C Corporation at June
30, 1998, the sale of the shares of Common Stock offered by the Company hereby
and the receipt and application of the estimated net proceeds therefrom,
including the repayment of $14.7 million of bank debt as of June 30, 1998 (of
which $11.0 million was classified as long-term debt) and the distribution by
the Company of approximately $3.5 million to its Existing Shareholders for the
purpose of paying income taxes on 1998 S Corporation earnings. See "Use of
Proceeds."
<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current portion...................................................... $ 10,987 $ 23
--------- -----------
Shareholders' equity(1):
Preferred Stock, no par value;
5,000,000 shares authorized; no shares issued or
outstanding actual or as adjusted..................................................... -- --
Common Stock, no par value;
45,000,000 shares authorized; 9,000,000 shares issued and outstanding; shares
outstanding as adjusted............................................................... 3,070 34,974
Retained earnings (accumulated deficit)................................................. (3,596) --
--------- -----------
Total shareholders' equity................................................................ (526) 34,974
--------- -----------
Total capitalization.................................................................. $ 10,461 $ 34,997
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Excludes (i) 1,200,000 shares of Common Stock available for issuance
pursuant to the Stock Plan, of which 828,000 shares were subject to
outstanding options as of the date of this Prospectus at a weighted average
exercise price of $11.35 per share (See "Management--Stock Plan") and (ii)
366,600 shares of Common Stock issuable upon exercise of the Moss Warrants
at an exercise price of $0.0017 per share. See "Description of Capital
Stock--Warrants."
16
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company for
the periods indicated. The following selected statement of income data for the
year ended December 31, 1997 and six months ended June 30, 1998, and the balance
sheet data as of December 31, 1997 and June 30, 1998 are derived from the
financial statements and notes thereto audited by Ernst & Young LLP, independent
auditors, and are included elsewhere herein. The following selected statement of
income data for the years ended December 31, 1995 and 1996, and the balance
sheet data as of December 31, 1995 and 1996 are derived from the financial
statements and notes thereto audited by Brown, Leifer, Slatkin + Berns (now
known as Brown, Leifer, Slatkin + Berns LLP), independent auditors, and are
included elsewhere herein. The unaudited selected statement of income data for
the period ended December 31, 1994, the six-month period ended June 30, 1997 are
derived from unaudited financial statements of the Company prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the Company's financial position and results of
operations. The results of operations for an interim period are not necessarily
indicative of results to be expected for a full year. The following data should
be read in conjunction with the Financial Statements of the Company and related
notes thereto and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- ----------------------
1994(1) 1995 1996 1997 1997 1998
------------- --------- --------- --------- ----------- ---------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales........................................... $ 2,223 $ 26,972 $ 25,814 $ 36,042 $ 16,442 $ 16,709
Cost of goods sold.................................. 1,460 14,875 12,113 23,140 10,330 11,023
------ --------- --------- --------- ----------- ---------
Gross profit........................................ 763 12,097 13,701 12,902 6,112 5,686
Selling, general and administrative expenses........ 345 6,093 2,537 4,214 1,891 2,040
Stock warrant compensation expense(2)............... -- -- -- -- -- 3,055
------ --------- --------- --------- ----------- ---------
Income from operations.............................. 418 6,004 11,164 8,688 4,221 591
Interest expense.................................... 113 957 1,108 818 428 448
Other income (expense), net......................... (52) 66 393 50 33 47
Change in accounting estimate for royalties(3)...... -- -- 3,770 -- -- --
------ --------- --------- --------- ----------- ---------
Income before state income taxes.................... 253 5,113 14,219 7,920 3,826 190
Provision for state income taxes.................... 4 72 223 120 57 3
------ --------- --------- --------- ----------- ---------
Net income.......................................... $ 249 $ 5,041 $ 13,996 $ 7,800 $ 3,769 $ 187
------ --------- --------- --------- ----------- ---------
------ --------- --------- --------- ----------- ---------
PRO FORMA STATEMENT OF INCOME DATA(4)(UNAUDITED):
Pro forma net income data:
Income before provision for income taxes............ $ 7,920 $ 190
Pro forma income tax provision...................... 2,909 76
Pro forma net income................................ 5,011 114
Pro forma basic earnings per share.................. .56 .01
Pro forma diluted earnings per share................ .54 .01
Weighted average shares outstanding--basic.......... 9,000,000 9,000,000
Weighted average shares outstanding--diluted........ 9,233,333 9,643,133
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1998
---------------------------------------------- --------------------------
1994 1995 1996 1997 ACTUAL AS ADJUSTED(5)
------------- --------- --------- --------- --------- ---------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................................. $ 1,513 $ 10,846 $ 11,252 $ 8,036 $ 7,552 $ 30,384
Property and equipment, net.................... 6,668 11,896 12,097 17,636 20,128 20,128
Total assets................................... 8,225 22,909 24,155 25,920 28,076 50,908
Current liabilities............................ 6,436 12,839 8,865 14,132 17,539 13,783
Long term debt, less current portion........... 1,525 4,765 2,145 1,784 10,987 23
Total shareholders' equity (deficit)........... 264 5,305 13,144 9,936 (526) 34,974
Dividends per share............................ -- -- .68 1.22 1.52
</TABLE>
- ------------------------------
(1) Reflects financial information for the period beginning June 8, 1994, the
date of the Company's inception, through December 31, 1994. The Company
commenced operations in October 1994.
(2) On January 1, 1998, the Company granted one of its officers warrants to
purchase 366,600 shares of stock at $0.0017 per share, with the warrants
expiring on December 31, 2007. In connection with these warrants, the
Company recognized compensation expense in the amount of $3,055,000
representing the excess of the estimated fair value of the shares over the
exercise price.
(3) The Company executed license agreements with two developers of CD technology
effective June 1, 1996 and October 1, 1996, respectively. The agreements set
forth royalty rates payable to the licensors for the license to manufacture
and sell CDs. Settlements totaling $70,000 for CD sales occurring prior to
the effective dates of the agreements were reached. As a result of the
settlement amounts, the Company's prior estimates of royalty liabilities
were overstated by approximately $3,470,000 in 1995 and $300,000 in 1994.
(4) The Company has been exempt from paying federal income taxes and has paid
certain state income taxes at a reduced rate as a result of its S
Corporation status. Upon the completion of this Offering, the Company's S
Corporation status will terminate. Pro forma statement of income data
reflect the income tax expense that would have been recorded had the Company
not been exempt from paying taxes under the S Corporation election. As a
result of the termination of the Company's S Corporation status, the Company
will be required to record a one-time, non-cash charge against historical
earnings for additional deferred taxes based upon the increase in the
effective tax rate from the Company's S Corporation status (1.5%) to C
Corporation status (approximately 40%). This charge will occur in the
quarter during which the Company's S Corporation status is terminated. If
this charge were recorded at June 30, 1998, the amount would have been
approximately $1,800,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes 1 and 7 to the June
30, 1998 financial statements.
(5) As adjusted to reflect receipt of the net proceeds to the Company of $40.8
million from this Offering, repayment of existing bank debt of $14.7 million
at June 30, 1998 (of which $11.0 million was classified as long-term debt),
the distribution by the Company of $3.5 million to its Existing Shareholders
for the purpose of paying income taxes on 1998 S Corporation earnings and
the recording of the additional deferred taxes based on the increase in the
effective tax rate upon the anticipated change of the Company's S
Corporation status to C Corporation status.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Future Media is a leading vertically-integrated, high volume, low cost
independent manufacturer of compact discs to the computer hardware and software,
on-line and publishing industries, providing mastering, replication and a full
range of services, including printing, packaging and fulfillment. Future Media
targets businesses with continuing high volume production requirements in the
CD-ROM market, and believes it is one of the most efficient high-volume, low
cost CD manufacturers.
The Company believes it distinguishes itself from its competitors through an
operating strategy founded on the following key principles: (i) maintaining high
capacity manufacturing facilities at a single location, (ii) continuing to
invest in technologically advanced manufacturing equipment, supported by strong
in-house engineering capabilities, (iii) focusing on large production runs in
order to maximize operational efficiency, and (iv) marketing the Company's
services directly to senior executives of companies with high volume production
requirements. Future Media believes that the principal competitive factors in
the CD replicating industry are price, turnaround time, capacity, service,
quality and reliability, with price and turnaround time typically being the most
important. Future Media believes that it competes favorably with respect to each
of these factors.
The Company typically operates with short lead times from its customers.
Completion of orders is often predicated upon receipt of printed materials and
the customer's delivery requirements. Therefore, the Company's backlog as of any
particular date is not a meaningful indicator of the Company's future financial
results.
TERMINATION OF S CORPORATION STATUS
Since its incorporation in June 1994, the Company has operated as an S
Corporation, and therefore has not been subject to federal income taxes and only
minimally to state income taxes. As an S Corporation, the Company's shareholders
are subject to federal and state taxes based on the Company's earnings. The
Company has historically paid dividends to its shareholders on an annual basis
in amounts which have generally been equal to the taxes they have been required
to pay on the Company's earnings. In April 1998, dividends totaling $2,604,000
were paid to the Existing Shareholders as a distribution of 1997 earnings for
this purpose. In addition, in May 1998, the Existing Shareholders received a
distribution totaling $11,100,000. As a result of terminating the Company's S
Corporation status, the Company will be required to record a one-time, non-cash
charge against historical earnings for additional deferred taxes based upon the
increase in the effective tax rate from the Company's S Corporation status
(1.5%) to C Corporation status (approximately 40%). The deferred taxes are a
result of timing differences, principally depreciation expense, between
increased amounts deducted for tax purposes as compared to financial statement
purposes and would increase the Company's cash liability for taxes at some
future date. This charge will occur in the quarter during which the Company's S
Corporation status is terminated. If this charge were recorded at June 30, 1998,
the amount would have been approximately $1,800,000.
Management expects that the S Corporation status of the Company will
terminate upon the closing of this Offering and, thereafter, the Company will be
subject to federal and state income taxes. As a result of terminating its S
Corporation status, the Company will pay a distribution to the Existing
Shareholders of approximately $3,500,000 for the purpose of paying income taxes
on earnings of the Company for the period January 1, 1998 through the
Termination Date.
19
<PAGE>
QUARTERLY RESULTS
The following table sets forth certain unaudited statement of income data
for the last six quarters and has been prepared on the same basis as the annual
information and in management's opinion includes all adjustments necessary to
present fairly the information for each of the quarters below.
<TABLE>
<CAPTION>
1997 1998
--------------------------------------------------- ----------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
----------- --------- ------------- ------------ ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales.......................................... $ 8,624 $ 7,818 $ 8,448 $ 11,152 $ 6,915 $ 9,794
Cost of goods sold................................. 5,226 5,104 5,513 7,297 4,634 6,389
----------- --------- ------ ------------ ----------- ---------
Gross profit....................................... 3,398 2,714 2,935 3,855 2,281 3,405
Selling, general and administrative expenses....... 834 1,057 856 1,467 890 1,150
Stock warrant compensation expense................. -- -- -- -- 3,055 --
----------- --------- ------ ------------ ----------- ---------
Income (loss) from operations...................... 2,564 1,657 2,079 2,388 (1,664) 2,255
Interest expense................................... 200 228 224 166 131 317
Other income, net.................................. 22 11 3 14 29 18
----------- --------- ------ ------------ ----------- ---------
Income (loss) before state income taxes............ 2,386 1,440 1,858 2,236 (1,766) 1,956
Provision (benefit) for state income taxes......... 35 22 29 34 (26) 29
----------- --------- ------ ------------ ----------- ---------
Net income (loss).................................. $ 2,351 $ 1,418 $ 1,829 $ 2,202 $ (1,740) $ 1,927
----------- --------- ------ ------------ ----------- ---------
----------- --------- ------ ------------ ----------- ---------
</TABLE>
The Company has experienced, and expects to experience in the future,
quarterly variations in revenues and earnings as a result of factors, many of
which are outside the Company's control, including (i) the seasonal pattern of
certain of the businesses served by the Company, (ii) the timing of new product
releases by the Company's customers, (iii) the commercial success of products of
the Company's customers and (iv) the timing of expenses incurred to obtain and
support new business.
The Company typically experiences increased demand for its products in its
third and fourth quarters due primarily to the release of new products by the
Company's customers for the new school year and the holiday season.
RESULTS OF OPERATIONS
Sales are recognized at the time of product shipment, except for certain
customers for which sales are recognized upon completion of orders with shipment
awaiting written instructions from the customer. Cost of goods sold consists
primarily of raw material purchases, direct labor, depreciation of plant
equipment, royalties payable on the sale of CDs, and rent and utilities related
to the plant facility. In addition to changes in these costs, the Company's cost
of goods sold as a percentage of net sales, is affected by various factors,
including the following: (i) CD units manufactured and associated number of CD
units sold as a percentage of the Company's total CD production capacity in any
period, which directly affects gross margin due to the high component of fixed
costs inherent in the Company's operations; (ii) average unit prices the Company
is able to charge for its products, which are subject to market conditions in
which the Company operates; (iii) raw material packaging costs and associated
direct labor costs required to fulfill customer orders during any particular
period; and (iv) royalty rates on the sale of CDs.
20
<PAGE>
The following table sets forth, for the periods indicated, certain
statements of income data expressed as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................... 55.1 46.9 64.2 62.8 66.0
Gross profit......................................... 44.9 53.1 35.8 37.2 34.0
Selling, general and administrative expenses......... 22.6 9.8 11.7 11.5 12.2
Income before stock warrant compensation expense..... 22.3 43.3 24.1 25.7 21.8
Stock warrant compensation expense................... -- -- -- -- 18.3
Income from operations............................... 22.3 43.3 24.1 25.7 3.5
Interest expense..................................... 3.5 4.3 2.3 2.6 2.7
Change in accounting estimate for royalties.......... -- 14.6 -- -- --
Income before state income taxes..................... 19.0 55.1 22.0 23.3 1.1
Provision for state income taxes..................... 0.3 0.9 0.3 0.3 0.0
Net income........................................... 18.7 54.2 21.7 23.0 1.1
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
NET SALES. Net sales totaled $16,709,000 for the six months ended June 30,
1998 as compared to $16,442,000 for the six months ended June 30, 1997. This
represents an increase of $267,000 or 1.6% for the six months ended June 30,
1998 as compared to the six months ended June 30, 1997. This increase is a
result of CD unit sales increasing by approximately 42.2%, offset by lower
average unit prices for CDs sold. The additional unit sales for the six months
ended June 30, 1998 are a result of increased demand for the Company's products
with fulfillment of these orders made possible by production capacity added
subsequent to June 30, 1997.
COST OF GOODS SOLD. Cost of goods sold was $11,023,000 and $10,330,000 for
the six months ended June 30, 1998 and 1997, respectively. Cost of goods sold as
a percentage of sales was approximately 66.0% for the six months ended June 30,
1998 compared to 62.8% for the six months ended June 30, 1997. This increase was
due to increased depreciation of expanded plant equipment and royalties payable
related to the sale of CDs. Depreciation expense increased in total and as a
percentage of net sales as a result of the Company's production capacity which
was increased subsequent to June 30, 1997. Royalties increased in total due to
additional unit sales of CDs during the six months ended June 30, 1998 compared
to the six months ended June 30, 1997 and as a percentage of net sales due to a
decrease in the average unit sales price. These increased costs were partially
offset by lower obsolescence reserves for the six months ended June 30, 1998 as
compared to the six months ended June 30, 1997.
GROSS PROFIT. As a result of the above items, gross profit for the six
months ended June 30, 1998 was $5,685,000 or 34.0% of net sales as compared to
$6,112,000 or 37.2% of net sales for the six months ended June 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2,040,000 for the six months ended June 30, 1998
as compared to $1,891,000 for the six months ended June 30, 1997, an increase of
$149,000 or approximately 7.9%. As a percentage of net sales, selling, general
and administrative expenses increased from 11.5% for the six months ended June
30, 1997 to 12.2% for the six months ended June 30, 1998. This increase is a
result of higher amounts paid for salaries (approximately $121,000), legal and
accounting expenses (approximately $107,000) and increased expenses for sales
taxes (approximately $181,000), partially offset by reduced provision for bad
debts (approximately $311,000). The provision for bad debts for the six months
ended June 30, 1997 included $315,000 from loans to companies which were
considered to be uncollectible. Of this amount, $165,000 was a loan to a related
party. Salary to an Existing Shareholder (totaling $225,000 for the six months
ended June 30, 1998)
21
<PAGE>
and the increased amount for sales taxes incurred during the six months ended
June 30, 1998 are not expected to recur in the future.
STOCK WARRANT COMPENSATION EXPENSE. On January 1, 1998, the Company granted
to one of its officers warrants to purchase 366,600 shares of stock at $0.0017
per share, with the warrants expiring on December 31, 2007. In connection with
these warrants, the Company recognized compensation expense in the amount of
$3,055,000 representing the excess of the estimated fair value of the shares
over the exercise price. The Company will not be required to recognize any
future compensation expense in connection with these warrants.
INCOME FROM OPERATIONS. As a result of the foregoing, income from
operations totaled $591,000 for the six months ended June 30, 1998 and
$4,221,000 for the six months ended June 30, 1997. This represents a decrease of
$3,630,000 or approximately 86.0% for the six months ended June 30, 1998 as
compared to the six months ended June 30, 1997. Income from operations was
approximately 3.5% and 25.7% of net sales for the six months ended June 30, 1998
and 1997, respectively. Excluding the stock warrant compensation expense
recognized in the six months ended June 30, 1998, income from operations would
have been $3,646,000 or approximately 21.8% of net sales.
INTEREST EXPENSE. Interest expense was approximately $448,000 for the six
months ended June 30, 1998 and $428,000 for the six months ended June 30, 1997.
These amounts are comparable as the Company's borrowings and corresponding
interest rates were approximately the same during the periods.
INCOME TAX EXPENSE. The Company has operated as an S Corporation for
federal and state income tax purposes, and accordingly was not subject to
federal taxes and was subject to only a minimal percentage (1.5% of pretax
income) of state income taxes. The only provision for income taxes was the
amount required for state income tax purposes.
NET INCOME. Based on its S Corporation status and the factors discussed
above, net income was $187,000 and $3,769,000 for the six months ended June 30,
1998 and 1997, respectively. This represents a decrease of $3,582,000 or 95.0%
for the six months ended June 30, 1998 as compared to the six months ended June
30, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales for the year ended December 31, 1997 totaled
$36,042,000 compared to net sales for the year ended December 31, 1996 which
totaled $25,814,000. This increase of $10,228,000 (approximately 39.6%) is
attributable to an increase in the number of CDs sold of approximately 58.2%,
offset by lower average CD sales prices for the year ended December 31, 1997
compared to 1996. Net sales and cost of goods sold in 1996 do not include
approximately $1,300,000 of CDs purchased from third parties and resold to the
Company's customers. The Company believes the inclusion of these amounts in net
sales and cost of sales would be misleading as the Company has a substantially
different gross profit on CDs purchased from third parties and resold.
COST OF GOODS SOLD. Cost of goods sold for the year ended December 31, 1997
totaled $23,141,000 or 64.2% of net sales, compared to $12,113,000 or 46.9% of
net sales for the year ended December 31, 1996. As a percentage of net sales,
increases in cost of sales in the year ended December 31, 1997 were related to
raw material costs (approximately 4.5%), royalty expense (approximately 6.4%),
inventory obsolescence expense (approximately 2.1%) and other manufacturing
costs (totaling approximately 4.3%).
GROSS PROFIT. As a result of the foregoing, gross profit for the year ended
December 31, 1997 was $12,902,000, as compared to $13,701,000 for the year ended
December 31, 1996, a decrease of $799,000 or 5.8%. As a percentage of net sales,
gross profit was approximately 35.8% in 1997 and approximately 53.1% in 1996.
22
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $4,214,000 and $2,537,000 for the years ended
December 31, 1997 and 1996, respectively. This represents an increase of
$1,677,000 or 66.1% in 1997 over 1996. As a percentage of net sales, selling,
general and administrative expenses increased from approximately 9.8% for the
year ended December 31, 1996 to approximately 11.7% for the year ended December
31, 1997. The increase in selling, general and administrative expenses is
primarily attributable to increases in salaries ($915,000) and provision for bad
debts ($674,000). The remaining expense items increased commensurate with the
Company's increased business. The increased provision for bad debts for the year
ended December 31, 1997 was directly related to accounts and loans receivable
from related companies which were determined to be uncollectible. A portion of
the increase in salaries in 1997 (approximately $400,000) relates to salary paid
to an Existing Shareholder. The remaining increase in salaries is a result of
the Company's increased level of operations.
INCOME FROM OPERATIONS. As a result of the above items income from
operations was $8,688,000 in 1997 and $11,164,000 in 1996, a decrease of
$2,476,000 or 22.2%. As a percentage of net sales, EBIT was 24.1% in 1997 and
43.3% in 1996.
CHANGE IN ACCOUNTING ESTIMATE: INCOME ADJUSTMENT FOR REDUCTION IN ESTIMATED
ROYALTY LIABILITIES. The Company executed license agreements with two
developers of CD technology effective June 1, 1996 and October 1, 1996.
Settlements totaling $70,000 for CD sales occurring prior to the effective dates
of the agreements were reached. As a result of the settlement amounts, the
Company's prior estimates of royalty liabilities were overstated by
approximately $3,470,000 in 1995 and $300,000 in 1994, which amounts the Company
recognized as a change in accounting estimate during the year ended December 31,
1996.
INTEREST EXPENSE. Interest expense totaled $818,000 and $1,108,000 for the
years ended December 31, 1997 and 1996, respectively. This decrease in 1997 of
$290,000, or 26.2%, is a result of lower average borrowings and lower average
interest rates in 1997 as compared to 1996. The Company's weighted average
interest rate on its debt was 10.5% for the year ended December 31, 1997 and
12.0% for the year ended December 31, 1996.
INCOME TAX EXPENSE. The Company has operated as an S Corporation for
federal and state income tax purposes, and accordingly was not subject to
federal taxes and was subject to only a minimal percentage (1.5% of pretax
income) of state income taxes. The only provision for income taxes was the
amount required for state income tax purposes.
NET INCOME. As a result of the items discussed above, net income for the
year ended December 31, 1997 was approximately $7,800,000 and totaled
$13,996,000 in 1996, a decrease of $6,196,000 or 44.3%.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales for the year ended December 31, 1996 totaled
$25,814,000 as compared to net sales for the year ended December 31, 1995 which
totaled $26,972,000. This decrease of $1,158,000 (approximately 4.3%) is
attributable to a decrease in the number of CDs sold of approximately 1.0%, and
lower average CD sales prices for the year ended December 31, 1996 compared to
1995. Net sales and cost of goods sold in 1995 do not include approximately
$4,800,000 ($1,300,000 in 1996) of CDs purchased from third parties and resold
to the Company's customers. The Company believes the inclusion of these amounts
in net sales and cost of sales would be misleading as the Company has a
substantially different gross profit on CDs purchased from third parties and
resold.
COST OF GOODS SOLD. Cost of goods sold for the year ended December 31, 1996
totaled $12,113,000 or 46.9% of net sales, compared to $14,875,000, or
approximately 55.1% of net sales for the year ended December 31, 1995. As a
percentage of net sales, decreases in cost of goods sold in the year ended
December 31, 1996 were related to raw material costs (approximately 0.8%) and
royalty liabilities (approximately 8.4%), partially offset by increases in
depreciation of plant equipment.
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<PAGE>
GROSS PROFIT. As a result of the foregoing, gross profit for the year ended
December 31, 1996 was $13,701,000 as compared to gross profit of $12,097,000 for
the year ended December 31, 1995. This represents an increase of $1,604,000 in
1996 compared to 1995, or approximately 13.3%. As a percentage of net sales,
gross profit was approximately 53.1% in 1996 and approximately 44.9% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2,537,000 and $6,093,000 for the years ended
December 31, 1996 and 1995, respectively. This represents a decrease of
$3,556,000 or 58.4% in 1996 compared to 1995. As a percentage of net sales,
selling, general and administrative expenses decreased from approximately 22.6%
for the year ended December 31, 1995 to approximately 9.8% for the year ended
December 31, 1996. The decrease in selling, general and administrative expense
in 1996 compared to 1995 is primarily attributable to a decrease in the
provision for bad debts ($4,641,000), offset by increases in salaries
($481,000), legal and accounting fees ($148,000) and donations ($110,000). In
the year ended December 31, 1995 the Company had accounts and loans receivable
from a related company which were determined to be uncollectible as a result of
that company filing for bankruptcy. Accordingly, the Company recognized as bad
debt expense approximately $4,888,000 related to that company in the year ended
December 31, 1995.
INCOME FROM OPERATIONS. As a result of the above items income from
operations was $11,164,000 in 1996 and $6,004,000 in 1995, an increase in 1996
of $5,160,000 or approximately 86.0%. As a percentage of net sales, income from
operations was 43.3% in 1996 and 22.3% in 1995.
INTEREST EXPENSE. Interest expense totaled $1,108,000 and $957,000 for the
years ended December 31, 1996 and 1995, respectively. This increase in 1996 of
$151,000 or 15.8% is a result of higher average borrowings in 1996 as compared
to 1995. The Company's weighted average interest expense was 12.0% and 12.7% for
the years ended December 31, 1996 and 1995, respectively.
CHANGE IN ACCOUNTING ESTIMATE: INCOME ADJUSTMENT FOR REDUCTION IN ESTIMATED
ROYALTY LIABILITIES. The Company executed license agreements with two
developers of CD technology effective June 1, 1996 and October 1, 1996.
Settlements totaling $70,000 for CD sales occurring prior to the effective dates
of the agreements were reached. As a result of the settlement amounts, the
Company's prior estimates of royalty liabilities were overstated by
approximately $3,470,000 in 1995 and $300,000 in 1994, which amounts the Company
recognized as a change in accounting estimate during the year ended December 31,
1996.
INCOME TAX EXPENSE. The Company has operated as an S Corporation for
federal and state income tax purposes, and accordingly was not subject to
federal taxes and was subject to only a minimal percentage (1.5% of pretax
income) of state income taxes. The only provision for income taxes was the
amount required for state income tax purposes.
NET INCOME. As a result of the items discussed above, net income for the
year ended December 31, 1996 was $13,996,000 and $5,041,000 for the year ended
December 31, 1995. This represents an increase of $8,955,000 or approximately
177.6% in 1996 over 1995.
LIQUIDITY AND CAPITAL RESOURCES
Historically the Company has funded its operations and capital expenditures
through cash flow from operations, borrowings under its lines of credit and
favorable terms from its equipment vendors for the purchase of equipment used in
the Company's manufacturing operations. In February 1997, the Company entered
into a credit agreement with Greyrock (the "Credit Facility") which has
subsequently been amended. The Credit Facility, as amended, provides for maximum
borrowings equal to 80% of eligible accounts receivable (the "Receivables Loan")
and additional revolving loans of up to $20 million (the "Revolving Loan"). The
Credit Facility, as amended, matures on May 31, 2000. Borrowings under the
Credit Facility bear interest at the prime rate (8.50% at July 31, 1998) plus 2%
per annum; however, the interest rate will not be less than 7.00% per annum.
24
<PAGE>
Borrowings under the Credit Facility are secured by accounts receivable,
equipment, inventory and other assets of the Company and are personally
guaranteed by the Existing Shareholders. Principal payments on the Revolving
Loan totaling $312,500 are payable monthly. At June 30, 1998 borrowings under
the Revolving Loan totaled $14,720,000 and the Company did not have any
borrowings outstanding under the Receivables Loan.
The Company expects to use a portion of the net proceeds of this Offering to
repay all amounts outstanding under the Credit Facility. The Company expects to
maintain a $20 million credit facility and expects to renegotiate various terms
under the Credit Facility, including length of term, covenants, interest rates
and release of personal guarantees of the Existing Shareholders. However, there
can be no assurance the Company will be successful in such negotiations.
Net cash provided by operating activities was $10,029,000 for the six months
ended June 30, 1998. Of this amount the Company invested $3,775,000 in property
and equipment utilized in its operations. In addition, the Company spent a net
amount of $3,619,000 in financing activities for the six months ended June 30,
1998. This amount results mainly from distributions to the Existing Shareholders
of $13,704,000 offset by proceeds from long-term debt under the Credit Facility
totaling $11,321,000. Net cash increased a total of $2,635,000 in the six months
ended June 30, 1998 as a result of the Company's operating, investing and
financing operations during the period.
In the near future the Company anticipates investing approximately
$10,500,000 in capital equipment. Of this amount, the Company anticipates
spending approximately $5,000,000 (in accounts payable--capital equipment at
June 30, 1998) for plant equipment already being utilized in the Company's
operations and approximately $5,500,000 for new equipment. New equipment
purchases will expand the Company's capacity for replication of CDs and the
acquisition of equipment for the manufacture of DVDs. It should be noted,
however, that the purchase of equipment is subject to many factors, including
but not limited to future demand for the Company's products and for DVDs.
Therefore, no assurance can be given that the Company will purchase equipment as
described above, and actual equipment purchased may vary significantly from the
Company's projections.
The Company believes that cash flow from operations, net proceeds to the
Company from the Offering, together with available funds under the Credit
Facility, will be sufficient to support its operating and capital expenditures
for the next twelve months and for the foreseeable future. However, long-term
capital requirements depend on many factors, including, but not limited to, the
rate at which the Company expands its business, whether internally or through
acquisitions and strategic alliances. To the extent the funds generated from the
sources described above are insufficient to fund the Company's activities in the
short or long term, the Company will be required to raise additional funds
through public or private financings. No assurance can be given that additional
funds will be available on terms acceptable to the Company.
SEASONALITY
The demand for CDs and other multimedia consumer products is usually highest
in the second half of the year, concurrent with the new school year and holiday
gift purchases. This seasonality could result in significant quarterly
variations in financial results, with the third and fourth quarters generally
being the strongest. See "Risk Factors--Quarterly Fluctuations."
INFLATION
Prices for raw materials used in the production of CDs have not changed
substantially as a percentage of sales since 1996. However, many of the
Company's other manufacturing and selling, general and administrative costs have
continued to increase (both in the aggregate and as a percentage of net sales)
since the beginning of 1996. Due to the decrease in the average selling price of
CDs, the Company has been unable to pass these costs to its customers, but has
remained profitable by increasing net sales.
25
<PAGE>
YEAR 2000
The Company has commenced a year 2000 date conversion project to address
necessary testing, code changes and implementation with respect to its
information systems. The Company does not presently anticipate any material year
2000 issues or significant expenses from the conversion of its own information
systems, manufacturing equipment, databases or programs. The Company is in the
process of developing a plan to assess the effect on the Company that non-year
2000 compliant third parties may have on the operations of the Company. If the
Company's current estimates with respect to the resources required to convert
its information systems prove to be understated, the additional costs and
resources required to address the year 2000 issues could have a material adverse
effect on the Company's business, financial condition and results of operations.
Based on the insignificant nature of the implementation to convert the Company's
information systems to year 2000 compliance, the Company does not believe a
contingency plan is necessary.
26
<PAGE>
INDUSTRY OVERVIEW
A CD is a laser-read data storage device on which up to 680 megabytes of
data or 74 minutes of audio can be stored. Digitally recorded information, along
with error correction data, tracking codes and cueing data, is recorded on a
digital master which, after a series of intermediate steps, is used to make
injection-molded polycarbonate discs, each covered by a thin, reflective
metallic layer and protected by a clear polycarbonate coating.
The first commercial application of CD technology was storage and playback
of pre-recorded music, or CD-Audio, adopted as an international standard in
1982, and introduced to the consumer market in 1983. A few years after the
introduction of CD-Audio, CD-ROM entered the market, providing cost-effective
storage and retrieval of any combination of data, text, graphics, audio and
video.
During the past decade, CD technology has become the dominant format in the
pre-recorded music market and has become a leading technology in the data
storage and retrieval markets. Consumer acceptance of the CD format is
attributable to the crisper sounds, sharper pictures, lack of image and sound
degradation, random accessibility of data, portability and ease of storage
provided by the CD.
DVD entered commercial distribution in December 1996. DVDs are currently
capable of storing nearly seven times as much data as CDs and are suitable for
high quality playback of film and video, multichannel surround sound audio and
interactive media and information.
The Company's management and many industry experts believe that DVD
technology is positioned to become the standard for home video and software
distribution and that the DVD market will grow rapidly over the next five years
as the technology is rolled out throughout the United States and other parts of
the world. Infotech Incorporated ("Infotech"), an independent market research
and consulting firm headquartered in Woodstock, Vermont, projects DVD-ROM drive
shipments will overtake CD-ROM by the end of the year 2000 and that DVD-ROM
drives will become predominant in the end user installed base of computers by
the end of the year 2002.
CD-ROM. According to Infotech, CD-ROM units shipped have grown at a
compound annual growth rate of 43.8% from approximately 677 million units in
1995 to approximately 1.4 billion units in 1997. The consumer market has emerged
within the past several years and its substantial growth is expected to help
drive the continued growth of aggregate unit sales of CD-ROM in the next few
years. Infotech estimates that total worldwide CD-ROM unit production will peak
at approximately 2.2 billion within the next two years.
CD-ROM is well suited to applications involving the storage of large amounts
of information in a form which can be distributed to a diverse user population.
CD-ROM was developed in the late 1980s and was initially limited to business and
professional applications such as library references and parts catalogues. In
the 1990s, the increasingly widespread presence of personal computers ("PCs")
and CD-ROM drives has created a thriving consumer market for CD-ROM
applications.
The growth of the CD-ROM market has been primarily driven by the number of
commercially available software titles. According to Infotech, the number of
commercially available titles has grown rapidly from a very limited number of
titles in the early 1990s to 45,000 titles in 1997 and that the worldwide
installed base of CD-ROM drives increased from approximately 26.4 million in
1994 to approximately 168.2 million in 1997, representing a compound annual
growth rate of 85.4%. This increase is due to consumer demand for more
interactive multimedia content and the bundling of CD-ROMs and CD-ROM drives
with new PCs. Infotech estimates that in the United States and Europe, two of
the principal geographic markets for CD-ROMs, the installed base of CD-ROM
drives will grow from approximately 136.4 million in 1997 to approximately 282.3
million by 2000. This rapidly growing installed base of CD-ROM drives expands
the potential consumer market for publishers of CD-ROM software, data and
entertainment products.
27
<PAGE>
The CD-ROM manufacturing industry consists of several large CD replication
companies, including Cinram International, Inc.; Carlton Communications PLC
(which recently acquired Nimbus CD International); KAO Infosystems Company; JVC
Corporation; MPO Disque Compact and some others (collectively, the "Large
Independents") which the Company believes control approximately half of the
worldwide market. The balance of the market is comprised of many smaller
independent CD manufacturers (the "Small Independents") and the Music
Replicators (defined below in "--CD-Audio").
CD-AUDIO. Infotech estimates that in 1998 the number of CD-Audio units
produced worldwide will increase 6.5% over 1997, from approximately 3.1 billion
units in 1997 to approximately 3.3 billion units in 1998 and will peak at
approximately 3.8 billion units in 2003.
CD-Audio is currently the preferred medium for retailing recorded music in
the United States and continental Europe. Aggregate demand in the CD-Audio
market is largely "hit driven" and thus strongly dependent on new releases from
popular music artists. The timing and degree of commercial acceptance of new
releases are highly unpredictable.
Unlike the CD-ROM manufacturing business, which is dominated by independent
manufacturers, the CD-Audio manufacturing business is dominated by manufacturing
organizations affiliated with the major international music companies (the
"Music Replicators"): Sony Music Entertainment, Inc. ("Sony"); Polygram
Holdings, Inc. ("Polygram"); Warner Music Group (a division of Time Warner,
Inc.) ("Warner"); Bertelsmann Music Group ("BMG"); and Capitol-EMI Music
("EMI"). The Company believes that the CD-Audio manufacturers affiliated with
these organizations have accounted for a major portion of aggregate CD-Audio
production in Europe and the United States (combined) in recent years, with the
majority of such production directed to meet the needs of their affiliated
record labels. The remaining CD-Audio output in Europe and the United States
(combined) was produced by the Large and Small Independents. The Company
currently does not compete directly with the Music Replicators or the Large
Independents with respect to CD-Audio replication, but instead provides overflow
CD-Audio production capabilities to record labels, including Warner Electra
Asylum ("WEA") and EMI. Management believes that in the near future its CD-Audio
production will continue to be limited to overflow work for the record labels.
DVD. Numerous industry experts believe that DVD will become the accepted
medium for home video and software distribution. Initially, the primary
application for the DVD format is expected to be traditional motion pictures.
Unlike videocassettes, DVD-Video experiences no image or sound degradation with
normal use, offers greater storage capacity, indexing and random access and
lower manufacturing costs. DVD-Video players are currently being made by several
manufacturers and are available at retail prices ranging from $400 to $800.
According to the HOLLYWOOD REPORTER, a leading entertainment industry trade
publication, manufacturers had sold nearly 600,000 DVD-Video players worldwide
through June 1998, with 63,000 units shipped in June 1998 alone. Infotech
estimates that the worldwide installed base of DVD-Video players will reach 1.8
million units in 1998. More than 1,400 motion picture titles are currently
available on DVD with 180 new DVD-Video titles issued in June 1998 alone.
Infotech estimates that DVD-Video titles will exceed 3,000 by the end of 1998.
DVD is expected initially to compete most directly with the market for
videocassette sales. The home video market, both rental and purchased videos,
has been served primarily by pre-recorded videotape (VHS). The Company believes
that the DVD-Video format will surpass the VHS format in the pre-recorded video
market over time. Infotech estimates that the installed base of DVD-Video
players will increase from 1.8 million in 1998 to 58.8 million in 2005,
representing a compounded annual growth rate of 64.6%. Infotech also estimates
that DVD-Video units shipped will increase from 80 million units in 1998 to
approximately 4.4 billion units in 2005, representing a compounded annual growth
rate of 77.3%.
While DVDs are initially expected to serve as substitutes for VHS cassettes,
due to DVDs' competitive advantages in picture and sound quality, convenience,
ease of use, and longevity, DVDs are also expected to be a better medium than
CD-Audio and CD-ROM. DVD technology is essentially the same as
28
<PAGE>
CD-ROM and CD-Audio technology. However, DVD reduces standard CD pit length and
the distance between tracks (pitch) and utilizes multiple layers in order to
achieve a dramatic increase in disc storage capacity and improved audio and
sound capabilities. A DVD is able to hold a minimum of 4.7 gigabytes of data,
almost seven times the 680 megabytes capacity of a present day CD-ROM. As a
result, a DVD is capable of holding a 135-minute motion picture with up to three
spoken languages, three foreign language subtitles and six channel, digital
surround sound. Added features such as multilingual voice tracks, CD-Audio
soundtrack albums, director's notes, story-based games and other CD-ROM
applications may be available with the higher storage capacity afforded with
DVDs, making DVD the first technology to embrace all mediums. DVD will also
allow software to cross-promote between mediums. For example, Warner Home Video
has already announced that movie titles released for DVD will have an Internet
hook-up built into DVD.
Management anticipates that the market for DVDs could eventually exceed that
of CD-ROM and CD-Audio. The recently released "PC 99" specifications, a baseline
design recommendation for PCs that will begin shipping in 1999, developed by
among others, Microsoft Corporation and Intel Corporation, provides
specifications for DVD-ROM drives. Microsoft's Windows 98 operating system
supports DVD and Intel Corporation has recently started shipping a new DVD
compatible motherboard. Intel estimates that DVD-ROM drive shipments will
outpace CD-ROM drives by late 1999. Forrester Research of Cambridge,
Massachusetts predicts that Windows 98 support for the hardware and software
technology needed to run DVD will drive an installed base of 53 million DVD-ROM
drives in PCs by 2002 and Infotech predicts DVD-ROM unit production will exceed
1.5 billion units in 2002.
Another important advantage of DVD players and DVD-ROM drives, which should
speed their market penetration, is their backward compatibility with CD-Audio
and CD-ROMs. This backward compatibility feature of DVD players and DVD-ROM
drives is expected to increase consumer' acceptance of DVD technology. Unlike
the introduction of CDs, when consumers were reluctant to purchase CD players
because they would be required to spend substantial amounts on new music
collections, consumers will be able to acquire the DVD players and DVD-ROM
drives without making obsolete their music collections. Industry experts believe
that this backward compatibility should create a smooth transition to DVD
technology.
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<PAGE>
BUSINESS
Future Media is a leading vertically integrated manufacturer and supplier of
CDs to the computer hardware, software, on-line and publishing industries,
providing mastering, replication and a full range of services, including
printing, packaging and fulfillment. Future Media targets businesses with
continuing high volume production requirements in the CD-ROM market, such as
AOL, Packard Bell NEC, Cendant, GT Interactive Software, Interplay Productions,
3Com Corporation and InfoUSA, Inc. (formerly American Business Information).
Future Media believes that due to its technologically advanced equipment, plant
design and workflow techniques, it is one of the most efficient high volume, low
cost CD manufacturers and is well positioned to capitalize on the near-term
growth in the CD-ROM market, as well as anticipated long-term growth in the DVD
market.
OPERATING STRATEGY
The Company believes it distinguishes itself from its competitors through an
operating strategy founded on the following key principles: (i) maintaining
high-capacity manufacturing facilities at a single location, (ii) continuing to
invest in technologically advanced manufacturing equipment, supported by strong
in-house engineering capabilities, (iii) focusing on large production runs in
order to maximize operational efficiency, and (iv) marketing the Company's
services directly to senior executives of companies with high volume production
requirements. Future Media believes that the principal competitive factors in
the CD replicating industry are price, turnaround time, capacity, service,
quality and reliability, with price and turnaround time typically being the most
important. Future Media believes that it competes favorably with respect to each
of these factors.
HIGH-CAPACITY MANUFACTURING FACILITIES AT A SINGLE LOCATION. The Company
maintains all of its production facilities within two buildings, aggregating
approximately 73,000 square feet, in Valencia, California, with total current
production capacity of approximately 130 million units per year in order to
optimize its production capacity, maintain high product yield rates, manage
costs and facilitate overall profitability. By concentrating all of its
mastering and replication activities, the Company believes it can more closely
administer its daily production schedule and quickly respond to unanticipated
customer requests that are time sensitive. The Company believes that with its
low-cost structure and fast turnaround times, it is able to fulfill the
replication needs of a national customer base from its Valencia, California
facility. For customers in the western United States, the Company can
additionally service all packaging requirements from its Valencia facility. For
companies located outside the western United States, the Company completes all
replication in Valencia, and ships unpackaged or "spindled" CDs directly to the
customer. In the future, if customers outside the western United States prefer,
the Company may ship to third-party packaging companies for packaging and final
delivery to its customers.
TECHNOLOGICALLY ADVANCED EQUIPMENT AND OPERATIONS. The Company strives to
maintain the most advanced, high volume equipment available and has invested
approximately $25 million in mastering, replication, printing and packaging
equipment since inception. The Company will apply approximately $5 million of
the proceeds of the Offering for recently acquired equipment and intends to
invest approximately $5.5 million to purchase additional capital equipment.
Because the manufacturing facilities are relatively new, by industry standards,
and were designed with respect to a high volume production model, the Company
believes it has one of the most automated facilities in the industry. The
manufacturing facilities were specifically designed to be fully integrated so
that the Company is able to complete and control all mastering, replication,
printing and packaging functions internally without dependence on independent
subcontractors. The Company believes that, historically, its sales per employee,
operating income per employee, operating margins and yield rates have been among
the highest in the industry. In order to enhance its manufacturing productivity,
the Company maintains a close technical working relationship with each of its
equipment vendors and a full machine shop with a spare parts inventory of
approximately $2 million, increasing the Company's production flexibility and
self-sufficiency. In addition, the Company has built and developed its facility
with redundant operating systems with respect to raw
30
<PAGE>
material supply and preparation. As a result of its fully integrated
manufacturing facilities, the Company believes that it can achieve turnaround
times for customer orders which are among the fastest in the industry.
FOCUS ON HIGH VOLUME CUSTOMERS. The Company focuses on customers requiring
high volume production runs in order to minimize the number of times production
lines must be shut down and reconfigured for different customer runs. High
volume customers allow the Company to maximize the efficiency of its
manufacturing operations resulting in lower overall unit costs by: (i) reducing
the number of masters and stampers required to fulfill the Company's daily
manufacturing capacity; (ii) minimizing machine downtime as a result of a
reduced number of stamper changeovers required to fulfill customer orders; and
(iii) increasing efficiency in the Company's packaging operation due to better
understanding of customer specific packaging and fulfillment requirements. In
addition, by focusing on higher volume runs, the Company believes it has a lower
cost structure, is less vulnerable to competitive pricing pressures and has
greater flexibility in the pricing of its products and services than its
competitors.
SENIOR EXECUTIVE SALES RELATIONSHIPS WITH HIGH VOLUME CUSTOMERS. In line
with its streamlined operating model, the Company maintains a focused sales and
marketing effort, spearheaded by Alex Sandel. As a result of Mr. Sandel's
background in the industry, he is able to actively target and market the
Company's capabilities typically at the higher executive levels. The Company
plans to expand these relationships with its newly expanded Board of Directors.
Because the Company is actively looking to attract customers with large annual
replication requirements, the selection of the replication vendor by the
Company's customers usually has higher visibility and importance at the
executive levels than with lower volume customers. Consequently, the Company is
able to more precisely target its customer prospects and minimize the use of
infield sales personnel.
GROWTH STRATEGY
Future Media plans to increase sales and profitability by implementing the
following growth initiatives: (i) expanding its position as a leading low cost
CD manufacturer within the computer hardware, software, on-line and publishing
industries; (ii) capitalizing on the growing DVD market; and (iii) selectively
expanding its market presence outside the western United States, with particular
emphasis on the eastern United States and Europe.
EXPAND ITS POSITION AS A LEADING LOW COST CD-ROM MANUFACTURER. Infotech
projects that the CD-ROM market will grow from approximately 1.4 billion units
in 1997 to approximately 2.2 billion units in the next two years. The Company's
penetration of the marketplace for CDs is highest in the CD-ROM market with a
significant presence among computer hardware and software developers. The
Company believes that because of its success as a low-cost, high-volume market
leader, it is well positioned to address the near-term growth in the market for
CD-ROM. The Company believes it can offer its customers very cost effective CD
manufacturing services with turnaround times that are among the shortest in the
industry. The Company intends to exploit its business model to maintain its
existing customer base, and to use the contacts of the Company's expanded Board
of Directors and an expanded senior executive direct selling effort to expand
its customer base to targeted high volume companies.
CAPITALIZE ON THE GROWTH OF DVD. The Company believes that it is well
positioned to participate in the DVD market which is projected to experience
significant growth beginning in 1999. Infotech projects DVD-ROM unit production
of over 1.5 billion units by 2002. Management intends to purchase over $3
million of additional equipment to manufacture DVDs and to commence DVD
production in 1999. In addition to its dedicated DVD production lines, the
Company may cost effectively adapt one or more of its existing CD-ROM production
lines to produce DVDs. Existing equipment, after it is adapted, will be capable
of producing either CDs or DVDs, which will require a mold change and certain
minor mechanical adjustments. In addition, the Company's CD mastering facility
is equipped for CD production and will soon be equipped for DVD mastering.
Through a direct sales effort targeting motion picture production
31
<PAGE>
companies and its existing game developer customers, the Company intends to
pursue a senior executive marketing strategy in the DVD market similar to the
one it has successfully utilized in the CD-ROM market. The Company believes that
its location in southern California, as well as its independence from any large
entertainment company, will provide an advantage in obtaining business from a
number of motion picture production companies.
GEOGRAPHICALLY EXPAND MARKET PRESENCE. The Company believes that its fast
turnaround time, cost effective operations and production capacity have
positioned it to pursue expansion opportunities beyond the western United
States, both in the eastern United States and selected areas in Europe. In order
to meet the needs of customers outside the western United States, the Company
ships unpackaged or "spindled" CDs directly to more distant customers. In
addition, the Company is in the process of establishing relationships with
printing and packaging companies in other parts of the United States which will
accept unpackaged or "spindled" CDs from the Company and then handle individual
customer packaging needs on a local basis. The Company anticipates that
increased volume resulting from geographical expansion will justify any
additional transportation costs which may be incurred to ship CDs to the
packaging facilities. The Company also intends to capitalize on the growing
CD-ROM markets in Europe, and is currently in negotiations to supply CDs to
customers in France and the United Kingdom. No assurance can be given that these
negotiations will prove to be successful.
PRODUCTS AND SERVICES
The Company is a vertically-integrated manufacturer and supplier of CDs to
the computer hardware, software, on-line and publishing industries, providing
mastering, replication and a full range of services, including printing,
packaging and fulfillment. Through its mastering process, the Company produces a
"stamper" or mold that is capable of replicating thousands of copies of the
master. Following completion of the stamper, the Company begins the replication
process. Individual CDs are then printed with the applicable customer and
product identification and promotional material based upon graphics and artwork
provided by the customer. Following completion of the replication and printing
process, the Company will, depending upon the customer's needs, either ship
unpackaged CDs to the final destination or individually package CDs for
shipment. In the event packaging is requested by the customer, all finished
packaging graphics as well as the actual inserted printed material is provided
by the customer. The Company offers various packaging types including jewel
cases, shrink-wraps, envelope inserts, sleeves and retail boxes. Packaging is
provided as a service to customers and is guided by individual customer
requirements. Following the completion of packaging, finished packaged discs are
then either shipped to the customer or distributed to various distribution
locations as directed by the customer. Any freight costs incurred in shipping
finished product are covered by the customer.
The Company's customer base is characterized primarily by two types: (i)
those, such as AOL, requiring production runs that are annual and ongoing, less
cyclical in nature and less time-sensitive, and (ii) those, such as software
game manufacturers, Cendant and GT Interactive, with substantial annual
production requirements where such needs are more closely tied to seasonal
consumer purchasing trends and product announcement cycles. As a result of the
Company's large available capacity, focused customer base and integrated
production operations, the Company is able to manage the competing capacity
demands of its customers on a daily basis. The Company works closely with
customers to monitor the actual production schedule and the product quality and
service delivered.
CUSTOMERS
Currently, approximately 40 customers account for substantially all of the
Company's net sales. The Company has expanded its customer base aggressively
since its founding in 1994 primarily due to the focused efforts of senior
management. In addition, due to the Company's fast turnaround time, high
capacity and strong customer service support, the Company believes that it has
been able to develop excellent relationships with its customers, including
several high volume CD users in various industries and
32
<PAGE>
market segments. The Company plans to further expand and diversify its customer
base beyond its current CD-ROM presence, by penetrating the film/entertainment,
music and publishing industries through DVD and CD-ROM replication.
As is typical in the multimedia services industry, the Company's business is
based primarily on purchase orders. The Company does not typically enter into
supply contracts with its customers; however, the Company has entered into
agreements with both Packard Bell NEC (the "Packard Bell NEC Agreement") and
Cendant (the "Cendant Agreement"). The Packard Bell NEC Agreement governs
certain general procedures with respect to ordering, pricing, delivery and
warranties. See "Certain Relationships and Related Transactions." The Cendant
Agreement requires the Company to maintain certain capacity levels for
replication and production for Cendant and includes provisions for pricing,
terms and conditions. The Cendant Agreement guarantees the Company a certain
percentage of Cendant's annual CD replication volume.
The Company's top three customers, AOL, Packard Bell NEC and Cendant,
accounted for 46.8%, 16.9% and 7.4%, respectively, of the Company's net sales
for the six months ended June 30, 1998 and 20.9%, 33.5% and 14.5%, respectively,
of the Company's net sales for the year ended December 31, 1997. The Company
plans to continue to expand and diversify its customer base in order to reduce
its dependence on any one customer and to optimize its production capacity.
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<PAGE>
The following table summarizes the principal market segments within CD-ROM
and CD Audio and the Company's market orientation, its current U.S. customer
base and the Company's estimate of the growth potential of the CD and DVD
markets.
CURRENT BUSINESS PROFILE AND ESTIMATED FUTURE GROWTH AREAS
<TABLE>
<CAPTION>
SELECTED ESTIMATED ESTIMATED
MARKET SEGMENT CUSTOMERS CD-ROM POTENTIAL DVD POTENTIAL
- ------------------------------------------------------------- --------------- ----------------- -------------
<S> <C> <C> <C>
CD-ROM
OEM HARDWARE AND PERIPHERALS
This is a substantial market sector in which the Company has Packard Bell High High
a demonstrated track record; the Company intends to continue NEC
to aggressively pursue PC and peripheral manufacturers. 3Com
COMPUTER SOFTWARE AND GAMES
This segment is one of the mass market segments most Cendant High High
appropriately suited to the Company...s speed and quality GT Interactive
capabilities. These companies are expected to be large volume Interplay
users driven by entertainment, games and application Mindscape/Pearson
software. THQ
MICROSOFT AUTHORIZED REPLICATORS AND TURNKEY MANUFACTURERS
These replicators are authorized by Microsoft to assemble and Modus Media High High
distribute operating systems, applications and manuals to OEM Phoenix/Softbank
computer manufacturers. These companies often rely on outside
sources for their CD requirements.
FILM/ENTERTAINMENT
This is one of the largest users of CD and DVD products. The None Low High
Company is positioning itself to penetrate this market
segment based upon its capacity and rapid turnaround
capabilities.
ON-LINE PROVIDERS
These customers are large users due to the continued and AOL High Low
growing prevalence of Internet and on-line services. These CompuServe
customers are attractive to the Company due to their less
seasonal and higher volume requirements.
PUBLISHING
Publishing companies are a large and increasing user of the InfoUSA High Medium
CD format given the continued transition from print to (formerly
electronic media. This segment is expected to continue to be American
large because of the large base of printed product that may Business
be stored on CD at low cost. Information)
CD AUDIO
MAJORS
This group is dominated by the five global music companies Warner Low Low
and their respective affiliates. The Company has a small Capitol-EMI
presence in this area, primarily completing overflow Music
production work from the various majors.
INDEPENDENT RECORD COMPANIES AND LABELS
These companies develop brands based upon specific product Thump Low Low
categories for sale in niche markets. The Company selectively
pursues this business where consistent with its business
strategy of focusing on large production runs.
OTHER SECTORS
Other sectors include special channel customers, budget None Low Low
distributors and various music brokers. This is not a
priority area for the Company due to volume and pricing
pressures.
</TABLE>
34
<PAGE>
SALES AND MARKETING
Historically, the Company's sales and marketing effort has been tailored to
meet its overall manufacturing capacity. During this time period, the Company
concentrated its efforts on developing the type of manufacturing facilities with
the necessary productivity and capacity to support the Company's operating
strategy. Currently, the Company has reached annual capacity of approximately
130 million units per year, with the ability to add incremental capacity in an
efficient and timely fashion. As a result, the Company pursued and secured
business from high volume customers that were primarily located in the western
United States and could be serviced with its existing manufacturing
infrastructure.
The Company has implemented a sales and marketing strategy to expand its
reach across the United States and selected international markets, across a
wider industrial base and to the future users of the DVD format. The Company
intends to increase its direct sales effort by adding one or more senior sales
executives with substantial experience in the CD and/or film/entertainment
industries. The Company also plans to leverage its relationships with existing
customers and the contacts of its new directors in order to expand its customer
base.
BROADER INDUSTRY COVERAGE. The Company's marketing efforts have been
historically targeted toward companies in the computer hardware and software
industries. While the Company intends to continue to aggressively market its
products and services in these industries, it also intends to place increased
emphasis on other industry areas such as film/entertainment and publishing. By
doing so, the Company not only intends to broaden the base of potential
customers, but also to attract new customers for which usage patterns are driven
by fundamentals which complement those of the computer hardware and software
market segments. The Company believes that this strategy helps to balance
capacity demands and thereby moderate seasonal fluctuations.
DEVELOP DVD CUSTOMER BASE. The Company believes that DVD technology is
positioned to become the accepted medium for home video and software
distribution. By the end of 1999, the Company believes that substantially all
personal computers shipped will include DVD drives. The Company anticipates it
will be well-positioned to attract the future DVD business of its current
computer hardware and software customers as a result of its strong relationships
and demonstrated performance with these customers. The Company believes that
another significant growth area will be in the film/entertainment industry. The
Company intends to broaden its sales and marketing efforts in this industry
through the relationships certain of its directors have with leading motion
picture producers and distributors.
GREATER GEOGRAPHICAL PENETRATION. The Company has recently increased its
marketing efforts directed at customers located throughout the United States.
Because of the competitive cost structure of the Company's operating model, the
Company believes it can effectively produce and deliver finished CD product to
customers around the country as efficiently as producers more regionally located
to the end customers. Since the beginning of 1998, the Company has completed
significant orders for companies located in the eastern United States. In
addition to expanding its domestic business, the Company believes both the
computer hardware and software market segments have strong international
potential. The Company intends to pursue opportunities in Europe, initially
focusing on both the United Kingdom and France. The Company will attempt to
directly access European business through certain of its directors who have
long-standing relationships with entertainment software companies and computer
hardware manufacturers, as well as through its internal direct marketing staff.
SUPPLIERS
The Company seeks to reduce costs and enhance quality by purchasing from a
limited number of suppliers; however, all raw materials needed to manufacture
the Company's products are readily available from multiple suppliers at
competitive prices. The principal raw materials used by the Company to
manufacture CDs are optical grade polycarbonate, aluminum, nickel,
ultraviolet-curable lacquers and ink.
35
<PAGE>
WAREHOUSING AND DISTRIBUTION
The Company primarily uses common carriers to ship products to customers
throughout the United States. The Company also delivers products by truck
directly to a small number of customers who demand direct shipping. In order to
meet the needs of customers outside the western United States, the Company will
ship unpackaged or "spindled" CDs directly to the customer or its distribution
facility. In addition, the Company is building relationships with packaging
companies in other parts of the United States which will be able to handle
individual customer packaging needs. The Company currently believes that this
strategy is superior to building multiple manufacturing facilities because the
cost to ship unpackaged CDs to a packaging company is generally lower than the
investment required to construct, operate and maintain multiple manufacturing
facilities.
SEASONALITY AND BACKLOG
The Company's peak sales activity normally occurs in the four-month period
from August through November, as hardware manufacturers and software developers
introduce new products before the back-to-school and holiday season. As a
result, the fourth quarter of the Company's fiscal year tends to outperform the
other three quarters and the Company has occasionally maintained a backlog
during this period. Typically, CDs are produced and shipped as orders are
received and the Company operates with little backlog during most of the year.
As a result, net sales in any quarter generally are dependent on orders booked
and shipped in that quarter. However, the Company believes focusing its
marketing efforts to a more diversified customer base will help reduce the
effects of seasonal cycles of its business.
COMPETITION
The Company believes that the principal competitive factors in the CD
replicating industry are price, turnaround time, capacity, service, quality and
reliability, with price and turnaround time typically being the most important.
The Company believes that it competes favorably with respect to each of these
factors, and that the quality of its products and services, its low cost
manufacturing operations, its ability to accommodate tight delivery schedules,
and its flexibility in production creates significant competitive advantages.
The CD replication industry is highly competitive and is experiencing
consolidation. The Company faces its primary competition from independent
service providers, including Cinram International Inc., Carlton Communications
PLC (which recently acquired Nimbus CD International), KAO Infosystems Company,
Zomax Optical Media, Inc., DOCData N.V., Denon Electronics, Inc. and
Disctronics, Inc. and JVC Corporation. These service providers generally have
the ability to handle large volume requirements and offer varying degrees of
service capability including services such as graphic design not currently
offered by the Company. Also, certain of these companies are currently
manufacturing DVDs. To a lesser extent, the Company competes with large service
providers who are affiliated with major music companies and have significantly
greater resources than the Company and many small localized service providers.
Affiliates of major music companies such as Sony, PolyGram, WEA Manufacturing,
BMG and EMI, are primarily captive to the CD-Audio needs of the affiliated
record labels. Small localized service providers generally offer limited
production capacity as well as a limited range of related services. See "Risk
Factors--Competition."
The Company may also face indirect competition from broadband on-line
service providers, such as telephone, cable and internet service providers. The
Company believes, however, that on-line delivery of data will not, for the
foreseeable future, be a practical alternative for consumers due to significant
time and hardware storage requirements to download the capacity of a CD or DVD.
Existing technologies, such as digital audio tape, digital compact disc and the
mini-disc could potentially compete with CD-ROM and currently compete with
CD-Audio, but none of these existing technologies has achieved widespread
consumer acceptance to date.
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<PAGE>
The Company may also face competition from video tape duplicators, many of
which have existing relationships in the film/entertainment industry. The
Company believes, however, that significant barriers of entry to the DVD market
exist due to the high costs and technical nature of establishing a DVD
manufacturing facility.
CD MANUFACTURING PROCESS
The CD manufacturing process consists of three stages: (i) pre-production,
(ii) replication and printing, and (iii) post-production services. While the
components used at each stage of the manufacturing process may vary, except for
pre-production, the manufacturing process is essentially the same for CD-Audio,
CD-ROM and other current CD media.
PRE-PRODUCTION. Pre-production of CDs consists of three distinct processes:
pre-mastering, mastering and electroplating. Through these processes, metal
stampers are created which contain tracks with pits and lands holding data in a
digital format. The metal stampers are then mounted in the injection molding
equipment to produce CDs. CD pre-production begins with receipt of the
customer's data which is supplied in any number of approved input media
(pre-mastered).
The mastering process forms the master image of the CD from which the
polycarbonate replicas are molded. CD mastering begins with the preparation of a
glass substrate which is coated with a thin photo resist layer and placed on a
computer-controlled laser beam recorder. The laser exposes a series of areas in
the photo-resist layer on the glass plate as the CD data is transferred from a
playback device. Chemicals etch the exposed areas of photo resist layer,
producing a series of microscopic "pits" and "lands," or physical
representations of the digital information. The glass substrate is then
developed and then initialized to produce the glass master.
An electroplating unit is then used to electroplate the glass master with
nickel vanadium to create the metal master (commonly referred to as the metal
"father"). The metal father is then separated from the glass master and
electroplated a second time to create an inverted impression on a metal
"mother." A further electroplating process is used to produce several stampers
from the metal mother. The nickel-plated stampers are punched, polished and
mounted in the injection molding machines to replicate CDs.
REPLICATION AND PRINTING. CD replication utilizes a fully integrated
in-line process which incorporates injection molding machines, metallizing
equipment, lacquering machinery and inspection equipment. To begin, optical
grade polycarbonate plastic is heated and injected under high pressure into the
mold cavity of the machine against the metal stamper. The molding process
creates a clear polycarbonate disc with pits on one side containing all of the
digitized data. In order to make the disc readable by reflected laser light, a
thin layer of reflective aluminum is deposited onto the disc surface by a
metallizing machine. A clear protective coating is then applied to the disc by a
spin coating device in order to protect the disc from scratches and oxidation
and to serve as a base for printing on the disc. An in-line inspection device is
used to scan each disc for physical flaws. Thereafter, the disc is ready for
label printing, the final step of production.
The DVD production process is essentially the same as the CD production
process, except that DVD replication entails the use of a special substrate
bonding machine which is integrated into the replication line itself. In
addition, the replication process is slightly different from the production of
other CD formats in that each replication line has two presses which produce two
polycarbonate substrates, each one-half the thickness of a standard CD.
Information is molded onto a layer or multiple layers of a substrate depending
on the specific data requirements. The two substrates are bonded together to
form a DVD. In the case of a 4.7 gigabyte DVD, data will only be molded onto one
layer of the bottom substrate.
POST-PRODUCTION SERVICES. Post-production services primarily involve
printing, packaging, fulfillment and distribution, including confectionering,
stickering, cellophaning, shrink-wrapping, spine printing, bundling and other
services. The Company maintains equipment to provide for most customer requested
37
<PAGE>
packaging configurations and utilizes temporary labor to manage labor intensive
packaging requests. Currently the standard packaging configuration is the jewel
box with customer supplied print material on the bottom and top sides of the
box. The jewel box is typically shrink-wrapped for protection.
EMPLOYEES
At July 31, 1998, the Company had 82 full-time employees, including five
engaged in sales and marketing, nine engaged in general administration and
finance and sixty-eight engaged in CD replication/ manufacturing. In addition,
the Company uses temporary employees in varying numbers throughout the year, who
are primarily engaged in packaging. The Company relies on its ability to vary
the number of part-time and temporary employees in order to respond to
fluctuating market demand for its packaging services. None of the employees of
the Company is covered by a collective bargaining agreement. The Company
believes it has a good relationship with its employees.
PROPERTIES
The Company's executive offices and manufacturing, sales and marketing
operations are located at 25136 Anza Drive, Valencia, California, where the
Company leases approximately 44,500 square feet of space. The current monthly
rental under this lease is approximately $21,300 and the lease expires on
February 28, 2002. The Company's mastering facility is located near its
executive offices at 24833 Anza Drive, Valencia, California, in leased
facilities occupying an aggregate of approximately 28,500 square feet of space.
The current monthly rental under the lease is approximately $20,000 and the
lease expires on May 31, 2007. The Company believes that its existing facilities
are adequate to meet its current and projected needs and that suitable
additional or alternative space will be available in the future on commercially
reasonable terms. See "Certain Relationships and Related Transactions."
LEGAL PROCEEDINGS
The Company is not involved in any pending, nor is the Company aware of any
threatened, legal proceedings which the Company believes could reasonably be
expected to have a material adverse effect on the Company's business, operating
results or financial condition.
38
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company at July 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Alex Sandel..................... 55 Chairman of the Board, Chief Executive Officer and
President
David Moss...................... 38 Vice President--Operations
Louis Weiss..................... 47 Chief Financial Officer, Principal Accounting Officer
and Secretary
Timothy Chaney.................. 42 Director
Sanford R. Climan(1)(2)......... 42 Director
Mark Dyne(2).................... 38 Director
Diana Maranon(1)................ 40 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Directors are elected at each annual meeting of shareholders and hold office
until the following annual meeting and their successors are duly elected and
qualified. The Bylaws of the Company presently provide that the number of
directors shall not be less than five nor more than nine, with the exact number
to be fixed from time to time by resolution of the Board of Directors. The
current number of directors is fixed at five. Any vacancy on the Board of
Directors, including a vacancy from increase in the size of the Board of
Directors, may be filled by the remaining directors. In no case will the Board
of Directors decrease the number of directors or shorten the term of any
incumbent director.
Executive officers are appointed and serve at the discretion of the Board of
Directors, subject to applicable employment contracts.
ALEX SANDEL. Mr. Sandel co-founded the Company with the Existing
Shareholders and has served as its Chairman of the Board, Chief Executive
Officer and President since inception. Together with the other Existing
Shareholders, Mr. Sandel founded Packard Bell NEC in 1986, where he has served
as a director since its founding. From December 1994 through December 1997, Mr.
Sandel served as a director and President of Cal Circuit Abco II, Inc., a
distributor of computer memory products. From 1983 until December 1994, Mr.
Sandel served as a director and President of Cal Circuit Abco, Inc. which
operated as a distributor of computer memory and peripheral components to the
personal computer industry. In December 1994, certain assets of Cal Circuit
Abco, Inc. were spun off to form Cal Circuit Abco II, Inc., and Mr. Sandel
served as President and a director of Cal Circuit Abco, II, until 1997. Also in
December 1994, Cal Circuit Abco, Inc. changed its name to Reveal Computer
Products Inc. and continued operating under the management of one of the other
Existing Shareholders. In 1979, Mr. Sandel co-founded ABCO, a wholesaler and
distributor of electronic components, with one of the Existing Shareholders.
ABCO was combined with Cal Circuit Sales in 1983 to form Cal Circuit Abco Inc.
See "Certain Relationship and Related Transactions".
DAVID MOSS. Mr. Moss has served as Vice President--Operations of the
Company since the Company was founded in June 1994. From May 1993 through May
1994, Mr. Moss served as Vice President and General Manager of ASR Recording, a
manufacturer of CDs. From April 1991 through April 1993, Mr. Moss served as
director of manufacturing at Denon Digital, also a manufacturer of CDs. Mr. Moss
has worked in the CD and other media replication business for 15 years. He has a
B.A. degree in Production and Operation Management and a B.A. degree in Computer
Science, both from California State University at Northridge.
LOUIS WEISS. Mr. Weiss has served as the Chief Financial Officer and
Principal Accounting Officer of the Company since May 1998. From December 1996
through April 1998, Mr. Weiss served as Chief Financial Officer of P.D.I.
Industries, Inc., a pharmaceuticals distributor. From January 1996 through
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<PAGE>
September 1996, Mr. Weiss served as Chief Financial Officer of Cardkey
Industries, a manufacturer of keycards for building security systems. From June
1992 through December 1995, Mr. Weiss served as President of LLW Associates, a
financial consulting firm founded by Mr. Weiss. Mr. Weiss is a Certified Public
Accountant and he has a B.A. and M.B.A. from the University of Wisconsin.
TIMOTHY CHANEY. Mr. Chaney has served as a Director of the Company since
August 1998. Since December 1991 Mr. Chaney has been a Director and has served
in various executive positions, most recently as President--International, with
Virgin Interactive Entertainment ("VIE"), a software games publisher. Mr. Chaney
currently manages for VIE eight international offices throughout Europe and
Asia. From April 1989 to December 1991, Mr. Chaney was the Managing Director of
I.D.G. (Europe) Limited, a consumer electronics and software consulting firm,
and Tec Magik Entertainment Limited, a publisher of Sega-compatible software.
From 1985 to 1989, Mr. Chaney served as General Manager of U.S. Gold Ltd., one
of Europe's largest software publishers during that period.
SANFORD R. CLIMAN. Mr. Climan has served as a Director of the Company since
August 1998. In June 1997, Mr. Climan returned to Creative Artists Agency, Inc.
("CAA"), a leading literary and talent agency, as a member of its senior
executive team. Mr. Climan was formerly a member of CAA's senior executive team
from June 1986 to September 1995. From October 1995 through May 1997, Mr. Climan
was Executive Vice President and President Worldwide Business Development of
Universal Studios, Inc. From 1979 to 1986, Mr. Climan held various positions in
the entertainment industry. Mr. Climan also serves as a director of PointCast
Inc., an Internet computer software company, Sunterra Corporation, an owner and
manager of resorts around the world, and Equity Marketing, Inc., a toy
manufacturer and promotions company. Mr. Climan received a B.A. degree from
Harvard College in 1977, a M.B.A. degree from Harvard Business School in 1979
and a Master of Science in Health Policy and Management from the Harvard School
of Public Health in 1979.
MARK DYNE. Mr. Dyne has served as a Director of the Company since August
1998. Since October 1996, Mr. Dyne has served as Chairman of the Board of
Directors and as Chief Executive Officer of Brilliant Digital Entertainment,
Inc., a production and development studio producing digital entertainment. Mr.
Dyne also currently is a Joint Managing Director of Sega Ozisoft Pty. Limited, a
company he helped found in 1982. From June 1995 through May 1997, Mr. Dyne
served as a Co-Chief Executive Officer of Sega Enterprises (Australia) Pty.,
Ltd., a theme park developer which operates the $70 million interactive indoor
theme park in Darling Harbor in Sydney, Australia. Mr Dyne also currently is
Chairman of the Board of Directors of Tag-It Pacific, Inc., a manufacturer of
buttons, tags and other apparel trim products.
DIANA MARANON. Ms. Maranon has served as a Director of the Company since
August 1998. Ms. Maranon is the President and Managing Director of Averil
Associates, Inc. ("Averil Associates"), a financial advisory firm, and a member
of the National Association of Securities Dealers. Ms. Maranon serves as a
director of Brilliant Digital Entertainment, Inc. and Tag-It Pacific, Inc. Prior
to founding Averil Associates in 1994, Ms. Maranon was a Vice President with
Wasserstein Perella & Co., Inc., an investment banking firm, with whom she
started in 1988. From 1985 to 1988, Ms. Maranon practiced securities law with
Skadden Arps Slate Meagher & Flom. Ms. Maranon received J.D. and M.B.A. degrees
from the University of California at Los Angeles and is a member of the
California Bar.
BOARD COMMITTEES
Commencing upon the closing of the Offering, the Board of Directors will
maintain an Audit Committee and a Compensation Committee. The Audit Committee's
functions will include recommending to the Board of Directors the engagement of
the Company's independent certified public accountants, reviewing with those
accountants the plan and results of their audit of the financial statements and
determining the independence of the accountants. The Compensation Committee will
review and make recommendations with respect to compensation payable to the
Company's executive officers and key employees and makes recommendations
concerning the Company's employee benefit plans.
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<PAGE>
DIRECTOR COMPENSATION
Prior to the Offering, the Company has not paid fees to its directors.
Following the Offering, the Company intends to pay non-employee directors fees
of $1,500 for their personal attendance at any meeting of the Board and $500 for
attendance at any telephonic meeting of the Board or at any meeting of a
committee of the Board. Directors also are reimbursed for their reasonable
travel expenses incurred in attending Board or committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a compensation committee for the fiscal year ended
December 31, 1997. For the fiscal year ended December 31, 1997, all decisions
regarding executive compensation were made by the Company's Board of Directors.
No interlocking relationship exists between any member of the Company's
Compensation Committee and any member of any other company's board of directors
or compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth both cash and noncash compensation paid or to
be paid by the Company to each executive officer of the Company (the "Named
Executive Officers") who received compensation for the year ended December 31,
1997 in excess of $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
YEAR ENDED ----------------------
NAME AND PRINCIPAL POSITION DECEMBER 31, SALARY BONUS
- ----------------------------------------------------------------- --------------- ---------- ----------
<S> <C> <C> <C>
Alex Sandel, Chief Executive Officer and President............... 1997 $ 540,000 --
David Moss, Vice President--Operations........................... 1997 $ 186,144 $ 181,995
</TABLE>
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Alex Sandel has an employment agreement (the "Sandel Employment Agreement")
pursuant to which he is entitled to a salary at an annual rate of $540,000 per
year, subject to upward adjustment by the Compensation Committee. Mr. Sandel is
also eligible to receive bonus compensation based on the attainment of various
corporate earnings and strategic goals. If the Company's actual earnings before
interest and taxes ("EBIT") are (i) greater than 120% of projected EBIT, to be
determined by the Board of Directors at the beginning of each fiscal year
commencing in 1999 ("Target EBIT"), then Mr. Sandel will receive a bonus equal
to 100% of his base salary, and (ii) less than 120%, but equal to or greater
than 105% of projected Target EBIT, then Mr. Sandel will receive a bonus
prorated from 25% to 100% of his base salary. The Sandel Employment Agreement is
effective August 26, 1998 through August 26, 2003 and shall be automatically
extended for successive one-year terms subject to 270 days notice of termination
from the Company. If Mr. Sandel's employment is terminated without cause, he
will be entitled to severance pay at two times his then-current annual salary
through the later of the expiration of the Sandel Employment Agreement or two
years. Mr. Sandel may terminate the Sandel Employment Agreement upon 180 days
written notice to the Company.
David Moss has an employment agreement (the "Moss Employment Agreement")
pursuant to which he is entitled to a salary at an annual rate of $395,000 per
year subject to automatic annual increases of six percent and further upward
adjustment at the discretion by the Compensation Committee. Mr. Moss is also
eligible to receive bonus compensation at the sole discretion of the
Compensation Committee of the Board of Directors. If Mr. Moss' employment is
terminated without cause, he will be entitled to severance pay at his
then-current annual salary through the expiration of the Moss Employment
Agreement plus a lump sum payment of $1,000,000. The Moss Employment Agreement
is effective August 26, 1998 through August 26, 2003, subject to extension
through August 26, 2006 upon the mutual written consent of both parties.
41
<PAGE>
STOCK PLAN
The Company adopted the Stock Plan in May 1998. Each executive officer,
other employee, non-employee director or consultant of the Company or any of its
future subsidiaries is eligible to be considered for the grant of awards under
the Stock Plan. A maximum of 1,200,000 shares of Common Stock may be issued
pursuant to awards granted under the Stock Plan, subject to certain adjustments
to prevent dilution. Any shares of Common Stock subject to an award which for
any reason expires or terminates unexercised are again available for issuance
under the Stock Plan.
The Stock Plan will be administered by the Company's Board of Directors or
by a committee of two or more non-employee directors appointed by the Board of
Directors, each of whom shall be a "Non-Employee Director" for purposes of
Section 16(b) of the Exchange Act and, at the discretion of the Board of
Directors, an "Outside Director" for purposes of 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code") (the "Administrator"). Subject to the
provisions of the Stock Plan, the Administrator will have full and final
authority to select the executives and other employees to whom awards will be
granted thereunder, to grant the awards and to determine the terms and
conditions of the awards and the number of shares to be issued pursuant thereto.
AWARDS. The Stock Plan authorizes the Administrator to enter into any type
of arrangement with an eligible employee that, by its terms, involves or might
involve the issuance of (i) shares of Common Stock, (ii) an option, warrant,
convertible security, stock appreciation right or similar right with an exercise
or conversion privilege at a price related to the Common Stock, or (iii) any
other security or benefit with a value derived from the value of the Common
Stock.
Awards under the Stock Plan are not restricted to any specified form or
structure and may include arrangements such as sales, bonuses and other
transfers of stock, restricted stock, stock options, reload stock options, stock
purchase warrants, other rights to acquire stock or securities convertible into
or redeemable for stock, stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares. An award may consist of
one such arrangement or two or more such arrangements in tandem or in the
alternative. An award may provide for the issuance of Common Stock for any
lawful consideration, including services rendered or, to the extent permitted by
applicable state law, to be rendered.
An award under the Stock Plan may permit the recipient to pay all or part of
the purchase price of the shares or other property issuable pursuant to the
award, and/or to pay all or part of the recipient's tax withholding obligations
with respect to such issuance, by delivering previously owned shares of capital
stock of the Company or other property, or by reducing the amount of shares or
other property otherwise issuable pursuant to the award. If an option granted
under the Stock Plan permitted the recipient to pay for the shares issuable
pursuant thereto with previously owned shares, the option may grant the
recipient the right to "pyramid" his or her previously owned shares, i.e., to
exercise the option in successive transactions, starting with a relatively small
number of shares and, by a series of exercises using shares acquired from each
transaction to pay the purchase price of the shares acquired in the following
transaction, to exercise the option for a larger number of shares with no more
investment than the original share or shares delivered.
PLAN DURATION. The Stock Plan became effective upon its adoption by the
Board of Directors on May 7, 1998, and was approved by the Company's
shareholders on the same day. The Stock Plan was subsequently amended on August
25, 1998 to increase the number of shares of Common Stock subject to the Stock
Plan to 1,200,000. The Company's shareholders approved the amendment on the same
day. As of the date hereof, the Board has granted options covering an aggregate
of 828,000 shares of Common Stock to directors, officers and employees of the
Company, with a weighted average exercise price of $11.35 per share. The options
will typically vest in four equal annual installments commencing on the first
anniversary of the date of grant. Although any award that was duly granted on or
prior to such date may thereafter be exercised or settled in accordance with its
terms, no shares of Common Stock may be issued pursuant to any award made after
May 7, 2008.
42
<PAGE>
AMENDMENTS. The Administrator may amend or terminate the Stock Plan at any
time and in any manner, subject to the following: (i) no recipient of any award
may, without his or her consent, be deprived thereof or of any of his or her
rights thereunder or with respect thereto as a result of such amendment or
termination; and (ii) if any rule or regulation promulgated by the Securities
and Exchange Commission (the "Commission"), the Internal Revenue Service or any
national securities exchange or quotation system upon which any of the Company's
securities are listed requires that any such amendment be approved by the
Company's shareholders, then such amendment will not be effective until it has
been approved by the Company's shareholders. Currently, shareholder approval is
required to, among other things, increase the number of shares available for
issuance under the Stock Plan.
FORM S-8 REGISTRATION. The Company intends to file a registration statement
under the Securities Act to register the 1,200,000 shares of Common Stock
reserved for issuance under the Stock Plan and the 366,600 shares issuable upon
exercise of the Moss Warrants. Such registration statement is expected to be
filed shortly following the date of this Prospectus and will become effective
immediately upon filing with the Commission. Shares issued under the Stock Plan
after the effective date of such registration statement generally will be
available for sale to the public without restriction, except for the 180-day
lock-up provisions and except for shares issued to affiliates of the Company,
which will remain subject to the volume and manner of sale limitations of Rule
144. See "Shares Eligible for Future Sale."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation include a provision that eliminates
the personal liability of its directors to the Company and its shareholders for
monetary damages for breach of the directors' fiduciary duties in certain
circumstances. This limitation has no effect on a director's liability (i) for
acts or omissions that involve intentional misconduct or a knowing and culpable
violation of law; (ii) for acts or omissions that a director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director; (iii) for any
transaction from which a director derived an improper personal benefit; (iv) for
acts or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of a serious injury to the Company or its shareholders; (v)
for acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Company or its
shareholders; (vi) under Section 310 of the California Corporations Code (the
"California Code") (concerning contracts or transactions between the Company and
a director) or (vii) under Section 316 of the California Code (concerning
directors' liability for improper dividends, loans and guarantees). The
provision does not extend to acts or omissions of a director in his capacity as
an officer. Further, the provision will not affect the availability of
injunctions and other equitable remedies available to the Company's shareholders
for any violation of a director's fiduciary duty to the Company or its
shareholders.
The Company's Articles of Incorporation also include an authorization for
the Company to indemnify its agents (as defined in Section 317 of the California
Code), through bylaw provisions, by agreement or otherwise, to the fullest
extent permitted by law. Pursuant to this provision, the Company's Bylaws
provide for indemnification of the Company's directors, officers and employees.
In addition, the Company, at its discretion, may provide indemnification to
persons whom the Company is not obligated to indemnify. The Bylaws also allow
the Company to enter into indemnity agreements with individual directors,
officers, employees and other agents. The Company has entered into
indemnification agreements designed to provide the maximum indemnification
permitted by law with all the directors and executive officers of the Company.
These agreements, together with the Company's Bylaws and Articles of
Incorporation, may require the Company, among other things, to indemnify these
directors against certain liabilities that may arise by reason of their status
or service as directors (other than liabilities resulting from willful
misconduct of a culpable nature), to advance expenses to them as they are
incurred, provided that they undertake to repay the amount advanced if it is
ultimately determined by a court that they are not entitled to
43
<PAGE>
indemnification, and to obtain directors' and officers' insurance if available
on reasonable terms. The Company maintains director and officer liability
insurance.
Section 317 of the California Code, the Company's Bylaws and the Company's
indemnification agreements with its directors and executive officers make
provision for the indemnification of officers, directors and other corporate
agents in terms sufficiently broad to indemnify such persons, under certain
circumstances, for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
44
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has been treated as an S Corporation since inception. The
Existing Shareholders hold all of the outstanding Common Stock. The Company paid
an aggregate of approximately $24.7 million in dividends to the Existing
Shareholders from January 1, 1997 through June 30, 1998. These dividends were
paid to the Existing Shareholders to pay their income taxes, and as a return of
their investment. The Company intends to pay dividends aggregating approximately
$3.5 million to the Existing Shareholders prior to the closing of the Offering
for the purpose of funding income taxes on S Corporation earnings. Such
dividends will be evidenced by notes which will be paid with the proceeds of the
Offering.
Approximately $11.1 million of the loan from Greyrock was used to pay a
distribution to the Existing Shareholders. The Existing Shareholders have
personally guaranteed repayment of the Greyrock bank debt. Upon completion of
this Offering and the application of the net proceeds to repay the loan from
Greyrock, it is anticipated that the shareholder guarantee will terminate. See
"Use of Proceeds."
The Company and the Existing Shareholders have entered into a tax
indemnification agreement relating to their respective income tax liabilities.
See "Termination of S Corporation Status."
The Company, on November 1, 1997, entered into a Purchase and Sale Agreement
with Packard Bell NEC. The Packard Bell NEC Agreement governs the Company's
relationship with Packard Bell NEC with respect to the procedures for ordering,
pricing and delivering products, as well as product warranties. Pursuant to the
Packard Bell NEC Agreement, Packard Bell NEC has agreed to purchase
substantially all of its United States requirements for CDs from the Company;
provided, the pricing, terms, conditions and quality of the CDs being sold by
the Company are at least as favorable as those available from any other third
party supplier. The Packard Bell NEC Agreement expires on November 1, 1998 and
is automatically renewed for an additional one year term unless terminated by
either party prior to October 1, 1998. The Existing Shareholders own a
significant minority interest in and Alex Sandel is a director of Packard Bell
NEC.
Historically, a significant portion of the Company's net sales have been to
Packard Bell NEC. The Company's net sales to Packard Bell NEC were approximately
$12.1 million, $14.2 million and $20.9 million for the years ended 1997, 1996
and 1995, respectively. Such sales represented approximately 33.5%, 54.9% and
77.5% of the Company's net sales for the years ended December 31, 1997, 1996 and
1995, respectively. For the six months ended June 30, 1998, net sales to Packard
Bell NEC were approximately $2.8 million, representing approximately 16.9% of
the Company net sales for that period. At June 30, 1998, accounts receivable
from Packard Bell NEC were approximately $2.0 million, or 40.3% of total trade
receivables as of such date.
During 1996, the Company made loans in an aggregate amount of approximately
$3.4 million to Cal Circuit Abco II, Inc., a wholesaler and distributor of
electronic components controlled by the Existing Shareholders. All of these
loans bore interest at prime plus three and were repaid in full during 1996. In
March 1997, the Company made an additional loan of $500,000 to Cal Circuit Abco
II, Inc., also bearing interest at prime plus three percent. In December 1997,
the Company wrote off this loan as uncollectible.
The Company had net sales to Reveal Computer Products (formerly named Cal
Circuit Abco, Inc. prior to December 1994) ("Reveal"), a repackager of computer
peripherals managed by Jason Barzilay and controlled by the Existing
Shareholders, amounting to $34,668 and $4,212,049 for the years ended December
31, 1996 and 1995, respectively. During the second quarter of 1996, the Company
wrote off accounts receivable balances in the amount of $1,559,017 that were due
from Reveal. Also, from June 1995 to November 1995, the Company loaned an
aggregate of approximately $3.3 million to Reveal bearing interest at prime plus
three percent. The Company determined that such amount was uncollectible and
reserved for it at December 31, 1995. The Company ultimately wrote off such
amount in 1996, the same year Reveal entered bankruptcy and ceased operations.
45
<PAGE>
During 1996 the Company advanced an aggregate of approximately $4.3 million
to the Existing Shareholders which was repaid during 1997. In December 1997, the
Company wrote off approximately $165,000 of interest on this advance.
The Company paid an aggregate of $630,000 to Jason Barzilay as salary from
April 1997 through May 1998. Mr. Barzilay no longer receives salary from the
Company.
In July 1998, the Company advanced approximately $1.5 million to Beny Alagem
and Mr. Alagem subsequently repaid the amount in full.
The Company leases one of its two facilities in Valencia, California, from
Bascal Properties II, a partnership owned by the Existing Shareholders. This
lease expires in May 2007 and currently provides for a monthly base rent of
$20,000, with periodic adjustments based on the Consumer Price Index. Rental
payments to Bascal Properties II were $120,000 and $140,000 for the six months
ended June 30, 1998 and the year ended December 31, 1997, respectively. In June
1997, the Company loaned approximately $1.9 million to Bascal Properties II.
This loan bore interest at prime plus two percent and was repaid in full in
September 1997.
Averil Associates, a financial advisory firm founded and controlled by Diana
Maranon, has, since September 1997, performed various services for the Company
including investigation of strategic and financing alternatives and assistance
in connection with this Offering. As consideration for services rendered, the
Company paid to Averil Associates the aggregate amount of $85,000 plus out of
pocket expenses in connection with the investigation of certain financing
alternatives. As consideration for services rendered in connection with this
Offering, the Company has agreed to pay Averil Associates a cash payment of
0.75% of the gross proceeds raised upon consummation of the Offering and
warrants to purchase shares of Common Stock equivalent to 0.25% of the gross
proceeds raised at an exercise price equal to 110% of the initial public
offering price (the "Averil Warrants"). The Averil Warrants will become
exercisable on the first anniversary of the Offering. The Company has entered
into an indemnification agreement with Averil Associates pursuant to which the
Company will indemnify Averil Associates and Ms. Maranon against any amounts
these parties may become obligated to pay in connection with Ms. Maranon's
service as a Director of and consultant to the Company.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of July 31, 1998, and as adjusted to reflect
the sale of shares of Common Stock by the Company and the sale of shares of
Common Stock by the Selling Shareholders offered by this Prospectus, for (i)
each person who is known to the Company to be the beneficial owner of more than
five percent of the outstanding Common Stock, (ii) each of the Company's
Directors, (iii) each of the Named Executive Officers, and (iv) all Directors
and executive officers of the Company as a group. The address of each person
listed is in care of the Company, 25136 Anza Drive, Valencia, California 91355,
unless otherwise set forth below such person's name.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
OFFERING(1) OFFERING
----------------------- NUMBER OF -----------------------
NUMBER OF PERCENT OF SHARES NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES CLASS OFFERED SHARES CLASS
- ------------------------------------------------------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Alex Sandel............................................ 3,000,000 33.3%
Beny Alagem............................................ 3,000,000 33.3%
Jason Barzilay......................................... 3,000,000 33.3%
David Moss(2).......................................... 366,600 3.9%
Louis Weiss............................................ -- *
Timothy Chaney(3)...................................... -- *
Sanford R. Climan(4)................................... -- *
Mark Dyne(5)........................................... -- *
Diana Maranon(6)....................................... -- *
All of the directors and executive officers as a group
(seven persons)(7)................................... 9,366,600 100.0%
</TABLE>
- ------------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially owned
by any person who has or shares voting or investment power with respect to
such shares. Unless otherwise indicated, the persons named in this table
have sole voting and sole investment power with respect to all shares shown
as beneficially owned, subject to community property laws where applicable.
(2) Represents shares of Common Stock reserved for issuance upon exercise of the
Moss Warrants which are currently exercisable.
(3) Mr. Chaney's address is c/o Virgin Interactive Entertainment, 2 Kensington
Square, London W85RB, United Kingdom.
(4) Mr. Climan's address is c/o Creative Artists Agency, 9830 Wilshire Blvd.,
Beverly Hills, California 90212.
(5) Mr. Dyne's address is c/o Brilliant Digital Entertainment, Inc., 6355
Topanga Canyon Boulevard, Suite 513, Woodland Hills, California 91367.
(6) Ms. Maranon's address is c/o Averil Associates, Inc., 833 17th Street, Suite
6, Santa Monica, California 90403.
(7) Includes 366,600 shares of Common Stock reserved for issuance upon exercise
of the Moss Warrants which are currently exercisable.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 45,000,000 shares of Common Stock, and
5,000,000 shares of Preferred Stock. As of the date of this Prospectus, there
were 9,000,000 shares of Common Stock outstanding and there were three holders
of record of the Common Stock. Currently, there are no shares of Preferred Stock
outstanding. The following statements are brief summaries of certain provisions
relating to the Company's capital stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters on which the holders of Common Stock are entitled to vote
and have cumulative voting rights with respect to the election of directors. The
right to cumulate votes will automatically cease as of the first record date of
the Company's annual meeting of shareholders where the Company has at least 800
holders of its equity securities. The holders of Common Stock are entitled to
receive ratably dividends when, as and if declared by the Board of Directors out
of funds legally available therefor. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled subject to
the rights of holders of Preferred Stock issued by the Company, if any, to share
ratably in all assets remaining available for distribution to them after payment
of liabilities and after provision is made for each class of stock, if any,
having preference over the Common Stock.
The holders of Common Stock have no preemptive or conversion rights and they
are not subject to further calls or assessments by the Company. There are no
redemption or sinking fund provisions applicable to the Common Stock. The
outstanding shares of Common Stock are, and the Common Stock issuable pursuant
to this Prospectus will be, when issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the authorized and
unissued Preferred Stock in one or more series with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without shareholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which adversely affect the voting power or other rights
of the holders of the Company's Common Stock. In the event of issuance, the
Preferred Stock could be utilized, under certain circumstances, as a way of
discouraging, delaying or preventing an acquisition or change in control of the
Company. The Company does not currently intend to issue any shares of its
Preferred Stock.
WARRANTS
The Company has granted to David Moss warrants to purchase 366,600 shares of
Common Stock. The Moss Warrants expire on December 31, 2007 and are exercisable
for $0.0017 per share. None of the Moss Warrants will have any voting rights,
dividend rights or preferences until such time as they are exercised for shares
of Common Stock.
Effective upon the closing of the Offering, the Company will grant to Averil
Associates warrants to purchase shares of the Common Stock equivalent to 0.25%
of the gross proceeds raised in the Offering with an exercise price equal to
110% of the initial public offering price. The Averil Warrants expire five years
after they are granted. See "Certain Relationships and Related Transactions."
TRANSFER AGENT
The Company's transfer agent and registrar for its Common Stock is U.S.
Stock Transfer Corporation.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares of
Common Stock outstanding ( if the Underwriters' over-allotment options are
exercised in full). Of those shares, a total of ( if the
Underwriters' over-allotment options are exercised in full) will be freely
tradable without restriction or further registration under the Securities Act,
unless purchased or held by "affiliates" of the Company as that term is defined
in Rule 144.
In general, under Rule 144 as currently in effect, any affiliate of the
Company who has beneficially owned restricted securities for at least one year
would be entitled to sell within any three-month period commencing 90 days after
the date of this Prospectus a number of shares that does not exceed the greater
of one percent of the then outstanding shares of Common Stock ( shares
immediately after the completion of the Offering) or the reported average weekly
trading volume during the four weeks preceding the sale. Sales under Rule 144
are also subject to certain manner of sale restrictions and notice requirements
and to the availability of current public information concerning the Company.
All shares of Common Stock held by the Existing Shareholders (and all shares
issuable upon exercise of the Moss Warrants) will be eligible for sale
commencing 180 days after the date of this Prospectus pursuant to Rule 144,
subject to the restrictions under Rule 144 referred to above and, as described
below, subject to the agreement of certain holders of Common Stock to certain
restrictions on their ability to sell Common Stock for a period of 180 days
following the consummation of the Offering. See "Underwriting."
Pursuant to certain lock-up agreements, the Company, its executive officers,
directors and shareholders, including the Selling Shareholders have agreed that
they will not, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant or any
option to purchase or other sale or disposition) of any shares of Common Stock
or any securities convertible into, or exercisable or exchangeable for, any
shares of Common Stock, or other similar securities of the Company for a period
of 180 days from the date of this Prospectus, without the prior written consent
of Prudential Securities Incorporated, on behalf of the Underwriters, except
that such agreements do not prevent the Company from granting additional options
under the Stock Plan. After such 180-day period, this restriction will expire
and shares permitted to be sold under Rule 144 will be eligible for sale.
Prudential Securities Incorporated may, in its sole discretion, at any time and
without notice, release all or any portion of the securities subject to such
lock-up agreements.
Within 90 days after the date of this Prospectus, the Company intends to
file a Registration Statement on Form S-8 covering an aggregate of approximately
1,566,600 shares of Common Stock (including the 828,000 shares of Common Stock
which will then be subject to outstanding options and 366,600 shares of Common
Stock underlying the Moss Warrants). The Company has also agreed to file a
Registration Statement on Form S-3 covering the shares of Common Stock
underlying the Averil Warrants, after the Averil Warrants become exercisable.
Shares of Common Stock issued upon exercise of options issued pursuant to the
Stock Plan and upon exercise of the Moss Warrants will be available for sale in
the public market after the effective date of the Form S-8, subject to Rule 144
volume limitations applicable to affiliates of the Company and to the lock-up
agreements. Shares of Common Stock issuable upon exercise of the Averil Warrants
will become exercisable subject to Rule 144 volume limitations, one year after
the date of the Averil Warrants or the filing of the related Form S-3, whichever
occurs first.
Prior to this Offering, there has been no public market for the Common
Stock, and no predictions can be made with respect to the effect, if any, that
future sales of shares, or the availability of shares for future sale, will have
on the prevailing market price for the Common Stock. Sales of substantial
amounts of Common Stock in the public market following the Offering, or the
perception that such sales may occur, could adversely affect the prevailing
market prices for the Common Stock and impair the Company's ability to raise
capital through the sale of equity securities. See "Risk Factors--Shares
Eligible for Future Sale."
49
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and ING Baring Furman Selz LLC are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase from
the Company and the Selling Shareholders the number of shares of Common Stock
set forth opposite their respective names.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Prudential Securities Incorporated...............................................
ING Baring Furman Selz LLC.......................................................
----------
Total............................................................................
----------
----------
</TABLE>
The Company and the Selling Shareholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby, if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Shareholders that they propose to offer the Common Stock at the
initial public offering price set forth on the cover page of this Prospectus;
that the Underwriters may allow to selected dealers a concession of $ per
share; and that such dealers may re-allow a concession of $ per share to
certain other dealers. After the Offering, the initial public offering price and
the concessions may be changed by the Representatives.
The Company and the Selling Shareholders have granted the Underwriters
options, exercisable for 30 days from the date of this Prospectus, to purchase,
in the aggregate up to additional shares of Common Stock at the initial
public offering price, less underwriting discounts and commissions, as set forth
on the cover page of this Prospectus. The Underwriters may exercise such options
solely for the purpose of covering over-allotments incurred in the sale of the
shares of Common Stock offered hereby. To the extent such option to purchase is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the preceding
table bears to .
The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise authority.
The Company, the Existing Shareholders and the Selling Shareholders have
agreed to indemnify the several Underwriters and contribute to losses arising
out of certain liabilities, including liabilities under the Securities Act.
The Company, its executive officers, directors and shareholders including
the Selling Shareholders have agreed not to, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or other
50
<PAGE>
capital stock of the Company or any securities convertible into, or exercisable
or exchangeable for, any shares of Common Stock or other capital stock of the
Company or any right to purchase or acquire Common Stock or other capital stock
of the Company for a period of 180 days after the date of this Prospectus
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, except for options granted pursuant to the Stock
Plan. Prudential Securities Incorporated may, in its sole discretion, at any
time and without notice, release all shares or any portion of the shares subject
to such lock-up agreements.
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price for the Common Stock will be
determined through negotiations among the Company, the Selling Shareholders and
the Underwriters. Among the factors to be considered in making such
determination will be prevailing market conditions, the Company's financial and
operating history and condition, its prospects and the prospects of the industry
in general, the management of the Company, and the market prices of securities
for companies in businesses similar to that of the Company.
In connection with the Offering, certain Underwriters (and selling group
members, if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Selling Shareholders, and in such case
may purchase Common Stock in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position, up to shares of
Common Stock, by exercising the Underwriters' over-allotment options referred to
previously. In addition, Prudential Securities Incorporated, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter (or dealer participating
in the Offering) for the account of the other Underwriters, the selling
concession with respect to Common Stock that is distributed in the Offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price for the Common Stock at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph are required and, if they are undertaken, then they may be
discontinued at any time.
51
<PAGE>
LEGAL MATTERS
Counsel for the Company, Troop Steuber Pasich Reddick & Tobey, LLP, Los
Angeles, California, have rendered an opinion to the effect that the Common
Stock offered by the Company upon sale will be duly and validly issued, fully
paid and non-assessable. Gibson, Dunn & Crutcher LLP, Los Angeles, California,
have acted as counsel to the Underwriters in connection with certain legal
matters relating to the Offering.
EXPERTS
The financial statements of Future Media Productions, Inc. at December 31,
1997 and June 30, 1998 and the year ended December 31, 1997 and six months ended
June 30, 1998, appearing in this Prospectus and the registration statement of
which this Prospectus is part have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing. The financial statements of
Future Media Productions, Inc. at December 31, 1996 and December 31, 1995 and
the period ended December 31, 1996, appearing in this Prospectus and the
registration statement of which this Prospectus is part have been audited by
Brown, Leifer, Slatkin + Berns, independent public accountants, as set forth in
their report also included elsewhere herein and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
The Company retained Ernst & Young LLP as its independent auditors and
replaced Brown, Leifer, Slatkin + Berns (now known as Brown, Leifer, Slatkin +
Berns LLP) in November 1997. The report of Brown, Leifer, Slatkin + Berns on the
financial statements of the Company as of December 31, 1996 and 1995 contained
no adverse opinion or disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or application of accounting principles. During the
years ended December 31, 1996 and 1995 and through the date of replacement,
there were no disagreements with Brown, Leifer, Slatkin + Berns on any matters
of accounting principles or practices, financial statements disclosure, or
auditing scope or procedure.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C., a registration statement under the Securities Act with respect
to the shares offered hereby. This Prospectus does not contain all of the
information set forth in such registration statement and the exhibits thereto.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and with respect to
any contract or other document filed as an exhibit to such registration
statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
such reference. For further information with respect to the Company and the
shares offered hereby, reference is hereby made to such registration statement
and exhibits thereto. A copy of such registration statement, including the
exhibits thereto, may be inspected without charge at the Securities and Exchange
Commission's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the Public Reference Section of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of certain prescribed rates.
Upon consummation of the Offering, the Company will become subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports and other information with the Securities and Exchange
Commission in accordance with its rules. Such reports and other information
concerning the Company may be inspected and copied at the public reference
facilities referred to above as well as certain regional offices of the
Securities and Exchange Commission.
The Securities and Exchange Commission maintains a web site which contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Securities and Exchange Commission
(such as the Company) at http:\\www.sec.gov.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2
Balance Sheets at December 31, 1997 and June 30, 1998...................................................... F-3
Statements of Income for year ended December 31, 1997 and six months ended June 30, 1998................... F-4
Statements of Shareholders' Equity (Deficit) for year ended December 31, 1997 and six months ended June 30,
1998 .................................................................................................... F-5
Statements of Cash Flows for year ended December 31,
1997 and six months ended June 30, 1998.................................................................. F-6
Notes to Financial Statements for December 31, 1997 and June 30, 1998...................................... F-7
Report of Brown Leifer Slatkin + Berns, Independent Auditors............................................... F-18
Balance Sheets at December 31, 1995 and 1996............................................................... F-19
Statements of Income for years ended December 31, 1995 and 1996............................................ F-20
Statements of Shareholders' Equity for years ended December 31, 1995 and 1996.............................. F-21
Statements of Cash Flows for years ended December 31, 1995 and 1996........................................ F-22
Notes to Financial Statements for December 31, 1995 and 1996............................................... F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Future Media Productions, Inc.
We have audited the accompanying balance sheets of Future Media Productions,
Inc. as of December 31, 1997 and June 30, 1998, and the related statements of
income, shareholders' equity (deficit) and cash flows for the year ended
December 31, 1997 and the six month period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Future Media Productions,
Inc. as of December 31, 1997 and June 30, 1998, and the results of its
operations and its cash flows for the year ended December 31, 1997 and the six
month period ended June 30, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Woodland Hills, California
September 4, 1998
F-2
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER PRO FORMA
31 JUNE 30 JUNE 30
1997 1998 1998
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ -- $1,891,151
Accounts receivable (net of allowance for doubtful
accounts of $250,000 in 1997 and $286,584 in
1998).............................................. 6,807,784 4,627,461
Inventories.......................................... 634,498 583,883
Other receivables.................................... 275,000 48,000
Prepaid expenses..................................... 310,409 392,064
Deferred state income taxes.......................... 8,300 9,800
---------- ----------
Total current assets................................... 8,035,991 7,552,359
Property and equipment, net............................ 17,636,252 20,127,747
Deferred state income taxes, noncurrent................ -- 45,825
Other assets........................................... 247,969 349,949
---------- ----------
Total assets........................................... $25,920,212 $28,075,880
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft....................................... $ 743,408 $ --
Line of credit....................................... 263,644 --
Accounts payable--trade.............................. 1,707,644 1,965,320
Accounts payable--capital equipment.................. 4,005,345 5,010,393
Accrued expenses--royalties.......................... 4,166,500 5,892,052
Accrued expenses..................................... 624,048 903,792
Current portion of long-term debt.................... 2,610,343 3,756,342
Current portion of capital lease obligations......... 10,979 10,979
---------- ----------
Total current liabilities.............................. 14,131,911 17,538,878
Long-term debt, less current portion................... 1,755,292 10,963,693
Capital lease obligations, less current portion........ 29,130 23,425
Deferred state income taxes............................ 68,300 76,300
Commitments............................................
Shareholders' equity (deficit):
Preferred stock, no par value:
Authorized shares--5,000,000.......................
Issued and outstanding shares--none................ -- -- $ --
Common stock, no par value:
Authorized shares--45,000,000......................
Issued and outstanding shares--9,000,000........... 15,000 3,070,000 (4,026,416)
Retained earnings (deficit).......................... 9,920,579 (3,596,416) --
---------- ---------- ----------
Total shareholders' equity (deficit)................... 9,935,579 (526,416) $(4,026,416)
---------- ---------- ----------
----------
Total liabilities and shareholders' equity (deficit)... $25,920,212 $28,075,880
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31 JUNE 30
1997 1998
------------- -------------
<S> <C> <C>
Net sales....................................................................... $ 36,042,427 $ 16,708,570
Cost of goods sold.............................................................. 23,140,591 11,023,119
------------- -------------
Gross profit.................................................................... 12,901,836 5,685,451
Selling, general and administrative expenses.................................... 4,214,033 2,039,873
Stock warrant compensation expense.............................................. -- 3,055,000
------------- -------------
Income from operations.......................................................... 8,687,803 590,578
Other income (expenses):
Interest income............................................................... 42,105 14,714
Interest expense.............................................................. (817,998) (448,377)
Other income, net............................................................. 8,149 32,938
------------- -------------
(767,744) (400,725)
------------- -------------
Income before provision for state income taxes.................................. 7,920,059 189,853
Provision for state income taxes................................................ 119,900 2,848
------------- -------------
Net income...................................................................... $ 7,800,159 $ 187,005
------------- -------------
------------- -------------
Pro forma net income data (Notes 1 and 7, unaudited):
Income before provision for income taxes...................................... $ 7,920,059 $ 189,853
Pro forma income tax provision................................................ 2,908,900 75,941
------------- -------------
Pro forma net income.......................................................... $ 5,011,159 $ 113,912
------------- -------------
------------- -------------
Pro forma basic earnings per share............................................ $ 0.56 $ 0.01
------------- -------------
------------- -------------
Pro forma diluted earnings per share.......................................... $ 0.54 $ 0.01
------------- -------------
------------- -------------
Weighted average shares outstanding--basic.................................... 9,000,000 9,000,000
------------- -------------
------------- -------------
Weighted average shares outstanding--diluted.................................. 9,233,333 9,643,133
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
FUTURE MEDIA PRODUCTIONS
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------------ EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
---------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997............................ 9,000,000 $ 15,000 $ 13,129,440 $ 13,144,440
Dividends, $1.22 per share............................ -- -- (11,009,020) (11,009,020)
Net income............................................ -- -- 7,800,159 7,800,159
---------- ------------ -------------- --------------
Balance at December 31, 1997.......................... 9,000,000 15,000 9,920,579 9,935,579
Dividends, $1.52 per share............................ -- -- (13,704,000) (13,704,000)
Issuance of stock warrants............................ -- 3,055,000 -- 3,055,000
Net income............................................ -- -- 187,005 187,005
---------- ------------ -------------- --------------
Balance at June 30, 1998.............................. 9,000,000 $ 3,070,000 $ (3,596,416) $ (526,416)
---------- ------------ -------------- --------------
---------- ------------ -------------- --------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31 ENDED JUNE 30
1997 1998
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................................................... $ 7,800,159 $ 187,005
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................... 1,949,838 1,286,002
Deferred income taxes............................................................ 17,000 (39,325)
Provision for bad debts.......................................................... 955,243 60,000
Stock warrant compensation expense............................................... -- 3,055,000
Loss on disposals of property and equipment...................................... 20,959 --
Changes in operating assets and liabilities:
Accounts receivable............................................................ (3,195,350) 2,120,323
Inventories.................................................................... 1,523,072 50,615
Prepaid expenses............................................................... (121,019) (81,655)
Other assets................................................................... 279,437 (104,036)
Other receivables.............................................................. -- 227,000
Accounts payable............................................................... (850,930) 257,676
Accounts payable--equipment.................................................... 3,835,376 1,005,048
Accrued expenses............................................................... 39,622 279,744
Accrued liability--royalties................................................... 3,090,416 1,725,552
------------- --------------
Net cash provided by operating activities.......................................... 15,343,823 10,028,949
INVESTING ACTIVITIES
Purchases of property and equipment................................................ (7,477,062) (3,775,441)
------------- --------------
Net cash used in investing activities.............................................. (7,477,062) (3,775,441)
FINANCING ACTIVITIES
Net repayments on line of credit................................................... (103,316) (263,644)
Proceeds from long-term debt....................................................... 6,537,612 11,321,000
Repayments on long-term debt....................................................... (6,700,928) (966,600)
Payments on capital lease obligations.............................................. (14,221) (5,705)
Dividends paid to shareholders..................................................... (6,671,542) (13,704,000)
------------- --------------
Net cash used in financing activities.............................................. (6,952,395) (3,618,949)
------------- --------------
Net increase in cash and cash equivalents.......................................... 914,366 2,634,559
Cash and cash equivalents (bank overdraft) at beginning of period.................. (1,657,774) (743,408)
------------- --------------
Cash and cash equivalents (bank overdraft) at end of period........................ $ (743,408) $ 1,891,151
------------- --------------
------------- --------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest....................................................................... $ 817,998 $ 444,287
State income taxes............................................................. $ 107,000 $ 20,000
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
During the year ended December 31, 1997, the Company distributed $11,009,020
to shareholders consisting of a $4,337,478 reduction of notes receivable due
from shareholders and cash payments of $6,671,542.
During the year ended December 31, 1997, the Company entered into capital
lease obligations totaling $29,228.
The total balance of accounts payable--equipment represents property and
equipment purchased and placed into service which the Company has not paid for
as of December 31, 1997 and June 30, 1998.
See accompanying notes.
F-6
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Future Media Productions, Inc. (the Company) is a vertically integrated
manufacturer and supplier of compact disks (CDs) to the computer hardware,
software, on-line and publishing industries, providing mastering, replication
and a full range of services, including printing, packaging and fulfillment. The
majority of the Company's business is targeted at high volume customers in the
CD-ROM market.
PRESENTATION
The Company is a S Corporation for income taxes purposes. The pro forma June
30, 1998 unaudited information reflected in the accompanying balance sheets
reflects the dividend, in the amount of approximately $3,500,000 (unaudited), to
shareholders upon conversion from a S Corporation to a C Corporation as
discussed further in Note 1, "Income Taxes," and Note 7 to the financial
statements.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates, although
management does not believe that any differences would materially affect the
Company's financial position or results of operations.
CONCENTRATION OF CREDIT RISK
The Company manufactures and distributes CDs principally to computer
hardware distributors and software publishers throughout the United States. The
Company grants credit to its customers and does not require collateral. Credit
evaluations are performed periodically as needed. Concentrations of credit
exist, including those with related parties, and are described in Note 4.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over its useful
life ranging from three to ten years using the straight-line method. Maintenance
and repairs are charged to expense as incurred and costs of additions and
betterments that increase the useful life are capitalized. Amortization of
leased property is computed by the straight-line method over the lesser of the
asset life or life of the lease.
F-7
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company has elected to be taxed under the S Corporation provisions of
the Internal Revenue Code which provide that, in lieu of corporate income taxes,
the shareholders separately account for their pro rata share of the Company's
items of income, deductions, losses and credits. Therefore, these statements do
not include any provision for corporate federal income taxes. Similar provisions
apply for California income tax reporting; however, California tax law provides
for a 1.5% rate on taxable income at the corporate level. Accordingly, the
income tax provision consists of 1.5% tax due on the California taxable income
of the Company.
In connection with the closing of the proposed public offering as discussed
in Note 11, the Company's S Corporation status will terminate and the Company
will be taxed thereafter as a C Corporation. The pro forma statements of income
reflect a provision for federal and state income taxes as if the Company was a C
Corporation for the periods presented. Upon conversion to a C Corporation, the
Company will establish a net deferred tax liability with an accompanying
increase to income tax expense. If this charge were recorded at June 30, 1998,
the amount would have been approximately $1,800,000 (unaudited).
REVENUE RECOGNITION
Revenues are recognized when products are shipped.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock Based Compensation" encourages, but does not require, companies to record
compensation for stock-based employee compensation plans at fair value. The
Company has chosen to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees."
EARNINGS PER SHARE (UNAUDITED)
The Company calculates earnings per share in accordance with SFAS No. 128
"Earnings Per Share." Pro forma basic earnings per share has been computed by
dividing net income by the weighted average number of common shares outstanding.
Pro forma diluted earnings per share has been computed by dividing net income by
securities or other contracts to issue common stock as if these securities were
exercised or converted to common stock.
F-8
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the calculation for pro forma basic and
diluted earnings per share for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31 JUNE 30
1997 1998
------------ ------------
<S> <C> <C>
Earnings:
Pro forma net income............................................ $5,011,159 $ 113,912
------------ ------------
------------ ------------
Shares:
Weighted average shares for basic earnings per share............ 9,000,000 9,000,000
Share equivalent for dividends to stockholders.................. 233,333 233,333
Stock options and warrants...................................... -- 409,800
------------ ------------
Weighted average shares for diluted earnings per share.......... 9,233,333 9,643,133
------------ ------------
------------ ------------
</TABLE>
As discussed further in Notes 1 and 7, the Company is currently taxed as an
S Corporation for federal income and California franchise tax purposes.
Accordingly, the provision for income taxes for the periods presented reflect
primarily state income tax. The pro forma unaudited earnings per share
information is calculated as if the Company had been subject to tax as a C
Corporation for the periods presented and gives effect to the dividend to be
paid to shareholders upon conversion to a C Corporation. If the earnings per
share data were computed based on the Company's S Corporation status for the
periods presented, pro forma basic and diluted earnings per share would have
been $0.87 and $0.84, respectively, for the year ended December 31, 1997 and
$0.02 and $0.02, respectively, for the six months ended June 30, 1998.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of any asset may not be recoverable. An impairment loss
would be recognized when the estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition is less than
the carrying amount. If an impairment is indicated, the amount of the loss to be
recorded is based upon an estimate of the difference between the carrying amount
and the fair value of the asset. Fair value is based upon discounted estimated
cash flows expected to result from the use of the asset and its eventual
disposition and other valuation methods. No such impairment losses have been
identified by the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components. Components of
comprehensive income are net income and all other non-owner changes in equity
such as unrealized gains on available-for-sale securities that are not included
in net income. This statement requires that an enterprise: (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings in the equity section of the balance sheet. While SFAS No. 130
is
F-9
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
effective for financial statements issued for periods beginning after December
15, 1997, and therefore was adopted in the six months ended June 30, 1998, there
were no items of comprehensive income and no impact on the Company's results of
operations or related disclosures for the six months ended June 30, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. SFAS No. 131 is effective for fiscal
years beginning subsequent to December 15, 1997, and therefore, will be adopted
by the Company for the year ended December 31, 1998. The Company does not expect
the adoption of SFAS No. 131 to result in any material changes in its disclosure
and this statement will have no impact on the Company's consolidated results of
operations, financial position or cash flows.
RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 1997 financial
statements to conform to the presentation in 1998.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
------------ ----------
<S> <C> <C>
Raw materials....................................................... $ 355,826 $ 451,113
Work-in process and finished goods.................................. 278,672 132,770
------------ ----------
$ 634,498 $ 583,883
------------ ----------
------------ ----------
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment, net, consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
------------- -------------
<S> <C> <C>
Plant equipment................................................ $ 21,248,859 $ 24,849,667
Computer equipment............................................. 112,021 120,857
Office furniture and equipment................................. 77,814 83,564
Computer software.............................................. 23,056 23,056
Automotive equipment........................................... 64,080 71,080
Leasehold improvements......................................... 504,171 657,218
Leased property under capital leases........................... 73,508 73,508
------------- -------------
22,103,509 25,878,950
Less accumulated depreciation and amortization................. (4,467,257) (5,751,203)
------------- -------------
$ 17,636,252 $ 20,127,747
------------- -------------
------------- -------------
</TABLE>
F-10
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
4. RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS
During the year ended December 31, 1997 and six months ended June 30, 1998,
a significant portion of the Company's revenue activity consisted of sales to
one affiliated company, which is partially owned by the shareholders of the
Company. Net sales to this affiliate, an original manufacturer of personal
computers, were $12,068,296 and $2,820,844 for the year ended December 31, 1997
and the six months ended June 30, 1998, respectively, and represented 33.5% and
16.9% of the Company's net sales, respectively. At December 31, 1997 and June
30, 1998, accounts receivable from this affiliate were $2,413,640 and
$1,980,299, or 34.2% and 40.3% of total trade receivables, respectively.
Net sales to two unaffiliated customers were 20.9% and 14.5% of total net
sales for the year ended December 31, 1997 and 46.8% and 7.4% of total net sales
for the six months ended June 30, 1998. Accounts receivable from these customers
at December 31, 1997 and June 30, 1998 were $1,320,345 and $1,323,142, or 18.7%
and 18.8%, and $549,532 and $378,452, or 11.2% and 7.7%, of total trade
receivables, respectively.
During the year ended December 31, 1997, the Company wrote off accounts
receivable balances due from related parties in the aggregate of $670,263, none
of which related to the receivables from the affiliated company discussed above.
A director of the Company performed services for the Company including
investigation of strategic and financing alternatives and assistance in the
offering as described in Note 11. As consideration for such services, the
Company paid to the director $60,459 during the six months ended June 30, 1998
and $25,000 during the year ended December 31, 1997, including out of pocket
expenses. The Company has committed, upon consummation of the offering, to a
cash payment to the director of 0.75% of the gross proceeds of the Offering and
a grant of warrants equivalent to 0.25% of the gross proceeds of the Offering to
purchase shares of common stock at an exercise price of 110% of the offering
price.
Refer to Note 8 for discussion of additional related party transactions.
5. FINANCING
In February 1997, the Company entered into a credit agreement (Credit
Agreement) with a lender, which was amended in January 1998 and further amended
in April 1998 and July 1998. The Credit Agreement currently provides both a loan
based on 80% of the Company's eligible receivables (as defined) (Receivable
Loans) and additional revolving loans (Revolving Loan). Under the Credit
Agreement the Company is allowed to borrow up to $20,000,000, or an amount equal
to 80% of the Company's eligible receivables (as defined in the Credit
Agreement) plus the unpaid balance of the Revolving Loan. The Credit Agreement
had an original maturity date of February 28, 1998 and provided for automatic
renewals. In January 1998, the agreement was amended to have an original
maturity of April 30, 1998 and in September 1998 the maturity date was extended
to May 31, 2000, and continues to provide for automatic renewals. Borrowings
under Receivables Loan bear interest at the prime rate (8.50% at December 31,
1997 and June 30, 1998) plus 2% per annum; however, the interest rate will not
be less than 7.00% per annum. Outstanding borrowings under the Receivables Loan
amounted to $263,644 at December 31, 1997. There were no outstanding borrowings
under the Receivables Loan at June 30, 1998. The Credit Agreement is secured by
accounts receivable, equipment, inventory and other assets and is personally
guaranteed by the shareholders of the Company. Interest expense related to the
Receivable Loans for the
F-11
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
5. FINANCING (CONTINUED)
year ended December 31, 1997 and for the six months ended June 30, 1998 was
$234,778 and $23,197, respectively.
Under the amendment of April 1998, the Revolving Loan was for an amount of
$15,000,000, which is payable in monthly principal installments of $312,500
through (i) the earlier of the date the Credit Agreement terminates, or is
terminated, or (ii) April 2002. The Revolving Loan bears interest at the prime
rate (8.50% at December 31, 1997 and June 30, 1998) plus 2% per annum; however,
the interest rate will not be less than 7.00% per annum. The outstanding balance
of the Revolving Loan was $4,330,000 and $14,687,500 at December 31, 1997 and
June 30, 1998, respectively. As part of the Credit Agreement, the Revolving Loan
is collateralized by accounts receivable, equipment, inventory and other assets
and is personally guaranteed by the shareholders of the Company.
Subsequent to the closing of the offering described in Note 11, the Company
anticipates renegotiating the terms under the Credit Facility, including
maturity dates, covenants, interest rates and personal guarantees.
In August 1997, the Company entered into a loan agreement for the purchase
of automotive equipment. Proceeds received from the loan were $37,612 which are
being repaid in monthly installments of $794 through August 2002. The
outstanding balance accrues interest at a rate of 9.6%. The loan is
collateralized by the automotive equipment.
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Six months ended December 31, 1998............................. $ 1,878,244
Year ended December 31:
1999......................................................... 3,756,987
2000......................................................... 3,757,697
2001......................................................... 3,758,480
2002......................................................... 1,568,627
-----------
$14,720,035
-----------
-----------
</TABLE>
Interest expense incurred for long-term debt was $579,123 and $412,015 for
the year ended December 31, 1997 and the six months ended June 30, 1998,
respectively.
The Company's weighted average interest rate on its debt was 10.5% for the
year ended December 31, 1997 and for the six months ended June 30, 1998.
F-12
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
6. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment with lease terms through August 2002.
Obligations under capital leases have been recorded in the accompanying
financial statements at the present value of future minimum lease payments,
discounted at interest rates ranging from 11.02% to 11.25%. The capitalized cost
of the equipment of $73,508, less accumulated depreciation of $26,435, is
included in property, plant, and equipment in the accompanying financial
statements. Depreciation expense for this equipment for the year ended December
31, 1997 and the six months ended June 30, 1998 was $4,223 and $6,367,
respectively.
At June 30, the future minimum lease payments under the capital leases are
as follows:
<TABLE>
<S> <C>
Six months ended December 31, 1998................................. $ 7,123
Year ended December 31:
1999............................................................. 14,347
2000............................................................. 7,625
2001............................................................. 7,625
2002............................................................. 5,083
---------
Total future minimum lease payments................................ 41,803
Less amount representing interest.................................. 7,399
---------
Total.............................................................. $ 34,404
---------
---------
</TABLE>
7. INCOME TAXES
The provision for state income taxes is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE
DECEMBER 31 30
1997 1998
------------ -----------
<S> <C> <C>
Current............................................................ $ 102,900 $ 42,173
Deferred........................................................... 17,000 (39,325)
------------ -----------
$ 119,900 $ 2,848
------------ -----------
------------ -----------
</TABLE>
As described in Note 1 to the financial statements, the Company is currently
an S Corporation for federal income and California franchise tax purposes under
Subchapter S of the Internal Revenue Code and the corresponding provisions of
the California statute. In connection with the closing of the proposed public
offering as discussed in Note 11, the Company's S Corporation status will
terminate and the Company will be taxed as a C Corporation. The following
unaudited pro forma income tax information has
F-13
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
7. INCOME TAXES (CONTINUED)
been determined as if the Company operated as a C Corporation for the year ended
December 31, 1997 and the six months period ended June 30, 1998.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE
DECEMBER 31 30
1997 1998
------------ -----------
<S> <C> <C>
Federal tax provisions............................................. $2,483,100 $ 64,550
State income taxes net of federal benefit.......................... 425,800 11,391
------------ -----------
Total pro forma income tax provision............................... $2,908,900 $ 75,941
------------ -----------
------------ -----------
</TABLE>
The difference between actual income tax expense and the U. S. Federal
statutory income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31 ENDED JUNE 30
1997 1998
------------- -------------
<S> <C> <C>
Statutory rate..................................................... 34.0% 34.0%
State tax provision................................................ 1.5 1.5
S Corporation status............................................... (34.0) (34.0)
----- -----
Effective tax rate................................................. 1.5% 1.5%
----- -----
----- -----
</TABLE>
Deferred income tax assets and liabilities are computed for those
differences that have future tax consequences using the currently enacted tax
laws and rates that apply to the periods in which they are expected to affect
taxable income. Income tax expenses is the current tax payable or refundable for
the period, plus or minus the net change in the deferred tax asset and
liabilities accounts.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
------------ ----------
<S> <C> <C>
Stock warrants...................................................... $ -- $ 45,825
Bad debt allowance.................................................. 3,700 4,300
Other............................................................... 4,600 5,500
------------ ----------
Total deferred assets............................................... 8,300 55,625
Depreciation........................................................ (68,300) (76,300)
------------ ----------
Total deferred liabilities.......................................... (68,300) (76,300)
------------ ----------
Net deferred tax liabilities........................................ $ (60,000) $ (20,675)
------------ ----------
------------ ----------
</TABLE>
F-14
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
8. COMMITMENTS
The Company leases two office and manufacturing facilities in Valencia,
California, under operating leases. One of the leases expires in February 2002.
The other lease expires in May 2007 and is with a company owned by the
shareholders of the Company. Both leases provide for adjustments to the monthly
base rent periodically, based on the Consumer Price Index.
At June 30, 1998, future minimum lease payments required under the lease
arrangement are as follows:
<TABLE>
<CAPTION>
RELATED
PARTY OTHER TOTAL
------------ ---------- ------------
<S> <C> <C> <C>
Six months ended December 31, 1998................... $ 120,000 $ 133,688 $ 253,688
Year ended December 31:
1999............................................... 240,000 267,886 507,886
2000............................................... 240,000 260,644 500,644
2001............................................... 240,000 257,364 497,364
2002............................................... 240,000 43,527 283,527
2003............................................... 240,000 570 240,570
Thereafter......................................... 820,000 -- 820,000
------------ ---------- ------------
$2,140,000 $ 963,679 $ 3,103,679
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
Total rent expense pursuant to these leases was $395,672 and $248,412 for
the year ended December 31, 1997 and the six months ended June 30, 1998,
respectively. Rental payments to related parties were $140,000 and $120,000 for
the year ended December 31, 1997 and the six months ended June 30, 1998,
respectively.
9. STOCKHOLDERS' EQUITY
STOCK OPTIONS
In April 1998 the Company adopted a Stock Incentive Plan (Stock Plan). Each
executive officer, employee, non-employee director or consultant of the Company
or any of its future subsidiaries is eligible to be considered for the grant of
awards under the Stock Plan. A maximum of 900,000 (1,200,000 as amended on
August 25, 1998) shares of common stock may be issued pursuant to awards granted
under the Stock Plan, subject to certain adjustments to prevent dilution. Any
shares of common stock subject to an award which for any reason expires or
terminates unexercised are again available for issuance under the Stock Plan.
The options vest generally at periods up to 5 years. The Stock Plan will be
administered by the Company's Board of Directors or by a committee of two or
more non-employee directors appointed by the Board of Directors. The Stock Plan
authorizes the grant of nonqualified stock options, incentive stock options,
stock appreciation rights, restricted stock and stock bonuses. No stock
appreciation rights are outstanding at June 30, 1998.
F-15
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
9. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity, and related information is
as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
-------------------------------------
WEIGHTED
AVERAGE
EXERCISE EXERCISE
NUMBER OF PRICE PER PRICE PER
OPTIONS SHARE SHARE
----------- ----------- -----------
<S> <C> <C> <C>
Outstanding at December 31, 1997........................... -- $ -- $ --
Granted.................................................. 648,000 11.20 11.20
----------- ----------- -----------
Outstanding at June 30, 1998............................... 648,000 $ 11.20 $ 11.20
----------- ----------- -----------
----------- ----------- -----------
Exercisable at:
June 30, 1998............................................ -- $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
At June 30, 1998, 252,000 shares were available for future grant. The
weighted average remaining contractual life for the outstanding options is 10
years at June 30, 1998.
If the Company had elected to recognize compensation expense based on the
fair value of the options granted at grant date for its stock-based compensation
plans consistent with the method prescribed by SFAS No. 123, the Company's net
income would have been reduced by approximately $44,504 for the six month period
ended June 30, 1998 and pro forma basic and diluted earnings per share
(unaudited) would have been $0.01 and $0.01, respectively. The fair value of the
options is estimated using the Black-Scholes option pricing model with the
following weighted average assumptions for grants in 1998: dividend yield of
0.0%; risk free interest rate of 6.5%; and expected life of 5.0 years.
Subsequent to June 30, 1998, the Company granted a total of 180,000 stock
options under the Stock Plan at an exercise price of $11.90 per share, which was
determined to be not less than the estimated fair market value of the stock at
the date of the grant.
WARRANTS
On January 1, 1998, the Company granted to one of its officers warrants to
purchase 366,600 shares of common stock. Each warrant provides for the purchase
of one share of common stock at $0.0017 per share, resulting in stock warrant
compensation expense of $3,055,000 for the six months ended June 30, 1998, with
the warrants expiring on December 31, 2007. None of these warrants have any
voting rights, dividend rights or preferences until such time as they are
exercised for shares of common stock. As of June 30, 1998, no warrants have been
exercised.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial statements:
CASH AND CASH EQUIVALENTS: The carrying amount approximates fair value.
F-16
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
ACCOUNTS RECEIVABLE, OTHER RECEIVABLES, ACCOUNTS PAYABLE AND ACCOUNTS
PAYABLE-EQUIPMENT: The carrying amount approximates fair value.
LINE OF CREDIT AND LONG-TERM DEBT: The carrying amounts of the Company's
borrowings under its short-term revolving credit arrangements approximate their
fair value. The fair values of the Company's long-term debts are estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The carrying amount
of long-term debts approximate their fair values.
11. PROPOSED INITIAL PUBLIC OFFERING
On August 25, 1998, the Company's Board of Directors authorized the filing
of a registration statement with the Securities and Exchange Commission,
relating to an initial public offering of shares of the Company's unissued
common stock and shares to be sold by selling shareholders.
Effective August 25, 1998 the Board of Directors approved a six
hundred-for-one stock split of the Company's common stock. All references in the
accompanying financial statements to the number of shares of common stock and
per common share amounts have been retroactively adjusted to reflect the stock
split. In addition, the Company's capital structure was changed to reflect
45,000,000 shares of authorized no par value common stock and authorize an
additional 5,000,000 shares of no par value preferred stock. The Board of
Directors has authority to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares of preferred stock
without any future vote or action by the shareholders.
It is expected that the S Corporation status of the Company will terminate
upon the closing of the offering and, thereafter, the Company will be subject to
federal and state income taxes. As a result of terminating its S Corporation
status, the Company will pay a distribution to its shareholders, in an amount
sufficient to cover the anticipated taxes on earnings of the Company for the
period January 1, 1998 through the date of termination of the S Corporation
status.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Future Media Productions, Inc.
Valencia, California
We have audited the accompanying balance sheets of Future Media Productions,
Inc. as of December 31, 1995 and 1996, and the related statements of income,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Future Media Productions,
Inc. as of December 31, 1995 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Brown, Leifer, Slatkin + Berns
Studio City, California
April 10, 1997, except for note 13, as to which the date is August 25, 1998
Studio City, California
F-18
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Accounts receivable, net......................................................... $ 8,320,164 $ 4,247,414
Inventories...................................................................... 780,773 2,157,570
Due from shareholders............................................................ 1,489,000 4,657,741
Prepaid expenses................................................................. 145,852 189,390
Deferred taxes................................................................... 110,099 --
------------- -------------
Total Current Assets........................................................... 10,845,888 11,252,115
Fixed assets, net.................................................................. 11,896,018 12,096,647
Other Assets:
Deposits......................................................................... 151,931 520,553
Investments...................................................................... -- 275,000
Organization and start-up costs, net............................................. 15,097 10,965
------------- -------------
167,028 806,518
------------- -------------
$ 22,908,934 $ 24,155,280
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank overdraft................................................................... $ 1,929,825 $ 1,657,774
Line of credit................................................................... -- 366,960
Current portion of loan payable.................................................. 3,400,000 2,400,200
Current portion capital leases payable........................................... 7,155 8,478
Deferred taxes................................................................... -- 43,000
Accounts payable--trade.......................................................... 2,422,756 2,558,574
Accounts payable--capital equipment.............................................. 842,023 169,969
Accrued expenses--royalties...................................................... 3,790,000 1,076,084
Accrued expenses................................................................. 446,951 584,426
------------- -------------
Total Current Liabilities...................................................... 12,838,710 8,865,465
------------- -------------
Long-Term Debt, net of current portion:
Loan payable--Bank............................................................... 4,750,343 2,128,751
Obligations under capital leases................................................. 14,904 16,624
------------- -------------
4,765,247 2,145,375
Shareholders' Equity:
Preferred stock, no par value; 5,000,000 shares authorized; none issued and
outstanding.................................................................... -- --
Common stock, no par value; 45,000,000 shares authorized; 9,000,000 shares issued
and outstanding................................................................ 15,000 15,000
Retained earnings................................................................ 5,289,977 13,129,440
------------- -------------
5,304,977 13,144,440
------------- -------------
$ 22,908,934 $ 24,155,280
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Sales.............................................................................. $ 26,971,939 $ 25,814,061
Cost of Goods Sold................................................................. 14,875,342 12,113,023
------------- -------------
Gross Profit....................................................................... 12,096,597 13,701,038
Selling, General and Administrative Expenses....................................... 6,092,719 2,536,743
------------- -------------
Income From Operations............................................................. 6,003,878 11,164,295
Other Income (Expenses):
Interest income.................................................................. 12,487 251,680
Interest expense................................................................. (957,200) (1,108,253)
Other income (expense), net...................................................... 54,184 141,995
------------- -------------
(890,529) (714,578)
------------- -------------
Change in Accounting Estimate:
Income adjustment for reduction in estimated royalty liabilities................. -- 3,770,000
------------- -------------
Income Before Provision for State Income Taxes..................................... 5,113,349 14,219,717
Provision for State Income Taxes................................................... 72,300 223,289
------------- -------------
Net Income......................................................................... $ 5,041,049 $ 13,996,428
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
---------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995................................. 9,000,000 $ 15,000 $ 248,928 $ 263,928
Shareholders' dividends.................................... -- -- -- --
Net income................................................. -- -- 5,041,049 5,041,049
---------- --------- ------------- -------------
Balance at December 31, 1995............................... 9,000,000 15,000 5,289,977 5,304,977
Shareholders' dividends.................................... -- -- (6,156,965) (6,156,965)
Net income................................................. -- -- 13,996,428 13,996,428
---------- --------- ------------- -------------
Balance at December 31, 1996............................... 9,000,000 $ 15,000 $ 13,129,440 $ 13,144,440
---------- --------- ------------- -------------
---------- --------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------ --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income........................................................................ $ 5,041,049 $ 13,996,428
Adjustments to reconcile net income to net cash provided by operating
activities:.....................................................................
Depreciation and amortization................................................... 1,053,046 1,388,659
Deferred income taxes........................................................... (110,099) 153,099
Provision for bad debts......................................................... 4,922,944 281,711
Change in accounting estimate................................................... -- (3,770,000)
Net changes in other operating assets and liabilities:..........................
(Increase) decrease in accounts receivable.................................... (9,124,262) 3,791,039
Increase in inventory......................................................... (289,906) (1,376,797)
(Increase) decrease in prepaid expenses....................................... 49,633 (43,538)
Increase in other assets...................................................... (126,929) (643,622)
Increase in notes receivable from affiliate................................... (3,329,000) --
Increase in accounts payable and accrued expenses............................. 3,284,327 657,323
------------ --------------
Net Cash Provided By Operating Activities........................................... 1,370,803 14,434,302
------------ --------------
Cash Flows From Investing Activities:
Purchase of fixed assets.......................................................... (6,276,871) (1,585,156)
------------ --------------
Net Cash Used By Investing Activities:.............................................. (6,276,871) (1,585,156)
------------ --------------
Cash Flows From Financing Activities:
Other borrowings.................................................................. 1,929,825 (272,051)
Borrowings/(repayments) on line of credit......................................... (221,695) 366,960
Proceeds from long-term debt...................................................... 7,716,303 --
Repayments on long-term debt...................................................... (1,909,744) (3,618,349)
Advances to shareholders.......................................................... (1,489,000) (4,507,741)
Repayments on notes payable - officers............................................ (1,160,132) --
Cash dividend paid................................................................ -- (4,817,965)
------------ --------------
Net Cash Provided (Used) By Financing Activities.................................... 4,865,557 (12,849,146)
------------ --------------
Net Decrease in Cash (40,511) 0
------------ --------------
Cash and Equivalents, Beginning of Year............................................. 40,511 0
------------ --------------
------------ --------------
Cash and Equivalents, End of Year................................................... $ 0 $ 0
------------ --------------
------------ --------------
Supplemental Disclosures of Cash Flows Information:
Cash paid during the year for:
Interest........................................................................ $ 1,022,422 $ 1,108,253
------------ --------------
------------ --------------
State Income taxes.............................................................. $ 186,000 $ 91,000
------------ --------------
------------ --------------
Noncash financing activities:
Dividend declaration.............................................................. $ -- $ 6,156,965
Reduction of shareholders' receivables............................................ $ -- (1,339,000)
------------ --------------
Cash dividend paid.............................................................. $ -- $ 4,817,965
------------ --------------
------------ --------------
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Organization:
Future Media Productions, Inc. ("the Company") was incorporated in the state
of California on June 8, 1994. Operations commenced in October 1994.
(b) Business Activities:
The Company is a manufacturer of compact discs ("CD's") selling principally
to computer hardware distributors and software publishers.
(c) Cash and Equivalents:
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. There were no cash equivalents at
December 31, 1995 and 1996.
The Company maintains cash balances at two banks. Accounts at those
institutions are insured by the Federal Deposit Insurance Corporation up to
$100,000.
(d) Concentration of Credit Risk:
The Company manufactures and distributes CD's principally to computer
hardware distributors and software publishers throughout the United States. The
Company grants credit to its customers and does not require collateral. Credit
evaluations are performed periodically as needed. Concentrations of credit exist
with related parties which are described in Note 6.
(e) Revenue Recognition and Cost of Goods Sold:
Revenues are recognized when products are shipped. Cost of goods sold
consists primarily of raw material purchases, direct labor, depreciation of
plant equipment, royalties payable on the sale of CDs and rent and utilities
related to the plant facility.
In 1995 and 1996, due to production capacity limitations, certain customer
sales orders were fulfilled by the Company by purchasing CDs from outside third
parties. These sales totaled approximately $5.4 million in 1995 and $1.5 million
in 1996 with the corresponding costs totaling approximately $4.8 million and
$1.3 million for 1995 and 1996, respectively. The Company has elected to present
these sales on a net basis, and therefore has included only the net revenues
from these transactions of $604,000 and $189,000 as sales in the Company's
statements of income for 1995 and 1996, respectively.
(f) Income Taxes:
The Company has elected to be taxed under the "S" corporation provisions of
the Internal Revenue Code which provide that, in lieu of corporate income taxes,
the shareholders separately account for their pro rata share of the Company's
items of income, deductions, losses and credits. Therefore, these statements do
not include any provision for corporate federal income taxes. Similar provisions
apply for California income tax reporting; however, California tax law provides
for a 1 1/2% tax at the corporate level. Accordingly, the income tax provision
consists of the 1 1/2% tax due on the California taxable income of the Company.
F-23
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(g) Fixed Assets and Depreciation:
Fixed assets are stated at cost and are depreciated over their useful lives
ranging from five to fifteen years. Depreciation is computed using the
straight-line and declining balance methods. Maintenance and repairs are charged
to expense as incurred and costs of additions and betterments that increase the
useful lives are capitalized. Amortization of leased property is computed by the
straight-line method over the lesser of the asset or life of the lease.
(h) Organization Costs:
The Company incurred certain organization and start-up costs. These costs
are being amortized over five years using the straight-line method.
(i) Inventory:
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market.
(j) Investments:
Investments are recorded at cost which approximates fair market value.
(k) Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
(l) Advertising Costs:
Advertising costs are charged to operations at the time the costs are
incurred.
Advertising costs charged to operations were $51,446 and $2,881 for the
years ended December 31, 1995 and 1996, respectively.
(m) Reclassifications:
Certain reclassifications have been made to the December 31, 1995 financials
statements to conform to the presentation in 1996.
NOTE 2--ACCOUNTS RECEIVABLE:
As of December 31, 1995 and 1996, accounts receivable consisted of the
following:
<TABLE>
<CAPTION>
1995 1996
------------- ------------
<S> <C> <C>
Trade accounts receivable........................................ $ 9,929,108 $ 4,545,853
Less: Allowance for bad debts.................................... (1,608,944) (298,439)
------------- ------------
Accounts receivable, net......................................... $ 8,320,164 $ 4,247,414
------------- ------------
------------- ------------
</TABLE>
F-24
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE 2--ACCOUNTS RECEIVABLE: (CONTINUED)
See also Note 6, "Related Party Transactions and Major Customers."
NOTE 3--INVENTORIES:
Inventories as of December 31, 1995 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ------------
<S> <C> <C>
Raw materials....................................................... $ 234,097 $ 733,152
Work-in process and finished goods.................................. 546,676 1,424,418
---------- ------------
$ 780,773 $ 2,157,570
---------- ------------
---------- ------------
</TABLE>
NOTE 4--FIXED ASSETS:
Fixed assets as of December 31, 1995 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Plant equipment................................................ $ 12,743,960 $ 14,274,767
Computer equipment............................................. 74,473 82,595
Office furniture and equipment................................. 52,149 52,149
Computer software.............................................. 11,399 13,074
Automotive equipment........................................... 21,968 21,968
Leasehold improvements......................................... 132,413 170,591
Leased property under capitalized leases....................... 37,906 44,280
------------- -------------
13,074,268 14,659,424
Less: Accumulated depreciation and amortization.............. (1,178,250) (2,562,777)
------------- -------------
$ 11,896,018 $ 12,096,647
------------- -------------
------------- -------------
</TABLE>
Depreciation expense was $1,048,955 and $1,384,527 for the years ended
December 31, 1995 and 1996, respectively.
NOTE 5--ORGANIZATION COSTS:
Organization costs as of December 31, 1995 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Organization costs...................................................... $ 20,559 $ 20,559
Accumulated amortization................................................ (5,462) (9,594)
--------- ---------
Organization costs, net............................................... $ 15,097 $ 10,965
--------- ---------
--------- ---------
</TABLE>
Amortization expense was $4,091 and $4,132 for the years ended December 31,
1995 and 1996, respectively.
F-25
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE 6--RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMERS:
During the years ended December 31, 1995 and 1996, the majority of the
Company's revenue activity consisted of sales to one affiliated company, the
majority of which is owned by the shareholders of Future Media Productions, Inc.
Sales to this affiliate, an original manufacturer of personal computers were
$20,915,333 and $14,161,395 for the years ended 1995 and 1996 respectively. Such
sales represented 77% and 55% of the Company's sales revenue for the years ended
December 31, 1995 and 1996, respectively. At December 31, 1995 and 1996 accounts
receivable from this affiliate were $6,587,451 and $1,601,323, or 66% and 35% of
total trade receivables, respectively.
The Company also had sales to a repackager of computer peripherals, another
affiliate, the majority of which is owned by the shareholders of Future Media
Productions, Inc. Such sales amounted to $4,212,049 and $34,668 for the years
ended December 31, 1995 and 1996, respectively. At December 31, 1995, accounts
receivable were $1,533,944, or 15% of total trade receivables. At December 31,
1996, there were no outstanding accounts receivable from this affiliate.
During the second quarter of 1996 the Company wrote off accounts receivable
balances in the amount of $1,559,017 that were previously outstanding and
reserved for during 1995. The Company also wrote off advances of $3,329,000 to
the same affiliate which had also been reserved for at 100% during 1995. The
affiliate has ceased operations and is insolvent.
Advances in the amount of $4,657,741 were made to shareholders of the
corporation which are evidenced by promissory notes which bear interest at the
Company's borrowing rate of prime plus 3%. (At December 31, 1996 the prime rate
of interest was 8.25%.)
NOTE 7--LOANS PAYABLE--BANK:
The Company has a credit facility in the amount of $15,000,000 with a
Finance Company which expires July 31, 1997. As discussed below, such limit
covers borrowings under a revolving line of credit for working capital purposes
and a line of credit for the purchase of certain equipment. All loans under the
credit facility bear interest at an annual rate of prime plus 3% (at December
31, 1996 the prime rate was 8.25%), however, in no event shall the interest rate
be less than 8%. The credit facility is secured by accounts receivable,
equipment, inventory and other assets, and is personally guaranteed by
shareholders of the Company. The agreement provides for certain restrictions on
cash distributions and debt repayments to shareholders.
The agreement provides for a revolving line of credit for working capital
purposes whereby the Finance Company may advance funds to the Company provided
the total amount of outstanding advances at any one time does not exceed the
eligible borrowing base as determined by the Finance Company. At December 31,
1996, the Company had a balance due to the Finance Company of $366,960 under the
revolving line of credit arrangement.
The agreement also provides for a line of credit for certain equipment
purchases. Advances up to 80% of the purchase price may be made by the Finance
Company. The facility funded the first $3,000,000 of advances which are being
repaid in equal monthly principal installments of $83,350 plus interest through
F-26
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE 7--LOANS PAYABLE--BANK: (CONTINUED)
February 28, 1998. The second advance of $2,400,000 is being repaid in equal
monthly principal installments of $100,000 plus interest through February 28,
1997. A third advance of $4,646,000 is to be repaid in equal monthly payments of
$100,000 plus interest through September 30, 1999.
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1997............................................................ $2,400,200
1998............................................................ 1,282,750
1999............................................................ 846,001
----------
Total........................................................... $4,528,951
----------
----------
</TABLE>
The Company's weighted average interest rate on its debt was 12.7% and 12.0%
for the years ended December 31, 1995 and 1996, respectively.
Subsequent to December 31, 1996, the Company's borrowing facility was paid
in full and a new credit arrangement was entered into with a new lender which
provides borrowings in an amount not to exceed the lesser of $12,000,000, or 80%
of eligible accounts receivable plus the sum of $6,500,000 which is repayable in
monthly principal installments of $217,000. Outstanding balances will bear
interest at a rate of prime plus 2% per annum, however the interest rate will
not be less than 7% per annum. The facility has an initial maturity date of
February 28, 1998, however, the agreement provides for automatic renewals and is
subject to certain restrictive covenants and a $60,000 loan fee payable at
$5,000 per month. The facility is secured by accounts receivable, equipment,
inventory and other assets and is personally guaranteed by shareholders of the
Company.
NOTE 8--CAPITAL LEASE OBLIGATIONS:
The Company leases certain equipment with lease terms through November,
1999. Obligations under capital leases have been recorded in the accompanying
financial statements at the present value of future minimum lease payments,
discounted at interest rates ranging from 11.02% to 16.60%. The capitalized cost
of $44,280, less accumulated depreciation of $8,482 is included in property,
plant, and equipment in the accompanying financial statements. Depreciation
expense for this equipment for the years ended December 31, 1995 and 1996 was
$3,791 and $4,216, respectively.
Obligations under capital leases consist of the following:
<TABLE>
<S> <C>
Total.............................................................. $ 25,102
Less: Current portion.............................................. 8,478
---------
Long-term portion.................................................. $ 16,624
---------
---------
</TABLE>
F-27
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE 8--CAPITAL LEASE OBLIGATIONS: (CONTINUED)
The future minimum lease payments under the capital leases and the net
present value of the future minimum lease payments are as follows for the years
ended December 31,
<TABLE>
<S> <C>
1997............................................................... $ 16,102
1998............................................................... 7,332
1999............................................................... 5,427
---------
Total future minimum lease payments................................ 28,861
Less, amount representing interest................................. 3,759
---------
Present value of future minimum lease payments..................... $ 25,102
---------
---------
</TABLE>
NOTE 9--INCOME TAXES:
The provision for state income taxes for the year ended December 31, 1995
and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Current............................................................ $ 182,399 $ 70,190
Deferred........................................................... (110,099) 153,099
----------- ----------
$ 72,300 $ 223,289
----------- ----------
----------- ----------
</TABLE>
The difference between actual income tax expense and the U.S. Federal
statutory income tax rate is as follows:
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
<S> <C> <C>
Statutory rate................................................... 34.0% 34.0%
State tax provision.............................................. 1.5 1.5
S corporation status............................................. (34.0) (34.0)
----- -----
Effective tax rate............................................... 1.5% 1.5%
----- -----
----- -----
</TABLE>
Deferred income tax assets and liabilities are computed for those
differences that have future tax consequences using the currently enacted tax
laws and rates that apply to the periods in which they are expected to affect
taxable income. Valuation allowances are established, if necessary, to reduce
deferred tax asset accounts to the amounts that will more likely than not be
realized. Income tax expenses is the current tax payable or refundable for the
period, plus or minus the net change in the deferred tax asset and liabilities
accounts.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying accounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-28
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE 9--INCOME TAXES: (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Bad debt allowance.................................................... $ 74,000 $ 4,500
Royalty accruals...................................................... 56,800 --
Other deferred assets................................................. 3,699 4,700
---------- ----------
Total deferred assets............................................. 134,499 9,200
Depreciation allowances............................................... (24,400) (52,200)
---------- ----------
Total deferred liabilities........................................ (24,400) (52,200)
---------- ----------
Net deferred taxes................................................ $ 110,099 $ (43,000)
---------- ----------
---------- ----------
</TABLE>
NOTE 10--COMMITMENTS AND CONTINGENT LIABILITIES:
The Company leases its office and manufacturing facility in Valencia,
California under an operating lease which expired in February 1997, at which
time, a 5 year renewal option was exercised. The lease provides for adjustments
to the monthly base rent periodically, based on the consumer price index.
Future minimum lease payments required under the lease arrangement are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 245,419
1998............................................................................ 245,419
1999............................................................................ 245,419
2000............................................................................ 245,419
2001............................................................................ 245,419
Thereafter...................................................................... 40,902
------------
$ 1,267,997
------------
------------
</TABLE>
Rent expense pursuant to this lease was $229,056 and $234,515 for the years
ended December 31, 1995 and 1996, respectively.
The Company is subject to pending legal actions. Based upon the preliminary
stages of the various proceedings, the Company's legal counsel can not assess
the liability, if any, which may result from such litigation and no provision
for any such liability has been made on the financial statements.
NOTE 11--CHANGE IN ACCOUNTING ESTIMATE OF ROYALTY LIABILITIES:
The Company executed license agreements with two developers of compact disc
("CD") technology effective June 1, 1996 and October 1, 1996, respectively. The
agreements set forth royalty rates payable to the licensors for the license to
manufacture and sell CD's. Settlements totaling $70,000 for CD sales occurring
prior to the effective dates of the agreements were reached. As a result of the
settlement amounts, the Company's prior estimates of royalty liabilities were
overstated by approximately $3,470,000
F-29
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE 11--CHANGE IN ACCOUNTING ESTIMATE OF ROYALTY LIABILITIES: (CONTINUED)
in 1995 and $300,000 in 1994. Pursuant to the license agreements and
settlements, royalty liabilities in the amount of $1,151,084 were expensed
through December 31, 1996.
NOTE 12--FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial statements:
CASH AND CASH EQUIVALENTS: The carrying amount approximates fair value.
ACCOUNTS RECEIVABLE, OTHER RECEIVABLES, ACCOUNTS PAYABLE AND ACCOUNTS
PAYABLE-EQUIPMENT: The carrying amount approximates fair value.
LINE OF CREDIT AND LONG-TERM DEBT: The carrying amounts of the Company's
borrowings under its short-term revolving credit arrangements approximate their
fair value. The fair values of the Company's long-term debts are estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The carrying amount
of long-term debts approximate their fair values.
NOTE 13--PROPOSED INITIAL PUBLIC OFFERING (UNAUDITED):
During August, 1998, the Company's Board of Directors authorized the filing
of a registration statement with the Securities and Exchange Commission,
relating to an initial public offering of shares of the Company's unissued
common stock and shares to be sold by selling shareholders.
Effective August 25, 1998 the Board of Directors approved a six
hundred-for-one stock split of the Company's common stock. All references in the
accompanying financial statements to the number of shares of common stock and
per common share amounts have been retroactively adjusted to reflect the stock
split. In addition, the Company's capital structure will be changed to reflect
45,000,000 shares of common stock and authorize an additional 5,000,000 shares
of preferred stock. The Board of Directors has authority to fix the rights,
preferences, privileges and restrictions, including voting rights, of these
shares of preferred stock without any future vote or action by the shareholders.
F-30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVESTORS SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER
FUTURE MEDIA, THE SELLING SHAREHOLDERS OR ANY OF THE UNDERWRITERS HAVE
AUTHORIZED ANYONE TO PROVIDE INVESTORS WITH DIFFERENT INFORMATION. NO OFFER TO
SELL THESE SECURITIES IS BEING MADE IN ANY JURISDICTION WHERE THE OFFER OR SALE
IS NOT PERMITTED. ALL INFORMATION CONTAINED IN THIS PROSPECTUS SHOULD NOT BE
ASSUMED TO BE ACCURATE AS OF ANY OTHER DATE THAN THE DATE OF THIS PROSPECTUS.
--------------------
P R O S P E C T U S
--------------------
UNTIL , ALL DEALERS EFFECTING TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
September , 1998
Shares
[LOGO]
Common Stock
PRUDENTIAL SECURITIES INCORPORATED
ING BARING FURMAN SELZ LLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the Securities being
registered, other than underwriting discounts. All the amounts shown are
estimates except the Securities and Exchange Commission registration fee and the
NASD filing fee.
<TABLE>
<S> <C>
Registration fee--Securities and Exchange Commission............ $ 14,750
NASD filing fee................................................. 5,500
Nasdaq National Market fee...................................... 60,000
Accounting fees and expenses.................................... 150,000
Legal fees and expenses (other than blue sky)................... 300,000
Blue sky fees and expenses, including legal fees................ 10,000
Printing; stock certificates.................................... 125,000
Transfer agent and registrar fees............................... 5,000
Consulting fees................................................. 340,000
Miscellaneous................................................... 39,750
---------
Total........................................................... $1,050,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Articles of Incorporation include a provision that
eliminates the personal liability of its directors to the Registrant and its
shareholders for monetary damages for breach of the directors' fiduciary duties
in certain circumstances. This limitation has no effect on a director's
liability (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that a
director believes to be contrary to the best interests of the Registrant or its
shareholders or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard for
the director's duty to the Registrant or its shareholders in circumstances in
which the director was aware, or should have been aware, in the ordinary course
of performing a director's duties, of a risk of a serious injury to the
Registrant or its shareholders, (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Registrant or its shareholders, (vi) under Section 310 of the
California Corporations Code (the "California Code") (concerning contracts or
transactions between the Registrant and a director) or (vii) under Section 316
of the California Code (concerning directors' liability for improper dividends,
loans and guarantees). The provision does not extend to acts or omissions of a
director in his capacity as an officer. Further, the provision will not affect
the availability of injunctions and other equitable remedies available to the
Registrant's shareholders for any violation of a director's fiduciary duty to
the Registrant or its shareholders.
The Registrant's Articles of Incorporation also include an authorization for
the Registrant to indemnify its agents (as defined in Section 317 of the
California Code), through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this latter provision, the
Registrant's Bylaws provide for indemnification of the Registrant's directors,
officers and employees. In addition, the Registrant, at its discretion, may
provide indemnification to persons whom the Registrant is not obligated to
indemnify. The Bylaws also allow the Registrant to enter into indemnity
agreements with individual directors, officers, employees and other agents.
These indemnity agreements have been entered into with all directors and provide
the maximum indemnification permitted by law. These agreements, together with
the Registrant's Bylaws and Articles of Incorporation, may require the
Registrant, among other things, to indemnify such directors against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities resulting from willful misconduct of a culpable nature),
to advance expenses to them as they are incurred, provided that they undertake
to repay the amount
II-1
<PAGE>
advanced if it is ultimately determined by a court that they are not entitled to
indemnification, and to obtain directors' and officers' insurance if available
on reasonable terms.
The Company and certain of the Company's shareholders (the "Existing
Shareholders") plan to enter into a tax indemnification agreement (the "Tax
Agreement") relating to their respective income tax liabilities. Because the
Company will be fully subject to corporate income taxation after the termination
of the Company's S Corporation status, the reallocation of income and deductions
between the period during which the Company was treated as an S Corporation and
the period during which the Company will be subject to corporate income taxation
may increase the taxable income of one party while decreasing that of another
party. Accordingly, the Tax Agreement is intended to assure that taxes are borne
by the Company on the one hand and the Existing Shareholders on the other only
to the extent that such parties received the related income. The Tax Agreement
generally provides that, if an adjustment is made to the taxable income of the
Company for a year in which it was treated as an S Corporation, the Company will
indemnify the Existing Shareholders and the Existing Shareholders will indemnify
the Company against any increase in the indemnified party's income tax liability
(including interest and penalties and related costs and expenses), with respect
to any tax year to the extent such increase results in a related decrease in the
income tax liability of the indemnifying party for that year. The Company will
also indemnify the Existing Shareholders for all taxes imposed upon them as the
result of their receipt of an indemnification payment under the Tax Agreement.
Section 317 of the California Code and the Registrant's Bylaws make
provision for the indemnification of officers, directors and other corporate
agents in terms sufficiently broad to indemnify such persons, under certain
circumstances, for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act of 1933 ("Securities Act").
Section of the Underwriting Agreement filed as Exhibit 1.1 hereto sets
forth certain provisions with respect to the indemnification of certain
controlling persons, directors and officers against certain losses and
liabilities, including certain liabilities under the Securities Act.
The Registrant maintains director and officer liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Proposed form of Underwriting Agreement...................................... 1.1
Registrant's Amended and Restated Articles of Incorporation.................. 3.1
Registrant's Amended and Restated Bylaws..................................... 3.2
Registrant's Form of Indemnification Agreement............................... 10.3
Tax Agreement................................................................ 10.4
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In August, 1998, the Company issued pursuant to its 1998 Stock Incentive
Plan (the "Stock Plan") stock options to purchase an aggregate of 180,000 shares
of Common Stock at $11.90 per share to four directors of the Company. The
issuance and sale of these securities is exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act as a transaction not involving any public offering, and also pursuant Rule
701 because the offer and sale of the securities was pursuant to a compensatory
benefit plan relating to compensation.
In May 1998, the Company issued pursuant to its 1998 Stock Plan stock
options to purchase an aggregate of 648,000 shares of Common Stock at $11.20 per
share to 13 employees of the Company. The
II-2
<PAGE>
issuance and sale of these securities is exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act as a transaction not involving any public offering, and also pursuant Rule
701 because the offer and sale of the securities was pursuant to a compensatory
benefit plan relating to compensation.
The Company has agreed to issue to Averil Associates warrants to purchase
shares of Common Stock equivalent to 0.25% of the gross proceeds raised in the
Offering. The issuance of these warrants was exempt from registration pursuant
to Section 4(2) of the Securities Act as a transaction not involving any public
offering, and also pursuant Rule 701 because the offer and sale of the
securities was pursuant to a compensatory benefit plan relating to compensation.
On January 1, 1998 the Company issued warrants to purchase 366,600 shares of
Common Stock to David Moss, the Company's Vice President--Operations, for
services which had been rendered by Mr. Moss. The issuance of these warrants was
exempt from registration pursuant to Section 4(2) of the Securities Act as a
transaction not involving any public offering, and also pursuant Rule 701
because the offer and sale of the securities was pursuant to a compensatory
benefit plan relating to compensation.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Articles of Incorporation of Registrant.
3.2 Amended and Restated Bylaws of Registrant.
4.1 Specimen Stock Certificate of Common Stock of Registrant.*
5.1 Opinion and Consent of Troop Steuber Pasich Reddick & Tobey, LLP.*
10.1 1998 Stock Incentive Plan.
10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock Option).
10.3 Form of Registrant's Stock Option Agreement (Incentive Stock Option).
10.4 Form of Director and Officer Indemnification Agreement.
10.5 Form of Tax Indemnification Agreement to be entered into among Registrant and the Existing
Shareholders.*
10.6 Employment Agreement, dated August 26, 1998, between the Registrant and Alex Sandel.*
10.7 Employment Agreement, dated August 26, 1998, between the Registrant and David Moss.
10.8 Warrant Agreement, dated January 1, 1998, between the Registrant and David Moss.
10.9 Lease Agreement and Notice of Extension thereof, dated August 24, 1994 and June 13, 1996, respectively,
between the Registrant and Hermann Rosen & Florence W. Rosen, Trustees.
10.10 Lease Agreement, dated May 1, 1997, between the Registrant and Bascal Properties.
10.11 Loan and Security Agreement dated February 26, 1997, between the Registrant and Greyrock Business
Credit.
10.12 Extension Agreement, dated January 16, 1998, between the Registrant and Greyrock Business Credit.
10.13 Amendment to Loan Agreement, dated April 29, 1998, between the Registrant and Greyrock Business Credit.
10.14 Amendment to Loan Agreement, dated September 4, 1998, between the Registrant and Greyrock Business
Credit.
10.15 Purchase and Sale Agreement, dated November 1, 1997, between the Registrant and Packard Bell NEC, Inc.
10.16 Preferred Replicator Agreement, dated July 14, 1998, between the Registrant and Cendant Corporation.*
10.17 Comprehensive CD Disc License Agreement, dated October 1, 1996, between the Registrant and U.S. Phillips
Corporation.
10.18 Non-Exclusive Patent License Agreement for Disc Product Manufacturers, dated June 1, 1996, between the
Registrant and Discovision Associates.
10.19 Letter Agreement, dated June 15, 1998, between the Registrant and Averil Associates.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.20 Engagement Agreement, dated June 15, 1998, between the Registrant and Averil Associates.
16.1 Letter from Brown, Leifer, Slatkin + Berns regarding change in accountants.
23.1 Consent of Troop Steuber Pasich Reddick & Tobey, LLP (included in its opinion filed as Exhibit 5.1
hereto).*
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Brown, Leifer, Slatkin + Berns LLP.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by Amendment.
(b) Financial Statement Schedules
Report of Independent Auditors.
Schedule II Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer of controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by a controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the Offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-1 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Los Angeles, State of California, on September 10, 1998.
<TABLE>
<S> <C> <C>
FUTURE MEDIA PRODUCTIONS, INC.
By: /s/ ALEX SANDEL
-----------------------------------------
Alex Sandel
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Alex
Sandel and Louis Weiss, and each of them, as his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any or
all amendments (including post effective amendments) to this Registration
Statement and a new Registration Statement filed pursuant to Rule 462(b) of the
Securities Act and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the foregoing, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, or their substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ ALEX SANDEL Chairman of the Board,
- ------------------------------ Chief Executive Officer September 10, 1998
Alex Sandel and President
/s/ LOUIS WEISS Chief Financial Officer,
- ------------------------------ Principal Accounting September 10, 1998
Louis Weiss Officer and Secretary
/s/ SANFORD R. CLIMAN
- ------------------------------ Director September 10, 1998
Sanford R. Climan
/s/ MARK DYNE
- ------------------------------ Director September 10, 1998
Mark Dyne
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ DIANA MARANON
- ------------------------------ Director September 10, 1998
Diana Maranon
/s/ TIMOTHY CHANEY
- ------------------------------ Director September 10, 1998
Timothy Chaney
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Future Media Productions, Inc.
We have audited the financial statements of Future Media Productions, Inc.
as of and for the year ended December 31, 1997 and as of and for the six month
period ended June 30, 1998, and have issued our report thereon dated September
4, 1998 (included elsewhere in this Registration Statement). The financial
statements of Future Media Productions, Inc. as of and for the years ended
December 31, 1995 and 1996, were audited by other auditors whose report dated
April 10, 1997, expressed an unqualified opinion on those statements. Our audits
also included the financial statement schedule listed in Item 16(b) of this
Registration Statement. The schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above as of and
for the year ended December 31, 1997, and as of and for the six month period
ended June 30, 1998, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Woodland Hills, California
September 4, 1998
<PAGE>
SCHEDULE II
FUTURE MEDIA PRODUCTIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
COLUMN C
COLUMN B ------------------------ COLUMN E
------------ CHARGED ------------
COLUMN A BALANCE AT TO COSTS CHARGED COLUMN D BALANCE AT
- ----------------------------------------- BEGINNING AND TO OTHER ------------- END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD
- ----------------------------------------- ------------ ------------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995
(unaudited)............................ $ 15,000 $ 4,922,944 $ -- $ 3,329,000 $ 1,608,944
Year Ended December 31, 1996
(unaudited)............................ 1,608,944 281,711 -- 1,592,216 298,439
Year Ended December 31, 1997............. 298,439 955,243 -- 1,003,682 250,000
Six-Month Period Ended June 30, 1998..... 250,000 60,000 -- 23,416 286,584
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
FUTURE MEDIA PRODUCTIONS, INC.
The undersigned, Alex Sandel and Dawn Dodson, do hereby certify that:
1. They are the President and Secretary, respectively, of Future Media
Productions, Inc., a California corporation (the "CORPORATION").
2. The Articles of Incorporation of this Corporation are amended and
restated to read as follows:
I.
The name of this Corporation is Future Media Productions, Inc.
II.
The purpose of this Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California ("GCL") other than the banking business, the trust company business,
or the practice of a profession permitted to be incorporated by the GCL.
III.
A. The liability of the directors of this Corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
B. This Corporation is authorized to provide for, whether by bylaw,
agreement or otherwise, the indemnification of agents (as defined in Section 317
of the GCL) of this Corporation in excess of that expressly permitted by such
Section 317 for those agents, for breach of duty to this Corporation and its
shareholders to the extent permissible under California law (as now or hereafter
in effect). In furtherance and not in limitation of the powers conferred by
statute:
1. this Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of this
Corporation, or is serving at the request of this Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not this Corporation would have the power to
indemnify against such liability under the provisions of law; and
2. this Corporation may create a trust fund, grant a security
interest and/or use other means (including, without limitation, letters of
credit, surety bonds and/or other similar
<PAGE>
arrangements), as well as enter into contracts providing indemnification to
the fullest extent authorized or permitted by law and including as part
thereof provisions with respect to any or all of the foregoing to ensure the
payment of such amounts as may become necessary to effect indemnification as
provided therein, or elsewhere.
No such bylaw, agreement or other form of indemnification shall be
interpreted as limiting in any manner the rights which such agents would have to
indemnification in the absence of such bylaw, agreement or other form of
indemnification.
C. Any repeal or modification of the foregoing provisions of this Article
III by the shareholders of this Corporation shall not adversely affect any right
or protection of a director of this Corporation existing at the time of such
repeal or modification.
IV.
A. This Corporation is authorized to issue 45,000,000 shares of Common
Stock, no par value (hereinafter referred to as the "COMMON STOCK"), and
5,000,000 shares of Preferred Stock, no par value (hereinafter referred to as
the "PREFERRED STOCK").
B. Such Preferred Stock may be issued from time to time in one or more
series as shall be authorized by the Board of Directors of this Corporation.
The Board of Directors of this Corporation shall, prior to the issuance of any
such shares of any series of Preferred Stock, fix (i) the number of shares of
each such series of Preferred Stock and (ii) such distinctive designation or
title of each such series of Preferred Stock with such rights, privileges,
powers and preferences thereof.
C. Upon the filing of these amended and restated Articles of
Incorporation, each outstanding share of Common Stock shall, without any further
action on the part of the Corporation, be split and converted into 600 shares of
Common Stock.
V.
Cumulative voting for the election of directors of this Corporation shall
be eliminated effective upon the date this Corporation becomes, and for as long
as this Corporation is, a "listed corporation" within the meaning of Section
301.5 of the GCL.
3. The foregoing amendment and restatement of Articles of Incorporation
has been duly approved by the Board of Directors of this Corporation.
4. The foregoing amendment and restatement of Articles of Incorporation
has been duly approved by the required vote of shareholders in accordance with
Section 902 of the GCL. The total number of outstanding shares of this
Corporation was 15,000 shares (prior to the stock split effected hereby) of
Common Stock. The number of shares voting in favor of the amendment equaled or
exceeded the vote required. The percentage vote required was more than 50% of
the Common Stock.
2
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Executed at Los Angeles, California, on August 25, 1998.
/s/ ALEX SANDEL
---------------------------------------
Alex Sandel, President
/s/ DAWN DODSON
---------------------------------------
Secretary
3
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
FUTURE MEDIA PRODUCTIONS, INC..
(a California corporation)
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICES. The principal executive office of the
corporation shall be at such place within or outside the State of California as
the board of directors from time to time shall designate. If the principal
executive office of the corporation is located outside the State of California,
and the corporation has one or more business offices in California, the board of
directors shall designate a principal business office in California.
Section 2. OTHER OFFICES. The board of directors may at any time
establish branch or subordinate offices at any place or places as it may deem
appropriate.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of the shareholders shall be
held at any place within or outside the State of California designated by the
board of directors. In the absence of any such designation, shareholders'
meetings shall be held at the principal executive office of the corporation.
Section 2. ANNUAL MEETING. The annual meeting of the shareholders
shall be held each year on the FIRST MONDAY OF APRIL AT 10 O'CLOCK A.M. or on
such other date and at such other time as may be designated by the board of
directors. If the date for the annual meeting is designated by the board of
directors, such date shall not be more than fifteen months after the date of the
preceding annual meeting. At each annual meeting directors shall be elected and
any other proper business may be transacted.
Section 3. SPECIAL MEETING. A special meeting of the shareholders,
for the purpose of taking any action permitted under the Corporations Code of
California and the articles of incorporation of the corporation, may be called
at any time by the board of directors
<PAGE>
or by the chairman of the board, or by the president or by one or more
shareholders holding, in the aggregate, shares representing not less than
10% of the total number of votes which would be entitled to be cast at such
meeting.
If a special meeting is called by any person or persons other than the
board of directors, such person or persons shall deliver to the chairman of the
board, the president, any vice president or the secretary of the corporation a
written demand that notice of such meeting be given to the shareholders of the
corporation, specifying in such demand the general nature of the business
proposed to be transacted thereat. Such demand shall be delivered personally or
sent by registered mail or by telegraphic or other facsimile transmission. The
officer receiving such demand shall, in accordance with the provisions of
Sections 4 and 5 of this Article II, cause notice to be promptly given to the
shareholders entitled to vote that a special meeting will be held at the date
and time requested by the person or persons calling the meeting, which date must
be not less than thirty-five nor more than sixty days after the receipt of such
demand. If such notice is not given within twenty days after receipt of the
demand, the person or persons calling the meeting may cause the notice to be
given.
Every notice of a special meeting of the shareholders shall specify
the general nature of the business to be transacted, and no other business may
be transacted at such meeting. Nothing contained in this Section 3 shall be
construed as limiting, fixing or affecting the date and time when a meeting of
the shareholders called by action of the board of directors may be held.
Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. Whenever the
shareholders are required or permitted to take any action at a meeting, notice
of the meeting shall be given in accordance with Section 5 of this Article II
not less than ten nor more than sixty days before the date of the meeting. Such
notice shall specify the place, date and time of the meeting and (i) in the case
of a special meeting, the general nature of the business to be transacted or
(ii) in the case of the annual meeting, those matters which the board of
directors, at the time of giving the notice, intends to present for action by
the shareholders. The notice of any meeting at which directors are to be elected
shall include the name of any nominee or nominees whom, at the time the notice
is given, management intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, (ii) an amendment of the articles of incorporation, (iii) a
reorganization of the corporation as defined in the Corporations Code of
California, (iv) a voluntary dissolution of the corporation or (v) a
distribution in dissolution other than in accordance with the rights of
outstanding preferred shares, if any, the notice of such meeting shall also
state the general nature of that proposal.
Section 5. MANNER OF GIVING NOTICE. Notice of any meeting of the
shareholders shall be given either personally or by first-class mail or
telegraphic or other written communication, charges prepaid, addressed to each
shareholder at his address
2
<PAGE>
appearing on the books of the corporation or given by such shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or has been given, notice shall be deemed to have been
given if sent to that shareholder by first-class mail or telegraphic or other
written communication to the corporation's principal executive office or if
published at least once in a newspaper of general circulation in the county
where said principal executive office is located. Any notice shall be deemed
to have been given at the time when delivered personally or deposited in the
mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of such
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to such shareholder
at that address, all future notices or reports shall be deemed to have been duly
given without further mailing if the same shall be available to such shareholder
on written demand of such shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice
to the other shareholders of the corporation.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting which is executed by the secretary, assistant secretary or
any transfer agent of the corporation giving the notice shall be PRIMA FACIE
evidence of the giving of such notice.
Section 6. QUORUM. The presence in person or by proxy of the holders
of a majority of the shares entitled to vote at any meeting of the shareholders
shall constitute a quorum for the transaction of business. The shareholders
present at a duly called or held meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 7. ADJOURNED MEETING; NOTICE. Any shareholders' meeting,
annual or special, whether or not a quorum is present, may be adjourned from
time to time by the vote of the majority of the shares represented at that
meeting, either in person or by proxy, but in the absence of a quorum, no other
business may be transacted at that meeting, except as provided in Section 6 of
this Article II.
When any meeting of the shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the date, time and place at which the adjourned meeting is to be
reconvened are announced at the meeting at which the adjournment is taken,
unless a new record date for the adjourned meeting is fixed or unless the
adjournment is for more than forty-five days from the date set for the original
meeting, in which case the board of directors shall set a new record date. If
notice of any
3
<PAGE>
adjourned meeting is required to be given as indicated above, such notice
shall be given to each shareholder of record entitled to vote at the
adjourned meeting in accordance with the provisions of Sections 4 and 5 of
this Article II. At any adjourned meeting the shareholders may transact any
business which might have been transacted at the original meeting.
Section 8. VOTING. The shareholders entitled to vote at any meeting
of the shareholders shall be determined in accordance with the provisions of
Section 11 of this Article II, subject to the provisions of Sections 702 to 704,
inclusive, of the Corporations Code of California (relating to the voting of
shares held by a fiduciary, in the name of a corporation or in joint ownership).
The shareholders' vote may be by voice vote or by ballot; provided, however,
that any election for directors must be by ballot if demanded by any shareholder
before the voting has begun. If a quorum is present, the affirmative vote of the
majority of the shares represented at the meeting and entitled to vote on any
matter (other than an election of directors with respect to which cumulative
voting is applicable) shall be the act of the shareholders, unless the vote of a
greater number or voting by classes is required by the Corporations Code of
California or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, no
shareholder shall be entitled to cumulate votes unless the names of the
candidates for whom votes are sought to be cumulated have been placed in
nomination prior to commencement of the voting and a shareholder has given
notice prior to commencement of the voting of his intention to cumulate votes.
If any shareholder has given such a notice, then every shareholder entitled to
vote may cumulate his votes for candidates whose names have been placed in
nomination and give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which his shares
are entitled, or distribute his votes on the same principle among any or all of
the candidates, as he thinks fit. The candidates receiving the highest number of
votes, up to the number of directors to be elected, shall be elected.
Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The
transactions of any meeting of the shareholders, either annual or special,
however called and noticed and wherever held, shall be as valid as though taken
at a meeting duly held after regular call and notice if a quorum was present
either in person or by proxy and if, either before or after the meeting, each
person entitled to vote who was not present in person or by proxy or who, though
present, did expressly object to the consideration of particular matters of
business as to which proper notice was not given or who, at the beginning of the
meeting, did object to the transaction of any business thereat because the
meeting was not lawfully called or convened, signs a written waiver of notice or
a consent to a holding of the meeting or any approval of the minutes. Such
waiver of notice or consent or approval need not specify either the business to
be transacted or the purpose of any annual or special meeting of the
shareholders, except that if action is taken or proposed to be taken for
approval of any of those matters specified in the second paragraph of Section 4
of this Article II, the waiver of notice or consent shall state the general
nature of the proposal. All
4
<PAGE>
such waivers, consents or approvals shall be filed with the corporate records
or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if the objection is expressly made at the meeting.
Section 10. SHAREHOLDER ACTION WITHOUT A MEETING. Any action which
may be taken at any annual or special meeting of the shareholders may be taken
without a meeting and without prior notice, by consent in writing setting forth
the action so taken. In the case of any action other than election of directors,
such action shall be effective if signed by the holders of outstanding shares
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
on that action were present and voted. In the case of election of directors,
such consent shall be effective only if signed by the holders of all outstanding
shares entitled to vote for the election of directors; provided, however, that a
vacancy on the board of directors (other than a vacancy created by the removal
of a director) that has not been filled by the directors may be filled at any
time by the written consent of the holders of a majority of the outstanding
shares entitled to vote for the election of directors. All such consents shall
be filed with the secretary of the corporation and shall be maintained in the
corporate records. Any shareholder giving a written consent or such
shareholder's proxy holders or a transferee of the shares or a personal
representative of such shareholder or their respective proxy holders may. revoke
the consent by a writing received by the secretary of the corporation before
written consents of the number of shares required to authorize the proposed
action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the written consent of all such shareholders shall
not have been received, the secretary shall give to all shareholders entitled to
vote whose written consent has not been received prompt notice of the corporate
action approved by the shareholders without a meeting. Such notice must be given
at least ten days before the consummation of such action in the event that such
action consists of (i) entering into a contract or transaction in which a
director has a direct or indirect financial interest, (ii) indemnification of an
agent of the corporation, (iii) a reorganization of the corporation as defined
in the Corporations Code of California or (iv) a distribution in dissolution
other than in accordance with the rights of outstanding preferred shares, if
any. Such notice shall be given in the manner specified in Section 5 of this
Article II.
Section 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of
and to vote at any meeting or entitled to give consent to corporate action
without a meeting,
5
<PAGE>
the board of directors may fix, in advance, a record date which shall not be
more than sixty days nor less than ten days before the date of any such
meeting nor more than sixty days before any such action without a meeting,
and in this event only shareholders of record at the close of business on the
date so fixed are entitled to notice and to vote or to give consents, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date, except as otherwise provided in the
Corporations Code of California.
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of the shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting shall be (i) when no
resolution with respect to such action has yet been adopted by the board of
directors, the day on which the first written consent is given or (ii) when a
resolution with respect to such action has theretofore been adopted by the board
of directors, at the close of business on the day on which the board adopted the
resolution relating to such action or the sixtieth day before the date of the
consummation of such action, whichever is later.
Section 12. PROXIES. Every person entitled to vote or execute
consents shall have the right to do so either in person or by one or more agents
authorized by a written proxy dated and executed by such person or his
attorney-in-fact and filed with the secretary of the corporation. A proxy shall
be deemed executed if the name of the person making the same is placed thereon
(whether by manual signature, typewriting, telegraphic transmission or
otherwise) by such person or his attorney-infact. A validly executed proxy which
does not state that it is irrevocable shall continue in full force and effect
until (i) an instrument revoking such proxy or a duly executed proxy bearing a
later date is filed with the secretary of the corporation prior to the vote
pursuant thereto, (ii) the person executing such proxy attends the meeting and
votes in person or (iii) written notice of the death or incapacity of the maker
of such proxy is received by the corporation before the vote pursuant thereto is
counted; provided that no proxy shall be valid after the expiration of eleven
months from the date thereof, unless the person executing the proxy specifies
therein the length of time for which the same is to continue in force.
The revocability of a proxy which states on its face that it is
irrevocable shall be governed by Sections 705(e) and 705(f) of the Corporations
Code of California.
In the determination of the validity and effect of proxies, the dates
contained on the forms of proxy shall presumptively determine the order of
execution of the proxies, regardless of the postmark dates on the envelopes in
which they are mailed.
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Section 13. INSPECTORS OF ELECTION. Before any meeting of the
shareholders, the board of directors may appoint any persons other than nominees
for office to act as inspectors of election at the meeting or any adjournment
thereof. If no inspectors of election are so appointed, the chairman of the
meeting may, and on the request of any shareholder or a shareholder's proxy
shall, appoint inspectors of election at the meeting. The number of inspectors
shall be either one or three. If inspectors are appointed at a meeting on the
request of one or more shareholders or proxies, the holders of a majority of the
shares or their proxies present at the meeting shall determine whether one or
three inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the chairman of the meeting may, and upon
the request of any shareholder or a shareholder's proxy shall, appoint a person
to fill that vacancy.
The inspectors of election shall:
(a) Determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the existence of a quorum
and the authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Determine when the polls shall close;
(e) Count and tabulate all votes or consents;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election
or vote with fairness to all shareholders.
If there are three inspectors of election, the decision, act or
certificate of a majority is effective in all respects as the decision, act or
certificate of all. Any report or certificate made by the inspectors of election
is PRIMA FACIE evidence of the facts stated therein.
ARTICLE III
DIRECTORS
Section 1. POWERS. Subject to the provisions of the Corporations
Code of California and any limitations in the articles of incorporation or these
bylaws, the business and
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affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the board of directors.
Section 2. NUMBER OF DIRECTORS. The authorized number of directors
shall be not less than 5 nor more than 9, with the exact number of directors
to be fixed, within the limits specified, by approval of the board or the
shareholders in the manner provided in these bylaws. The initial number of
directors shall be 5. Subject to the provisions of the Corporations Code of
California, the range of directors may be changed, or a definite number fixed
without provision for a range, by a duly adopted amendment to the articles of
incorporation or by an amendment to this bylaw duly adopted by the vote or
written consent of holders of a majority of the outstanding shares entitled
to vote; provided, however, that an amendment reducing the exact number or
the minimum number of directors to a number less than five shall not be
adopted if the votes cast against its adoption at a meeting of the
shareholders, or the shares not consenting in the case of action by written
consent, are equal to more than 16-2/3% of the outstanding shares entitled to
vote; and provided further, that no amendment may change the stated maximum
number of authorized directors to a number greater than two times the stated
minimum of directors minus one.
Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall
be elected at the annual meeting of the shareholders, but if any such annual
meeting is not held or the directors are not elected thereat, the directors may
be elected at any special meeting of shareholders held for that purpose. Each
director, including a director elected to fill a vacancy, shall hold office
until the next annual meeting of shareholders and until a successor has been
elected.
Section 4. VACANCIES. Vacancies in the board of directors may be
filled by a majority of the remaining directors, though less than a quorum, or
by a sole remaining director, except that a vacancy created by the removal of a
director by the vote or written consent of the shareholders or by court order
may be filled only by the vote of a majority of the shares entitled to vote
represented at a duly held meeting at which a quorum is present or by the
unanimous written consent of the holders of all outstanding shares entitled to
vote.
A vacancy or vacancies in the board of directors shall be deemed to
exist in the event of the death, resignation or removal of any directors or if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony or if the authorized number of directors is increased.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors.
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of directors,
unless the notice specifies a
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later time for the resignation to become effective. If the resignation of a
director is effective at a future time, a successor may be elected to take
office when the resignation becomes effective.
No reduction of the authorized number of directors shall have the
effect of removing any director before such director's term of office expires.
Section 5. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. Regular
meetings of the board of directors may be held at any place within or outside
the State of California that has been designated from time to time by resolution
of the board. In the absence of such a designation, regular meetings shall be
held at the principal executive office of the corporation. Special meetings of
the board shall be held at any place within or outside the State of California
that has been designated in the notice of the meeting or, if not stated in the
notice or there is no notice, at the principal executive office of the
corporation. Any meeting, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another, and all such directors shall
be deemed to be present in person at the meeting.
Section 6. ORGANIZATION MEETING. Immediately following each annual
meeting of shareholders, the board of directors shall hold a regular meeting for
the purpose of organization, any desired election of officers and the
transaction of other business. Notice of this meeting shall not be required.
Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the
board of directors shall be held without call at such time as shall from time to
time be fixed by the board of directors. Such regular meetings may be held
without notice.
Section 8. SPECIAL MEETINGS. Special meetings of the board of
directors for any purpose or purposes may be called at any time by the chairman
of the board, the president, any vice president, the secretary or any two
directors.
Notice of the time and place of special meetings shall be delivered
personally to each director or communicated to each director by telephone,
telegraph or by mail, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation or, if it is
not so shown on such records or is not readily ascertainable, at the place at
which the meetings of the directors are regularly held. In case such notice is
mailed, it shall be deposited in the United States mail at least four days
before the time of the holding of the meeting. In case such notice is delivered
personally or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight hours before the time
of the holding of the meeting. Any oral notice given personally or by telephone
may be communicated either to the director or to a person at the office of the
director who the
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person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose of the meeting or, if the
meeting is to be held at the principal executive office of the corporation, the
location at which the meeting is to be held.
Section 9. QUORUM. A majority of the authorized number of directors
shall constitute a quorum for the transaction of business, except to adjourn as
provided in Section 11 of this Article III. Every act or decision done or made
by a majority of the directors present at a meeting duly held at which a quorum
is present shall be regarded as the act of the board of directors, unless a
greater number is required by law, by the articles of incorporation or by these
bylaws. A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the directors required for a quorum
for that meeting.
Section 10. WAIVER OF NOTICE. The transactions of any meeting of the
board of directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum was present and if, either before or after the meeting, each of the
directors not present or who, though present, did, prior to the meeting or at
its commencement, protest the lack of proper notice to him signs a written
waiver of notice, a consent to holding the meeting or an approval of the
minutes. The waiver of notice or consent need not specify the purpose of the
meeting. All such waivers, consents and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting. Notice of a
meeting shall also be deemed duly given to any director who attends the meeting
without protesting, before or at its commencement, the lack of notice to that
director.
Section 11. ADJOURNMENT. A majority of the directors present at any
directors' meeting, whether or not a quorum is present at such meeting, may
adjourn such meeting to another time and place.
Section 12. NOTICE OF ADJOURNMENT. If a meeting is adjourned for
more than twenty-four hours, notice of the adjournment to another time or place
shall be given prior to the time of the adjourned meeting to the directors who
were not present at the time of adjournment. Otherwise notice of the time and
place of holding an adjourned meeting need not be given to absent directors if
the time and place be fixed at the meeting adjourned.
Section 13. ACTION WITHOUT MEETING. Any action required or permitted
to be taken by the board of directors may be taken without a meeting if all
members of the board shall individually or collectively consent in writing to
such action. Such action by written consent shall have the same force and effect
as a unanimous vote of the board of directors. Such written consent or consents
shall be filed with the minutes of the proceedings of the board.
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Section 14. FEES AND COMPENSATION OF DIRECTORS. Directors and
members of committees may receive such compensation, if any, for their services
and such reimbursement of expenses as may be fixed or determined by resolution
of the board of directors. This Section 14 shall not be construed to preclude
any director from serving the corporation in any other capacity as an officer,
agent, employee or otherwise and receiving compensation for those services.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF DIRECTORS. The board of directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees (including an executive committee), each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent member at any meeting of the committee. Members and
alternate members of committees shall be designated by the vote of a majority of
the authorized number of directors. Any committee, to the extent provided in the
resolution of the board, shall have all the authority of the board, except with
respect to:
(a) the approval of any action which, under the Corporations
Code of California, also requires shareholders' approval or approval of the
outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on
the board or on any committee;
(d) the amendment or repeal of bylaws or the adoption of new
bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation,
except at a rate or in a periodic amount or within a price range determined by
the board of directors; or
(g) the appointment of any other committees of the board of
directors or the members of these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by, and held and taken in accordance with, the
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provisions of Article III of these bylaws relating to meetings and actions of
the board of directors, with such changes therein as are necessary to substitute
the committee and its members for the board of directors and its members, except
that (i) the time of regular meetings of committees may be determined either by
resolution of the board of directors or by resolution of the committee; (ii)
special meetings of committees may also be called by resolution of the board of
directors; and (iii) notice of special meetings of committees shall also be
given to all alternate members, who shall have the right to attend all meetings
of the committee. The board of directors may adopt rules for the government of
any committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the corporation shall be a
president or a chairman of the board or both, a secretary and a chief financial
officer. The corporation may also have, at the discretion of the board of
directors, one or more vice presidents and such other officers as may be
appointed in accordance with the provisions of Section 3 of this Article V. Any
number of offices may be held by the same person.
Section 2. ELECTION. The officers of the corporation, except such
officers as may be appointed in accordance with the provisions of Section 3 or
Section 5 of this Article V, shall be chosen by the board of directors. Each
officer of the corporation shall serve at the pleasure of the board or until he
shall resign or shall be removed.
Section 3. SUBORDINATE OFFICERS. The board of directors may appoint
or may confer upon any officer or officers of the corporation the power to
appoint such other officers as the business of the corporation may require, each
of whom shall hold office for such period, have such authority and perform such
duties as are provided in these bylaws or as the board of directors may from
time to time determine.
Section 4. REMOVAL AND RESIGNATION. Any officer may be removed,
either with or without cause, by the board of directors or, except in case of an
officer chosen by the board of directors, by any officer upon whom such power of
removal may be conferred by the board of directors.
Any officer may resign (without prejudice to the rights, if any, of
the corporation under any contract to which the officer is a party) at any time
by giving written notice to the corporation. Any resignation shall, take effect
on the date of the receipt of such notice or at any later time specified
therein; and, unless otherwise specified therein, the acceptance of any
resignation shall not be necessary to make it effective.
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Section 5. VACANCIES. A vacancy in any office because of death,
resignation, removal or any other cause shall be filled in the manner prescribed
in these bylaws for regular election or appointment to such office.
Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if the
corporation shall have such an officer, shall, if present, preside at meetings
of the board of directors and exercise and perform such other powers and duties
as may be assigned to him from time to time by the board of directors or
prescribed by these bylaws. If there is no president or if provided in the
articles of incorporation or these bylaws, the chairman of the board shall in
addition be the chief executive officer of the corporation and shall have the
powers and duties prescribed in Section 7 of this Article V.
Section 7. PRESIDENT. Subject to the control of the board of
directors and to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if the corporation shall have such an
officer, the president shall have general supervision, direction and control of
the business and the officers of the corporation. Unless otherwise provided in
the articles of incorporation or these bylaws, the president shall be the chief
executive officer and general manager of the corporation. He shall preside at
all meetings of the shareholders and, in the absence of the chairman of the
board or if there be none, at all meetings of the board of directors. He shall
be ex-officio a member of all the standing committees, if any, of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws. Subject to such limitations as may be imposed by the board of directors,
any powers or duties vested in the president may be delegated by him to such
subordinates as he may choose.
Section 8. VICE PRESIDENT. In the absence or disability of the
president, the vice presidents, if any, in order of their rank as fixed by
the board of directors or, if not ranked, a vice president designated by the
board of directors, shall perform all the duties of the president and when so
acting shall have all the powers of, and be subject to all the restrictions
upon, the president. The vice presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the board of directors, these bylaws, the president or the
chairman of the board.
Section 9. SECRETARY. The secretary shall keep or cause to be kept,
at the principal executive office or such other place as the board of directors
may direct, a book of minutes of all meetings and actions of directors,
committees of directors and shareholders, with the time and place of holding,
whether regular or special and, if special, how authorized, the notice given,
the names of those present at directors' meetings or committee meetings, the
number of shares present or represented at shareholders' meetings and the
proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent or
registrar a share register or a duplicate share
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register, showing the names of all shareholders and their addresses, the
number and classes of shares held by each, the number and date of
certificates issued for the same and the number and date of cancellation of
every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the board of directors required by these bylaws or by
law to be given, and he shall keep the seal of the corporation, if the
corporation shall adopt one, in safe custody, and he shall have such other
powers and perform such other duties as may be prescribed by the board of
directors or by these bylaws.
Section 10. CHIEF FINANCIAL OFFICER. The chief financial officer
shall keep and maintain, or cause to be kept and maintained, adequate and
correct books and records of accounts of the properties and business
transactions of the corporation, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, and retained earnings, and
records of the holders of its shares. The books of account shall at all
reasonable times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the board of directors and shall have the
authority to execute and affix the endorsement of the corporation upon any
negotiable instrument for the purpose of making any such deposit. He shall
render to the president and directors, whenever they request it, an account of
all of his transactions as chief financial officer and of the financial
condition of the corporation and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or these bylaws.
Unless another person has been appointed treasurer of the corporation pursuant
to Section 3 of this Article V, the chief financial officer shall also be known
as the treasurer.
Section 11. ASSISTANTS. If an assistant officer to any officer shall
be appointed, such assistant officer may exercise any of the powers of his
superior officer, as provided in these bylaws or as authorized by the board of
directors, and shall perform such other duties as are imposed upon him by these
bylaws or the board of directors.
ARTICLE VI
RECORDS AND REPORTS
Section 1. MAINTENANCE OF SHARE REGISTER AND INSPECTION BY
SHAREHOLDERS. The corporation shall keep at its principal executive office, or
at the office of its transfer agent or registrar if either shall have been
appointed, a record of its shareholders, giving the names and addresses of all
shareholders and the number and class of shares held by each shareholder.
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A shareholder or shareholders of the corporation holding in the
aggregate at least five percent of the outstanding voting shares of the
corporation shall have the right (i) to inspect and copy the record of
shareholders' names and addresses and shareholdings during usual business hours
up on five business days' prior written demand on the corporation and (ii) to
obtain from the transfer agent of the corporation (if one shall have been
appointed) up on written demand and up on the tender of such transfer agent's
usual charges for such list, a list of the names and addresses of the
shareholders entitled to vote for the election of directors and their
shareholdings, as of the most recent record date for which that list has been
compiled or as of a date specified by such shareholder after the date of demand.
Such list shall be made available to any such shareholder by the transfer agent
on or before five business days after the demand is received or the date
specified in the demand as the date as of which such list is to be compiled,
whichever is later. The record of shareholders shall also be open to inspection
and copying up on the written demand of any shareholder or holder of a voting
trust certificate at any reasonable time during usual business hours for a
purpose reasonably related to such person's interests as a shareholder or as the
holder of a voting trust certificate. Any inspection and copying under this
Section 1 may be made in person or by an agent or attorney of the shareholder or
holder of a voting trust certificate making the demand.
Section 2. MAINTENANCE OF BYLAWS AND INSPECTION BY SHAREHOLDERS. The
corporation shall keep at its principal executive office, or if its principal
executive office is not in California, at its principal business office in this
state, the original or a copy of these bylaws as amended to date, which shall be
open to inspection by the shareholders at any time during usual business hours.
If the principal executive office of the corporation is outside California and
the corporation has no principal business office in California, the secretary
shall, upon the written request of any shareholder, furnish to such shareholder
a copy of these bylaws as amended to date.
Section 3. MAINTENANCE OF OTHER CORPORATE RECORDS AND INSPECTION BY
SHAREHOLDERS. The minutes of proceedings of the shareholders, the board of
directors and any committee or committees of the board of directors and the
accounting books and records shall be kept at the principal executive office or
such other place as the board of directors may direct. The minutes shall be kept
in written form, and the accounting books and records shall be kept either in
written form or in any other form capable of being converted into written form.
The minutes and the accounting books and records shall be open to inspection
upon the written demand of any shareholder or holder of a voting trust
certificate at any reasonable time during usual business hours for a purpose
reasonably related to such person's interests as a shareholder or as the holder
of a voting trust certificate. The inspection may be made in person or by an
agent or attorney of the shareholder or holder of a voting trust certificate and
shall include the right to copy and make extracts. The rights of inspection
under this Section 3 shall extend to the records of any subsidiary corporation
of the corporation.
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Section 4. INSPECTION BY DIRECTORS. Every director shall have the
absolute right to inspect at any reasonable time all books, records and
documents of every kind and the physical properties of the corporation and each
of its subsidiary corporations. Any inspection by a director may be made in
person or by an agent or attorney and the right of inspection includes the right
to copy and make extracts of documents.
Section 5. ANNUAL REPORT TO SHAREHOLDERS. The annual report to
shareholders referred to in Section 1501 of the Corporations Code of California
is expressly dispensed with, but nothing herein shall be interpreted as
prohibiting the board of directors from issuing annual or other periodic reports
to the shareholders of the corporation as it considers appropriate.
The corporation shall, upon the written request of any shareholder
made more than 120 days after the close of any fiscal year of the corporation,
deliver or mail to the shareholder making the request within 30 days thereafter
the financial statements which would be required to be included in the annual
report for such year under subdivision (a) of Section 1501 of the Corporations
Code of California. If financial statements are delivered or mailed upon the
request of a shareholder pursuant to this Section 5, copies of the same shall be
kept on file in the principal executive office of the corporation for a period
of twelve months and shall be exhibited during usual business hours, a copy
thereof mailed, to any shareholder demanding to examine the same.
Section 6. SHAREHOLDER RIGHT TO REQUEST OTHER FINANCIAL STATEMENTS.
A shareholder or shareholders holding in the aggregate at least five percent of
the outstanding shares of any class of stock of the corporation may make a
written request to the corporation for (i) an income statement of the
corporation for any three-month, six-month or nine-month period (ended more than
thirty days before the date of the request) of the then current fiscal year and
a balance sheet of the corporation as of the end of such period and (ii) if no
annual report for the last fiscal year of the corporation has been sent to the
shareholders of the corporation, the financial statements for the last fiscal
year which would have been required by the Corporations Code of California to
have been included in such annual report. Such income statement and balance
sheet shall be prepared and delivered personally or mailed by the corporation to
such shareholder within thirty days after receipt of the request therefor. If an
income statement and balance sheet is prepared upon the request of a shareholder
or shareholders pursuant to this Section 6, copies of the same shall be kept on
file in the principal executive office of the corporation for a period of twelve
months and shall be exhibited during usual business hours, or a copy thereof
mailed, to any shareholder demanding to examine the same.
ARTICLE VII
GENERAL CORPORATE MATTERS
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Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.
For purposes of determining the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than action by
shareholders by written consent without a meeting), the board of directors may
fix a time in the future as a record date, which shall not be more than sixty
days before any such action, and in that case only shareholders of record at the
close of business on the date so fixed are entitled to receive the dividend,
distribution or allotment of rights or to exercise the rights, as the case may
be, notwithstanding any transfer of any shares on the books of the corporation
after the record date so fixed, except as otherwise provided in the Corporations
Code of California.
If the board of directors does not fix a record date, the record date
for determining shareholders entitled to receive payment of any dividend or
other distribution or allotment of any rights or entitled to exercise any rights
in respect of any other lawful action shall be at the close of business on the
date on which the board adopts the applicable resolution authorizing such action
or the sixtieth day before the date of such action, whichever is later.
Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks,
drafts or other orders for payment of money or notes or other evidences of
indebtedness, issued in the name of or payable to the corporation, shall be
signed or endorsed by such person or persons and in such manner as shall be
determined, from time to time, by resolution of the board of directors.
Section 3. CORPORATE CONTRACTS, ETC., HOW EXECUTED. The board of
directors, except as otherwise provided in these bylaws, may authorize any
officer or officers or agent or agents to enter into any contract or execute any
instrument in the name of and on behalf of the corporation, and such authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the board of directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
Section 4. FISCAL YEAR. The fiscal year of the corporation shall be
such as shall be determined, from time to time, by resolution of the board of
directors.
Section 5. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
chairman of the board, the president or any vice president of the corporation or
any other person authorized by resolution of the board of directors or by any of
the foregoing designated officers is authorized to vote, represent and exercise
on behalf of the corporation all rights incident to any and all shares of any
other corporation or corporations, foreign or domestic, standing in the name of
the corporation. The authority granted to such persons to vote or represent on
behalf of the corporation any and all shares held by the corporation in any
other
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corporation or corporations may be exercised by any of them in person or
by any person authorized to do so by a proxy duly executed by any of them.
ARTICLE VIII
CAPITAL STOCK
Section 1. CERTIFICATES FOR SHARES. A certificate or certificates
for shares of the capital stock of the corporation, certifying the number of
shares and the class or series of shares owned by a shareholder, shall be issued
to each shareholder when such shares are fully, paid. Certificates may be issued
prior to full payment under such restrictions and for such purposes as may be
authorized by the board of directors; provided, however, that any certificate so
issued prior to full payment shall state on the face thereof the total amount of
the consideration to be paid for the shares represented thereby and the amount
paid thereon.
All certificates shall be signed in the name of the corporation by the
chairman or vice chairman of the board or the president or a vice president and
by the chief financial officer or an assistant treasurer or the secretary or an
assistant secretary. Any or all of the signatures on the certificate may be
facsimile. If any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate shall have ceased to be
such officer, transfer agent or registrar before that certificate is issued, it
may be issued by the corporation with the same effect as if that person were an
officer, transfer agent or registrar at the date of issue.
Section 2. TRANSFER OF SHARES. Subject to the balance of this
Article VIII, upon surrender to the corporation or its transfer agent of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, a new certificate shall be
issued to the person entitled thereto, the old certificate shall be canceled and
the transfer shall be recorded upon the books of the corporation.
Section 3. LOST OR DESTROYED CERTIFICATES. In the event that any
share certificate or certificate for any other security is, or is claimed to be,
lost, stolen or destroyed, the corporation may authorize the issuance of a
replacement certificate on such terms and conditions as the president, any vice
president, the chief financial officer or the secretary may require, including
provision for indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it.
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ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or
these bylaws may be amended or repealed by the vote or written consent of
holders of a majority of the outstanding shares entitled to vote; provided,
however, that if the articles of incorporation of the corporation set forth the
number of authorized directors of the corporation, the authorized number of
directors may be changed only by an amendment of the articles of incorporation.
Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the
shareholders as provided in Section 1 of this Article IX to adopt, amend or
repeal bylaws, bylaws may be adopted, amended or repealed by the board of
directors; provided, however, that the board of directors may adopt a bylaw or
amendment of a bylaw changing the authorized number of directors only for the
purpose of fixing the exact number of directors within the limits specified in
the articles of incorporation or in Section 2 of Article III hereof.
Section 3. RECORD OF AMENDMENTS. Whenever an amendment or new bylaw
is adopted it shall be copied in the original bylaws in the appropriate place.
If any bylaw is repealed, the fact of repeal and the date of the meeting at
which the repeal was enacted or the date the written consent was effective shall
be stated in the original bylaws.
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CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of FUTURE MEDIA
PRODUCTIONS, INC., a California corporation; and
2. That the foregoing Amended and Restated Bylaws constitute the
Bylaws of said corporation as duly adopted on August 25, 1998.
IN WITNESS WHEREOF, I have executed this certificate on this 25th day
of August, 1998.
/S/ DAWN DODSON
-----------------------------------
Secretary
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FUTURE MEDIA PRODUCTIONS, INC.
1998 STOCK INCENTIVE PLAN
1. PURPOSES.
(a) The purpose of the 1998 Stock Incentive Plan (the "PLAN") is to
provide a means by which Employees or Directors of or Consultants to Future
Media Productions, Inc. (the "COMPANY"), and its Affiliates, may be given an
opportunity to benefit from increases in value of the Common Stock of the
Company through the granting of Stock Awards.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company, to
secure and retain the services of new Employees, Directors and Consultants, and
to provide incentives for such persons to exert maximum efforts for the success
of the Company.
(c) The Company intends that the Stock Awards issued under the Plan shall,
in the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to Section 3(c), be
either (1) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, (2) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof, or (3) Stock
Appreciation Rights granted pursuant to Section 8 hereof. All Options shall be
separately designated Incentive Stock Options or Nonstatutory Stock Options at
the time of grant and a separate certificate or certificates will be issued for
shares purchased upon exercise of each type of Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CCSL" means the California Corporate Securities Law of 1968, as
amended.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a Committee appointed by the Board in accordance
with Section 3(c) of the Plan.
(f) "COMMON STOCK" means the Common Stock of the Company.
(g) "COMPANY" means Future Media Productions, Inc., a California
corporation.
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(h) "CONCURRENT STOCK APPRECIATION RIGHT" or "CONCURRENT RIGHT" means a
right granted pursuant to subsection 8(b)(ii) of the Plan.
(i) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render bona fide consulting services and who is
compensated for such services, provided that the term "Consultant" shall not
include Directors who are paid only a director's fee by the Company or who are
not compensated by the Company for their services as Directors.
(j) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the
employment or relationship as a Director or Consultant is not interrupted or
terminated by the Company or any Affiliate. The Board, in its sole discretion,
may determine whether Continuous Status as an Employee, Director or Consultant
shall be considered interrupted in the case of: (1) any leave of absence
approved by the Board, including sick leave, military leave, or any other
personal leave; PROVIDED, HOWEVER, that for purposes of Incentive Stock Options
and Stock Appreciation Rights appurtenant thereto, any such leave may not exceed
90 days, unless reemployment upon the expiration of such leave is guaranteed by
contract (including certain Company policies) or statute; (2) transfers between
locations of the Company or between the Company, Affiliates or its successor; or
(3) a change in the status of the relationship from Employee to Director or
Consultant, from Director to Employee or Consultant, or from Consultant to
Employee or Director.
(k) "COVERED EMPLOYEE" means the chief executive officer and the four
other highest compensated officers of the Company for whom total compensation is
required to be reported to shareholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.
(l) "DIRECTOR" means a member of the Board.
(m) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(n) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(o) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(p) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market, the Fair Market Value of a share of Common Stock shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in the Common Stock) on the last market trading day
prior to the day of determination, as reported in the Wall Street Journal or
such other source as the Board deems reliable;
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(ii) If the Common Stock is quoted on the Nasdaq System (but
not on the Nasdaq National Market) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a share of Common Stock shall be the mean between the bid and asked prices for
the Common Stock on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the Board,
unless otherwise provided for in the Stock Award Agreement.
(q) "INCENTIVE STOCK OPTION" means an Option intended by the Board at the
time of grant to qualify as an incentive stock option within the meaning of
Section 422 of the Code and the regulations promulgated thereunder.
(r) "INDEPENDENT STOCK APPRECIATION RIGHT" or "INDEPENDENT RIGHT" means a
right granted under subsection 8(b)(iii) of the Plan.
(s) "NON-EMPLOYEE DIRECTOR" means a Director (1) who is not currently an
officer of the Company or any of its Affiliates or otherwise currently employed
by the Company or any of its Affiliates; (2) does not receive compensation,
either directly or indirectly from the Company or any of its Affiliates for
services rendered as a consultant or in any capacity other than as a director,
except for an amount that does not exceed the dollar amount for which disclosure
would be required pursuant to Item 404(a) of Regulation S-K; (3) does not
possess an interest in any other transaction for which disclosure would be
required pursuant to Item 404(a) of Regulation S-K; or (4) is not engaged in a
business relationship for which disclosure would be required pursuant to
Item 404(b) of Regulation S-K.
(t) "NONSTATUTORY STOCK OPTION" means an Option not intended by the Board
at the time of grant to qualify as an Incentive Stock Option.
(u) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(v) "OPTION" means a stock option granted pursuant to the Plan.
(w) "OPTIONEE" means an Employee, Director or Consultant who holds an
outstanding Option.
(x) "OUTSIDE DIRECTOR" means a Director who either (1) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an affiliated corporation who receives
compensation for prior services (other than benefits under a tax qualified
retirement plan) during the taxable year, was not an officer of the Company or
an affiliated corporation at any time, and is not currently receiving
remuneration from the Company or an affiliated corporation, directly
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or indirectly, for services in any capacity other than as a Director, or (2)
is otherwise considered an "outside director" for purposes of Section 162(m)
of the Code.
(y) "PLAN" means this 1998 Stock Incentive Plan.
(z) "RULE 16b-3" means Rule 16b-3 under the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
(aa) "REGULATION S-K" means Regulation S-K of the Securities and Exchange
Commission.
(bb) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(cc) "STOCK APPRECIATION RIGHT" means any of the various types of rights
which may be granted under Section 8 of the Plan.
(dd) "STOCK AWARD" means any right granted under the Plan, including any
Option, any stock bonus, any right to purchase restricted stock and any Stock
Appreciation Right.
(ee) "STOCK AWARD AGREEMENT" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to
the terms and conditions of the Plan.
(ff) "TANDEM STOCK APPRECIATION RIGHT" or "TANDEM RIGHT" means a right
granted under subsection 8(b)(i) of the Plan.
(ff) "TERMINATION" means, with respect to any person, the termination for
any reason of such person's Continuous Status as an Employee, Director or
Consultant.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in Section 3(c).
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how Stock Awards shall be
granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory
Stock Option, a stock bonus, a right to purchase restricted stock, a Stock
Appreciation Right, or a combination of the foregoing; the provisions of each
Stock Award granted (which need not be identical), including, without
limitation, the time or times when a person shall be permitted to receive stock
pursuant to a Stock Award; whether a person shall be permitted to receive stock
upon exercise of an Independent Stock Appreciation Right; and the number of
shares with respect to which Stock Awards shall be granted to each such person.
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(ii) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement
and, subject to Section 14 hereof, otherwise amend the Plan in a manner and to
the extent it shall deem necessary.
(iii) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company and which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than two members (the "COMMITTEE"), all of the members of
which Committee shall be Non-Employee Directors and may also be, in the
discretion of the Board, Outside Directors. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board (and references in this
Plan to the Board shall thereafter be to the Committee), subject, however, to
such resolutions, not inconsistent with the provisions of the Plan, as may be
adopted from time to time by the Board. The Board may abolish the Committee at
any time and revest in the Board the administration of the Plan.
Notwithstanding anything in this Section 3 to the contrary, at any time the
Board or the Committee may delegate to a committee of one or more members of the
Board the authority to grant Stock Awards to eligible persons who (1) are not
then subject to Section 16 of the Exchange Act and/or (2) are either (i) not
then Covered Employees and are not expected to be Covered Employees at the time
of recognition of income resulting from such Stock Award or (ii) not persons
with respect to whom the Company wishes to avoid the application of Section
162(m) of the Code. Any Non-Employee Director shall otherwise comply with the
requirements of Rule 16b-3 and any Outside Director shall otherwise comply with
the requirements of Section 162(m) of the Code.
(d) Notwithstanding Section 3(c), any requirement that an administrator of
the Plan be a Non-Employee Director or Outside Director shall not apply (1)
prior to the date of the first registration of an equity security of the Company
under Section 12 of the Exchange Act, or (2) if the Board expressly declares
that such requirement shall not apply.
4. SHARES SUBJECT TO THE PLAN.
Subject to the provisions of Section 13 relating to adjustments upon
changes in the Common Stock, the number of shares of Common Stock that may be
issued pursuant to Stock Awards under the Plan shall not exceed in the aggregate
1,500 shares. If any Stock Award or option granted under the terms of the Plan
shall for any reason expire or otherwise terminate without having been exercised
in full, the Common Stock not purchased shall again become available for
issuance under the Plan. Shares subject to Stock Appreciation Rights exercised
in accordance with Section 8 of the Plan and Shares withheld by the Company to
satisfy a federal, state and/or local tax withholding obligation of a
participant relating to the exercise of a Stock Award shall not be available for
subsequent issuance under the Plan. The
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Common Stock subject to the Plan may be unissued shares or reacquired shares,
bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options and Stock Appreciation Rights appurtenant
thereto may be granted only to Employees. Stock Awards other than Incentive
Stock Options and Stock Appreciation Rights appurtenant thereto may be granted
only to Employees, Directors or Consultants.
(b) No person shall be eligible for the grant of an Incentive Stock Option
if, at the time of grant, such person owns (or is deemed to own pursuant to
Section 424(d) of the Code) stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or of any of its Affiliates
unless the exercise price of such Incentive Stock Option is at least 110% of the
Fair Market Value of the Common Stock at the date of grant and such Incentive
Stock Option is not exercisable after the expiration of five years from the date
of its grant.
(c) Subject to the provisions of Section 13 relating to adjustments upon
changes in the Common Stock, no person shall be eligible to be granted in any
calendar year Options and Stock Appreciation Rights covering more than 50% of
the aggregate number of shares of the Common Stock that may be issued pursuant
to the Plan; PROVIDED, HOWEVER, this Section 5(c) shall not apply (1) prior to
the date of the first registration of an equity security of the Company under
Section 12 of the Exchange Act, or (2) if the Board expressly declares that such
requirement shall not apply.
(d) Notwithstanding the foregoing, so long as the Company maintains its
election to be named as a "small business corporation" (an "S CORPORATION")
under subchapter S of the Code, only natural persons, who are United States
residents, are eligible for Stock Awards under the Plan. So long as the Company
is an S Corporation, no person shall be eligible for a Stock Award under the
Plan if such Person is a corporation, partnership or trust or if receipt by such
person of an Award or shares upon exercise of an Award would result in the
termination or revocation of the Company's taxable status as an S Corporation.
(e) Notwithstanding the foregoing, no person that is a nonresident alien
is eligible for a Stock Award under the Plan so long as the Company is an S
Corporation. Moreover, no person whose spouse is a nonresident alien who would
have a current ownership interest in any Stock Award under the Plan by reason of
any applicable law, such as a state community property law or a foreign
country's law is eligible for a Stock Award under the Plan.
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6. OPTION PROVISIONS.
Each Option shall be approved by the Board and be in such form and shall
contain such terms and conditions as the Board shall deem appropriate. The
provisions of separate options need not be identical, but each Option shall
include (through incorporation of provisions hereof by reference in the Option
or otherwise) the substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock option shall be not
less than 100% of the Fair Market Value of the Common Stock subject to the
Option on the date the Option is granted. The exercise price of each
Nonstatutory Stock Option shall be established at the discretion of the Board;
PROVIDED, HOWEVER, to the extent required to maintain S Corp status and to
obtain an exemption from qualification under the CCSL, such exercise price shall
be not less than 90% of the Fair Market Value of the Common Stock subject to the
Option on the date the Option is granted. Notwithstanding the foregoing, to the
extent required to obtain an exemption from qualification under the CCSL, an
Option which is granted to a person who owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or of any
of its Affiliates, shall be at least 110% of the Fair Market Value of the Common
Stock at the date of grant.
(c) CONSIDERATION. The exercise price of Common Stock acquired pursuant
to the exercise of an Option shall be paid, to the extent permitted by
applicable statutes and regulations, either (1) in cash at the time the Option
is exercised, or (2) at the discretion of the Board, either at the time of the
grant or exercise of the Option, (i) by delivery to the Company of other shares
of Common Stock, (ii) according to a deferred payment or other arrangement
(which may include, without limiting the generality of the foregoing, the use of
other shares of Common Stock) with the person to whom the Option is granted or
to whom the Option is transferred pursuant to Section 6(d), or (iii) in any
other form of legal consideration that may be acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be payable
at least annually and shall be payable at the minimum rate of interest necessary
to avoid the imputation of interest, under the applicable provisions of the Code
and Treasury Regulations.
(d) TRANSFERABILITY. No Option shall be transferable except by will or by
the laws of descent and distribution, and shall be exercisable during the
lifetime of the person to whom the Option is granted only by such person, or in
the case of such person's disability by such person's legal representative or
guardian. In the event of death, to the extent required to maintain S
Corporation status, the Option cannot be transferred to any person who is not
eligible to be an S Corporation shareholder as defined in Section 1361 of the
Code, or to any person if such transfer would, in the opinion of the Company's
counsel, result in the termination or revocation of the Company's taxable status
as an S Corporation.
(e) VESTING. The total number of shares of Common Stock subject to an
Option may, but need not, be allotted in periodic installments (which may, but
need not, be equal). The Option may provide
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that from time to time during each of such installment periods, the Option
may become exercisable ("VEST") with respect to some or all of the shares
allotted to that period, and may be exercised with respect to some or all of
the shares allotted to such period and/or any prior period as to which the
Option became vested but was not fully exercised. The Option may be subject
to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board
may deem appropriate. The vesting provisions of individual Options may vary;
PROVIDED, HOWEVER, to the extent required to obtain an exemption from
qualification under the CCSL, the vesting provisions of Options granted to
Employees who are not Officers or Directors must provide for vesting of at
least 20% per year of the total number of shares subject to the Option from
the date the Option was granted. During the remainder of the term of the
Option (if its term extends beyond the end of the installment periods), the
option may be exercised from time to time with respect to any shares then
remaining subject to the Option. The provisions of this Section 6(e) are
subject to any Option provisions governing the minimum number of shares as to
which an Option may be exercised.
(f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or
any person to whom an Option is transferred pursuant to Section 6(d), as a
condition of exercising any such Option, (1) to give written assurances
satisfactory to the Company as to the Optionee's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matters, and that he or she is capable of evaluating,
alone or together with the purchaser representative, the merits and risks of
exercising the option; and (2) to give written assurances satisfactory to the
Company stating that such person is acquiring the Common Stock subject to the
Option for such person's own account and not with any present intention of
selling or otherwise distributing the Common Stock. These requirements, and any
assurances given pursuant to such requirements, shall be inoperative if (i) the
issuance of the shares upon the exercise of the Option has been registered under
a then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws.
(g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT.
In the event an Optionee's Continuous Status as an Employee, Director or
Consultant terminates (other than upon the Optionee's death or Disability), the
Optionee may exercise his or her Option (to the extent that the Optionee is
entitled to exercise it at the date of Termination), but only within such period
of time as is determined by the Board, which period shall not be longer than 60
days from the date of Termination for an Incentive Stock Option, unless
otherwise provided for in the Stock Award Agreement. To the extent required to
obtain an exemption from qualification under the CCSL, such period shall not be
less than 30 days from the date of Termination of an Option; PROVIDED, HOWEVER,
that if an Optionee is terminated for cause, as defined in the applicable Stock
Award Agreement, the Option may provide for an exercise period shorter than 30
days, or may provide for expiration concurrent with such Termination. In no
event shall an Option be exercised later than the expiration of the term of such
Option as set forth in the Stock Award Agreement. If, at the date of
Termination, the Optionee is not entitled to exercise his or her entire Option,
the shares covered by the unexercisable portion of the Option shall revert to
the Plan. If, after Termination, the Optionee does not exercise his or her
Option within the time specified in the Stock
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Award Agreement, the Option shall terminate, and the shares covered by such
Option, to the extent unexercised, shall revert to the Plan.
(h) DISABILITY OF OPTIONEE. If an Optionee's Continuous Status as an
Employee, Director or Consultant terminates as a result of the Optionee's
Disability, the Optionee may exercise his or her Option at any time prior to the
expiration of that period ending six months after the date of such Termination
(or such longer period, not exceeding 12 months for Incentive Stock Options, as
specified in the Option), and only to the extent that the Optionee was entitled
to exercise the Option at the date of such Termination (but in no event later
than the expiration of the term of such Option as set forth in the Stock Award
Agreement). If, at the date of Termination, the Optionee is not entitled to
exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after Termination, the
Optionee does not exercise his or her Option within the time specified therein,
the Option shall terminate, and the shares covered by such Option, to the extent
unexercised, shall revert to the Plan.
(i) DEATH OF OPTIONEE. In the event of the death of an Optionee, the
Option may be exercised at any time prior to the expiration of that period
ending six months after the date of death (or such longer period, not exceeding
12 months for Incentive Stock Options, as specified in the Option), but in no
event later than the expiration of the term of such Option as set forth in the
Stock Award Agreement, by the Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
the Optionee was entitled to exercise the Option at the date of death. If, at
the time of death, the Optionee was not entitled to exercise his or her entire
Option, the shares covered by the unexercisable portion of the Option shall
revert to the Plan. If, after death, the Optionee's estate or a person who
acquired the right to exercise the Option by bequest or inheritance does not
exercise the Option within the time specified therein, the Option shall
terminate, and the shares covered by such Option, to the extent unexercised,
shall revert to the Plan.
(j) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased shall be subject to a right to repurchase in favor of the Company upon
Termination of the Optionee, at a repurchase price equal to the exercise price
of the Option, payable in cash or cancellation of purchase money indebtedness
for the shares; PROVIDED, HOWEVER, to the extent required to obtain an exemption
from qualification under the CCSL, the Company's right to repurchase at the
exercise price of the Option shall lapse at a minimum rate of 20% per year over
five years from the date the Option was granted and such right shall terminate
to the extent not exercised within 90 days following Termination of the
Optionee.
(k) WITHHOLDING. To the extent provided by the terms of an Option, the
Optionee may satisfy any federal, state or local tax withholding obligation
relating to the exercise of such Option by any of the following means or by a
combination of such means: (1) tendering a cash payment; (2) authorizing the
Company to withhold shares from the shares of the Common Stock otherwise
issuable to the Optionee as a result of the exercise of the Option; or (3)
delivering to the Company owned and unencumbered shares of Common Stock.
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(l) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board to make or not to make grants of Options hereunder, the Board shall have
the authority (but not an obligation) to include as part of any Option a
provision entitling the Optionee to a further Option (a "RE-LOAD OPTION") in the
event the Optionee exercises the Option, in whole or in part, by surrendering
other shares of Common Stock in accordance with this Plan and the terms and
conditions of the Stock Award Agreement. Any such Re-Load Option (1) shall be
for a number of shares equal to the number of shares surrendered as part or all
of the exercise price of such Option; (2) shall have an expiration date which is
the same as the expiration date of the Option the exercise of which gave rise to
such Re-Load Option; and (3) in the case of a Re-Load Option which is granted to
a 10% shareholder (as described in Section 5(c)), and which is an Incentive
Stock Option or requires an exemption from qualification under the CCSL, shall
have an exercise price which is equal to 110% of the Fair Market Value of the
Common Stock subject to the Re-Load Option on the date of exercise of the
original Option and, with respect to Incentive Stock Options, shall have a term
which is no longer than five years.
Any such Re-Load Option may be an Incentive Stock Option or a Nonqualified
Stock Option, as the Board may designate at the time of the grant of the
original Option; PROVIDED, HOWEVER, that the designation of any Re-Load Option
as an Incentive Stock Option shall be subject to the $100,000 annual limitation
on exercisability of Incentive Stock Options described in Section 12(d) of the
Plan and in Section 422(d) of the Code. There shall be no Re-Load Options on a
Re-Load Option. Any such Re-Load Option shall be subject to the availability of
sufficient shares under Section 4(a) and shall be subject to such other terms
and conditions as the Board may determine which are not inconsistent with the
express provisions of the Plan regarding the terms of the Options.
(m) REPURCHASE RIGHTS AND FIRST REFUSAL RIGHTS.
(i) Each Option may provide that the Company shall have the
right (the "REPURCHASE RIGHT"), exercisable following Termination of an
Optionee, to repurchase (1) all of the Common Stock purchased by the Optionee
upon exercise of the Option (the "PURCHASED SHARES") at the Fair Market Value
on the date of Termination, and (2) the unexercised portion of the Option (to
the extent that such Option had vested prior to the date of Termination) at
the price equal to the amount by which the Fair Market Value of the Common
Stock underlying such Option (or portion thereof) exceeds the exercise price
of the Option, in each case for cash or cash equivalents (including the
cancellation of any purchase-money indebtedness). Such Repurchase Right
shall terminate to the extent not exercised by the Company within 90 days
following the date of Termination (or if later, 90 days after the exercise of
the option).
(ii) Each Option may provide that the Company shall have the right
of first refusal (the "FIRST REFUSAL RIGHT"), exercisable in connection with any
proposed sale, hypothecation or other disposition of the Purchased Shares; and
that in the event the holder of the Purchased Shares desires to accept a bona
fide third-party offer for any or all of the Purchased Shares, such shares shall
first be offered to the Company at the same terms and conditions as are set
forth in the bona fide offer. To exercise this First Refusal Right, the Company
must elect to purchase such Purchased Shares within 30 days after receipt of
notice of the related proposed sale, and upon such election the Company must
purchase such Purchased Shares within 60 days of the receipt of notice of the
proposed sale.
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<PAGE>
(iii) The Repurchase Rights and First Refusal Rights shall lapse and
cease to have effect upon the earlier to occur of (1) the first date on which
shares of the Company's Common Stock are held of record by more than five
hundred persons, (2) a determination by the Company's Board of Directors that a
public market exists for the outstanding shares of the Company's Common Stock or
(3) a firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act, covering the offer and sale of
the Company's Common Stock in the aggregate amount of at least $5,000,000.
7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be approved
by the Board and be in such form and shall contain such terms and conditions as
the Board shall deem appropriate. The terms and conditions of stock bonus or
restricted stock purchase agreements may change from time to time, and the terms
and conditions of separate agreements need not be identical, but each stock
bonus or restricted stock purchase agreement shall include (through
incorporation of provisions hereof by reference in the agreement or otherwise)
the substance of each of the following provisions, as appropriate:
(a) PURCHASE PRICE. The purchase price under each stock purchase
agreement shall be such amount as the Board shall determine and designate in
such agreement. Additionally, the Board may determine that eligible
participants in the Plan may be awarded stock pursuant to a stock bonus
agreement in consideration for past services actually rendered to the Company or
for its benefit. Notwithstanding the foregoing, to the extent required to
obtain an exemption from qualification under the CCSL, the purchase price of
shares of Common Stock shall be at least 90% of the Fair Market Value of the
Common Stock at the date of the grant or the sale and if such shares of Common
Stock are granted or sold to a person who owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or of any
of its Affiliates, the purchase price shall be at least 100% of the Fair Market
Value of the Common Stock at the date of grant or sale.
(b) TRANSFERABILITY. No rights under a stock bonus or restricted stock
purchase agreement shall be assignable by any participant under the Plan, either
voluntarily or by operation of law, except by will or by the laws of descent and
distribution, and shall be exercisable during the lifetime of the person to whom
the rights are granted only by such person. The person to whom such rights are
granted may, by delivering written notice to the Company, in a form satisfactory
to the Company, designate a third party who, in the event of the death of such
person, shall thereafter be entitled to exercise the rights held by such person
under the stock bonus or restricted stock purchase agreement. Notwithstanding
the foregoing, for so long as the Company maintains its taxable status as an S
Corporation, in the event of death, rights under a stock bonus or restricted
stock purchase agreement cannot be transferred to any person who is not eligible
to be an S Corporation shareholder as defined in Section 1361 of the Code, or to
any person if such transfer would, in the opinion of the Company's counsel,
result in the termination or revocation of the Company's taxable status as an S
Corporation
(c) CONSIDERATION. The purchase price of Common Stock acquired pursuant
to a stock purchase agreement shall be paid either: (1) in cash at the time of
purchase; (2) at the discretion of the Board, according to a deferred payment or
other arrangement with the person to whom the Common
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<PAGE>
Stock is sold; or (3) in any other form of legal consideration that may be
acceptable to the Board in its discretion. Notwithstanding the foregoing,
the Board may award stock pursuant to a stock bonus agreement in
consideration for past services actually rendered to the Company or for its
benefit.
(d) VESTING. Shares of Common Stock sold or awarded under the Plan may,
but need not, be subject to a right to repurchase in favor of the Company upon
Termination of the person to whom such shares have been sold or awarded at a
repurchase price equal to the original purchase price (or such higher price as
the Board may determine to be appropriate) payable in cash or cancellation of
purchase money indebtedness. The Board shall provided that such rights to
repurchase lapse with respect to such purchased shares (or that such purchased
shares vest) pursuant to a schedule determined by the Board; PROVIDED, HOWEVER,
to the extent required to obtain an exemption from qualification under the CCSL,
the Company's right to repurchase at the original purchase price shall lapse (or
the purchased shares shall vest) at a minimum rate of 20% per year over five
years from the date the stock bonus or restricted stock purchase right was
granted and such right shall terminate to the extent not exercised within 90
days following Termination of the purchaser.
(e) REPURCHASE RIGHTS AND FIRST REFUSAL RIGHTS.
(i) In addition to Section 7(d) above, each stock bonus or
restricted stock purchase agreement may provide that the Company shall have a
Repurchase Right exercisable following Termination of a purchaser, to repurchase
all of the shares (vested or unvested) of Common Stock purchased by the
purchaser pursuant to the stock bonus or restricted stock purchase agreement
(the "PURCHASED SHARES") at the Fair Market Value on the date of Termination for
cash or cash equivalents (including the cancellation of any purchase-money
indebtedness). Such Repurchase Right shall terminate to the extent not
exercised by the Company within 90 days following the date of Termination.
(ii) Each stock bonus or restricted stock purchase agreement may
provide that the Company shall have a First Refusal Right, exercisable in
connection with any proposed sale, hypothecation or other disposition of the
Purchased Shares; and that in the event the holder of the Purchased Shares
desires to accept a bona fide third-party offer for any or all of the Purchased
Shares, such shares shall first be offered to the Company at the same terms and
conditions as are set forth in the bona fide offer. To exercise this First
Refusal Right, the Company must elect to purchase such Purchased Shares within
30 days after receipt of notice of the related proposed sale, and upon such
election the Company must purchase such Purchased Shares within 60 days of the
receipt of notice of the proposed sale.
(iii) Each stock bonus or restricted stock purchase agreement shall
provide that the Repurchase Rights and First Refusal Rights shall lapse and
cease to have effect upon the earlier to occur of (1) the first date on which
shares of the Company's Common Stock are held of record by more than five
hundred persons, (2) a determination by the Company's Board of Directors that a
public market exists for the outstanding shares of the Company's Common Stock or
(3) a firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act, covering the offer and sale of
the Company's Common Stock in the aggregate amount of at least $5,000,000.
12
<PAGE>
8. STOCK APPRECIATION RIGHTS.
(a) The Board shall have full power and authority, exercisable in its sole
discretion, to grant Stock Appreciation Rights to Employees or Directors of, or
Consultants to, the Company or its Affiliates under the Plan. Each such right
shall entitle the holder to a distribution based on the appreciation in the Fair
Market Value per share of a designated amount of Common Stock.
(b) Three types of Stock Appreciation Rights shall be authorized for
issuance under the Plan, Tandem Rights, Concurrent Rights and Independent
Rights, and the terms and conditions applicable to each shall be as follows:
(i) TANDEM STOCK APPRECIATION RIGHTS. Tandem Rights will be
granted appurtenant to an Option and will require the holder to elect between
the exercise of such Option for shares of Common Stock and the surrender, in
whole or in part, of such Option for an appreciation distribution payable in
cash in an amount equal to (1) the aggregate Fair Market Value (on the date of
Option surrender) of the number of vested shares of Common Stock under the
Option (or portion thereof) being surrendered on such date, less (2) the
aggregate exercise price of such vested shares of Common Stock. Tandem Rights
may be tied to either Incentive Stock Options or Nonstatutory Stock Options.
Each such right shall, except as specifically set forth below, be subject to the
same terms and conditions applicable to the particular Option to which it
pertains.
(ii) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights will
be granted appurtenant to an Option and may apply to all or any portion of the
shares of Common Stock subject to such Option and will be automatically
exercised at the same time such Option is exercised with respect to the
particular shares of Common Stock to which the Concurrent Right pertains. The
appreciation distribution, payable in cash, to which the holder of such
Concurrent Rights shall be entitled upon exercise of the related Option shall be
an amount equal to (1) the aggregate Fair Market Value (on the date of Option
exercise) of the number of vested shares of Common Stock under the Option (or
portion thereof) being exercised on such date and with respect to which such
Concurrent Rights apply, less (2) the aggregate exercise price paid for such
vested shares of Common Stock. Concurrent Rights may be tied to any or all of
the shares of Common Stock under any Incentive Stock Option or Nonstatutory
Stock Option. A Concurrent Right shall, except as specifically set forth below,
be subject to the same terms and conditions applicable to the particular Option
grant to which it pertains.
(iii) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights
shall be granted independently of any Option and will entitle the holder upon
exercise thereof to an appreciation distribution payable in cash in an amount
equal to (1) the aggregate Fair Market Value (on the date of the exercise of the
Independent Right) of a number of shares of Common Stock equal to the number of
vested share equivalents with respect to which the holder is exercising the
Independent Right on such date, less (2) the aggregate Fair Market Value (on the
date of the grant of the Independent Right) of such number of shares of Common
Stock. Independent Rights shall, except as specifically set forth below, be
subject to the same terms and conditions applicable to Nonstatutory Stock
Options as set forth in Section 6. They shall be denominated in share
equivalents.
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<PAGE>
(iv) TERMS APPLICABLE TO STOCK APPRECIATION RIGHTS GENERALLY.
(A) To exercise any outstanding Stock Appreciation Right,
the holder must provide written notice of exercise to the Company in compliance
with the provisions of the instrument evidencing such right.
(B) If a Stock Appreciation Right is granted to an
individual who is at the time subject to Section 16(b) of the Exchange Act, the
instrument of grant shall incorporate all the terms and conditions at the time
necessary to assure that the subsequent exercise of such right shall qualify for
the safe-harbor exemption from short-swing profit liability provided by Rule
16b-3 promulgated under the Exchange Act (or any successor role or regulation).
(C) No limitation shall exist on the aggregate amount of
cash payments the Company may make under the Plan in connection with the
exercise of Stock Appreciation Rights.
9. CANCELLATION AND REGRANT OF OPTIONS.
(a) The Board shall have the authority to effect, at any time and from
time to time, with the consent of the affected holders of Options and/or Stock
Appreciation Rights, (1) the repricing of any outstanding Options and/or any
Stock Appreciation Rights under the Plan and/or (2) the cancellation of any
outstanding Options and/or any Stock Appreciation Rights under the Plan and the
grant in substitution therefor of new Options and/or Stock Appreciation Rights
under the Plan covering the same or different numbers of shares of Common Stock,
but having an exercise price per share not less than 90% of the Fair Market
Value (100% of the Fair Market Value in the case of an Incentive Stock Option
or, in the case of an Incentive Stock Option granted to a 10% shareholder as
described in Section 5(c), not less than 110% of the Fair Market Value) per
share of Common Stock on the new grant date. Notwithstanding the forgoing, the
Board may grant an Option and/or Stock Appreciation Right with an exercise price
lower than that set forth above if such Option and/or Stock Appreciation Right
is granted as part of a transaction to which Section 424(a) of the Code applies.
(b) Shares subject to an Option or Stock Appreciation Right canceled under
this Section 9 shall continue to be counted against the maximum award of Options
and Stock Appreciation Rights permitted to be granted to a person pursuant to
Section 5(c) of the Plan. The repricing of an Option and/or Stock Appreciation
Right under this Section 9, resulting in a reduction of the exercise price,
shall be deemed to be a cancellation of the original Option and/or Stock
Appreciation Right and the grant of a substitute Option and/or Stock
Appreciation Right; in the event of such repricing, both the original and the
substituted Options and Stock Appreciation Rights shall be counted against the
maximum awards of Options and Stock Appreciation Rights permitted to be granted
to a person pursuant to Section 5(c) of the Plan. The provisions of this
Section 9(b) shall be applicable only to the extent required by Section 162(m)
of the Code.
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<PAGE>
10. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep available
at all times the number of shares of Common Stock required to satisfy such Stock
Awards up to the number of shares of Common Stock authorized under the Plan.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
effect any Stock Award, and to issue and sell shares of Common Stock under the
Stock Awards; PROVIDED, HOWEVER, that this undertaking shall not require the
Company to register under the Securities Act either the Plan, any Stock Award or
any stock issued or issuable pursuant to any such Stock Award. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance and sale of Common Stock under the Plan, the Company
shall be relieved from any liability for failure to issue and sell stock under
such Stock Awards unless and until such authority is obtained.
11. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.
12. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a Stock
Award may first be exercised or the time during which a Stock Award or any part
thereof will vest, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
(b) Neither an Optionee nor any person to whom an Option is transferred
under Section 6(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares of Common Stock subject to such
Option unless and until such person has satisfied all requirements for exercise
of the Option pursuant to its terms.
(c) Nothing in the Plan or any instrument executed or Stock Award granted
pursuant thereto shall confer upon any Employee, Director, Consultant, Optionee,
or other holder of Stock Awards any right to continue in the employ of the
Company or any Affiliate (or to continue acting as a Director or Consultant) or
shall affect the right of the Company or any Affiliate to terminate the
employment or relationship as a Director or Consultant of any Employee,
Director, Consultant or Optionee, with or without cause.
(d) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its affiliates exceeds $100,000,
15
<PAGE>
the Options or portions thereof which exceed such limit (according to the
order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(e) The Company shall deliver to the holders of Stock Awards, not later
than 120 days after the close of each of the Company's fiscal years, a balance
sheet and an income statement. This Section shall not apply when the issuance
of Stock Awards is limited to key employees whose duties in connection with the
Company assure them access to equivalent information.
13. ADJUSTMENTS UPON CHANGES IN THE COMMON STOCK.
(a) Subject to the provisions of Section 13(b), if any change is made in
the Common Stock subject to the Plan, or subject to any Stock Award, without
receipt of consideration by the Company (through merger, consolidation,
reorganization, recapitalization, reincorporation, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, conversion pursuant to the provisions of the Company's Articles of
Incorporation, exchange of shares, change in corporate structure or other
transaction not involving the receipt of consideration by the Company) the Plan
will be appropriately adjusted in the class(es) and maximum number of shares
subject to the Plan pursuant to Section 4(a) and the maximum number of shares
subject to Options and Stock Appreciation Rights pursuant to Section 5(c), and
the outstanding Stock Awards will be appropriately adjusted in the class(es) and
number of shares and price per share of stock subject to such outstanding Stock
Awards. Such adjustments shall be made by the Board, the determination of which
shall be final, binding and conclusive. (The conversion of any convertible
securities of the Company shall not be treated as a "transaction of not
involving the receipt of consideration by the Company".)
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Common
Stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise, then, at the sole discretion of the Board (unless otherwise provided
for in the Stock Award Agreement) and to the extent permitted by applicable law,
such Stock Awards shall (i) terminate upon such event and may be exercised prior
thereto to the extent such Stock Awards are then exercisable or (ii) continue in
full force and effect and, if applicable, the surviving corporation or an
Affiliate of such surviving corporation shall assume any Stock Awards
outstanding under the Plan and/or shall substitute similar Stock Awards for
those outstanding under the Plan.
14. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 13 relating to adjustments upon changes
in the Common Stock, no amendment shall be effective unless approved by the
shareholders of the Company within 12 months before or after the adoption of the
amendment, where the amendment will:
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<PAGE>
(i) Increase the number of shares of Common Stock
reserved for Stock Awards under the Plan;
(ii) Modify the requirements as to eligibility for
participation in the Plan to the extent such modification requires shareholder
approval in order for the Plan to satisfy the requirements of Section 422 of the
Code; or
(iii) Modify the Plan in any other way if such
modification requires shareholder approval in order for the Plan to satisfy the
requirements of Section 422 of the Code or to comply with the requirements of
Rule 16b-3. Rights and obligations under any Stock Award granted before
amendment of the Plan shall not be altered or impaired by any amendment of the
Plan unless (1) the Company requests the consent of the person to whom the Stock
Award was granted and (2) such person consents thereto in writing.
(b) The Board at any time, and from time to time, may amend the terms of
any one or more Stock Award; PROVIDED, HOWEVER, that the rights and obligations
under any Stock Award shall not be impaired by any such amendment unless (1) the
Company requests the consent of the person to whom the Stock Award was granted
and (2) such person consents thereto in writing.
15. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on May 7, 2008. No Stock Awards may
be granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any Stock Award granted while the Plan is
in effect shall not be altered or impaired by suspension or termination of the
Plan, except with the written consent of the person to whom the Stock Award was
granted.
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Stock
Awards granted under the Plan shall be exercisable unless and until the Plan has
been approved by the shareholders of the Company (and such approval by the
shareholders must be obtained within 12 months of the Plan being adopted by the
Board).
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<PAGE>
OPTION CERTIFICATE
(NON-STATUTORY STOCK OPTION)
THIS IS TO CERTIFY that Future Media Productions, Inc., a California
corporation (the "COMPANY"), has granted to the person named below a
non-statutory stock option (the "OPTION") to purchase shares (the "SHARES") of
the Company's Common Stock, without par value (the "COMMON STOCK"), under its
1998 Stock Incentive Plan, as follows:
Name of Optionee:
---------------------------------
Address of Optionee:
---------------------------------
---------------------------------
---------------------------------
Number of Shares:
---------------------------------
---------------------------------
Option Exercise Price:
---------------------------------
Date of Grant:
---------------------------------
Option Expiration Date:
---------------------------------
EXERCISE SCHEDULE: The Option shall become exercisable as follows:
SUMMARY OF OTHER TERMS: This Option is defined in the Stock Option
Agreement (Non-Statutory Stock Option) (the "OPTION AGREEMENT") which is
attached to this Option Certificate (this "CERTIFICATE") as Annex I. This
Certificate summarizes certain of the provisions of the Option Agreement for
your information, but is not complete. Your rights are governed by the Option
Agreement, NOT by this summary. The Company strongly suggests that you
carefully review the full Option Agreement prior to signing this Certificate or
exercising the Option.
<PAGE>
Among the terms of the Option Agreement are the following:
EMPLOYMENT: The Option Agreement does not obligate the Company to retain
you for any period of time. Unless otherwise agreed IN WRITING, the Company
reserves the right to terminate any employee at any time, with or without cause.
TERMINATION OF EMPLOYMENT: While the Option terminates on the Option
Expiration Date, it will terminate earlier if you cease to be employed by the
Company (or to hold office if you are a director). If your employment ends due
to death or permanent disability, the Option terminates six months after the
date of death or permanent disability, and is exercisable during such six month
period as to the portion of the Option which has vested prior to the date of
termination of employment. If your employment ends "for cause," the Option
terminates immediately upon termination of your employment. In all other cases,
the Option terminates 30 days after the date of termination of employment, and
is exercisable during such 30 day period as to the portion of the Option which
had vested prior to the date of termination of employment. See Section 5 of the
Option Agreement.
TRANSFER: The Option is personal to you, and cannot be sold, transferred,
assigned or otherwise disposed of to any other person, except on your death. For
so long as the Company maintains its taxable status as an S Corporation, in the
event of death, the Option cannot be transferred to any person who is not
eligible to be an S Corporation shareholder as defined in Section 1361 of the
Code, or to any person if such transfer, or the exercise of the Option by the
transferee, would, in the opinion of the Company's counsel, result in the
termination or revocation of the Company's taxable status as an S Corporation.
EXERCISE: You can exercise the Option (once it is exercisable), in whole
or in part, by delivering to the Company a Notice of Exercise identical to
Exhibit "A" attached to the Option Agreement, accompanied by payment of the
Option Exercise Price, set forth above, for the Shares to be purchased. The
Company will then issue a certificate to you for the Shares you have purchased.
You are under no obligation to exercise the Option. See Section 4 of the Option
Agreement.
REPURCHASE RIGHTS: The Company has the right exercisable following
termination of your employment to repurchase (x) all of the Shares purchased by
you upon exercise of the Option at fair market value on the date of your
termination, and (y) the unexercised portion of the Option (to the extent that
the Option had vested prior to the date of your termination) at the price equal
to the amount by which the fair market value of the Shares underlying the Option
(or portion thereof) exceeds the exercise price of the Option, in each case for
cash or cash equivalents (including the cancellation of any purchase-money
indebtedness). Those Shares are also subject to the Company's right of first
refusal, which provides that in the event you desire to accept a bona fide
third-party offer for any of the Shares you acquire upon exercise of your
Option, you must first offer those shares to the Company or its designee on the
same terms and conditions as are set forth in the bona fide offer. The
Repurchase Rights and First Refusal Rights lapse and cease to have affect upon
the earlier to occur of (1) the first date on which shares of the Company's
Common Stock are held of record by more than 500 persons, (2) a determination by
the Company's Board of Directors that a public market exists for the outstanding
shares of the
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<PAGE>
Company's Common Stock or (3) a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of the Company's Common Stock in
the aggregate amount of at least $5,000,000. See Section 6 of the Option
Agreement.
FIRST REFUSAL RIGHTS: The Option provides that the Company shall have the
right of first refusal, exercisable in connection with any proposed sale,
hypothecation or other disposition of the Shares; and that in the event you
desire to accept a bona fide third-party offer for any or all of the Shares,
such shares shall first be offered to the Company at the same terms and
conditions as are set forth in the bona fide offer. To exercise this first
refusal right, the Company must elect to purchase the Shares within 30 days
after receipt of notice from you of the related proposed sale, and upon such
election the Company must purchase the Shares within 60 days of the receipt of
notice of the proposed sale. See Section 6 of the Option Agreement.
MARKET STAND-OFF: The Option provides that in connection with any
underwritten public offering by the Company, you may not sell or transfer any of
your Shares without the prior written consent of the Company or its underwriters
for such period of time from and after the effective date of such offering as
may be reasonably requested by the Company or such underwriters. See Section 6
of the Option Agreement.
S CORPORATION RESTRICTIONS: No Optionee may sell, transfer, grant proxies
with respect to, assign, pledge, encumber or otherwise dispose of any Shares
acquired upon the exercise of an Option, to any person who is not eligible to be
an S Corporation shareholder as defined in Section 1361 of the Internal Revenue
Code of 1986, as amended (the "CODE"), or to any person if such transfer would,
in the opinion of the Company's counsel, result in the termination or revocation
of the Company's taxable status as an S Corporation. See Section 6(h) of the
Option Agreement.
ANTI-DILUTION PROVISIONS: The Option contains provisions which adjust your
Option to reflect stock splits, stock dividends, mergers and other major
corporate reorganizations which would change the nature of the Shares underlying
your Option. See Section 7 of the Option Agreement.
WAIVER: By signing this Certificate, you will be agreeing to all of the
terms of the Option Agreement, including those not summarized in this
Certificate. You will waive your rights to any other options or stock which may
have heretofore been promised to you, other than any rights you may have
pursuant to the agreements (the "RESERVED AGREEMENTS"), if any, identified
below. See Section 8 of the Option Agreement.
RESERVED AGREEMENTS:[INDICATE "NONE," OR IDENTIFY AGREEMENT BY EXECUTION
DATE, TYPE OF AGREEMENT AND IDENTITIES OF PARTIES]
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3
<PAGE>
WITHHOLDING: The Company may require you to make any arrangements
necessary to insure the proper withholding of any amount of tax, if any,
required to be withheld by the Company as a result of the exercise of the
Option. See Section 13 of the Option Agreement.
COPYRIGHT OWNERSHIP AND NONDISCLOSURE: By signing this certificate you
will be agreeing that (i) you will not disclose to any person outside the
Company any non-public information and/or trade secrets of the Company, and (ii)
that all inventions, ideas, concepts and other intellectual property devised,
developed, conceived or created by you relating to your employment by the
Company are the sole and exclusive property of the Company. See Section 15 of
the Agreement.
4
<PAGE>
AGREEMENT
Future Media Productions, Inc., a California corporation (the "COMPANY"),
and the above-named person ("OPTIONEE") each hereby agrees to be bound by all of
the terms and conditions of the Stock Option Agreement (Non-Statutory Stock
Option) which is attached hereto as Annex I and incorporated herein by this
reference as if set forth in full in this document.
DATED:
Future Media Productions, Inc.
By:
--------------------------------
Its:
-------------------------------
OPTIONEE
-----------------------------------
(Signature)
-----------------------------------
(Please print your name exactly
as you wish it to appear on any
stock certificates issued to you
upon exercise of the Option)
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<PAGE>
ANNEX I
STOCK OPTION AGREEMENT
(NON-STATUTORY STOCK OPTION)
This STOCK OPTION AGREEMENT (this "OPTION AGREEMENT") is made and
entered into on the execution date of the Option Certificate to which it is
attached (the "CERTIFICATE"), by and between Future Media Productions, Inc., a
California corporation (the "COMPANY"), and the director, consultant or employee
named in the Certificate ("OPTIONEE").
Pursuant to the Future Media Production, Inc. 1998 Stock Incentive
Plan (the "PLAN"), the Board of Directors of the Company (the "BOARD") has
authorized the grant to Optionee of a non-statutory stock option to purchase
shares of the Company's Common Stock, without par value (the "COMMON STOCK"),
upon the terms and subject to the conditions set forth in this Option Agreement
and in the Plan.
The Company and Optionee agree as follows:
1. GRANT OF OPTION.
The Company hereby grants to Optionee the right and option (the
"OPTION"), upon the terms and subject to the conditions set forth in this Option
Agreement, to purchase all or any portion of that number of shares of the Common
Stock (the "SHARES") set forth in the Certificate, at the Option Exercise Price
set forth in the Certificate (the "EXERCISE PRICE").
2. TERM OF OPTION.
The Option shall terminate and expire on the Option Expiration Date
set forth in the Certificate, unless sooner terminated as provided herein.
3. EXERCISE PERIOD.
(a) Subject to the provisions of Sections 3, 5, and 7 of this Option
Agreement, the Option shall become exercisable (in whole or in part) upon and
after the dates set forth under the caption "Exercise Schedule" in the
Certificate. The installments shall be cumulative; I.E., the Option may be
exercised, as to any or all Shares covered by an installment, at any time or
times after the installment first becomes exercisable and until expiration or
termination of the Option.
(b) Notwithstanding anything to the contrary contained in this Option
Agreement, the Option may not be exercised, in whole or in part, unless and
until any then-applicable requirements of all federal, state and local laws and
regulatory agencies shall have been fully complied with to the satisfaction of
the Company and its counsel.
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4. EXERCISE OF OPTION.
(a) There is no obligation to exercise the Option, in whole or in
part. The Option may be exercised, in whole or in part, only by delivery to the
Company of:
(i) written notice of exercise in form and substance identical
to Exhibit "A" attached to this Option Agreement stating the number of Shares
then being purchased (the "PURCHASED SHARES");
(ii) payment of the Exercise Price of the Purchased Shares,
either in cash, by check, by cancellation of any indebtedness of the Company to
Optionee for accrued and unpaid salary or, with the consent of the Board, by
transfer to the Company of issued and outstanding shares of Common Stock which,
to the extent required to avoid liability under Section 16(b) of the Securities
and Exchange Act of 1934, as amended, have been held by Optionee for a period of
at least six calendar months preceding the date of surrender, or by any
combination of the above methods of payment. If payment is made, in whole or in
part, by transfer to the Company of issued and outstanding shares of Common
Stock, the value (the "FAIR MARKET VALUE") of such shares shall be determined as
follows: (1) if the Common Stock is listed on any established stock exchange or
a national market system, including without limitation the Nasdaq National
Market, the Fair Market Value of a share of Common Stock shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such system or exchange (or the exchange with the greatest volume of
trading in the Common Stock) on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable; (2) if the Common Stock is quoted on the Nasdaq System
(but not on the Nasdaq National Market) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a share of Common Stock shall be the mean between the bid and asked prices for
the Common Stock on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable; and (3) in the absence of an established market for
the Common Stock, the Fair Market Value shall be determined in good faith by the
Board; and
(iii) if requested by the Company, a letter of investment intent
in such form and containing such provisions as the Company may reasonably
require.
(b) Following receipt of the notice and payment referred to above,
the Company shall issue and deliver to Optionee a stock certificate or stock
certificates evidencing the Purchased Shares; PROVIDED, HOWEVER, that the
Company shall not be obligated to issue a fraction or fractions of a share of
its Common Stock, and may pay to Optionee, in cash or by check, the Fair Market
Value of any fraction or fractions of a share exercised by Optionee, which Fair
Market Value shall be determined as set forth in this Section 4.
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5. TERMINATION OF EMPLOYMENT.
(a) If Optionee shall cease to be a director of the Company, or to be
in the employ of, or a consultant to the Company, any Subsidiary or any Parent
for any reason other than Optionee's death or permanent disability (a "SPECIAL
TERMINATING EVENT"), Optionee shall have the right, subject to the provisions of
Section 5(c) below, to exercise the Option at any time within 30 days after the
date Optionee ceased to be a director of the Company, or to be employed by, or
to be a consultant to the Company, but in no case later than the Option
Expiration Date. The Option may be exercised during such period only with
respect to the Shares that were vested as of the date Optionee's employment
terminated and only to the extent the Option had not previously been exercised.
To the extent the Option remains unexercised at the end of such period, the
Option shall terminate. The Board, in its sole and absolute discretion, shall
determine whether or not authorized leaves of absence shall constitute
termination of employment for purposes of this Option Agreement.
(b) If a Special Terminating Event occurs while Optionee is a
director of the Company, or in the employ of, or a consultant to the Company,
any Subsidiary or any Parent, then Optionee, Optionee's executors or
administrators or any person or persons acquiring the Option directly from
Optionee by bequest or inheritance, shall have the right to exercise the Option
at any time within six months after the Special Terminating Event, but in no
case later than the Option Expiration Date. The Option may be exercised during
such period only with respect to the Shares that were vested as of the Special
Terminating Event and only to the extent the Option had not previously been
exercised. To the extent the Option remains unexercised at the end of such
period, the Option shall terminate.
(c) If Optionee shall be terminated "for cause" by the Company, any
Subsidiary or any Parent, the Option shall terminate immediately. For purposes
of this Option Agreement, "for cause" shall mean:
(i) with respect to employees or directors of the Company:
(A) the failure or refusal by such person to perform his or
her duties to the Company; or
(B) Such person's willful disobedience of any orders or
directives of the Board or any officers thereof acting under the authority
thereof or such person's deliberate interference with the compliance by other
employees of the Company with any such orders or directives; or
(C) the failure or refusal of such person to abide by or
comply with the written policies, standard procedures or regulations of the
Company; or
(D) any willful or continued act or course of conduct by
such person which the Board in good faith determines might reasonably be
expected to have a material detrimental effect on the Company or the business,
operations, affairs or financial position thereof; or
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(E) the committing by such person of any fraud, theft,
embezzlement or other dishonest act against the Company; or
(F) the determination by the Board, in good faith and in
the exercise of reasonable discretion, that such person is not competent to
perform his or her duties of employment; and
(ii) with respect to consultants, any material breach of their
consulting agreement with the Company.
(d) For purposes of this Option Agreement, "permanent disability"
shall mean permanent and total disability as defined by the Board. Optionee
shall not be considered permanently disabled unless he furnishes proof of such
disability in such form and manner, and at such times, as the Board may from
time to time require.
6. RESTRICTIONS ON PURCHASED SHARES.
(a) MARKET STAND-OFF.
(i) In connection with any underwritten public offering by the
Company of its equity securities pursuant to an effective registration statement
filed under the Securities Act of 1933, as amended (the "SECURITIES ACT"),
including the Company's initial public offering, Optionee shall not sell, make
any short sale of, loan, hypothecate, pledge, grant any option for the purchase
of, or otherwise dispose or transfer for value or otherwise agree to engage in
any of the foregoing transactions with respect to any Purchased Shares without
the prior written consent of the Company or its underwriters, for such period of
time from and after the effective date of such registration statement as may be
reasonably requested by the Company or such underwriters. This Section 6(a)(i)
shall only remain in effect for the two-year period immediately following the
effective date of the Company's initial public offering and shall thereafter
terminate and cease to be in force or effect. Optionee agrees to execute and
deliver to the Company such further documents or instruments as the Company
reasonably determines to be necessary or appropriate to effect the provisions of
this Section 6(a).
(ii) In the event of any stock dividend, stock split,
recapitalization, or other change affecting the Company's outstanding Common
Stock effected without receipt of consideration, then any new, substituted, or
additional securities distributed with respect to the Purchased Shares shall be
immediately subject to the provisions of this Section 6(a), to the same extent
the Purchased Share are at such time covered by such provisions.
(iii) In order to enforce the provisions of Section 6(a), the
corporation may impose stop-transfer instructions with respect to the Purchased
Shares until the end of the applicable stand-off period.
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(b) RESTRICTION ON TRANSFER.
(i) Optionee shall not sell, transfer, grant proxies with
respect to, assign, pledge, encumber or otherwise dispose of (each a "TRANSFER")
any of the Purchased Shares that are subject to the Company's Repurchase Right
under Section 6(c). In addition, Purchased Shares that are released from the
Repurchase Right shall not be Transferred in contravention of the Company's
First Refusal Right under Section 6(d) or the provisions of Sections 6(g) or
6(h). The restrictions contained in Section 6(c) and Section 6(d) shall NOT be
applicable to (1) a transfer of the Purchased Shares made without consideration
to Optionee's spouse or issue, including adopted children, (2) a transfer of
title to the Purchased Shares effected pursuant to Optionee's will or the laws
of intestate succession or (3) a transfer to the Company in pledge as security
for any purchase-money indebtedness incurred by Optionee in connection with the
acquisition of the Purchased Shares; provided Optionee shall have first obtained
the written consent of the Company to such Transfer. Any Transfer of Purchased
Shares permitted hereunder shall be subject to the Securities Law Restrictions
set forth in Section 6(g) and the S Corporation Restrictions set forth in
Section 6(h).
(ii) Each person (other than the Company) to whom the Purchased
Shares are transferred by means of one of the permitted transfers specified in
Section 6(b)(i) must, as a condition precedent to the validity of such transfer,
acknowledge in writing to the Company that such person is bound by the
provisions of this Agreement and that the transferred shares are subject to (1)
both the Company's Repurchase Right and the Company's First Refusal Right
granted hereunder, (2) the market stand-off provisions of Section 6(a) and, (3)
the restrictions set forth in Sections 6(g) and 6(h), to the same extent such
shares would be so subject if retained by Optionee.
(iii) For purposes of Sections 6(b), 6(c) and 6(d) of this
Agreement, the term "Owner" shall include Optionee and all subsequent holders of
the Purchased Shares who derive their ownership through a permitted Transfer
from Optionee in accordance with Section 6(b)(i).
(c) REPURCHASE RIGHT.
(i) GRANT. The Company is hereby granted the right (the
"REPURCHASE RIGHT") exercisable within the 90 day period following termination
of Optionee's employment with the Company, or in the case of stock issued upon
exercise of options after the date of termination, within 90 days after the date
of exercise, to repurchase all of the Purchased Shares at the Fair Market Value
on the date of termination of employment and Shares underlying vested Options
which have not been fully exercised prior to termination of Optionee's
employment at the price equal to the amount by which the Fair Market Value of
the Shares underlying such Options (or portion thereof) exceeds the exercise
price of the Options on the date of termination of employment.
(ii) EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right
shall be exercisable by written notice delivered to the Owner of the Purchased
Shares prior to the expiration of the applicable period specified in Section
6(c)(i). The notice shall indicate the number of Purchased Shares to be
repurchased and the date on which the repurchase is to be effected, such date to
be not more than 30 days after the date of notice. Owner shall, prior to the
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<PAGE>
close of business on the date specified for the repurchase, deliver to the
Secretary of the Company the certificates representing the Purchased Shares to
be repurchased, each certificate to be properly endorsed for transfer. The
Company shall, concurrently with the receipt of such stock certificates from
Owner, pay to Owner in cash or cash equivalents (including the cancellation of
any purchase-money indebtedness), the amount determined pursuant to Section
6(c)(i) above.
(iii) TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right
under this Section 6(c) shall lapse and cease to have effect upon the EARLIEST
to occur of (A) failure by the Company to timely exercise the Repurchase Right
under Section 6(c)(i), (B) the first date on which shares of the Company's
Common Stock are held of record by more than 500 persons, (C) a determination by
the Company's Board of Directors that a public market exists for the outstanding
shares of the Company's Common Stock or (D) a firm commitment underwritten
public offering pursuant to an effective registration statement under the
Securities Act, covering the offer and sale of the Company's Common Stock in the
aggregate amount of at least $5,000,000.
(d) RIGHT OF FIRST REFUSAL
(i) GRANT. The Company is hereby granted the right of first
refusal (the "FIRST REFUSAL RIGHT"), exercisable in connection with any proposed
Transfer of the Purchased Shares. For purposes of this Section 6(d), the term
"Transfer" shall not include any of the permitted transfers under Section
6(b)(i).
(ii) NOTICE OF INTENDED DISPOSITION. In the event the Owner
desires to accept a bona fide third-party offer for any or all of the Purchased
Shares (the shares subject to such offer to be hereinafter called, solely for
the purposes of this Section 6(d), the "TARGET SHARES"), Owner shall promptly
(1) deliver to the Secretary of the Company written notice (the "DISPOSITION
NOTICE") of the offer and the basic terms and conditions thereof, including the
proposed purchase price, and (2) provide satisfactory proof that the disposition
of the Target Shares to the third-party offeror would not be in contravention of
the provisions set forth in Sections 6(b), 6(c), 6(g) and 6(h) of this
Agreement.
(iii) EXERCISE OF RIGHT. The Company (or its assignees)
shall, for a period of 30 days following receipt of the Disposition Notice, have
the right to repurchase any or all of the Target Shares specified in the
Disposition Notice upon substantially the same terms and conditions specified
therein. Such right shall be exercisable by written notice (the "EXERCISE
NOTICE") delivered to Owner prior to the expiration of the 30 day exercise
period. If such right is exercised with respect to all the Target Shares
specified in the Disposition Notice, then the Company (or its assignees) shall
effect the repurchase of the Target Shares, including payment of the purchase
price, not more than 30 days after delivery of the Exercise Notice; and at such
time Owner shall deliver to the Company the certificates representing the Target
Shares to be repurchased, each certificate to be properly endorsed for transfer.
Should the purchase price specified in the Disposition Notice be
payable in property other than cash or evidences of indebtedness, the Company
(or its assignees) shall have the right to pay the purchase price in the form of
cash equal in amount to the value of such
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property. If the Owner and the Company (or its assignees) cannot agree on such
cash value within ten days after the Company's receipt of the Disposition
Notice, the valuation shall be made by an appraiser of recognized standing
selected by the Owner and the Company (or its assignees), or, if they cannot
agree on an appraiser within 20 days after the Company's receipt of the
Disposition Notice, each shall select an appraiser of recognized standing and
the two appraisers shall designate a third appraiser of recognized standing,
whose appraisal shall be determinative of such value. The cost of such
appraisal shall be shared equally by the Owner and the Company. The closing
shall then be held on the LATTER of (1) the 30th business day following delivery
of the Exercise Notice or (2) the 15th day after such cash valuation shall have
been made.
(iv) NON-EXERCISE OF RIGHT. In the event the Exercise Notice is
not given to Owner within 30 days following the date of the Company's receipt of
the Disposition Notice, Owner shall have a period of 30 days thereafter, in
which to sell or otherwise dispose of the Target Shares upon terms and
conditions (including the purchase price) no more favorable to the third-party
purchaser than those specified in the Disposition Notice; PROVIDED, HOWEVER,
that any such sale or disposition must not be effected in contravention of the
provisions of Sections 6(g) or 6(h) of this Agreement. The third-party
purchaser shall acquire the Target Shares free and clear of all the terms and
provisions of this Agreement (including the Company's Repurchase Right under
Section 6(c) and the Company's First Refusal Right hereunder). In the event
Owner does not sell or otherwise dispose of the Target Shares within the
specified 30 day period, the Company's First Refusal Right shall continue to be
applicable to any subsequent disposition of the Target Shares by Owner until
such right lapses in accordance with Section 6(d)(vi).
(v) PARTIAL EXERCISE OF RIGHT. In the event the Company (or its
assignees) makes a timely exercise of the First Refusal Right with respect to a
portion, but not all, of the Target Shares specified in the Disposition Notice,
Owner shall have the option, exercisable by written notice to the Company
delivered within 30 days after the date of the Disposition Notice, to effect the
sale of the Target Shares pursuant to one of the following alternatives:
(A) sale or other disposition of all the Target Shares to a
third-party purchaser in compliance with the requirements of section 6(d)(iv),
as if the Company did not exercise the First Refusal Right hereunder; or
(B) sale to the Company (or its assignees) of the portion
of the Target Shares which the Company (or its assignees) has elected to
purchase, such sale to be effected in substantial conformity with the provisions
of Section 6(d)(iii).
Failure of Owner to deliver timely notification to the Company
under this Section 6(d)(v) shall be deemed to be an election by Owner to sell
the Target Shares pursuant to alternative (A) above.
(vi) TERMINATION OF THE FIRST REFUSAL RIGHT. The First
Refusal Right under this Section 6(d) shall lapse and cease to have effect upon
the EARLIEST to occur of (1) the first date on which shares of the Company's
Common Stock are held of record by more than 500 persons, (2) a determination is
made by the Company's Board of Directors that a public market exists for the
outstanding shares of the Company's Common Stock or (3) a firm commitment
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underwritten public offering pursuant to an effective registration statement
under the Securities Act, covering the offer and sale of the Company's Common
Stock in the aggregate amount of at least $5,000,000.
(e) RECAPITALIZATION. In the event of any stock dividend, stock
split, recapitalization or other transaction resulting in an adjustment under
Section 7 hereof, then any new, substituted or additional securities or other
property which is by reason of such transaction distributed with respect to or
in exchange for the Purchased Shares shall be immediately subject to the
Company's Repurchase Right and First Refusal Right, but only to the extent the
Purchased Shares are at that time covered by such right.
(f) LEGEND. All certificates representing Purchased Shares subject
to the First Refusal Rights and Repurchase Rights shall be endorsed with the
following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE
WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE
REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE
SHARES). SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN REPURCHASE RIGHTS
AND RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES. THE
SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH
AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE."
(g) SECURITIES LAW RESTRICTIONS. None of the Purchased Shares shall
be Transferred (with or without consideration) and the Company shall not be
required to register any such Transfer and the Company may instruct its transfer
agent not to register any such Transfer, unless and until all of the following
events shall have occurred:
(i) the Purchased Shares are Transferred pursuant to and in
conformity with (1) (x) an effective registration statement filed with the
Securities and Exchange Commission (the "COMMISSION") pursuant to the Securities
Act, or (y) an exemption from registration under the Securities Act, and (2) the
securities laws of any state of the United States; and
(ii) Optionee has, prior to the Transfer of such Purchased
Shares, and if requested by the Company, provided all relevant information to
Company's counsel so that upon Company's request, Company's counsel is able to,
and actually prepares and delivers to the Company a written opinion that the
proposed Transfer (1) (x) is pursuant to a registration statement which has been
filed with the Commission and is then effective, or (y) is exempt from
registration under the Securities Act as then in effect, and the Rules and
Regulations of the Commission thereunder, and (2) is either qualified or
registered under any applicable state securities laws, or exempt from such
qualification or registration. The Company shall bear all reasonable costs of
preparing such opinion.
(h) S CORPORATION RESTRICTIONS. For so long as the Company maintains
its taxable status as an S Corporation, none of the Purchased Shares shall be
Transferred (with or
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without consideration) and the Company shall not be required to register any
such Transfer and the Company may instruct its transfer agent not to register
any such Transfer to any person who is not eligible to be an S Corporation
shareholder as defined in Section 1361 of the Code, or to any person if such
transfer would, in the opinion of the Company's counsel, result in the
termination or revocation of the Company's taxable status as an S Corporation.
(i) NONCOMPLYING TRANSFERS INVALID. Any attempted Transfer which
is not in full compliance with this Section 6 shall be null and void AB INITIO,
and of no force or effect.
7. ADJUSTMENTS UPON RECAPITALIZATION.
(a) Subject to the provisions of Section 7(b), if any change is made
in the Common Stock, without receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company) the Option will be appropriately adjusted in the class(es) and number
of shares and price per share of stock subject to the Option. Such adjustments
shall be made by the Board (excluding the Optionee), the determination of which
shall be final, binding and conclusive. The conversion of any convertible
securities of the Company shall not be treated as a "transaction not involving
the receipt of consideration by the Company."
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Common
Stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise, then, at the sole discretion of the Board (excluding the Optionee)
and to the extent permitted by applicable law, the Option shall (i) terminate
upon such event and may be exercised prior thereto to the extent the Option is
then exercisable or (ii) continue in full force and effect and, if applicable,
the surviving corporation or an Affiliate of such surviving corporation shall
assume the Option and/or shall substitute a similar option or award in place of
the Option.
(c) To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the Board
(excluding the Optionee), and its determination shall be final, binding and
conclusive.
(d) The provisions of this Section 7 are intended to be exclusive,
and Optionee shall have no other rights upon the occurrence of any of the events
described in this Section 7.
(e) The grant of the Option shall not affect in any way the right or
power of the Company to make adjustments, reclassifications, reorganizations or
changes in its capital or business structure, or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
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8. WAIVER OF RIGHTS TO PURCHASE STOCK.
By signing this Option Agreement, Optionee acknowledges and agrees
that neither the Company nor any other person or entity is under any obligation
to sell or transfer to Optionee any option or equity security of the Company,
other than only (i) the shares of Common Stock subject to the Option, and (ii)
those rights or options, if any, (the "RESERVED AGREEMENTS") to purchase Common
Stock previously granted in writing to Optionee by the Board (or a committee
thereof) and specifically identified on the Certificate under the caption,
"WAIVER." By signing this Option Agreement, Optionee specifically waives all
rights which he or she may have had prior to the date of this Option Agreement
to receive any option or equity security of the Company, including, without
limitation, those which arise out of or are in any manner whatsoever, directly
or indirectly, related to any stock option agreement or any other right or
agreement relating directly or indirectly to the acquisition by Optionee of
securities of the Company, excluding the Reserved Agreements, if any.
9. INVESTMENT INTENT.
Optionee represents and agrees that if he or she exercises the Option
in whole or in part, and if at the time of such exercise the Plan and/or the
Purchased Shares have not been registered under the Securities Act, he or she
will acquire the Shares upon such exercise for the purpose of investment and not
with a view to the distribution of such Shares, and that upon each exercise of
the Option he or she will furnish to the Company a written statement to such
effect.
10. LEGEND ON STOCK CERTIFICATES.
Optionee agrees that all certificates representing the Purchased
Shares will be subject to such stock transfer orders and other restrictions (if
any) as the Company may deem advisable under the rules, regulations and other
requirements of the Commission, any stock exchange upon which the Common Stock
is then listed and any applicable federal or state securities laws, and the
Company may cause a legend or legends to be put on such certificates to make
appropriate reference to such restrictions.
11. NO RIGHTS AS SHAREHOLDER.
Optionee shall have no rights as a shareholder with respect to the
Shares until the date of the issuance to Optionee of a stock certificate or
stock certificates evidencing such Shares. Except as may be provided in Section
7 of this Option Agreement, no adjustment shall be made for dividends (ordinary
or extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such stock certificate is issued.
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12. MODIFICATION.
Subject to the terms and conditions and within the limitations of the
Plan, the Board (or a committee thereof) may modify, extend or renew the Option
or accept the surrender of, and authorize the grant of a new option in
substitution for, the Option (to the extent not previously exercised). No
modification of the Option shall be made which, without the consent of Optionee,
would alter or impair any rights of Optionee under the Option.
13. WITHHOLDING.
(a) The Company shall be entitled to require as a condition of
delivery of any Purchased Shares upon exercise of this Option that the Optionee
agree to remit, at the time of such delivery or at such later date as the
Company may determine, an amount sufficient to satisfy all federal, state and
local withholding tax requirements relating thereto, and Optionee agrees to take
such other action required by the Company to satisfy such withholding
requirements.
(b) With the consent of the Board, and in accordance with any rules
and procedures from time to time adopted by the Board, Optionee may elect to
satisfy his or her obligations under Section 13(a) above by (i) directing the
Company to withhold a portion of the Shares otherwise deliverable; or (ii)
tendering other shares of the Common Stock of the Company which are already
owned by Optionee which in all cases have a fair market value on the date as of
which the amount of tax to be withheld is determined (the "TAX DATE") equal to
the amount of taxes to be paid by such method (each, a "WITHHOLDING RIGHT").
(c) To exercise a Withholding Right, the Optionee must follow the
election procedures set forth below, together with such additional procedures
and conditions set forth in this Option Agreement or otherwise adopted by the
Board:
(i) the Optionee must deliver to the Company his or her
written notice of election (the "ELECTION") and specify whether all or a stated
percentage of the applicable taxes will be paid in accordance with Section 13(b)
above and whether the amount so paid shall be made in accordance with the "flat"
withholding rates for supplemental wages or as determined in accordance with
Optionee's form W-4 (or comparable state or local form);
(ii) unless disapproved by the Board as provided in Subsection
(iii) below, the Election once made will be irrevocable; and
(iii) no Election is valid unless the Board approves such
Election, and such Election may be disapproved by the Board, in its sole
discretion, with or without cause or reason therefor; provided, if the Board has
not approved or disapproved the Election on or prior to the Tax Date, the
Election will be deemed approved.
14. CHARACTER OF OPTION.
The Option is NOT intended to qualify as an "incentive stock option"
as that term is defined in Section 422 of the Code.
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15. NONDISCLOSURE AND INTELLECTUAL PROPERTY OWNERSHIP.
(a) Optionee agrees to assign to the Company or its nominees, all
Optionee's rights to ideas, concepts, business plans and strategies, computer
programs, inventions, discoveries, improvements, and developments
("DEVELOPMENTS"), whether or not copyrightable, patentable, or subject to trade
secret protection, which, during the period of Optionee's employment by the
Company, Optionee has made, conceived, or conducted, or hereafter may make or
conceive or conduct, either solely or jointly with others: (i) with the use of
the Company's time, materials, or facilities; or (ii) resulting from or
suggested by Optionee's work for the Company; or (iii) in any way pertaining to
any subject matter related to the Company's existing or contemplated business,
products, and services. Notwithstanding anything to the contrary herein,
pursuant to Section 2870 of the California Labor Code, this Agreement does not
apply to any Development for which no equipment, supplies, facilities or trade
secret information of the Company was used and which was developed entirely on
Optionee's own time, and (1) which does not relate at the time of conception or
reduction to practice of the Development either to the business of the Company
or to the Company's actual or demonstrably anticipated business, or (2) which
does not result from any work performed by Optionee for the Company.
(b) At any time requested by the Company, either during employment or
after termination thereof, and without charge to the Company, but at its
expense, Optionee agrees to execute, acknowledge, and deliver all such further
papers, including applications for registrations of copyrights, and to perform
such other lawful acts as, in the opinion of said Company, are necessary to
obtain, maintain, or register copyrights or patents for such Development in any
and all countries and to vest title thereto in the Company or its nominees.
(c) Optionee realizes that in the course of Optionee's employment the
Company will necessarily reveal to Optionee or Optionee may develop proprietary,
secret, or confidential information, and in addition to all other obligations
with respect to the observance of federal and state statutes and U.S. Government
security regulations, Optionee hereby agrees as follows:
(i) Optionee agrees to keep in strictest confidence during and
subsequent to Optionee's employment all information identified as secret or
confidential or which, from the circumstances, in good faith and good conscience
ought to be treated as confidential, regarding the business plans and
strategies, concepts, inventions, discoveries, or trade secrets or secret
processes, reports, client lists, profit margins, or any other information of
the business or affairs of the Company (hereinafter collectively referred to as
"INFORMATION") which Optionee may acquire or develop in connection with or as a
result of Optionee's employment.
(ii) Optionee covenants and agrees that, except as instructed
by Company during Optionee's employment, Optionee will not use any Information
and without the prior written consent of Company, Optionee will not directly or
indirectly publish, communicate, divulge, or describe to any unauthorized
person, nor patent or register a copyright for, any Information during the
period of Optionee's employment or at any time subsequent thereto.
(iii) This covenant shall not apply to Information already in
the public domain or Information which has been dedicated to or released to the
public by the Company.
12
<PAGE>
(d) During the period of Optionee's employment, Optionee agrees to
abide by Company's policies, including but not limited to employment policies,
confidentiality policies, and policies prohibiting sexual harassment and
discrimination, as such policies may exist and be made known to Optionee from
time to time.
16. GENERAL PROVISIONS.
(a) FURTHER ASSURANCES. Optionee shall promptly take all actions and
execute all documents requested by the Company which the Company deems to be
reasonably necessary to effectuate the terms and intent of this Option
Agreement.
(b) NOTICES. All notices, requests, demands and other communications
under this Option Agreement shall be in writing and shall be given to the
parties hereto as follows:
(i) If to the Company, to:
Future Media Production, Inc.
25136 Anza Dr.
Valencia, CA 91355
Fax No: (805) 294-5582
Attn.: Alex Sandel
(ii) If to Optionee, to the address set
forth in the records of the Company,
or at such other address or addresses as may have been furnished by either party
in writing to the other party hereto. Any such notice, request, demand or other
communication shall be effective (1) if given by mail, 72 hours after such
communication is deposited in the mail by first-class certified mail, return
receipt requested, postage prepaid, addressed as aforesaid, or (2) if given by
any other means, when delivered at the address specified in this subsection (b).
(c) TRANSFER OF RIGHTS UNDER THIS OPTION AGREEMENT. The Company may
at any time transfer and assign its rights and delegate its obligations under
this Option Agreement to any other person, corporation, firm or entity,
including its officers, directors and shareholders, with or without
consideration.
(d) OPTION NON-TRANSFERABLE. Optionee may not sell, transfer, assign
or otherwise dispose of the Option except by will or the laws of descent and
distribution, and the Option may be exercised during the lifetime of Optionee
only by Optionee or by his or her guardian or legal representative. For so
long as the Company maintains its taxable status as an S Corporation, in the
event of death, the Option cannot be transferred to any person who is not
eligible to be an S Corporation shareholder as defined in Section 1361 of the
Code, or to any person if such transfer, or the exercise of the Option by the
transferee, would, in the opinion of the Company's counsel, result in the
termination or revocation of the Company's taxable status as an S Corporation.
13
<PAGE>
(e) SUCCESSORS AND ASSIGNS. Except to the extent specifically
limited by the terms and provisions of this Option Agreement, this Option
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors, assigns, heirs and personal representatives.
(f) GOVERNING LAW. THIS OPTION AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS MADE IN, AND TO BE PERFORMED WITHIN, THAT STATE.
(g) THE PLAN. This Option Agreement is made pursuant to the Plan,
and it is intended, and shall be interpreted in a manner, to comply therewith.
Any provision of this Option Agreement inconsistent with the Plan shall be
superseded and governed by the Plan. All capitalized terms not defined herein
shall have the same meaning as set forth in the Plan.
(h) INJUNCTIVE RELIEF. Optionee agrees that the Company may suffer
irreparable harm in the event that Optionee fails or threatens not to comply
with any terms of this Agreement, and that monetary damages may be inadequate to
compensate the Company in such event. Accordingly, Optionee agrees that the
Company, in addition to any other remedies available to it at law or in equity,
including the right to monetary damages, will be entitled to injunctive relief,
without the posting of bond or other security, to enforce this Agreement.
(i) MISCELLANEOUS. Titles and captions contained in this Option
Agreement are inserted for convenience of reference only and do not constitute a
part of this Option Agreement for any other purpose.
The Signature Page to this Option Agreement consists of the last page
of the Certificate.
14
<PAGE>
Exhibit "A"
NOTICE OF EXERCISE
(To be signed only upon exercise of the Option)
TO: FUTURE MEDIA PRODUCTIONS, INC.
The undersigned, the holder of the enclosed Stock Option Agreement
(Non-Statutory Stock Option), hereby irrevocably elects to exercise the purchase
rights represented by the Option and to purchase thereunder _________ * shares
of Common Stock of FUTURE MEDIA PRODUCTIONS, INC. (the "COMPANY"), and herewith
encloses payment of $_______ and/or _________ shares of the Company's Common
Stock in full payment of the purchase price of such shares being purchased.
Dated:
----------------
------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the
Option)
------------------------------
(Please Print Name)
------------------------------
(Address)
* Insert here the number of shares called for on the face of the Option
(or, in the case of a partial exercise, the number of shares being exercised),
in either case without making any adjustment for additional Common Stock of the
Company, other securities or property which, pursuant to the adjustment
provisions of the Option, may be deliverable upon exercise.
<PAGE>
OPTION CERTIFICATE
(INCENTIVE STOCK OPTION)
THIS IS TO CERTIFY that Future Media Productions, Inc., a California
corporation (the "COMPANY"), has granted to the employee named below an
incentive stock option (the "OPTION") to purchase shares (the "SHARES") of the
Company's Common Stock, without par value (the "COMMON STOCK"), under its 1998
Stock Incentive Plan, as follows:
Name of Optionee:
--------------------------------------------------
Address of Optionee:
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
Number of Shares:
--------------------------------------------------
--------------------------------------------------
Option Exercise Price:
--------------------------------------------------
Date of Grant:
--------------------------------------------------
Option Expiration Date:
--------------------------------------------------
EXERCISE SCHEDULE: The Option shall become exercisable as follows:
SUMMARY OF OTHER TERMS: This Option is defined in the Stock Option
Agreement (Incentive Stock Option) (the "OPTION AGREEMENT") which is attached to
this Option Certificate (this "CERTIFICATE") as Annex I. This Certificate
summarizes certain of the provisions of the Option Agreement for your
information, but is not complete. Your rights are governed by the Option
Agreement, NOT by this summary. The Company strongly suggests that you
carefully review the full Option Agreement prior to signing this Certificate or
exercising the Option.
<PAGE>
Among the terms of the Option Agreement are the following:
EMPLOYMENT: The Option Agreement does not obligate the Company to retain
you for any period of time. Unless otherwise agreed IN WRITING, the Company
reserves the right to terminate any employee at any time, with or without cause.
TERMINATION OF EMPLOYMENT: While the Option terminates on the Option
Expiration Date, it will terminate earlier if you cease to be employed by the
Company. If your employment ends due to death or permanent disability, the
Option terminates six months after the date of death or permanent disability,
and is exercisable during such six month period as to the portion of the Option
which has vested prior to the date of termination of employment. If your
employment ends "for cause," the Option terminates immediately upon termination
of your employment. In all other cases, the Option terminates 30 days after the
date of termination of employment, and is exercisable during such 30 day period
as to the portion of the Option which had vested prior to the date of
termination of employment. See Section 5 of the Option Agreement.
TRANSFER: The Option is personal to you, and cannot be sold, transferred,
assigned or otherwise disposed of to any other person, except on your death.
For so long as the Company maintains its taxable status as an S Corporation, in
the event of death, the Option cannot be transferred to any person who is not
eligible to be an S Corporation shareholder as defined in Section 1361 of the
Code, or to any person if such transfer, or the exercise of the Option by the
transferee, would, in the opinion of the Company's counsel, result in the
termination or revocation of the Company's taxable status as an S Corporation.
See Section 16(d) of the Option Agreement.
EXERCISE: You can exercise the Option (once it is exercisable), in whole
or in part, by delivering to the Company a Notice of Exercise identical to
Exhibit "A" attached to the Option Agreement, accompanied by payment of the
Option Exercise Price, set forth above, for the Shares to be purchased. The
Company will then issue a certificate to you for the Shares you have purchased.
You are under no obligation to exercise the Option. See Section 4 of the Option
Agreement.
REPURCHASE RIGHTS; FIRST REFUSAL RIGHTS: The Company has the right
exercisable following termination of your employment to repurchase (x) all of
the Shares purchased by you upon exercise of the Option at fair market value on
the date of your termination, and (y) the unexercised portion of the Option (to
the extent that the Option had vested prior to the date of your termination) at
the price equal to the amount by which the fair market value of the Shares
underlying the Option (or portion thereof) exceeds the exercise price of the
Option, in each case for cash or cash equivalents (including the cancellation of
any purchase-money indebtedness). Those Shares are also subject to the
Company's right of first refusal, which provides that in the event you desire to
accept a bona fide third-party offer for any of the Shares you acquire upon
exercise of your Option, you must first offer those shares to the Company or its
designee on the same terms and conditions as are set forth in the bona fide
offer. The Repurchase Rights and First Refusal Rights lapse and cease to have
affect upon the earlier to occur of (1) the first date on
2
<PAGE>
which shares of the Company's Common Stock are held of record by more than
500 persons, (2) a determination by the Company's Board of Directors that a
public market exists for the outstanding shares of the Company's Common Stock
or (3) a firm commitment underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of the Company's Common Stock in the
aggregate amount of at least $5,000,000. See Section 6 of the Option
Agreement.
FIRST REFUSAL RIGHTS: The Option provides that the Company shall have the
right of first refusal, exercisable in connection with any proposed sale,
hypothecation or other disposition of the Shares; and that in the event you
desire to accept a bona fide third-party offer for any or all of the Shares,
such shares shall first be offered to the Company at the same terms and
conditions as are set forth in the bona fide offer. To exercise this first
refusal right, the Company must elect to purchase the Shares within 30 days
after receipt of notice from you of the related proposed sale, and upon such
election the Company must purchase the Shares within 60 days of the receipt of
notice of the proposed sale. See Section 6 of the Option Agreement.
MARKET STAND-OFF: The Option provides that in connection with any
underwritten public offering by the Company, you may not sell or transfer any of
your Shares without the prior written consent of the Company or its underwriters
for such period of time from and after the effective date of such offering as
may be reasonably requested by the Company or such underwriters. See Section 6
of the Option Agreement.
S CORPORATION RESTRICTIONS: No Optionee may sell, transfer, grant proxies
with respect to, assign, pledge, encumber or otherwise dispose of any Shares
acquired upon the exercise of an Option, to any person who is not eligible to be
an S Corporation shareholder as defined in Section 1361 of the Internal Revenue
Code of 1986, as amended (the "CODE"), or to any person if such transfer would,
in the opinion of the Company's counsel, result in the termination or revocation
of the Company's taxable status as an S Corporation. See Section 6(h) of the
Option Agreement.
ANTI-DILUTION PROVISIONS: The Option contains provisions which adjust your
Option to reflect stock splits, stock dividends, mergers and other major
corporate reorganizations which would change the nature of the Shares underlying
your Option. See Section 7 of the Option Agreement.
3
<PAGE>
WAIVER: By signing this Certificate, you will be agreeing to all of the
terms of the Option Agreement, including those not summarized in this
Certificate. You will waive your rights to any other options or stock which may
have heretofore been promised to you, other than any rights you may have
pursuant to the agreements (the "RESERVED AGREEMENTS"), if any, identified
below. See Section 8 of the Option Agreement.
RESERVED AGREEMENTS:[INDICATE "NONE," OR IDENTIFY AGREEMENT BY EXECUTION
DATE, TYPE OF AGREEMENT AND IDENTITIES OF PARTIES]
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WITHHOLDING: The Company may require you to make any arrangements
necessary to insure the proper withholding of any amount of tax, if any,
required to be withheld by the Company as a result of the exercise of the
Option. See Section 13 of the Option Agreement.
COPYRIGHT OWNERSHIP AND NONDISCLOSURE: By signing this certificate you
will be agreeing that (i) you will not disclose to any person outside the
Company any non-public information and/or trade secrets of the Company, and (ii)
that all inventions, ideas, concepts and other intellectual property devised,
developed, conceived or created by you relating to your employment by the
Company are the sole and exclusive property of the Company. See Section 15 of
the Agreement.
4
<PAGE>
AGREEMENT
Future Media Productions, Inc., a California corporation (the "COMPANY"),
and the above-named employee ("OPTIONEE") each hereby agrees to be bound by all
of the terms and conditions of the Stock Option Agreement (Incentive Stock
Option) which is attached hereto as Annex I and incorporated herein by this
reference as if set forth in full in this document.
DATED:
-------------------------
Future Media Productions, Inc.
By:
-------------------------------
Its:
-------------------------------
OPTIONEE
-----------------------------------
(Signature)
-----------------------------------
(Please print your name exactly
as you wish it to appear on any
stock certificates issued to you
upon exercise of the Option)
5
<PAGE>
ANNEX I
STOCK OPTION AGREEMENT
(INCENTIVE STOCK OPTION)
This STOCK OPTION AGREEMENT (this "OPTION AGREEMENT") is made and
entered into on the execution date of the Option Certificate to which it is
attached (the "CERTIFICATE"), by and between Future Media Productions, Inc., a
California corporation (the "COMPANY"), and the employee named in the
Certificate ("OPTIONEE").
Pursuant to the Future Media Productions, Inc. 1998 Stock Incentive
Plan (the "PLAN"), the Board of Directors of the Company (the "BOARD") has
authorized the grant to Optionee of an incentive stock option to purchase shares
of the Company's Common Stock, without par value (the "COMMON STOCK"), upon the
terms and subject to the conditions set forth in this Option Agreement and in
the Plan.
The Company and Optionee agree as follows:
1. GRANT OF OPTION.
The Company hereby grants to Optionee the right and option (the
"OPTION"), upon the terms and subject to the conditions set forth in this Option
Agreement, to purchase all or any portion of that number of shares of the Common
Stock (the "SHARES") set forth in the Certificate, at the Option Exercise Price
set forth in the Certificate (the "EXERCISE PRICE").
2. TERM OF OPTION.
The Option shall terminate and expire on the Option Expiration Date
set forth in the Certificate, unless sooner terminated as provided herein.
3. EXERCISE PERIOD.
(a) Subject to the provisions of Sections 3, 5, and 7 of this Option
Agreement, the Option shall become exercisable (in whole or in part) upon and
after the dates set forth under the caption "Exercise Schedule" in the
Certificate. The installments shall be cumulative; I.E., the Option may be
exercised, as to any or all Shares covered by an installment, at any time or
times after the installment first becomes exercisable and until expiration or
termination of the Option.
(b) Notwithstanding anything to the contrary contained in this Option
Agreement, the Option may not be exercised, in whole or in part, unless and
until any then-
<PAGE>
applicable requirements of all federal, state and local laws and
regulatory agencies shall have been fully complied with to the satisfaction of
the Company and its counsel.
4. EXERCISE OF OPTION.
(a) There is no obligation to exercise the Option, in whole or in
part. The Option may be exercised, in whole or in part, only by delivery to the
Company of:
(i) written notice of exercise in form and substance
identical to Exhibit "A" attached to this Option Agreement stating the number of
Shares then being purchased (the "Purchased Shares");
(ii) payment of the Exercise Price of the Purchased Shares,
either in cash, by check, by cancellation of any indebtedness of the Company to
Optionee for accrued and unpaid salary or, with the consent of the Board, by
transfer to the Company of issued and outstanding shares of Common Stock which,
to the extent required to avoid liability under Section 16(b) of the Securities
and Exchange Act of 1934, as amended, have been held by Optionee for a period of
at least six calendar months preceding the date of surrender, or by any
combination of the above methods of payment. If payment is made, in whole or in
part, by transfer to the Company of issued and outstanding shares of Common
Stock, the value (the "FAIR MARKET VALUE") of such shares shall be determined as
follows: (1) if the Common Stock is listed on any established stock exchange or
a national market system, including without limitation the Nasdaq National
Market, the Fair Market Value of a share of Common Stock shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such system or exchange (or the exchange with the greatest volume of
trading in the Common Stock) on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable; (2) if the Common Stock is quoted on the Nasdaq System
(but not on the Nasdaq National Market) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a share of Common Stock shall be the mean between the bid and asked prices for
the Common Stock on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable; and (3) in the absence of an established market for
the Common Stock, the Fair Market Value shall be determined in good faith by the
Board; and
(iii) if requested by the Company, a letter of investment intent
in such form and containing such provisions as the Company may reasonably
require.
(b) Following receipt of the notice and payment referred to above,
the Company shall issue and deliver to Optionee a stock certificate or stock
certificates evidencing the Purchased Shares; PROVIDED, HOWEVER, that the
Company shall not be obligated to issue a fraction or fractions of a share of
its Common Stock, and may pay to Optionee, in cash or by check, the Fair Market
Value of any fraction or fractions of a share exercised by Optionee, which Fair
Market Value shall be determined as set forth in this Section 4.
2
<PAGE>
5. TERMINATION OF EMPLOYMENT.
(a) If Optionee shall cease to be in the employ of the Company, any
Subsidiary or any Parent for any reason other than Optionee's death or permanent
disability (a "SPECIAL TERMINATING EVENT"), Optionee shall have the right,
subject to the provisions of Section 5(c) below, to exercise the Option at any
time within 30 days after the date Optionee ceased to be employed by the
Company, but in no case later than the Option Expiration Date. The Option may
be exercised during such period only with respect to the Shares that were vested
as of the date Optionee's employment terminated and only to the extent the
Option had not previously been exercised. To the extent the Option remains
unexercised at the end of such period, the Option shall terminate. The Board,
in its sole and absolute discretion, shall determine whether or not authorized
leaves of absence shall constitute termination of employment for purposes of
this Option Agreement.
(b) If a Special Terminating Event occurs while Optionee is in the
employ of the Company, any Subsidiary or any Parent, then Optionee, Optionee's
executors or administrators or any person or persons acquiring the Option
directly from Optionee by bequest or inheritance, shall have the right to
exercise the Option at any time within six months after the Special Terminating
Event, but in no case later than the Option Expiration Date. The Option may be
exercised during such period only with respect to the Shares that were vested as
of the Special Terminating Event and only to the extent the Option had not
previously been exercised. To the extent the Option remains unexercised at the
end of such period, the Option shall terminate.
(c) If Optionee shall be terminated "for cause" by the Company, any
Subsidiary or any Parent, the Option shall terminate immediately. For purposes
of this Option Agreement, "for cause" shall mean:
(A) the failure or refusal by such person to perform his or
her duties to the Company; or
(B) Such person's willful disobedience of any orders or
directives of the Board or any officers thereof acting under the authority
thereof or such person's deliberate interference with the compliance by other
employees of the Company with any such orders or directives; or
(C) the failure or refusal of such person to abide by or
comply with the written policies, standard procedures or regulations of the
Company; or
(D) any willful or continued act or course of conduct by such
person which the Board in good faith determines might reasonably be expected to
have a material detrimental effect on the Company or the business, operations,
affairs or financial position thereof; or
3
<PAGE>
(E) the committing by such person of any fraud, theft,
embezzlement or other dishonest act against the Company; or
(F) the determination by the Board, in good faith and in the
exercise of reasonable discretion, that such person is not competent to perform
his or her duties of employment; and
(d) For purposes of this Option Agreement, "permanent disability"
shall mean permanent and total disability as defined by the Board. Optionee
shall not be considered permanently disabled unless he furnishes proof of such
disability in such form and manner, and at such times, as the Board may from
time to time require.
6. RESTRICTIONS ON PURCHASED SHARES.
(a) MARKET STAND-OFF.
(i) In connection with any underwritten public offering by
the Company of its equity securities pursuant to an effective registration
statement filed under the Securities Act of 1933, as amended (the "SECURITIES
ACT"), including the Company's initial public offering, Optionee shall not sell,
make any short sale of, loan, hypothecate, pledge, grant any option for the
purchase of, or otherwise dispose or transfer for value or otherwise agree to
engage in any of the foregoing transactions with respect to any Purchased Shares
without the prior written consent of the Company or its underwriters, for such
period of time from and after the effective date of such registration statement
as may be reasonably requested by the Company or such underwriters. This
Section 6(a)(i) shall only remain in effect for the two-year period immediately
following the effective date of the Company's initial public offering and shall
thereafter terminate and cease to be in force or effect. Optionee agrees to
execute and deliver to the Company such further documents or instruments as the
Company reasonably determines to be necessary or appropriate to effect the
provisions of this Section 6(a).
(ii) In the event of any stock dividend, stock split,
recapitalization, or other change affecting the Company's outstanding Common
Stock effected without receipt of consideration, then any new, substituted, or
additional securities distributed with respect to the Purchased Shares shall be
immediately subject to the provisions of this Section 6(a), to the same extent
the Purchased Share are at such time covered by such provisions.
(iii) In order to enforce the provisions of Section 6(a), the
corporation may impose stop-transfer instructions with respect to the Purchased
Shares until the end of the applicable stand-off period.
4
<PAGE>
(b) RESTRICTION ON TRANSFER.
(i) Optionee shall not sell, transfer, grant proxies with
respect to, assign, pledge, encumber or otherwise dispose of (each a "TRANSFER")
any of the Purchased Shares that are subject to the Company's Repurchase Right
under Section 6(c). In addition, Purchased Shares that are released from the
Repurchase Right shall not be Transferred in contravention of the Company's
First Refusal Right under Section 6(d) or the provisions of Sections 6(g) or
6(h). The restrictions contained in Section 6(c) and Section 6(d) shall NOT be
applicable to (1) a transfer of the Purchased Shares made without consideration
to Optionee's spouse or issue, including adopted children, or to a trust for the
exclusive benefit of Optionee or Optionee's spouse or issue, (2) a transfer of
title to the Purchased Shares effected pursuant to Optionee's will or the laws
of intestate succession or (3) a transfer to the Company in pledge as security
for any purchase-money indebtedness incurred by Optionee in connection with the
acquisition of the Purchased Shares; provided Optionee shall have first obtained
the written consent of the Company to such Transfer. Any Transfer of Purchased
Shares permitted hereunder shall be subject to the Securities Law Restrictions
set forth in Section 6(g) and the S Corporation Restrictions set forth in
Section 6(h).
(ii) Each person (other than the Company) to whom the
Purchased Shares are transferred by means of one of the permitted transfers
specified in Section 6(b)(i) must, as a condition precedent to the validity of
such transfer, acknowledge in writing to the Company that such person is bound
by the provisions of this Agreement and that the transferred shares are subject
to (1) both the Company's Repurchase Right and the Company's First Refusal Right
granted hereunder, (2) the market stand-off provisions of Section 6(a) and (3)
the restrictions set forth in Sections 6(g) and 6(h), to the same extent such
shares would be so subject if retained by Optionee.
(iii) For purposes of Sections 6(b), 6(c) and 6(d) of this
Agreement, the term "Owner" shall include Optionee and all subsequent holders of
the Purchased Shares who derive their ownership through a permitted Transfer
from Optionee in accordance with Section 6(b)(i).
(c) REPURCHASE RIGHT.
(i) GRANT. The Company is hereby granted the right (the
"REPURCHASE RIGHT") exercisable within the 90 day period following termination
of Optionee's employment with the Company, or in the case of stock issued upon
exercise of options after the date of termination, within 90 days after the date
of exercise, to repurchase all of the Purchased Shares at the Fair Market Value
on the date of termination of employment and Shares underlying vested Options
which have not been fully exercised prior to termination of Optionee's
employment at the price equal to the amount by which the Fair Market Value of
the Shares underlying such Options (or portion thereof) exceeds the exercise
price of the Options on the date of termination of employment.
(ii) EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right
shall be exercisable by written notice delivered to the Owner of the Purchased
Shares prior to the
5
<PAGE>
expiration of the applicable period specified in Section 6(c)(i). The notice
shall indicate the number of Purchased Shares to be repurchased and the date
on which the repurchase is to be effected, such date to be not more than 30
days after the date of notice. Owner shall, prior to the close of business
on the date specified for the repurchase, deliver to the Secretary of the
Company the certificates representing the Purchased Shares to be repurchased,
each certificate to be properly endorsed for transfer. The Company shall,
concurrently with the receipt of such stock certificates from Owner, pay to
Owner in cash or cash equivalents (including the cancellation of any
purchase-money indebtedness), the amount determined pursuant to Section
6(c)(i) above.
(iii) TERMINATION OF THE REPURCHASE RIGHT. The Repurchase
Right under this Section 6(c) shall lapse and cease to have effect upon the
EARLIEST to occur of (A) failure by the Company to timely exercise the
Repurchase Right under Section 6(c)(i), (B) the first date on which shares of
the Company's Common Stock are held of record by more than 500 persons, (C) a
determination by the Company's Board of Directors that a public market exists
for the outstanding shares of the Company's Common Stock or (D) a firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act, covering the offer and sale of the Company's
Common Stock in the aggregate amount of at least $5,000,000.
(d) RIGHT OF FIRST REFUSAL
(i) GRANT. The Company is hereby granted the right of first
refusal (the "FIRST REFUSAL RIGHT"), exercisable in connection with any proposed
Transfer of the Purchased Shares. For purposes of this Section 6(d), the term
"Transfer" shall not include any of the permitted transfers under Section
6(b)(i).
(ii) NOTICE OF INTENDED DISPOSITION. In the event the Owner
desires to accept a bona fide third-party offer for any or all of the Purchased
Shares (the shares subject to such offer to be hereinafter called, solely for
the purposes of this Section 6(d), the "TARGET SHARES"), Owner shall promptly
(1) deliver to the Secretary of the Company written notice (the "DISPOSITION
NOTICE") of the offer and the basic terms and conditions thereof, including the
proposed purchase price, and (2) provide satisfactory proof that the disposition
of the Target Shares to the third-party offeror would not be in contravention of
the provisions set forth in Sections 6(b), 6(c), 6(g) and 6(h) of this
Agreement.
(iii) EXERCISE OF RIGHT. The Company (or its assignees) shall,
for a period of 30 days following receipt of the Disposition Notice, have the
right to repurchase any or all of the Target Shares specified in the Disposition
Notice upon substantially the same terms and conditions specified therein. Such
right shall be exercisable by written notice (the "EXERCISE NOTICE") delivered
to Owner prior to the expiration of the 30 day exercise period. If such right
is exercised with respect to all the Target Shares specified in the Disposition
Notice, then the Company (or its assignees) shall effect the repurchase of the
Target Shares, including payment of the purchase price, not more than 30 days
after delivery of the Exercise Notice; and at such
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time Owner shall deliver to the Company the certificates representing the
Target Shares to be repurchased, each certificate to be properly endorsed for
transfer.
Should the purchase price specified in the Disposition Notice be
payable in property other than cash or evidences of indebtedness, the Company
(or its assignees) shall have the right to pay the purchase price in the form of
cash equal in amount to the value of such property. If the Owner and the
Company (or its assignees) cannot agree on such cash value within ten days after
the Company's receipt of the Disposition Notice, the valuation shall be made by
an appraiser of recognized standing selected by the Owner and the Company (or
its assignees), or, if they cannot agree on an appraiser within 20 days after
the Company's receipt of the Disposition Notice, each shall select an appraiser
of recognized standing and the two appraisers shall designate a third appraiser
of recognized standing, whose appraisal shall be determinative of such value.
The cost of such appraisal shall be shared equally by the Owner and the Company.
The closing shall then be held on the LATTER of (1) the 30th business day
following delivery of the Exercise Notice or (2) the 15th day after such cash
valuation shall have been made.
(iv) NON-EXERCISE OF RIGHT. In the event the Exercise Notice
is not given to Owner within 30 days following the date of the Company's receipt
of the Disposition Notice, Owner shall have a period of 30 days thereafter, in
which to sell or otherwise dispose of the Target Shares upon terms and
conditions (including the purchase price) no more favorable to the third-party
purchaser than those specified in the Disposition Notice; PROVIDED, HOWEVER,
that any such sale or disposition must not be effected in contravention of the
provisions of Sections 6(g) or 6(h) of this Agreement. The third-party
purchaser shall acquire the Target Shares free and clear of all the terms and
provisions of this Agreement (including the Company's Repurchase Right under
Section 6(c) and the Company's First Refusal Right hereunder). In the event
Owner does not sell or otherwise dispose of the Target Shares within the
specified 30 day period, the Company's First Refusal Right shall continue to be
applicable to any subsequent disposition of the Target Shares by Owner until
such right lapses in accordance with Section 6(d)(vi).
(v) PARTIAL EXERCISE OF RIGHT. In the event the Company (or
its assignees) makes a timely exercise of the First Refusal Right with respect
to a portion, but not all, of the Target Shares specified in the Disposition
Notice, Owner shall have the option, exercisable by written notice to the
Company delivered within 30 days after the date of the Disposition Notice, to
effect the sale of the Target Shares pursuant to one of the following
alternatives:
(A) sale or other disposition of all the Target Shares
to a third-party purchaser in compliance with the requirements of section
6(d)(iv), as if the Company did not exercise the First Refusal Right hereunder;
or
(B) sale to the Company (or its assignees) of the
portion of the Target Shares which the Company (or its assignees) has elected to
purchase, such sale to be effected in substantial conformity with the provisions
of Section 6(d)(iii).
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Failure of Owner to deliver timely notification to the Company
under this Section 6(d)(v) shall be deemed to be an election by Owner to sell
the Target Shares pursuant to alternative (A) above.
(vi) TERMINATION OF THE FIRST REFUSAL RIGHT. The First
Refusal Right under this Section 6(d) shall lapse and cease to have effect upon
the EARLIEST to occur of (1) the first date on which shares of the Company's
Common Stock are held of record by more than 500 persons, (2) a determination is
made by the Company's Board of Directors that a public market exists for the
outstanding shares of the Company's Common Stock or (3) a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act, covering the offer and sale of the Company's Common
Stock in the aggregate amount of at least $5,000,000.
(e) RECAPITALIZATION. In the event of any stock dividend, stock
split, recapitalization or other transaction resulting in an adjustment under
Section 7 hereof, then any new, substituted or additional securities or other
property which is by reason of such transaction distributed with respect to or
in exchange for the Purchased Shares shall be immediately subject to the
Company's Repurchase Right and First Refusal Right, but only to the extent the
Purchased Shares are at that time covered by such right.
(f) LEGEND. All certificates representing Purchased Shares subject
to the First Refusal Rights and Repurchase Rights shall be endorsed with the
following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE
WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE
REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE
SHARES). SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN REPURCHASE RIGHTS
AND RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES. THE
SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH
AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE."
(g) SECURITIES LAW RESTRICTIONS. None of the Purchased Shares shall
be Transferred (with or without consideration) and the Company shall not be
required to register any such Transfer and the Company may instruct its transfer
agent not to register any such Transfer, unless and until all of the following
events shall have occurred:
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(i) the Purchased Shares are Transferred pursuant to and in
conformity with (1) (x) an effective registration statement filed with the
Securities and Exchange Commission (the "COMMISSION") pursuant to the Securities
Act, or (y) an exemption from registration under the Securities Act, and (2) the
securities laws of any state of the United States; and
(ii) Optionee has, prior to the Transfer of such Purchased
Shares, and if requested by the Company, provided all relevant information to
Company's counsel so that upon Company's request, Company's counsel is able to,
and actually prepares and delivers to the Company a written opinion that the
proposed Transfer (1) (x) is pursuant to a registration statement which has been
filed with the Commission and is then effective, or (y) is exempt from
registration under the Securities Act as then in effect, and the Rules and
Regulations of the Commission thereunder, and (2) is either qualified or
registered under any applicable state securities laws, or exempt from such
qualification or registration. The Company shall bear all reasonable costs of
preparing such opinion.
(h) S CORPORATION RESTRICTIONS. For so long as the Company maintains
its taxable status as an S Corporation, none of the Purchased Shares shall be
Transferred (with or without consideration) and the Company shall not be
required to register any such Transfer and the Company may instruct its transfer
agent not to register any such Transfer to any person who is not eligible to be
an S Corporation shareholder as defined in Section 1361 of the Code, or to any
person if such transfer would, in the opinion of the Company's counsel, result
in the termination or revocation of the Company's taxable status as an S
Corporation.
(i) NONCOMPLYING TRANSFERS INVALID. Any attempted Transfer which is
not in full compliance with this Section 6 shall be null and void AB INITIO, and
of no force or effect.
7. ADJUSTMENTS UPON RECAPITALIZATION.
(a) Subject to the provisions of Section 7(b), if any change is made
in the Common Stock, without receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company) the Option will be appropriately adjusted in the class(es) and number
of shares and price per share of stock subject to the Option. Such adjustments
shall be made by the Board (excluding the Optionee), the determination of which
shall be final, binding and conclusive. The conversion of any convertible
securities of the Company shall not be treated as a "transaction not involving
the receipt of consideration by the Company."
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation
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but the shares of the Common Stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in
the form of securities, cash or otherwise, then, at the sole discretion of
the Board (excluding the Optionee) and to the extent permitted by applicable
law, the Option shall (i) terminate upon such event and may be exercised
prior thereto to the extent the Option is then exercisable or (ii) continue
in full force and effect and, if applicable, the surviving corporation or an
Affiliate of such surviving corporation shall assume the Option and/or shall
substitute a similar option or award in place of the Option.
(c) To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the Board
(excluding the Optionee), and its determination shall be final, binding and
conclusive.
(d) The provisions of this Section 7 are intended to be exclusive,
and Optionee shall have no other rights upon the occurrence of any of the events
described in this Section 7.
(e) The grant of the Option shall not affect in any way the right or
power of the Company to make adjustments, reclassifications, reorganizations or
changes in its capital or business structure, or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
8. WAIVER OF RIGHTS TO PURCHASE STOCK.
By signing this Option Agreement, Optionee acknowledges and agrees
that neither the Company nor any other person or entity is under any obligation
to sell or transfer to Optionee any option or equity security of the Company,
other than only (i) the shares of Common Stock subject to the Option, and (ii)
those rights or options, if any, (the "RESERVED AGREEMENTS") to purchase Common
Stock previously granted in writing to Optionee by the Board (or a committee
thereof) and specifically identified on the Certificate under the caption,
"WAIVER." By signing this Option Agreement, Optionee specifically waives all
rights which he or she may have had prior to the date of this Option Agreement
to receive any option or equity security of the Company, including, without
limitation, those which arise out of or are in any manner whatsoever, directly
or indirectly, related to any stock option agreement or any other right or
agreement relating directly or indirectly to the acquisition by Optionee of
securities of the Company, excluding the Reserved Agreements, if any.
9. INVESTMENT INTENT.
Optionee represents and agrees that if he or she exercises the Option
in whole or in part, and if at the time of such exercise the Plan and/or the
Purchased Shares have not been registered under the Securities Act, he or she
will acquire the Shares upon such exercise for the purpose of investment and not
with a view to the distribution of such Shares, and that upon each exercise of
the Option he or she will furnish to the Company a written statement to such
effect.
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10. LEGEND ON STOCK CERTIFICATES.
Optionee agrees that all certificates representing the Purchased
Shares will be subject to such stock transfer orders and other restrictions (if
any) as the Company may deem advisable under the rules, regulations and other
requirements of the Commission, any stock exchange upon which the Common Stock
is then listed and any applicable federal or state securities laws, and the
Company may cause a legend or legends to be put on such certificates to make
appropriate reference to such restrictions.
11. NO RIGHTS AS SHAREHOLDER.
Optionee shall have no rights as a shareholder with respect to the
Shares until the date of the issuance to Optionee of a stock certificate or
stock certificates evidencing such Shares. Except as may be provided in Section
7 of this Option Agreement, no adjustment shall be made for dividends (ordinary
or extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such stock certificate is issued.
12. MODIFICATION.
Subject to the terms and conditions and within the limitations of the
Plan, the Board (or a committee thereof) may modify, extend or renew the Option
or accept the surrender of, and authorize the grant of a new option in
substitution for, the Option (to the extent not previously exercised). No
modification of the Option shall be made which, without the consent of Optionee,
would cause the Option to fail to continue to qualify as an incentive stock
option within the meaning of Section 422 of the Code or alter or impair any
rights of Optionee under the Option.
13. WITHHOLDING.
(a) Optionee agrees that should he or she make a "disposition" (as
defined in Section 424(c) of the Code) of all or any of the Purchased Shares
within two years from the date of the grant of the Option or within one year
after the issuance of such Purchased Shares, he or she shall immediately advise
the Company in writing as to the occurrence of the sale and the price realized
upon the sale of such Purchased Shares. Optionee agrees that he or she shall
maintain all Purchased Shares in his or her name so long as he or she maintains
beneficial ownership of such Shares.
(b) The Company shall be entitled to require as a condition of
delivery of any Purchased Shares upon exercise of this Option that the Optionee
agree to remit, at the time of such delivery or at such later date as the
Company may determine, an amount sufficient to satisfy all federal, state and
local withholding tax requirements relating thereto, and Optionee agrees to take
such other action required by the Company to satisfy such withholding
requirements.
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(c) With the consent of the Board, and in accordance with any rules
and procedures from time to time adopted by the Board, Optionee may elect to
satisfy his or her obligations under Section 13(b) above by (i) directing the
Company to withhold a portion of the Shares otherwise deliverable; or (ii)
tendering other shares of the Common Stock of the Company which are already
owned by Optionee which in all cases have a fair market value on the date as of
which the amount of tax to be withheld is determined (the "TAX DATE") equal to
the amount of taxes to be paid by such method (each, a "Withholding Right").
(d) To exercise a Withholding Right, the Optionee must follow the
election procedures set forth below, together with such additional procedures
and conditions set forth in this Option Agreement or otherwise adopted by the
Board:
(i) the Optionee must deliver to the Company his or her
written notice of election (the "ELECTION") and specify whether all or a stated
percentage of the applicable taxes will be paid in accordance with Section 13(c)
above and whether the amount so paid shall be made in accordance with the "flat"
withholding rates for supplemental wages or as determined in accordance with
Optionee's form W-4 (or comparable state or local form);
(ii) unless disapproved by the Board as provided in Subsection
(iii) below, the Election once made will be irrevocable; and
(iii) no Election is valid unless the Board approves such
Election, and such Election may be disapproved by the Board, in its sole
discretion, with or without cause or reason therefor; provided, if the Board has
not approved or disapproved the Election on or prior to the Tax Date, the
Election will be deemed approved.
14. CHARACTER OF OPTION.
The Option is intended to qualify as an "incentive stock option" as
that term is defined in Section 422 of the Code.
15. NONDISCLOSURE AND INTELLECTUAL PROPERTY OWNERSHIP.
(a) Optionee agrees to assign to the Company or its nominees, all
Optionee's rights to ideas, concepts, business plans and strategies, computer
programs, inventions, discoveries, improvements, and developments
("DEVELOPMENTS"), whether or not copyrightable, patentable, or subject to trade
secret protection, which, during the period of Optionee's employment by the
Company, Optionee has made, conceived, or conducted, or hereafter may make or
conceive or conduct, either solely or jointly with others: (i) with the use of
the Company's time, materials, or facilities; or (ii) resulting from or
suggested by Optionee's work for the Company; or (iii) in any way pertaining to
any subject matter related to the Company's existing or contemplated business,
products, and services. Notwithstanding anything to the contrary herein,
pursuant to Section 2870 of the California Labor Code, this Agreement does not
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<PAGE>
apply to any Development for which no equipment, supplies, facilities or trade
secret information of the Company was used and which was developed entirely on
Optionee's own time, and (1) which does not relate at the time of conception or
reduction to practice of the Development either to the business of the Company
or to the Company's actual or demonstrably anticipated business, or (2) which
does not result from any work performed by Optionee for the Company.
(b) At any time requested by the Company, either during employment or
after termination thereof, and without charge to the Company, but at its
expense, Optionee agrees to execute, acknowledge, and deliver all such further
papers, including applications for registrations of copyrights, and to perform
such other lawful acts as, in the opinion of said Company, are necessary to
obtain, maintain, or register copyrights or patents for such Development in any
and all countries and to vest title thereto in the Company or its nominees.
(c) Optionee realizes that in the course of Optionee's employment the
Company will necessarily reveal to Optionee or Optionee may develop proprietary,
secret, or confidential information, and in addition to all other obligations
with respect to the observance of federal and state statutes and U.S. Government
security regulations, Optionee hereby agrees as follows:
(i) Optionee agrees to keep in strictest confidence during
and subsequent to Optionee's employment all information identified as secret or
confidential or which, from the circumstances, in good faith and good conscience
ought to be treated as confidential, relating to the business plans and
strategies, concepts, inventions, discoveries, or trade secrets or secret
processes, reports, client lists, profit margins, or any other information of
the business or affairs of the Company (hereinafter collectively referred to as
"INFORMATION") which Optionee may acquire or develop in connection with or as a
result of Optionee's employment.
(ii) Optionee covenants and agrees that, except as instructed
by Company during Optionee's employment, Optionee will not use any Information
and without the prior written consent of Company, Optionee will not directly or
indirectly publish, communicate, divulge, or describe to any unauthorized
person, nor patent or register a copyright for, any Information during the
period of Optionee's employment or at any time subsequent thereto.
(iii) This covenant shall not apply to Information already in
the public domain or Information which has been dedicated to or released to the
public by the Company.
(d) During the period of Optionee's employment, Optionee agrees to
abide by Company's policies, including but not limited to employment policies,
confidentiality policies, and policies prohibiting sexual harassment and
discrimination, as such policies may exist and be made known to Optionee from
time to time.
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16. GENERAL PROVISIONS.
(a) FURTHER ASSURANCES. Optionee shall promptly take all actions and
execute all documents requested by the Company which the Company deems to be
reasonably necessary to effectuate the terms and intent of this Option
Agreement.
(b) NOTICES. All notices, requests, demands and other communications
under this Option Agreement shall be in writing and shall be given to the
parties hereto as follows:
(i) If to the Company, to:
Future Media Production, Inc.
25136 Anza Dr.
Valencia, CA 91355
Fax No: (805) 294-5582
Attn.: Alex Sandel
(ii) If to Optionee, to the address set
forth in the records of the Company,
or at such other address or addresses as may have been furnished by either party
in writing to the other party hereto. Any such notice, request, demand or other
communication shall be effective (1) if given by mail, 72 hours after such
communication is deposited in the mail by first-class certified mail, return
receipt requested, postage prepaid, addressed as aforesaid, or (2) if given by
any other means, when delivered at the address specified in this subsection (b).
(c) TRANSFER OF RIGHTS UNDER THIS OPTION AGREEMENT. The Company may
at any time transfer and assign its rights and delegate its obligations under
this Option Agreement to any other person, corporation, firm or entity,
including its officers, directors and shareholders, with or without
consideration.
(d) OPTION NON-TRANSFERABLE. Optionee may not sell, transfer, assign
or otherwise dispose of the Option except by will or the laws of descent and
distribution, and the Option may be exercised during the lifetime of Optionee
only by Optionee or by his or her guardian or legal representative. For so long
as the Company maintains its taxable status as an S Corporation, in the event of
death, the Option cannot be transferred to any person who is not eligible to be
an S Corporation shareholder as defined in Section 1361 of the Code, or to any
person if such transfer, or the exercise of the Option by the transferee, would,
in the opinion of the Company's counsel, result in the termination or revocation
of the Company's taxable status as an S Corporation.
(e) SUCCESSORS AND ASSIGNS. Except to the extent specifically
limited by the terms and provisions of this Option Agreement, this Option
Agreement shall be binding upon and
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<PAGE>
inure to the benefit of the parties hereto and their respective successors,
assigns, heirs and personal representatives.
(f) GOVERNING LAW. THIS OPTION AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS MADE IN, AND TO BE PERFORMED WITHIN, THAT STATE.
(g) THE PLAN. This Option Agreement is made pursuant to the Plan,
and it is intended, and shall be interpreted in a manner, to comply therewith.
Any provision of this Option Agreement inconsistent with the Plan shall be
superseded and governed by the Plan. All capitalized terms not defined herein
shall have the same meaning as set forth in the Plan.
(h) INJUNCTIVE RELIEF. Optionee agrees that the Company may suffer
irreparable harm in the event that Optionee fails or threatens not to comply
with any terms of this Agreement, and that monetary damages may be inadequate to
compensate the Company in such event. Accordingly, Optionee agrees that the
Company, in addition to any other remedies available to it at law or in equity,
including the right to monetary damages, will be entitled to injunctive relief,
without the posting of bond or other security, to enforce this Agreement.
(i) MISCELLANEOUS. Titles and captions contained in this Option
Agreement are inserted for convenience of reference only and do not constitute a
part of this Option Agreement for any other purpose.
The Signature Page to this Option Agreement consists of the last page
of the Certificate.
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Exhibit "A"
NOTICE OF EXERCISE
(To be signed only upon exercise of the Option)
TO: FUTURE MEDIA PRODUCTIONS, INC.
The undersigned, the holder of the enclosed Stock Option Agreement
(Incentive Stock Option), hereby irrevocably elects to exercise the purchase
rights represented by the Option and to purchase thereunder _________ * shares
of Common Stock of FUTURE MEDIA PRODUCTION, INC. (the "COMPANY"), and herewith
encloses payment of $_______ and/or _________ shares of the Company's Common
Stock in full payment of the purchase price of such shares being purchased.
Dated:
---------------
------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the
Option)
------------------------------
(Please Print Name)
------------------------------
(Address)
* Insert here the number of shares called for on the face of the Option
(or, in the case of a partial exercise, the number of shares being exercised),
in either case without making any adjustment for additional Common Stock of the
Company, other securities or property which, pursuant to the adjustment
provisions of the Option, may be deliverable upon exercise.
<PAGE>
EXHIBIT 10.4
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "AGREEMENT") is made as of this ___
day of _____________, 1998, by and between FUTURE MEDIA PRODUCTIONS, INC., a
California corporation (the "COMPANY"), and ______________, an individual
("INDEMNITEE").
RECITALS
A. The Company and Indemnitee recognize the substantial increase in
corporate litigation in general, subjecting directors, officers, employees, and
agents to expensive litigation risk at the same time that the availability and
coverage of liability insurance has been severely limited.
B. Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other directors,
officers, employers and agents of the Company may not be willing to continue to
serve as directors, officers, employees and agents without additional
protection.
C. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as directors, officers,
employees and agents of the Company and to indemnify its directors, officers,
employees and agents so as to provide them with the maximum protection permitted
by law.
AGREEMENT
The Company and Indemnitee hereby agree as follows:
1. AGREEMENT TO SERVE. Indemnitee agrees to serve and/or continue
to serve the Company, at the Company's will (or under separate written agreement
approved by the Board of Directors of the Company (the "BOARD"), if such
agreement exists), in the capacity Indemnitee currently serves the Company, as
long as Indemnitee is duly appointed or elected and qualified in accordance with
the applicable provisions of the Bylaws of the Company or any subsidiary of the
Company or (subject to any employment agreement between Indemnitee and the
Company) until such time as Indemnitee, in his sole discretion, tenders a
written resignation or is removed in accordance with the Bylaws; PROVIDED,
HOWEVER, that nothing contained in this Agreement is intended to or shall create
any right (express or implied) to continued employment by Indemnitee.
2. INDEMNIFICATION.
a. THIRD PARTY PROCEEDINGS. The Company shall indemnify
Indemnitee if Indemnitee is or was a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Company) by reason in whole or in part
<PAGE>
of: (i) the fact that Indemnitee is or was a director, officer, employee or
agent of the Company, or any subsidiary of the Company, (ii) any action or
inaction on the part of Indemnitee while a director, officer, employee or
agent, or (iii) the fact that Indemnitee is or was serving at the request of
the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against all expenses
(including, without limitation, attorneys' fees, disbursements and retainers,
accounting and witness fees, travel and deposition costs, and expenses of
investigations), judgments, fines and amounts paid in settlement (if such
settlement is approved in advance by the Company which approval shall not be
unreasonably withheld) and other amounts actually incurred by Indemnitee in
connection with such action, suit or proceeding to the fullest extent
permissible under California Law as currently in effect and as may be
expanded in the future. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or
its equivalent, shall not, of itself, create a presumption that
indemnification is unavailable under this Agreement.
b. PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company
shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Company or any subsidiary of the Company arising in whole or in
part out of (i) the fact that Indemnitee is or was a director, officer, employee
or agent of the Company or any subsidiary of the Company, (ii) any action or
inaction on the part of Indemnitee while a director, officer, employee or agent,
or (iii) the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including, without limitation, attorneys' fees, disbursements and retainers,
accounting and witness fees, travel and deposition costs, and expenses of
investigations) and amounts paid in settlement, in each case to the extent
actually incurred by Indemnitee in connection with such action or suit, to the
fullest extent permissible under California Law as currently in effect and as
may be expanded in the future. For purposes of this Section 2(b),
indemnification shall include, to the extent not prohibited by law,
indemnification against all judgments, fines and amounts paid in settlement
actually incurred by Indemnitee in connection with such action, suit or
proceeding.
c. MANDATORY PAYMENT OF EXPENSES. Notwithstanding any
limitations or conditions upon the Company's indemnification obligations set
forth in Sections 1(a) and (b) above, to the extent that Indemnitee has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 2(a) or (b) or in defense of any claim, issue
or matter therein, Indemnitee shall be indemnified against expenses (including,
without limitation, attorneys' fees, disbursements and retainers, accounting and
witness fees, travel and deposition costs, and expenses of investigations)
actually incurred by Indemnitee in connection therewith.
d. INDEMNIFICATION FOR SERVING AS A WITNESS. Notwithstanding
any other provision of this Agreement, to the extent that Indemnitee is, by
reason of Indemnitee's status as a director, officer, employee or agent of the
Company, a witness in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, Indemnitee shall be indemnified against
expenses actually incurred by Indemnitee in connection therewith.
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3. EXPENSES; INDEMNIFICATION PROCEDURE.
a. ADVANCEMENT OF EXPENSES. The Company shall advance all
expenses incurred by Indemnitee in connection with the investigation, defense,
settlement or appeal of any civil, criminal, administrative or investigative
action, suit or proceeding referenced in Sections 2(a) or (b) hereof.
Indemnitee hereby undertakes to repay such amounts advanced only if, and to the
extent that, it shall ultimately be determined that Indemnitee is not entitled
to be indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to Indemnitee within 30 days following
delivery of a written request therefor by Indemnitee to the Company.
b. NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a
condition precedent to his right to be indemnified under this Agreement, give
the Company notice, in accordance with Section 14 hereof, of any claim made
against Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the principal executive offices of the Company. In
addition, Indemnitee shall give the Company, at the Company's expense, such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
c. PROCEDURE. Any indemnification and advances provided for in
Section 2 and this Section 3 shall be made no later than 30 days after receipt
of the written request of Indemnitee. If a claim under this Agreement is not
paid in full by the Company within 30 days after a written request for payment
therefor has first been received by the Company, Indemnitee may, but need not,
at any time thereafter bring an action against the Company to recover the unpaid
amount of the claim and, subject to Section 13 of this Agreement, Indemnitee
shall also be entitled to be paid for the expenses (including attorneys' fees)
of bringing such action. It shall be a defense to any such action (other than
an action brought to enforce a claim for expenses incurred in connection with
any action, suit or proceeding in advance of its final disposition) that
Indemnitee has not met the standards of conduct which make it permissible under
applicable law for the Company to indemnify Indemnitee, but the burden of
proving such defense shall be on the Company and Indemnitee shall be entitled to
receive interim payments of expenses pursuant to Section 3(a) unless and until
such defense may be finally adjudicated by court order or judgment from which no
further right of appeal exists. It is the intention of the parties that if the
Company contests Indemnitee's right to indemnification under this Agreement or
applicable law, the question of Indemnitee's right to indemnification shall be
for the court to decide, and neither the failure of the Company (including its
officers, its Board, any committee or subgroup of its Board, independent legal
counsel, or its shareholders) to have made a determination that indemnification
of Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by this Agreement or by applicable law,
nor an actual determination by the Company (including its officers, its Board,
any committee or subgroup of its Board, independent legal counsel, or its
shareholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has not met the applicable standard
of conduct.
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d. NOTICE TO INSURERS. If, at the time of the receipt of a
notice of a claim pursuant to Section 3(b) hereof, the Company has director and
officer liability insurance in effect, the Company shall give prompt notice of
the commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
e. SELECTION OF COUNSEL. In the event the Company shall be
obligated under Section 3(a) hereof to pay the expenses of any proceedings
against Indemnitee, the Company, if appropriate, shall be entitled to assume the
defense of such proceeding, with counsel approved by Indemnitee, upon the
delivery to Indemnitee of written notice of its election so to do, provided,
however, that (i) the Company shall have no right to assume the defense of any
claim, action or other matter which seeks, in whole or in part, any remedy other
than monetary damages (e.g., injunction, specific performance, criminal
sanctions) or which could, if Indemnitee were not to prevail therein, materially
damage Indemnitee's personal or business reputation, and (ii) the Company shall
have no right to assume the defense of any claim, action or other matter unless
the Company first agrees fully and unconditionally, in writing, that the Company
is obligated to indemnify Indemnitee in full with respect thereto, and waives
any and all defenses, counterclaims or set-offs which might otherwise be
asserted in limitation or mitigation of such indemnification obligation. After
delivery of such notice, approval of such counsel by Indemnitee and the
retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same proceeding, provided that (i) Indemnitee
shall have the right to employ separate counsel in any such proceeding at
Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee
has been previously authorized by the Company, (B) Indemnitee shall have
reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense, or (C) the Company
shall not, in fact, have employed counsel to assume the defense of such
proceeding, then the fees and expenses of Indemnitee's counsel shall be at the
expense of the Company.
4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
a. SCOPE. Notwithstanding any other provision of this
Agreement, in the event of any change in any applicable law, statute or rule
which narrows the right of the Company to indemnify Indemnitee, such change, to
the extent not otherwise required by such law, statute or rule to be applied to
this Agreement, shall have no effect on this Agreement or the parties' rights
and obligations hereunder.
b. NONEXCLUSIVITY. The indemnification rights provided to
Indemnitee by this Agreement shall be in addition to, and not in lieu of, any
rights to which Indemnitee may be entitled under the Company's Articles of
Incorporation, its Bylaws, any agreement, any vote of shareholders or
disinterested directors, applicable law or otherwise, both as to action in
Indemnitee's official capacity and as to action in another capacity while
holding such office. The indemnification provided under this Agreement shall
continue as to Indemnitee with respect to (i) any action taken or not taken
while serving in an indemnified capacity and (ii) any claim,
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action or other matter arising out of or relating to the period prior to the
date upon which Indemnitee ceased to serve in an indemnified capacity, even
though he may have ceased to serve in such capacity at the time of any
action, suit or other covered proceeding.
5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually incurred by him
in the investigation, defense, appeal or settlement of any civil or criminal
action, suit or proceeding, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify Indemnitee for the portion of such
expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee
acknowledge that in certain instances, Federal or state law or regulation may
prohibit the Company from indemnifying Indemnitee under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under law to
indemnify Indemnitee. The Company agrees to assert vigorously, in any such
action pertaining to the Company's right to indemnify Indemnitee, the position
that the Company has the full and unfettered right to so indemnify Indemnitee,
and further agrees that Indemnitee may, at any time and in Indemnitee's sole
discretion, assume control of the Company's defense of such right (including
without limitation selection of counsel and determination of strategy), with
such defense nonetheless being conducted at the Company's expense.
7. LIABILITY INSURANCE. The Company shall, from time to time, make
the good faith determination whether or not it is practicable for the Company to
obtain and maintain a policy or policies of insurance with reputable insurance
companies providing the directors, officers, employees and agents of the Company
with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this agreement. Among
other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
such policies of liability insurance, Indemnitee shall be named as an insured in
such a manner as to provide Indemnitee the same rights and benefits as are
accorded to the most favorably insured of the Company's directors, if Indemnitee
is a director; or of the Company's officers, if Indemnitee is not a director of
the Company but is an officer; or of the Company's employees, if Indemnitee is
not a director or officer but is an employee; or of the Company's agents, if
Indemnitee is not a director, officer or employee but is an agent.
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain such insurance if the Company determines in good faith that such
insurance is not reasonably available, if the premium costs for such insurance
are disproportionate to the amount of coverage provided, if the coverage
provided by such insurance is limited by exclusions so as to provide an
insufficient benefit, or if Indemnitee is covered by similar insurance
maintained by a subsidiary or parent of the Company.
8. SEVERABILITY. Nothing in this Agreement is intended to require
or shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to law,
regulation or court order, to perform its obligations under
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this Agreement shall not constitute a breach of this Agreement. The
provisions of this Agreement shall be severable as provided in this Section
8. If this Agreement or any portion hereof shall be invalidated on any
ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any
applicable portion of this entire Agreement that shall not have been
invalidated, and the balance of this Agreement not so invalidated shall be
enforceable in accordance with its terms.
9. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
a. CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except with respect
to proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or otherwise but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board has approved the initiation or bringing of such suit;
b. FRIVOLOUS PROCEEDINGS. To indemnify Indemnitee for any
expenses incurred by Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by Indemnitee
in such proceedings were frivolous;
c. INSURED CLAIMS. To make any payment in connection with any
claim made against Indemnitee to the extent Indemnitee has otherwise received
payment (under any insurance policy, the Articles of Incorporation or Bylaws of
the Company, contract or otherwise) of the amounts otherwise indemnifiable
hereunder. If the Company makes any indemnification payment to Indemnitee in
connection with any particular expense indemnified hereunder and Indemnitee has
already received or thereafter receives, and is entitled to retain, duplicate
payments in reimbursement of the same particular expense, then Indemnitee shall
reimburse the Company in an amount equal to the lesser of (i) the amount of such
duplicate payment and (ii) the full amount of such indemnification payment made
by the Company;
d. CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for
expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute;
e. UNLAWFUL CLAIMS. To indemnify Indemnitee in any manner
which a court of competent jurisdiction has finally determined to be unlawful;
f. FAILURE TO SETTLE PROCEEDING. In the event that Indemnitee
Fails to Pursue a Recommended Settlement of a Qualifying Claim, to indemnify
Indemnitee (i) for amounts paid or payable in settlement of such Qualifying
Claim in excess of the amount of such Recommended Settlement thereof, or (ii)
for any cost and/or expenses directly related to such Qualifying Claim incurred
by Indemnitee following the date upon which Indemnitee Fails To Pursue such
Recommended Settlement. For purposes of this clause, "Qualifying Claim" shall
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mean any claim the defense of which may be assumed by the Company under SECTION
3(e) above (i.e., any claim that (A) is not described in clause (i) of said
SECTION 3(e) and (B) with respect to which the Company has acknowledged its
unconditional duty to indemnify as described in clause (ii) of said
SECTION 3(e)), "Recommended Settlement" shall mean a reasonable written
settlement proposal, in full and final executable form in all material respects,
and "Fails To Pursue" shall mean either (i) Indemnitee's failure to communicate
a Recommended Settlement to the principal adverse party in the subject matter
within 30 days after Indemnitee' receipt thereof from the Company, or
(ii) Indemnitee's failure to agree to any Recommended Settlement that has been
accepted by all adverse parties in the subject matter within 30 days after
receipt thereof, provided the Company has (A) irrevocably deposited all funds
necessary to satisfy all of Indemnitee's obligations under such Recommended
Settlement in an account subject to Indemnitee's or a third party's control and
(B) irrevocably taken all actions and given all instructions necessary or
appropriate to permit such funds to be applied in satisfaction of such
obligations of Indemnitee.
g. BREACH OF EMPLOYMENT AGREEMENT. To indemnify Indemnitee for
any breach by Indemnitee of any employment agreement between Indemnitee and the
Company or any of its subsidiaries.
10. CONSTRUCTION OF CERTAIN PHRASES.
For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees and/or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company or any
subsidiary of the Company which imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit plan,
its participants, or beneficiaries.
11. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
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13. ATTORNEYS' FEES. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were frivolous. In the event of an action instituted by or in the name
of the Company under this Agreement to enforce or interpret any of the terms of
this Agreement, Indemnitee shall be entitled to be paid all court costs and
expenses, including attorneys' fees, incurred by Indemnitee in defense of such
action (including with respect to Indemnitee's counterclaims and cross-claims
made in such action), unless as a part of such action the court determines that
each of Indemnitee's material defenses to such action were frivolous.
14. NOTICE. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice. All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed duly given (i) if delivered
by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked if
addressed as provided for on the signature page of this Agreement, unless
sooner received, or as subsequently modified by written notice.
15. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of California,
or in Federal courts located in such State.
16. CHOICE OF LAW. This Agreement shall be governed by and its
provisions construed in accordance with the laws of the State of California.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
FUTURE MEDIA PRODUCTIONS, INC.
a California corporation, as the Company
By:
-------------------------------------
Name:
--------------------------------
Title:
--------------------------------
Notice Address:
Future Media Productions, Inc.
25136 Anza Drive
Valencia, CA 91355
AGREED TO AND ACCEPTED:
INDEMNITEE:
- -------------------------------------
- -------------------------------------
Notice Address:
- -------------------------------------
- -------------------------------------
- -------------------------------------
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EMPLOYMENT AGREEMENT
This Employment Agreement (this "AGREEMENT") is made and entered into as
of the 26th day of August, 1998, by and between Future Media Productions,
Inc., a California corporation (the "COMPANY"), and David Moss ("EXECUTIVE").
1. ENGAGEMENT AND DUTIES.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, the Company hereby engages and employs Executive as an officer of the
Company, with the title and designation "Executive Vice President - Operations."
Executive hereby accepts such engagement and employment.
(b) During the term of this Agreement, Executive, as Vice President -
Operations of the Company, shall report to the President, Chief Executive
Officer and/or Board. Subject to the direction and control of the President,
Chief Executive Officer and/or Board, Executive shall have active control of the
day to day operations of the Company and shall perform all duties and enjoy all
powers commonly incident to the position Vice President - Operations and
otherwise as may be delegated to him from time to time by the President, Chief
Executive Officer and/or Board.
(c) Executive agrees to devote his full-time business time, energy and
efforts to the business of the Company and will use his best efforts and
abilities faithfully and diligently to promote the Company's business interests.
(d) For so long as Executive is employed by the Company or is receiving
severance under Section 5(a) or Section 5(c) of this Agreement, Executive shall
not, directly or indirectly, as owner, partner, joint venturer, shareholder,
employee, broker, agent, principal, trustee, corporate officer, director,
licensor, or in any capacity whatsoever (i) engage in, become financially
interested in, be employed by, render any consultation or business advice with
respect to, or have any connection with, any business engaged in the
development, design, manufacture, sale, marketing, utilization or exploitation
of any products or services which are designed for the same purpose as, are
similar to, or are otherwise competitive with, current, proposed or anticipated
products or services of the Company, in any geographic area where, prior to or
at the time of the termination of his employment, the business of the Company
was being conducted or was proposed to be conducted in any manner whatsoever;
provided, however, that the Executive may own any securities of any corporation
which is engaged in such business and is publicly owned and traded but in an
amount not to exceed at any one time five percent (5%) of any class of stock or
securities of such corporation, or (ii) prepare or agree to undertake any action
or conduct not permitted to be engaged in by Executive pursuant to the preceding
clause (i). Notwithstanding the foregoing, the Company expressly acknowledges
that Executive may:
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(i) make and manage personal business investments of Executive's
choice without consulting the Board;
(ii) serve in any capacity with any civic, educational, charitable
or trade organization; and
(iii) serve as a member of the board of directors of other companies
or businesses with the approval of the Board, which approval will not be
unreasonably withheld.
2. DEFINITIONS.
For the purposes of this Agreement, the following terms shall have the
meanings set forth below:
"BOARD" shall mean the Board of Directors of the Company, not including
Executive.
"COMPENSATION COMMITTEE" shall mean the members of the Board who have been
appointed by the Board to determine compensation issues relating to the Company.
"EMPLOYMENT COMMENCEMENT DATE" shall mean August 26, 1998.
"EMPLOYMENT TERM" shall mean August 26, 1998 through August 26, 2003;
provided, the term shall be extended through August 26, 2006 upon the mutual
written consent of the Company and Executive and if so extended, "Employment
Term" shall mean August 26, 1998 through August 26, 2006.
"FOR CAUSE" shall mean, in the context of a basis for termination of
Executive's employment with the Company, that:
(a) Executive materially breaches any obligation, duty or
agreement under this Agreement, which breach is not cured or corrected within 30
days of written notice thereof from the Company (except for breaches of Sections
1(d), 6 or 7 of this Agreement, which cannot be cured and for which the
Executive shall have no opportunity to cure);
(b) Executive is grossly negligent in the course of providing
services to the Company, or commits any act of personal dishonesty, fraud or
breach of fiduciary duty or trust against the Company;
(c) Executive is convicted of, or pleads guilty or nolo contendere
with respect to, theft, fraud or felony under federal or applicable state law;
(d) Executive commits any act or acts of personal conduct that,
following due investigation and determination by the Board of probable cause,
gives rise to a likelihood of liability under federal or applicable state law
for discrimination or sexual or other forms of harassment or other similar
liabilities with respect to subordinate employees; or
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(e) Executive commits continued and repeated material violations
of specific directions of the Board, which directions are consistent with past
practices of the Board with respect to governance matters, with this Agreement
and with Executive's position, or continued and repeated substantive failure to
perform duties assigned by or pursuant to this Agreement; provided that no
termination shall be deemed For Cause under this subsection (e) unless Executive
first receives written notice from the Company advising him of the specific acts
or omissions alleged to constitute violations of written directions or a
material failure to perform his duties, and such violations or material failure
continue after he shall have had a reasonable opportunity to correct the acts or
omissions so complained of, which opportunity shall in no event be less than 30
days.
"PERSON" shall mean an individual or a partnership, corporation, trust,
association, limited liability company, governmental authority or other entity.
3. COMPENSATION; EXECUTIVE BENEFIT PLANS.
(a) BASE SALARY. The Company shall pay to Executive a base salary (the
"BASE SALARY") at an annual rate of $395,000 during the Employment Term. The
Base Salary shall be payable in installments throughout the year in the same
manner and at the same times the Company pays base salaries to other executive
officers of the Company. The Base Salary shall be automatically increased by 6%
at each anniversary of the date of this agreement, subject to further upward
adjustment in the sole discretion of the Compensation Committee.
(b) BONUSES AND STOCK OPTIONS. Executive may be paid a bonus or bonuses
in the sole discretion of the Compensation Committee of the Board. Also, it
shall be within the sole discretion of the Compensation Committee of the Board
whether to grant to Executive an option or options to purchase shares of Common
Stock of the Company under any Company stock option plans and, if granted, the
number of shares subject to such option(s) and the terms and conditions of such
option(s).
(c) REIMBURSEMENT. Executive shall be entitled to reimbursement from the
Company for the reasonable costs and expenses that he incurs in connection with
the performance of his duties and obligations under this Agreement in a manner
consistent with the Company's practices and policies for reimbursements for
executive officers.
(d) ADDITIONAL BENEFITS. During the Term of this Agreement and on a basis
comparable to the current practice of the Company, the Company shall provide
Executive with, or reimburse Executive for, a cellular telephone and home office
equipment for his use in performing his employment duties and obligations under
this Agreement. In addition, during the Term of this Agreement, the Company
shall pay to Executive an automobile allowance of $1,200 per month.
(e) INSURANCE. During the term of this Agreement, the Company shall pay
100% of the premiums on term life insurance having a face value payable on death
of Executive of no less than $1 million, net of all loans or encumbrances, to a
beneficiary designated by the Executive.
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(f) GROUP BENEFIT PLANS. The Company shall provide and pay for 100% of
the cost of group health and dental plans for Executive and his dependents and
Executive shall be eligible to participate in group life, disability, retirement
and pension benefit plans the Company may provide to its employees from time to
time, subject to the terms, conditions and limitations contained in the
applicable plan documents and insurance policies; PROVIDED, HOWEVER, Executive's
group health, dental, life, disability, retirement and pensions benefits shall
in no case be less favorable than they are as of the Employment Commencement
Date.
(g) VACATION. Executive shall be entitled to four weeks of paid vacation
each year during the term of this Agreement. Any vacation time shall be
scheduled to minimize interference with the exercise of Executive's duties under
this Agreement.
(h) WITHHOLDING. The Company may deduct from any compensation payable to
Executive the minimum amounts sufficient to cover applicable federal, state
and/or local income tax withholding, old-age and survivors' and other social
security payments, state disability and other insurance premiums and payments.
4. TERMINATION OF EMPLOYMENT.
Executive's employment pursuant to this Agreement shall commence on the
Employment Commencement Date and shall terminate upon the earlier of (i) the
expiration of the Employment Term or (ii) on the earliest to occur of the
following:
(a) upon the death of Executive;
(b) upon delivery to Executive of written notice of termination by the
Company if Executive shall suffer a physical or mental disability which renders
Executive unable to perform his duties and obligations under this Agreement for
at least 120 days, whether or not consecutive, in any 12-month period;
(c) upon delivery to Executive of written notice of termination by the
Company For Cause; or
(d) upon delivery to Executive of written notice of termination by the
Company Other Than For Cause.
5. SEVERANCE COMPENSATION.
(a) If Executive's employment is terminated pursuant to Section 4(a)
(death), the Company shall pay to the Executive or his estate his full Base
Salary through the end of the month of Executive's death, and Executive or his
estate shall be entitled to a prorated share of any bonus or benefits as
provided under Section 3 hereof for the calendar year during which his death
occurred. If Executive's employment is terminated pursuant to Section 4(b)
(disability), Executive shall be entitled to continue to receive 50% of his then
current Base Salary from the Company in accordance with Section 3(a) of this
Agreement, payable at the same time and in the same manner
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as if Executive's employment had not terminated, through the later of (i) the
end of the Employment Term or (ii) that date which is one year after the date
Executive's employment was terminated. Any disability benefits that
Executive does receive shall be offset against any amounts payable to
Executive pursuant to this Section. Executive agrees to cooperate fully with
the Company and any disability insurance carrier with respect to any claim
for disability benefits. In addition to the foregoing, if Executive's
employment is terminated due to death or disability, the Company shall
continue to provide group health and dental insurance to Executive and his
immediate family, at the same levels as such insurance was provided prior to
termination, through the end of the Employment Term.
(b) If Executive's employment is terminated pursuant to Section 4(c) (by
the Company For Cause), Executive's Base Salary and all benefits under Section 3
shall cease as of the date of termination, and Executive shall not be entitled
to any bonus for the calendar year during which his employment shall be
terminated or at any time thereafter. In the event of termination of
Executive's employment pursuant to Section 4(c) (by the Company For Cause), and
subject to applicable law and regulations, the Company shall be entitled to
offset against any payments due Executive the loss and damage, if any, which
shall have been suffered by the Company as a result of the acts or omissions of
Executive giving rise to termination under Section 4(c). The foregoing shall
not be construed to limit any cause of action, claim or other rights which the
Company may have against Executive in connection with such acts or omissions.
(c) If Executive's employment is terminated pursuant to Section 4(d) (by
the Company Other Than For Cause) prior to the end of the Employment Term,
Executive shall be entitled to receive a lump sum of $1,000,000 payable in full
no later than 30 days after the date of termination. In addition, Executive
shall continue to receive his Base Salary (including the automatic increases) in
accordance with Section 3(a) of this Agreement through the end of the Employment
Term payable at the same time and in the same manner as if Executive's
employment had not terminated. Executive shall have no duty to seek other
employment upon such termination. Executive acknowledges that the Company has
the right to terminate Executive's employment Other Than For Cause and that such
termination shall not be a breach of this Agreement or any other express or
implied agreement between the Company and Executive. Accordingly, in the event
of such termination, Executive shall be entitled only to the compensation and
benefits specifically provided for in this Agreement in the event of such
termination, and shall not have any other rights to any compensation or damages
from the Company for breach of contract.
6. COVENANT NOT TO SOLICIT.
(a) During the period Executive is employed by the Company and through the
first anniversary of the date Executive's employment with the Company is
terminated, Executive will not directly or indirectly, either alone or by action
in concert with others: (i) induce any employee of the Company to engage in any
activity in which Executive is prohibited from engaging by Section 1(d) of this
Agreement or to terminate his or her employment with the Company; or (ii) employ
or offer employment or induce any Person to employ or offer employment to anyone
who is or was within the 12 months prior to the date of the proscribed action
employed by the
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Company; or (iii) induce or attempt to induce any customer, supplier,
licensee, licensor or other business relationship of the Company to
discontinue or reduce its business with the Company, or in any way interfere
with the relationship between any such customer, supplier, licensee or
business relationship and the Company (provided, this prohibition shall not
prevent Executive from doing business with such supplier, licensee or other
business relationship of the Company in a manner which is not adverse to the
Company); or (iv) solicit or accept any business whatsoever from any of the
customers with which the Company did business during the Executive's
engagement or employment by the Company. All of the provisions of this
Section 6(a) shall continue to apply through the first anniversary of the
termination of Executive's employment with the Company (the "POST-EMPLOYMENT
PERIOD"), except that during the Post-Employment Period, Executive may work
with or for, or solicit or accept business from suppliers or licensees of the
Company so long as such business activity by the Executive is not detrimental
to the Company and such actions do not otherwise interfere with Executive's
other obligations under this Agreement.
(b) Executive acknowledges that the Company conducts business on a
world-wide basis, that its sales and marketing prospects are for continued
expansion into world markets and that, therefore, the territorial and time
limitations set forth in Section 1(d) and in this Section 6 are reasonable
and properly required for the adequate protection of the business of the
Company. In the event any such territorial or time limitation is deemed to
be unreasonable by a court of competent jurisdiction, Executive agrees to the
reduction of the territorial or time limitation to the area or period which
such court deems reasonable.
(c) If any portion of the restrictions set forth in Section 1(d) and in
this Section 6 should, for any reason whatsoever, be declared invalid by a court
of competent jurisdiction, the validity or enforceability of the remainder of
such restrictions shall not thereby be adversely affected.
(d) The existence of any claim or cause of action by Executive against the
Company shall not constitute a defense to the enforcement by the Company of the
restrictive covenants set forth in Section 1(d) and in this Section 6, but such
claim or cause of action shall be litigated separately.
7. CONFIDENTIALITY.
Executive will not at any time (whether during or after his employment with
the Company) disclose or use for his own benefit or purposes or the benefit or
purposes of any other Person, other than the Company, any trade secrets,
information, data, or other confidential information relating to customers,
development programs, costs, marketing, trading, investment, sales activities,
promotion, credit and financial data, financial methods, plans, or the business
and affairs of the Company generally. Executive agrees that upon termination
for any reason of his employment by the Company, he will immediately return to
the Company all memoranda, books, papers, plans, information, letters and other
data, and all copies thereof or therefrom, in any way relating to the business
of the Company; provided, however, that Executive may retain such materials as
in the reasonable discretion of the Board are required to fulfill his duties, if
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<PAGE>
applicable, as a director of the Company (retention being permitted by Executive
until such time as the Board requests the return of such materials). Executive
further agrees that he will not retain or use at any time any trade name,
trademark or other proprietary business designation used or owned in connection
with the business of the Company.
8. COPYRIGHT AND TRADEMARKS.
(a) All right, title and interest, of every kind whatsoever, in the United
States and throughout the world, in (i) any work, including the copyright
thereof (for the full terms and extensions thereof in every jurisdiction),
created by the Executive at any time during the term of this Agreement and all
material embodiments of the work subject to such rights; and (ii) all
inventions, ideas, discoveries, designs and improvements, patentable or not,
made or conceived by the Executive at any time during the term of this
Agreement, shall be and remain the sole property of the Company without payment
of any further consideration to the Executive other than as set forth herein,
and each such work shall, for purposes of United States copyright law, be deemed
created by the Executive pursuant to his duties under this Agreement and within
the scope of his employment and shall be deemed a work made for hire; and
Executive agrees to assign, at the Company's expense, and the Executive does
hereby assign, all of his right, title and interest in and to all such works,
copyrights, materials, inventions, ideas, discoveries, designs and improvements,
patentable or not, and any copyrights, letters patent, trademarks, trade
secrets, and similar rights, and the applications therefor, which may exist or
be issued with respect thereto. For the purposes of this Section 8, "WORKS"
shall include all materials created during the term of this Agreement, whether
or not ever used by or submitted to the Company, including, without limitation,
any work which may be the subject matter of a copyright under the United States
copyright law. In addition to its other rights, the Company may copyright any
such work in its name in the United States in accordance with the requirements
of the United States copyright law and the Universal Copyright Convention and
any other convention or treaty to which the United States is or may become a
party. In accordance with California Labor Code Sections 2870 and 2872, the
provisions of this Section 8(a) shall not apply to any works that Executive
developed entirely on his own time without using the Company's equipment,
supplies, facilities or proprietary information, except for those works that
either: (i) relate at the time of conception or reduction to practice of the
work to the Company's business, or actual or demonstrably anticipated research
or development of the Company; or (2) result from any work performed by
Executive for the Company.
(b) Whenever the Company shall so request, whether during or after the
term of this Agreement, the Executive shall execute, acknowledge and deliver all
applications, assignments or other instruments; make or cause to be made all
rightful oaths; testify in all legal proceedings; communicate all known facts
which relate to such works, copyrights, inventions, ideas, discoveries, designs
and improvements; perform all lawful acts and otherwise render all such
assistance as the Company may deem necessary to apply for, obtain, register,
enforce and maintain any copyrights, letters patent and trademark registrations
of the United States or any foreign jurisdiction or under the Universal
Copyright Convention (or any other convention or treaty to which the United
States is or may become a party), or otherwise to protect the Company's
interests therein, including any which the Company shall deem necessary in
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connection with any proceeding or litigation involving the same. The Company
shall reimburse the Executive for all reasonable out-of-pocket costs incurred by
the Executive in testifying at the Company's request or in rendering any other
assistance requested by the Company pursuant to this Section 8. All
registration and filing fees and similar expenses shall be paid by the Company.
9. SPECIFIC PERFORMANCE.
Executive acknowledges and agrees that the Company's remedies at law for a
breach or threatened breach of any of the provisions of Sections 1(d), 6 or 7
would be inadequate and, in recognition of this fact, Executive agrees that, in
the event of such a breach or threatened breach, in addition to any remedies at
law, the Company shall be entitled to obtain equitable relief in the form of
specific performance, temporary restraining order, temporary or permanent
injunction or any other equitable remedy which may then be available. In
addition, the Executive recognizes that the services to be rendered by him under
this Agreement are of a special, unique, unusual, extraordinary and intellectual
character involving skill of the highest order and giving them peculiar value,
the loss of which cannot be adequately compensated in damages. Consequently, in
the event of a breach of this Agreement by the Executive, the Company shall be
entitled to injunctive relief or any other legal or equitable remedies. The
Executive agrees that the Company also may recover by appropriate action the
amount of the actual damage caused the Company by any failure, refusal or
neglect of the Executive to perform his agreements, representations and
warranties contained in this Agreement. The remedies provided in this Agreement
shall be deemed cumulative and the exercise of one shall not preclude the
exercise of any other remedy at law or in equity for the same event or any other
event.
10. RESOLUTION OF DISPUTES.
(a) Except as provided in subsection (c) below, any controversy or claim
between or among the parties, relating to Executive's employment with the
Company, including but not limited to those arising out of or relating to this
Agreement or any agreements or instruments relating hereto or delivered in
connection herewith and any claim based on or arising from an alleged tort,
shall at the request of any party be determined by arbitration. The arbitration
shall be conducted in Los Angeles, California, in accordance with the United
States Arbitration Act (Title 9 of the United States Code), notwithstanding any
choice of law provision in this Agreement, and under the National Rules for the
Resolution of Employment Disputes of the American Arbitration Association
("AAA"). The parties shall have the right to review and approve a panel of
prospective arbitrators supplied by AAA, but the arbitration shall be conducted
by a single arbitrator selected from the approved panel by AAA or by stipulation
of the parties. The arbitrator shall give effect to statutes of limitation in
determining any claim. Any controversy concerning whether an issue is
arbitrable shall be determined by the arbitrator. The arbitrator shall be
entitled to order specific performance of the obligations imposed by this
Agreement. Judgment upon the arbitration award may be entered in any court
having jurisdiction.
(b) All decisions of the arbitrator shall be final, conclusive and binding
on all parties and shall not be subject to judicial review. All costs of the
arbitration shall be borne by the party which is not the Prevailing Party (as
defined in Section 11(h) of this Agreement). If required, each
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party shall advance 50% of any costs of the arbitration required to be
advanced, subject to the right of the non-Prevailing Party to reimbursement.
(c) Subsection (a) above does not prohibit a party from seeking and
obtaining injunctive relief from a court of competent jurisdiction pending the
outcome of arbitration. A party bringing an action for injunctive relief shall
not be deemed to have waived its right to demand arbitration of all disputes.
(d) If Executive resigns, Executive agrees that he will not assert that
the Company breached this Agreement unless prior to such resignation Executive
provides written notice to the Chairman of the Company describing the alleged
breach and the Company does not cure, or take appropriate steps to cure, such
breach within 30 days of receipt of such notice.
11. MISCELLANEOUS.
(a) NOTICES. All notices, requests, demands and other communications
(collectively, "NOTICES") given pursuant to this Agreement shall be in writing,
and shall be delivered by personal service, courier, facsimile transmission or
by United States first class, registered or certified mail, addressed to the
following addresses:
(i) If to the Company, to:
Future Media Productions, Inc.
25136 Anza Drive
Valencia, California 91355
Attn: President
(ii) If to Executive, to:
Attn: David Moss
Future Media Productions, Inc.
25136 Anza Drive
Valencia, California 91355
Any Notice, other than a Notice sent by registered or certified mail, shall be
effective when received; a Notice sent by registered or certified mail, postage
prepaid return receipt requested, shall be effective on the earlier of when
received or the third day following deposit in the United States mails (or on
the seventh day if sent to or from an address outside the United States). Any
party may from time to time change its address for further Notices hereunder by
giving notice to the other party in the manner prescribed in this Section.
(b) ENTIRE AGREEMENT. This Agreement contains the sole and entire
agreement and understanding of the parties with respect to the entire subject
matter hereof, and any and all prior discussions, negotiations, commitments and
understandings, whether oral, written or implied, related to the subject matter
hereof are hereby extinguished and superseded. No representations,
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oral or otherwise, express or implied, other than those contained in this
Agreement have been relied upon by either party to this Agreement.
(c) SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions of this Agreement shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law.
(d) GOVERNING LAW. This Agreement has been made and entered into in the
State of California and shall be construed in accordance with the laws of the
State of California.
(e) CAPTIONS. The various captions of this Agreement are for reference
only and shall not be considered or referred to in resolving questions of
interpretation of this Agreement.
(f) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
(g) BUSINESS DAY. If the last day permissible for delivery of any notice
under any provision of this Agreement, or for the performance of any obligation
under this Agreement, shall be other than a business day, such last day for such
notice or performance shall be extended to the next following business day
(provided, however, under no circumstances shall this provision be construed to
extend the date of termination of this Agreement).
(h) ATTORNEYS' FEES. If any action, proceeding or arbitration is brought
to enforce or interpret any provision of this Agreement, the Prevailing Party
shall be entitled to recover as an element of its costs, and not its damages,
its reasonable attorneys' fees, costs and expenses. The "PREVAILING PARTY" is
the party who would have been entitled to recover its costs under the California
Code of Civil Procedure had the action been maintained in the Superior Court of
California regardless of whether there is final judgment. A party not entitled
to recover its costs may not recover attorneys' fees. No sum for attorneys'
fees shall be counted in calculating the amount of a judgment for purposes of
determining whether a party is entitled to recover its costs or attorneys' fees.
(i) ADVICE FROM INDEPENDENT COUNSEL. The parties hereto understand that
this Agreement is legally binding and may affect such party's rights. Each
party represents to the other that it has received legal advice from counsel of
its choice regarding the meaning and legal significance of this Agreement.
(j) INTERPRETATION. Should any provision of this Agreement require
interpretation, it is agreed that any court or arbitrator interpreting or
construing the same shall not apply a presumption that the terms hereof shall be
more strictly construed against any Person by reason of the rule of construction
that a document is to be construed more strictly against the Person who itself
or through its agent prepared the same, it being agreed that all Parties have
participated in the preparation of this Agreement.
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(k) SURVIVAL. The termination of the Executive's employment hereunder
shall not affect the enforceability of Sections 1(d), 6, 7 and 8.
(l) WAIVER OF JURY TRIAL. IF NOTWITHSTANDING THE AGREEMENT THAT ALL
DISPUTES BE SUBMITTED TO BINDING ARBITRATION, A DISPUTE IS SUBMITTED TO A COURT,
EACH PARTY HERETO WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY DISPUTE IN
CONNECTION WITH OR RELATING TO THIS AGREEMENT, ANY RELATED AGREEMENT OR ANY
MATTERS DESCRIBED OR CONTEMPLATED HEREIN OR THEREIN, AND AGREE TO TAKE ANY AND
ALL ACTION NECESSARY OR APPROPRIATE TO EFFECT SUCH WAIVER. IN THE EVENT OF
LITIGATION, THIS AGREEMENT MAY BE FILED AS WRITTEN CONSENT TO A TRIAL BY THE
COURT.
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IN WITNESS WHEREOF, the undersigned parties hereby execute this Agreement
as of the date first set forth above.
Company:
FUTURE MEDIA PRODUCTIONS, INC.
By: /s/ ALEX SANDEL
-------------------------------
Its: President
------------------------------
EXECUTIVE:
/s/ DAVID MOSS
----------------------------------
David Moss
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THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
TRANSFERRED OR OTHERWISE HYPOTHECATED WITHOUT REGISTRATION UNDER SUCH
ACT OR PURSUANT TO AN EXEMPTION THEREFROM.
WARRANT AGREEMENT
This WARRANT AGREEMENT (the "AGREEMENT") is made and entered into as of
January 1, 1998, by and between Future Media Productions, Inc., a California
corporation (the "COMPANY"), and David Moss ("HOLDER"). In consideration of
these premises and the mutual covenants and agreements hereinafter set forth,
and other good and valuable consideration the receipt and sufficiency of which
are hereby acknowledged, the Company and Holder agree as follows:
1. GRANT OF WARRANT.
For good and valuable consideration, receipt of which is hereby
acknowledged, the Company hereby grants to Holder the right and option (the
"WARRANT"), upon the terms and subject to the conditions set forth in this
Agreement, to purchase all or any portion of 611 shares of the common stock of
the Company (the "WARRANT SHARES") at an exercise price of $1 per share (the
"EXERCISE PRICE").
2. TERM OF WARRANT.
(a) The Warrant shall terminate and expire at 5:00 p.m., Los
Angeles time, on December 31, 2007 (the "WARRANT EXPIRATION DATE"), unless
sooner terminated as provided herein.
(b) If Holder shall cease to be in the employ of the Company for
any reason other than Holder's death or permanent disability (a "SPECIAL
TERMINATING EVENT"), Holder shall have the right, subject to the provisions of
Section 2(d) below, to exercise the Warrant at any time within 30 days after the
date Holder ceased to be employed by the Company, but in no case later than the
Warrant Expiration Date. The Warrant may be exercised during such period only
with respect to the Warrant Shares that were vested as of the date Holder's
employment terminated and only to the extent the Warrant had not previously been
exercised. To the extent the Warrant remains unexercised at the end of such
period, the Warrant shall terminate. The Board, in its sole and absolute
discretion, shall determine whether or not authorized leaves of absence shall
constitute termination of employment for purposes of this Agreement.
(c) If a Special Terminating Event occurs while Holder is in the
employ of the Company, then Holder, Holder's executors or administrators or any
person or persons acquiring the Warrant directly from Holder by bequest or
inheritance, shall have the right to exercise the Warrant at any time within six
months after the Special Terminating Event, but in no case later than the
Warrant Expiration Date. The Warrant may be exercised during such period only
with respect to the Warrant Shares that were vested as of the Special
Terminating Event and only to
<PAGE>
the extent the Warrant had not previously been exercised. To the extent the
Warrant remains unexercised at the end of such period, the Warrant shall
terminate.
(d) If Holder shall be terminated "for cause" by the Company, the
Warrant shall terminate immediately. For purposes of this Agreement, "for
cause" shall mean:
(i) the failure or refusal by Holder to perform his or her
duties to the Company; or
(ii) Holder's willful disobedience of any orders or
directives of the Board or any officers thereof acting under the authority
thereof or such person's deliberate interference with the compliance by other
employees of the Company with any such orders or directives; or
(iii) the failure or refusal of Holder to abide by or comply
with the written policies, standard procedures or regulations of the Company; or
(iv) any willful or continued act or course of conduct by
Holder which the Board in good faith determines might reasonably be expected to
have a material detrimental effect on the Company or the business, operations,
affairs or financial position thereof; or
(v) the committing by Holder of any fraud, theft,
embezzlement or other dishonest act against the Company; or
(vi) the determination by the Board, in good faith and in
the exercise of reasonable discretion, that Holder is not competent to perform
his or her duties of employment.
(e) For purposes of this Agreement, "permanent disability" shall
mean permanent and total disability as defined by the Board. Holder shall not
be considered permanently disabled unless he furnishes proof of such disability
in such form and manner, and at such times, as the Board may from time to time
require.
3. VESTING.
(a) The Warrant is fully vested and all of the Warrant Shares may
be immediately exercised.
(b) Notwithstanding anything to the contrary contained in this
Agreement, the Warrant may not be exercised, in whole or in part, unless and
until any then-applicable requirements of all state and federal laws and
regulatory agencies shall have been fully complied with to the satisfaction of
the Company and its counsel.
4. EXERCISE OF WARRANT.
There is no obligation to exercise the Warrant, in whole or in part. The
Warrant may be exercised, in whole or in part, only by delivery to the Company
of:
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(a) written notice of exercise in form and substance identical to
EXHIBIT "A" attached to this Agreement stating the number of Warrant Shares then
being purchased (the "PURCHASED SHARES"); and
(b) payment of the Exercise Price of the Purchased Shares in cash,
by check or by wire transfer. Upon receipt of the foregoing, the Company shall
promptly issue in the name of the Holder a stock certificate evidencing the
Purchased Shares by such exercise and deliver such certificate to the Holder.
5. RESTRICTIONS ON TRANSFER.
(a) HOLDER AGREES THAT THE WARRANT MAY NOT BE TRANSFERRED, SOLD,
ASSIGNED OR HYPOTHECATED EXCEPT BY OPERATION OF LAW. HOLDER FURTHER AGREES THAT
THE COMPANY SHALL HAVE NO OBLIGATION TO EFFECT ANY TRANSFER OF THE WARRANTS
UNLESS THE TRANSFEREE SHALL HAVE EXECUTED AN AGREEMENT OBLIGATING THE TRANSFEREE
TO COMPLY WITH ALL TERMS AND CONDITIONS OF THIS AGREEMENT APPLICABLE TO THE
TRANSFEROR.
(b) Prior to any exercise of the Warrants or any transfer or
attempted transfer of any of the Warrants, Warrant Shares, or Purchased Shares
(the "SECURITIES"), the Holder shall give the Company written notice of Holder's
intention so to do, describing briefly the manner of any such proposed exercise,
sale or transfer. The Holder may effect such exercise or transfer, provided
that such exercise or transfer is not prohibited by this Section 5 and such
exercise or transfer complies with all applicable federal and state securities
laws and regulations. If in the reasonable opinion of counsel for the Company,
notwithstanding the opinion of counsel to a Holder to the contrary, if any, the
proposed exercise or transfer of such Securities may not be effected without
registration thereof under the Securities Act and such registration has not been
accomplished, the Company shall, as promptly as practicable, so notify the
Holder and the Holder shall not consummate the proposed transfer.
(c) Each certificate for Purchased Shares initially issued upon
the exercise of the Warrants, shall be stamped or otherwise imprinted with a
legend in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE CONDITIONS SPECIFIED IN THAT CERTAIN WARRANT AGREEMENT
DATED JANUARY 1, 1998. NO TRANSFER, SALE, PLEDGE,
HYPOTHECATION, ENCUMBRANCE OR OTHER DISPOSITION OF THE
SHARES REPRESENTED BY THIS CERTIFICATE SHALL BE VALID OR
EFFECTIVE UNLESS SUCH TRANSFER, SALE, PLEDGE, HYPOTHECATION,
ENCUMBRANCE OR OTHER DISPOSITION IS IN COMPLIANCE WITH THE
PROVISIONS OF THE WARRANT AGREEMENT AND UNTIL REGISTERED OR
THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY
TO IT, THAT THE TRANSACTION IS EXEMPT FROM REGISTRATION, AND
UNTIL SUCH CONDITIONS AS ARE CONTAINED IN THE WARRANT
AGREEMENT HAVE BEEN FULFILLED. A COPY OF THE FORM OF THE
WARRANT AGREEMENT IS ON FILE AT THE OFFICES OF FUTURE MEDIA
PRODUCTIONS, INC. THE HOLDER OF THIS CERTIFICATE, BY
ACCEPTANCE
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OF THIS CERTIFICATE, AGREES TO BE BOUND BY THE PROVISIONS
OF THE WARRANT AGREEMENT."
Subject to the provisions of Section 5(e) below, if the Purchased Shares
are no longer subject to the transfer restrictions imposed by applicable state
and Federal securities law because either (i) the Purchased Shares or the resale
of the Purchased Shares has been registered on a registration statement declared
effective by the Commission, or (ii) in the reasonable opinion of counsel for
the Company, or the opinion of counsel for Holder, which opinion is reasonably
satisfactory to counsel for the Company, all future dispositions of any of the
Purchased Shares by the contemplated transferee would be exempt from or would
satisfy the registration and prospectus delivery requirements of the Securities
Act and the qualification requirements of the applicable state securities laws,
then the restrictions on transfer of such securities contained in this Section
5(c) shall not apply to any subsequent transfer thereof and the Company shall,
promptly upon request by Holder, remove the legend set forth above and shall
promptly issue, in exchange for the certificate bearing such legend, a
certificate without such legend to Holder.
(d) In connection with any underwritten public offering by the
Company of its equity securities pursuant to an effective registration statement
filed under the 1933 Act, including the Company's initial public offering,
Holder shall not sell, make any short sale of, loan, hypothecate, pledge, grant
any option for the purchase of, or otherwise dispose or transfer for value or
otherwise agree to engage in any of the foregoing transactions with respect to
the Securities without the prior written consent of the Company or its
underwriters, for such period of time from and after the effective date of such
registration statement as may be requested by the Company or such underwriters;
PROVIDED, HOWEVER, that in no event shall such period exceed 180 days. This
Section 5(d) shall only remain in effect for the two-year period immediately
following the effective date of the Company's initial public offering and shall
thereafter terminate and cease to be in force or effect. Holder agrees to
execute and deliver to the Company such further documents or instruments as the
Company reasonably determines to be necessary or appropriate to effect the
provisions of this Section 5(d). In order to enforce the provisions of this
Section 5(d), the Company may impose stop-transfer instructions with respect to
the Securities until the end of the applicable stand-off period.
(e) So long as the Company is an S Corporation, none of the
Securities shall be transferred, sold, assigned or hypothecated (with or without
consideration) and the Company shall not be required to register any such
transfer and the Company may instruct its transfer agent not to register any
such transfer to any person who is not eligible to be an S Corporation
shareholder as defined in Section 1361 of the Internal Revenue Code, or to any
person if such transfer would, in the opinion of the Company's counsel, result
in the termination or revocation of the Company's taxable status as an S
Corporation.
(f) In the event of any stock dividend, stock split,
recapitalization or other transaction resulting in an adjustment under Section 6
hereof, then any new, substituted or additional securities or other property
which is by reason of such transaction distributed with respect to or in
exchange for the Securities or shall be immediately subject to the provisions of
this Section 5, to the same extent such Securities are at such time covered by
such provisions.
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6. ADJUSTMENTS UPON RECAPITALIZATION.
(a) In the event the Company should at any time or from time to
time after the date of this Warrant (the "ISSUANCE DATE") fix a record date for
the effectuation of a split or subdivision of the outstanding shares of Common
Stock or the determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common Stock or
other securities or rights convertible into, or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "COMMON STOCK EQUIVALENTS") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend, distribution, split or subdivision if no record date is fixed),
the number of Warrant Shares shall be increased in proportion to such increase
in the aggregate number of shares of Common Stock outstanding and those issuable
with respect to such Common Stock Equivalents and the Exercise Price shall be
appropriately decreased (i.e., the per share Exercise Price shall be adjusted
such that the aggregate exercise price for all Warrant Shares issuable upon
exercise of the Warrants in full, as adjusted, shall remain the same).
(b) If the number of shares of Common Stock outstanding at any
time after the Issuance Date is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination, the
number of Warrant Shares shall be decreased in proportion to such decrease in
the aggregate number of shares of Common Stock outstanding and those issuable
with respect to such Common Stock Equivalents and the Exercise Price shall be
appropriately increased (i.e., the per share Exercise Price shall be adjusted
such that the aggregate exercise price for all Warrant Shares issuable upon
exercise of the Warrants in full, as adjusted, shall remain the same).
(c) In case of any capital reorganization, any reclassification of
the Common Stock (other than a change in par value or a recapitalization
described in Section 6(a) or 6(b) of this Agreement), or the consolidation of
the Company with, or a sale of substantially all of the assets of the Company to
(which sale is followed by a liquidation or dissolution of the Company), or
merger of the Company with, another person, the Holder shall thereafter be
entitled upon exercise of the Warrant to purchase the kind and number of shares
of stock or other securities or the amount or value of any cash, assets or other
property receivable upon such event by a holder of the number of shares of the
Common Stock which the Warrant entitles the holder of the Warrant to purchase
from the Company immediately prior to such event; and in any such case,
appropriate adjustment shall be made in the application of the provisions set
forth in this Agreement with respect to the Holder's rights and interests
thereafter, to the end that the provisions set forth in this Agreement
(including the specified changes and other adjustments to the Exercise Price)
shall thereafter be applicable in relation to any shares or other property
thereafter purchasable upon exercise of the Warrant.
(d) In the event the Company should at any time or from time to
time after the Issuance Date fix a record date for the determination of holders
of Common Stock entitled to receive a dividend or other distribution payable in
securities or rights convertible into, or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock or the
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<PAGE>
securities or such rights of any other corporation (other than Common Stock
Equivalents covered be Section 6(a) hereof), the Holder shall thereafter be
entitled upon exercise of the Warrant to receive, in addition to the Purchased
Shares being purchased upon such exercise, the securities or rights convertible
into securities receivable upon such event by a holder of the number of shares
of the Common Stock which the Holder is purchasing upon such exercise.
(e) If it is expected that there will occur any event described in
Section 6(c) or 6(d) hereof, the Company shall give the holder of the Warrants
notice thereof, which notice shall be given at such time or times as notice is
given to the holders of the Company's Common Stock.
(f) The provisions of this Section 6 are intended to be exclusive,
and the holder of the Warrant shall have no rights other than as set forth in
this Agreement (and the rights of a stockholder upon exercise of the Warrant)
upon the occurrence of any of the events described in this Section 6.
(g) The grant of the Warrant shall not affect in any way the right
or power of the Company to make adjustments, reclassifications, reorganizations
or changes in its capital or business structure, or to merge, consolidate,
dissolve or liquidate, or to sell or transfer all or any part of its business or
assets.
7. REPRESENTATIONS AND WARRANTIES OF HOLDER.
Holder makes the following representations and warranties:
(a) Holder is acquiring the Warrants for its own account with the
present intention of holding such securities for investment purposes only and
not with a view to, or for sale in connection with, any distribution of such
securities (other than a distribution in compliance with all applicable federal
and state securities laws).
(b) Holder is an experienced and sophisticated investor and has
such knowledge and experience in financial and business matters that it is
capable of evaluating the relative merits and the risks of an investment in the
Warrants and in the Warrant Shares and of protecting its own interests in
connection with this transaction.
(c) Holder is willing to bear and is capable of bearing the
economic risk of an investment in the Warrants and the Warrant Shares.
(d) The Company has made available, prior to the date of this
Agreement, to Holder the opportunity to ask questions of the Company and its
officers, and to receive from the Company and its officers information
concerning the terms and conditions of the Warrants and this Agreement and to
obtain any additional information with respect to the Company, its business,
operations and prospects, as reasonably requested by Holder.
(e) Holder is an "accredited investor" as that term is defined
under Rule 501(a) of Regulation D promulgated by the Securities and Exchange
Commission under the Act.
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(f) For purposes of the application of federal and state
securities laws, Holder acknowledges that the offer and sale of the Warrants to
such Holder occurred in the State of California and that such Holder is a
resident of the State of California.
8. LEGEND ON STOCK CERTIFICATES.
Holder agrees that all certificates representing the Securities will be
subject to such stock transfer orders and other restrictions as the Company may
deem advisable under the rules, regulations and other requirements of the
Securities and Exchange Commission (the "COMMISSION"), any stock exchange upon
which the Common Stock is then listed and any applicable federal or state
securities laws, and the Company may cause the following legend, or such other
legend as the Company may deem appropriate, to be put on such certificates to
make appropriate reference to such restrictions:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
TRANSFERRED OR OTHERWISE HYPOTHECATED WITHOUT REGISTRATION UNDER SUCH
ACT OR PURSUANT TO AN EXEMPTION THEREFROM.
9. NO RIGHTS AS STOCKHOLDER.
Holder shall have no rights as a stockholder of the Company with respect to
the Securities until the date of the issuance to Holder of a stock certificate
or stock certificates evidencing such Securities. Except as may be provided in
Paragraph 6 of this Agreement, no adjustment shall be made for dividends
(ordinary or extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such stock certificate is issued.
10. MODIFICATION.
The Board or a committee thereof may modify, extend or renew the Warrant or
accept the surrender of, and authorize the grant of a new option in substitution
for, the Warrant (to the extent not previously exercised). No modification of
the Warrant shall be made without the consent of Holder which would alter or
impair any rights of Holder under the Warrant.
11. COVENANTS OF HOLDER AND THE COMPANY.
(a) PIGGYBACK REGISTRATION OF WARRANT SHARES. If, at any time
during the period commencing on the date that is 180 days from the date upon
which any initial public offering ("IPO") is declared effective by the
Commission and on or before December 31, 2002, the Company shall propose to
register any shares of Common Stock (but excluding any shares or securities
being registered pursuant to Form S-8 or Form S-4 or any successor form
thereto), the Company shall (i) give the Holder written notice, or telegraphic,
telecopy or telephonic notice followed as soon as practicable by written
confirmation thereof, of such proposed registration at least 20 business days
prior to the filing of such registration statement and, (ii) upon written
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notice, or telegraphic or telephonic notice followed as soon as practicable by
written confirmation thereof, given to the Company by the Holder within 15 days
after the giving of such written confirmation or written notice by the Company,
the Company shall include or cause to be included in any such registration
statement all or such portion of the Warrant Shares as the Holder may request;
PROVIDED, HOWEVER, that the Company may at any time withdraw or cease proceeding
with any such registration if it shall at the same time withdraw or cease
proceeding with the registration of the Common Stock originally proposed to be
registered; and PROVIDED FURTHER, that in connection with any registered public
offering involving an underwriting, the managing underwriter may (if in its
reasonable opinion marketing factors so require) limit the number of securities
(including any Warrant Shares) included in such offering (other than securities
of the Company). In the event of any such limitation, the total number of
Warrant Shares to be offered for the account of the Holder in the registration
shall be reduced in proportion to the respective number of shares requested to
be included therein by all holders of the Company's Common Stock (other than the
Company) entitled to include shares of Common Stock in the registration to the
extent necessary to reduce the total number of shares proposed to be registered
to the number of shares recommended by the managing underwriter.
(b) COMPANY'S OBLIGATIONS IN REGISTRATION. The following
provisions shall also be applicable at the sole cost and expense of the Company
in the case of registrations under Section 11:
i) Following the effective date of such registration statement,
the Company shall, upon the request of the Holder, forthwith supply such number
of prospectuses meeting the requirements of the Securities Act as shall be
requested by the Holder to permit it to make a public distribution of all of its
Warrant Shares, provided that the Holder shall from time to time furnish the
Company with such appropriate information (relating to the intentions of the
Holder) in connection therewith as the Company shall request in writing.
ii) the Company shall bear the entire cost and expense of the
registration of securities provided for in this Section (but not the selling
expenses of the Holder).
iii) the Company shall indemnify and hold harmless the Holder from
and against any and all losses, claims, damages and liabilities (including
reasonable fees and expenses of counsel) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or any prospectus included therein required to be filed
or furnished by reason of this Section or otherwise or in any application or
other filing under, the Securities Act or any other applicable Federal or state
securities law, or arising out of or based upon any omission or alleged omission
to state therein a material fact required to be stated therein (i.e., in any
such registration statement, prospectus, application or other filing) or
necessary to make the statements therein not misleading, to which such person
may become subject, or any violation or alleged violation by the Company to
which such Person may become subject, under the Securities Act, the Exchange
Act, or other Federal or state laws or regulations, at common law or otherwise,
except to the extent that such losses, claims, damages or liabilities are caused
by any such untrue statement or alleged untrue statement or omission or alleged
omission based upon and in strict conformity with written information furnished
to the Company by such person expressly for use therein; PROVIDED HOWEVER, that
the Holder shall at the same time
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indemnify the Company, its directors, each officer signing the related
registration statement, and each person, if any, who controls the Company
within the meaning of the Securities Act, from and against any and all
losses, claims, damages and liabilities (including reasonable fees and
expenses of counsel) arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any registration
statement or any prospectus included therein required to be filed or
furnished by reason of this Section, or otherwise or in any application or
other filing under, the Securities Act or any other applicable Federal or
state securities law, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein
(i.e., in any such registration statement, prospectus, application or other
filing) or necessary to make the statements therein not misleading, to which
such person may become subject, or any violation or alleged violation by the
Holder to which the Company, its directors, each officer signing the related
registration statement, and each person, if any, who controls the Company
within the meaning of the Securities Act, may become subject, under the
Securities Act, the Exchange Act, or other Federal or state laws or
regulations, at common law or otherwise, to the extent that such losses,
claims, damages or liabilities are caused by any such untrue statement or
alleged untrue statement or omission or alleged omission based upon and in
strict conformity with written information furnished to the Company by the
Holder expressly for use therein.
(c) In the event any person entitled to indemnification hereunder
receives in writing a complaint, claim or other written notice of any loss,
claim, damage, liability or action giving rise to a claim for indemnification
under Section 11(b)(iii), the person claiming indemnification under Section
11(b)(iii) shall promptly notify the person or persons against whom
indemnification is sought (the "INDEMNITOR") of such complaint, notice, claim or
action, and the Indemnitor shall have the right to investigate and defend any
such loss, claim, damage, liability or action. The person claiming
indemnification shall have the right to employ separate counsel in any such
action and to participate in the defense thereof but the fees and expenses of
such counsel shall not be at the expense of the Indemnitor. In no event shall
the Indemnitor be obligated to indemnify any person for any settlement of any
claim or action effected without the Indemnitor's consent, which consent shall
not be unreasonably withheld.
12. DISPUTES.
(a) ARBITRATION. All disputes arising in connection with this
Agreement shall be finally settled by arbitration in Los Angeles, California, in
accordance with the rules of the American Arbitration Association (the "RULES OF
ARBITRATION") and judgment on the award rendered by the arbitration panel (the
"ARBITRATION PANEL") may be entered in any court or tribunal of competent
jurisdiction.
(b) Any party which desires to initiate arbitration proceedings as
provided in Section 12(a) above may do so by delivering written notice to the
other party (the "ARBITRATION NOTICE") specifying (A) the nature of the dispute
or controversy to be arbitrated, (B) the name and address of the arbitrator
appointed by the party initiating such arbitration and (C) such other matters as
may be required by the Rules of Arbitration.
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(c) The Parties shall appoint a single arbitrator who shall
constitute the Arbitration Panel hereunder. Should the parties not agree
upon the appointment of the arbitrator within 30 days of delivery of the
Arbitration Notice, the Arbitrator shall be appointed in accordance with the
Rules of Arbitration.
(d) In any arbitration proceeding conducted pursuant to the provisions
of this Section 12, both parties shall have the right to discovery, to call
witnesses and to cross-examine the opposing party's witnesses, either through
legal counsel, expert witnesses or both.
(e) FINALITY OF DECISION. All decisions of the Arbitration Panel
shall be final, conclusive and binding on all parties and shall not be subject
to judicial review. The arbitrator shall divide all costs (other than fees of
counsel) incurred in conducting the arbitration proceeding and the final award
in accordance with what they deem just and equitable under the circumstances.
(f) LIMITATIONS. Notwithstanding anything to the contrary
contained in Sections 12(a) and 12(b) above, any claim by either party for
injunctive or other equitable relief, including specific performance, may be
brought in any court of competent jurisdiction and any judgment, order or
decree relating thereto shall have precedence over any arbitral award or
proceeding.
13. GENERAL PROVISIONS.
(a) FURTHER ASSURANCES. Holder shall promptly take all actions
and execute all documents requested by the Company which the Company deems to be
reasonably necessary to effectuate the terms and intent of this Agreement.
(b) NOTICES. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be given to
the parties hereto as follows:
If to the Company, to:
Future Media Productions, Inc.
2536 Anza Drive
Valencia, California 91355
Attention: Chief Executive Officer
If to Holder, to the address set
forth in the records of the Company,
or at such other address or addresses as may have been furnished by either party
in writing to the other party hereto. Any such notice, request, demand or other
communication shall be effective (i) if given by mail, two days after such
communication is deposited in the mail by first-class certified mail, return
receipt requested, postage prepaid, addressed as aforesaid, or (ii) if given by
any other means, when delivered at the address specified in this subparagraph
(b).
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(c) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS MADE IN, AND TO BE PERFORMED WITHIN, THAT STATE. JURISDICTION AND
VENUE OVER ANY LEGAL ACTION BROUGHT HEREUNDER SHALL RESIDE EXCLUSIVELY IN THE
COUNTY OF LOS ANGELES, STATE OF CALIFORNIA. EACH OF THE PARTIES HERETO WAIVE
THEIR RIGHT TO A JURY TRIAL WITH RESPECT TO ANY SUCH LEGAL ACTIONS.
(d) ATTORNEYS' FEES. In the event that any action, suit or
arbitration or other proceeding is instituted upon any breach of this Agreement,
the prevailing party shall be paid by the other party thereto an amount equal to
all of the prevailing party's costs and expenses, including attorneys' fees
incurred in each and every such action, suit or proceeding (including any and
all appeals or petitions therefrom). As used in this Agreement, "attorneys'
fees" shall mean the full and actual cost of any legal services actually
performed in connection with the matter involved calculated on the basis of the
usual fee charged by the attorney performing such services and shall not be
limited to "reasonable attorneys' fees" as defined in any statute or rule of
court.
(e) AMENDMENT; WAIVER. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors, heirs and personal representatives. No provision of this Agreement
may be amended or waived unless in writing signed by all of the parties to this
Agreement. Waiver of any one provision of this Agreement shall not be deemed to
be a waiver of any other provision.
(f) NO FINDERS. The parties each agree to indemnify and hold
harmless the other against any expense incurred by reason of any consulting,
brokerage commission or finder's fee alleged to be payable to any person in
connection with the transactions contemplated hereby because of any act,
omission or statement of indemnifying party or any dealings by the indemnifying
party with any consultant, broker or finder.
(g) EXPENSES. Each of the parties shall pay its own expenses
incurred in connection with the preparation of this Agreement and the
consummation of the transactions contemplated hereby.
(h) SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be or become
prohibited or invalid under applicable law, such provision shall be ineffective
to the extent of such prohibition or invalidity without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
(i) COUNTERPARTS. This Agreement may be executed in several
counterparts, all of which together shall constitute one agreement binding on
all parties hereto, notwithstanding that all of the parties have not signed the
same counterpart.
(j) ENTIRE AGREEMENT. This Agreement constitutes and embodies the
entire understanding and agreement of the parties hereto relating to the subject
matter hereof and there
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are no other agreements or understandings, written or oral, in effect between
the parties relating to such subject matter except as expressly referred to
herein.
(k) MISCELLANEOUS. Titles and captions contained in this
Agreement are inserted for convenience of reference only and do not constitute a
part of this Agreement for any other purpose. Except as specifically provided
herein, neither this Agreement nor any right pursuant hereto or interest herein
shall be assignable by any of the parties hereto without the prior written
consent of the other party hereto.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
Future Media Productions Inc.
By: /S/ ALEX SANDEL
-------------------------
Alex Sandel
Its: President
/s/ DAVID MOSS
-------------------------------
David Moss
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EXHIBIT "A"
NOTICE OF EXERCISE
(TO BE SIGNED ONLY UPON EXERCISE OF THE WARRANT)
TO: Future Media Productions Inc.
The undersigned hereby irrevocably elects (to the extent indicated herein)
to exercise the purchase right represented by the Warrant granted to the
undersigned on January 1, 1998 and to purchase thereunder ___________ shares of
Common Stock of Future Media Productions Inc., a California corporation (the
"COMPANY"). The closing of the exercise of the purchase right shall take place
at _____ on _________________, ____ at the principal executive office of the
Company located at 2536 Anza Drive, Valencia, California 91355.
HOLDER
-------------------------------
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[LETTERHEAD]
June 13, 1996
Howard Rosen
2759 Casinno Road
Los Angeles, Ca. 90077-1525
Dear Howard,
This notice is given pursuant to section 50 of the lease Agreement dated
August 24, 1994, between Future Media Productions, Inc. as Lessee and Herman
Rosen & Florence W. Rosen, Trustees, etc., as Lessors.
Future Media does hereby exercise its option to extend the original term of
the Lease for a period of five (5) years commencing March 1, 1997 and ending
February 28, 2002.
Pursuant to the terms of paragraph 50(a) and Howard Rosen's letter of
June 5, 1996, this option is exercised early. Please acknowledge your
acceptance.
Very truly yours,
/s/ Alex Sandel
Alex Sandel
Future Media Productions, Inc.
Accepted:
/s/ Howard Rosen 8/20/96
- -----------------------------------
Howard Rosen
<PAGE>
[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET
(DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes
only, August 24, 1994 is made by and between Herman Rosen and Florence W.
Rosen, Trustees of the Herman and Florence W. Rosen Family Trust Dated
December 21, 1988 and Howard N. Rosen and Carol L. Rosen,* ("LESSOR") and
Future Media Productions, Inc., a California corporation ("LESSEE"),
(collectively the "PARTIES," or individually a "PARTY").
1.2 PREMISES: That certain real property, including all
improvements therein or to be provided by Lessor under the terms of this
Lease, and commonly known by the street address of 25136 Anza Drive, Valencia,
located in the County of Los Angeles, State of California and generally
described as (describe briefly the nature of the property) an industrial
tilt-up building of approximately 44,460 square feet (including mezzanine)
situated on approximately 84,506 square feet of land. See attached Exhibit
"A". ("PREMISES"). (See Paragraph 2 for further provisions.)
1.3 TERM: 2 years and 6+ months ("ORIGINAL TERM") commencing
August 29, 1994 ("COMMENCEMENT DATE") and ending February 28, 1997
("EXPIRATION DATE"). (See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: [OMITTED]
1.5 BASE RENT: $20,451.60 per month ("BASE RENT"), payable on the
1st day of each month commencing August 29, 1994. See Addendum attached
hereto. (See Paragraph 4 for further provisions.)
/ / If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $22,430.79 as Base Rent for
the period August 29-31, 1994 and November 1994
1.7 SECURITY DEPOSIT: $20,451.60 ("SECURITY DEPOSIT"). (See
Paragraph 5 for further provisions.)
1.8 PERMITTED USE: corporate offices, assembly, manufacturing,
distribution and warehousing of electronic and computer products. (See
Paragraph 6 for further provisions.)
1.9 INSURING PARTY: Lessee is the "INSURING PARTY" unless
otherwise stated herein. (See Paragraph 8 for further provisions.)
1.10 REAL ESTATE BROKERS: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
CB Commercial Real Estate Group, Inc. represents
/X/ Lessor exclusively ("LESSOR'S BROKER"); / / both Lessor and Lessee, and
CB Commercial Real Estate Group, Inc. represents
/X/ Lessee exclusively ("LESSEE'S BROKER"); / / both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 GUARANTOR. The obligations of the Lessee under this Lease are
to be guaranteed by Alex Sandel pursuant to separate Guaranty of Lease dated
concurrently herewith ("GUARANTOR"). (See Paragraph 37 for further
provisions.)
1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting
of Paragraphs 1.5, 2.3, 6.2(b), 6.2(c), 6.3, 6.4, 7.2, 8.3(a), 9.1(b) and
9.4, 10.1(a), 12.4, 15, 30.5, and 49 through 56 and Exhibits A, B and C, all
of which constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all
of the terms, covenants and conditions set forth in this Lease. Unless
otherwise provided herein, any statement of square footage set forth in this
Lease, or that may have been used in calculating rental, is an approximation
which Lessor and Lessee agree is reasonable and the rental based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 CONDITION: Lessor shall deliver the Premises to Lessee clean
and free of debris on the Commencement Date and warrants to Lessee that the
existing plumbing, fire sprinkler system, lighting, air conditioning,
heating, and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the
Commencement Date. If a non-compliance with said warranty exists as of the
Commencement Date, Lessor shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within fifteen (15) days after the
Commencement Date, correction of that non-compliance shall be the obligation
of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. See
Addendum attached hereto. Lessor warrants to Lessee that the improvements on
the Premises comply with all applicable covenants or restrictions of record
and applicable building codes, regulations and ordinances in effect on the
Commencement Date. Said warranty does not apply to the use to which Lessee
will put the Premises or to any Alterations or Utility Installations (as
defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises
do not comply with said warranty, Lessor shall, except as otherwise provided
in this Lease, promptly after receipt of written notice from Lessee setting
forth with specificity the nature and extent of such non-compliance, rectify
the same at Lessor's expense. If Lessee does not give Lessor written notice
of a non-compliance with this warranty within three (3) months following the
Commencement Date, corrections of that non-compliance shall be the obligation
of Lessee at Lessee's sole cost and expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that
it has been advised by the Brokers to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical and
fire sprinkler systems, security, environmental aspects, compliance with
Applicable Law, as defined in Paragraph 6.3) and the present and future
suitability of the Premises for Lessee's intended use, (b) that Lessee has
made such investigation as it deems necessary with reference to such matters
and assumes all responsibility therefor as the same relate to Lessee's
occupancy of the Premises and/or the term of this Lease, and (c) that neither
Lessor, nor any of Lessor's agents, has made any oral or written
representations or warranties with respect to the said matters other than as
set forth in this Lease.
2.5 LESSEE PRIOR OWNER/OCCUPANT. [OMITTED]
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. [OMITTED]
*Trustees of the Howard and Carol Rosen Trust Dated April 8, 1975.
Initials [ILLEGIBLE]
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3.3 DELAY IN POSSESSION. [OMITTED]
4. RENT.
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent
or charges, as the same may be adjusted from time to time, to be received by
Lessor in lawful money of the United States, without offset or deduction, on
or before the day on which it is due under the terms of this Lease. Base
Rent and all other rent and charges for any period during the term hereof
which is for less than one (1) full calendar month shall be prorated based
upon the actual number of days of the calendar month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated
herein or to such other persons or at such other addresses as Lessor may from
time to time designate in writing to Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for
Lessee's faithful performance of Lessee's obligations under this Lease. If
Lessee fails to pay Base Rent or other rent or charges due hereunder, or
otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor
may use, apply or retain all or any portion of said Security Deposit for the
payment of any amount due Lessor or to reimburse or compensate Lessor for any
liability, cost, expense, loss or damage (including attorneys' fees) which
Lessor may suffer or incur by reason thereof. If Lessor uses or applies all
or any portion of said Security Deposit, Lessee shall within ten (10) days
after written request therefor deposit moneys with Lessor sufficient to
restore said Security Deposit to the full amount required by this Lease. Any
time the Base Rent increases during the term of this Lease, Lessee shall,
upon written request from Lessor, deposit additional moneys with Lessor
sufficient to maintain the same ratio between the Security Deposit and the
Base Rent as those amounts are specified in the Basic Provisions. Lessor
shall not be required to keep all or any part of the Security Deposit
separate from its general accounts. Lessor shall, at the expiration or
earlier termination of the term hereof and after Lessee has vacated the
Premises, return to Lessee (or, at Lessor's option, to the last assignee, if
any, of Lessee's interest herein), that portion of the Security Deposit not
used or applied by Lessor. Unless otherwise expressly agreed in writing by
Lessor, no part of the Security Deposit shall be considered to be held in
trust, to bear interest or other increment for its use, or to be prepayment
for any moneys to be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the
purposes set forth in Paragraph 1.8, or any other use which is comparable
thereto, and for no other purpose. Lessee shall not use or permit the use of
the Premises in a manner that creates waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to, neighboring premises or
properties. Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessees assignees or subtenants,
and by prospective assignees and subtenants of the Lessee, its assignees and
subtenants, for a modification of said permitted purpose for which the
premises may be used or occupied, so long as the same will not impair the
structural integrity of the improvements on the Premises, the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises and the improvements thereon, and is otherwise permissible pursuant
to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall
within five (5) business days give a written notification of same, which
notice shall include an explanation of Lessor's reasonable objections to the
change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or
effect, either by itself or in combination with other materials expected to
be on the Premises, is either: (i) potentially injurious to the public
health, safety or welfare, the environment or the Premises, (ii) regulated or
monitored by any governmental authority, or (iii) a basis for liability of
Lessor to any governmental agency or third party under any applicable statute
or common law theory. Hazardous Substance shall include, but not be limited
to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products
or fractions thereof. Lessee shall not engage in any activity in, on or
about the Premises which constitutes a Reportable Use (as hereinafter
defined) of Hazardous Substances without the express prior written consent of
Lessor and compliance in a timely manner (at Lessee's sole cost and expense)
with all Applicable Law (as defined in paragraph 6.3). "REPORTABLE USE"
shall mean (i) the installation or use of any above or below ground storage
tank, (ii) the generation, possession, storage, use, transportation, or
disposal of a Hazardous Substance that requires a permit from, or with
respect to which a report, notice, registration or business plan is required
to be filed with, any governmental authority. Reportable Use shall also
include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises
or neighboring properties. Notwithstanding the foregoing, Lessee may,
without Lessor's prior consent, but in compliance with all Applicable Law,
use any ordinary and customary materials reasonably required to be used by
Lessee in the normal course of Lessee's business permitted on the Premises,
so long as such use is not a Reportable Use and does not expose the Premises
or neighboring properties to any meaningful risk of contamination or damage
or expose Lessor to any liability therefor. In addition, Lessor may (but
without any obligation to do so) condition its consent to the use or presence
of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's
giving Lessor such additional assurances as Lessor, in its reasonable
discretion, deems necessary to protect itself, the public, the Premises and
the environment against damage, contamination or injury and/or liability
therefrom or therefor, including, but not limited to, the installation (and
removal on or before Lease expiration or earlier termination) of reasonably
necessary protective modifications to the Premises (such as concrete
encasements) and/or the deposit of an additional Security Deposit under
Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. See Addendum attached hereto. If
Lessee knows, or has reasonable cause to believe, that a Hazardous Substance,
or a condition involving or resulting from same, has come to be located in,
on, under or about the Premises, other than as previously consented to by
Lessor, Lessee shall immediately give written notice of such fact to Lessor.
Lessee shall also immediately give Lessor a copy of any statement, report,
notice, registration, application, permit, business plan, license, claim,
action or proceeding given to, or received from, any governmental authority
or private party, or persons entering or occupying the Premises, concerning
the presence, spill, release, discharge of, or exposure to, any Hazardous
Substance or contamination in, on or about the Premises, included but not
limited to all such documents as may be involved in any Reportable Uses
involving the Premises.
(c) INDEMNIFICATION. See Addendum attached hereto. Lessee shall
indemnify, protect, defend and hold Lessor, its agents, employees, lenders
and ground lessor, if any, and the Premises, harmless from and against any
and all loss of rents and/or damages, liabilities, judgments, costs, claims,
liens, expenses, penalties, permits and attorney's and consultant's fees
arising out of or involving any Hazardous Substance or storage tank brought
onto the Premises by or for Lessee or under Lessee's control. Lessee's
obligations under this Paragraph 6 shall include, but not be limited to, the
effects of any contamination or injury to person, property or the environment
created or suffered by Lessee, and the cost of investigation (including
consultant's and attorney's fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein
involved, and shall survive the expiration or earlier termination of this
Lease. No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. See Addendum attached hereto.
Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"APPLICABLE LAW," which term is used in this Lease to include all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises
(including but not limited to matters pertaining to (i) industrial hygiene,
(ii) environmental conditions on, in, under or about the Premises, including
soil and groundwater conditions, and (iii) the use, generation, manufacture,
production, installation, maintenance, removal, transportation, storage,
spill or release of any Hazardous Substance or storage tank), now in effect
or which may hereafter come into effect, and whether or not reflecting a
change in policy from any previously existing policy. Lessee shall, within
five (5) days after receipt of Lessor's written request, provide Lessor with
copies of all documents and information, including, but not limited to,
permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor,
and shall immediately upon receipt, notify Lessor in writing (with copies of
any documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or
the Premises to comply with any Applicable Law.
6.4 INSPECTION; COMPLIANCE. See Addendum attached hereto. Lessor and
Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to
enter the Premises at any time, in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants
in connection therewith and/or to advise Lessor with respect to Lessee's
activities, including but not limited to the installation, operation, use,
monitoring, maintenance, or removal of any Hazardous Substance or storage
tank on or from the Premises. The costs and expenses of any such inspections
shall be paid by the party requesting same, unless a Default or Breach of
this Lease, violation of Applicable Law, or a contamination, caused or
materially contributed to by Lessee is found to exist or be imminent, or
unless the inspection is requested or ordered by a governmental authority as
the result of any such existing or imminent violation or contamination. In
any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender,
as the case may be, for the costs and expenses of such inspections.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as
to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.,
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7.2 (Lessor's obligations to repair), 9 (damage and destruction), 14
(condemnation), and 7.2 (Lessor's Obligations) Lessee shall, at Lessee's sole
cost and expense and at all times, keep the Premises and every part thereof
in good order, condition and repair, structural and non-structural (whether
or not such portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and
whether or not the need for such repairs occurs as a result of Lessee's use,
any prior use, the elements or the age of such portion of the Premises),
including, without limiting the generality of the foregoing, all equipment or
facilities serving the Premises, such as plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities, boilers, fired or unfired
pressure vessels, fire sprinkler and/or standpipe and hose or other automatic
fire extinguishing system, including fire alarm and/or smoke detection
systems and equipment, fire hydrants, fixtures, walls (interior and
exterior), foundations, ceilings, roofs, floors, window, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls,
signs, sidewalks and parkways located in, on, about, or adjacent to the
Premises. Lessee shall not cause or permit any Hazardous Substance to be
spilled or released in, on, under or about the Premises (including through
the plumbing or sanitary sewer system) and shall promptly, at Lessee's
expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of
any contamination of, and for the maintenance, security and/or monitoring of
the Premises, the elements surrounding same, or neighboring properties, that
was caused or materially contributed to by Lessee, or pertaining to or
involving any Hazardous Substance and/or storage tank brought onto the
Premises by or for Lessee or under its control. Lessee, in keeping the
Premises in good order, condition and repair, shall exercise and perform good
maintenance practices. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair. If Lessee occupies the Premises for seven (7) years or more, Lessor
may require Lessee to repaint the exterior of the buildings on the Premises
as reasonably required, but not more frequently than once every seven (7)
years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt, and parking
lot maintenance.
7.2 LESSOR'S OBLIGATIONS. Except as provided in the Addendum attached
hereto and except for the warranties and agreements of Lessor contained in
Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to
compliance with covenants, restrictions and building code), 9 (relating to
destruction of the Premises) and 14 (relating to condemnation of the Premises),
it is intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, the improvements located
thereon, or the equipment therein, whether structural or non structural, all of
which obligations are intended to be that of the Lessee under Paragraph 7.1
hereof. It is the intention of the Parties that the terms of this Lease govern
the respective obligations of the Parties as to maintenance and repair of the
Premises. Lessee and Lessor expressly waive the benefit of any statute now or
hereafter in effect to the extent it is inconsistent with the terms of this
Lease with respect to, or which affords Lessee the right to make repairs at the
expense of Lessor or to terminate this Lease by reason of any needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
is used in this Lease to refer to all carpeting, window coverings, air lines,
power panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "ALTERATIONS"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED
ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or
Utility Installations made by lessee that are not yet owned by Lessor as defined
in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations to the
interior of the Premises (excluding the roof), as long as they are not visible
from the outside, do not involve puncturing, relocating or removing the roof or
any existing walls, and the cumulative costs thereof during the term of this
Lease as extended does not exceed $25,000.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable
permits required by governmental authorities, (ii) the furnishing of copies of
such permits together with a copy of the plans and specifications for the
Alteration or Utility Installation to Lessor prior to commencement of the work
thereon, and (iii) the compliance by Lessee with all conditions of said permits
in a prompt and expeditious manner. Any Alterations or Utility Installations by
Lessee during the term of this Lease shall be done in a good and workmanlike
manner, with good and sufficient materials, and in compliance with all
Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor
with as-built plans and specifications therefor. Lessor may (but without
obligation to do so) condition its consent to any requested Alteration or
Utility Installation that costs $10,000 or more upon Lessee's providing Lessor
with a lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation and/or upon Lessee's
posting an additional Security Deposit with Lessor under Paragraph 36 hereof.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by
any mechanics' or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on or about the Premises, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend and protect itself, Lessor and the Premises against the same
and shall pay and satisfy any such adverse judgment that may be rendered
thereon before the enforcement thereof against the Lessor or the Premises.
If Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to one and one-half times the
amount of such contested lien claim or demand, indemnifying Lessor against
liability for the same, as required by law for the holding of the Premises
free from the effect of such lien or claim. In addition, Lessor may require
Lessee to pay Lessor's attorney's fees and costs in participating in such
action if Lessor shall decide it is to its best interest to do so.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date,
with all of the improvements, parts and surfaces thereof clean and free of
debris and in good operating order, condition and state of repair, ordinary
wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease.
Except as otherwise agreed or specified in writing by Lessor, the Premises,
as surrendered, shall include the Utility Installations. The obligation of
Lessee shall include the repair of any damage occasioned by installation,
maintenance or removal of Lessee's Trade Fixtures, furnishing, equipment, and
Alterations and/or Utility Installations, as well as the removal of any
storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all
as may then be required by Applicable Law and/or good service practice.
Lessee's Trade Fixtures shall remain the property of Lessee and shall be
removed by Lessee subject to its obligation to repair and restore the
Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8. Premiums for policy periods commencing prior to or extending
beyond the Lease term shall be prorated to correspond to the Lease term.
Payment shall be made by Lessee to Lessor within ten (10) days following receipt
of an invoice for any amount due.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be on an occurrence basis
providing single limit coverage in an amount not less than $3,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises"
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not
contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance required by this Lease or as
carried by Lessee shall not, however, limit the liability of Lessee nor relieve
Lessee of any obligation hereunder. All insurance to be carried by Lessee shall
be primary to and not contributory with any similar insurance carried by Lessor,
whose insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party,
Lessor shall also maintain liability insurance described in Paragraph 8.2(a),
above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured
therein.
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8.3 PROPERTY INSURANCE--BUILDING, IMPROVEMENTS AND RENTAL VALUE.
See Addendum attached hereto
(a) BUILDING AND IMPROVEMENTS.* The Insuring Party shall
obtain and keep in force during the term of this Lease a policy or policies
in the name of Lessor, with loss payable to Lessor and to the holders of any
mortgages, deeds of trust or ground leases on the Premises ("LENDER(S)"),
insuring loss or damage to the Premises. The amount of such insurance shall
be equal to the full replacement cost of the Premises, as the same shall
exist from time to time, or the amount required by Lenders, but in no event
more than the commercially reasonable and available insurable value thereof
if, by reason of the unique nature or age of the improvements involved, such
latter amount is less than full replacement cost. If Lessor is the Insuring
Party, however, Lessee Owned Alterations and Utility Installations shall be
insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage
is available and commercially appropriate, such policy or policies shall
insure against all risks of direct physical loss or damage (except the perils
of flood and/or earthquake unless required by a Lender), including coverage
for any additional costs resulting from debris removal and reasonable amounts
of coverage for the enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Premises
required to be demolished or removed by reason of the enforcement of any
building, zoning, safety or land use laws as the result of a covered cause of
loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property
insurance coverage amount by a factor of not less than the adjusted U.S.
Department of Labor Consumer Price Index for All Urban Consumers for the city
nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000 per
occurrence, and Lessee shall be liable for such deductible amount in the
event of an Insured Loss, as defined in Paragraph 9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition,
obtain and keep in force during the term of this Lease a policy or policies
in the name of Lessor, with loss payable to Lessor and Lender(s), insuring
the loss of the full rental and other charges payable by Lessee to Lessor
under this Lease for one (1) year (including all real estate taxes, insurance
costs, and any scheduled rental increases). Said insurance shall provide
that in the event the Lease is terminated by reason of an insured loss, the
period of indemnity for such coverage shall be extended beyond the date of
the completion of repairs or replacement of the Premises, to provide for one
full year's loss of rental revenues from the date of any such loss. Said
insurance shall contain an agreed valuation provision in lieu of any
coinsurance clause, and the amount of coverage shall be adjusted annually to
reflect the projected rental income, property taxes, insurance premium costs
and other expenses, if any, otherwise payable by Lessee, for the next twelve
(12) month period. Lessee shall be liable for any deductible amount in the
event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a
larger building, or if the Premises are part of a group of buildings owned by
Lessor which are adjacent to the Premises, the Lessee shall pay for any
increase in the premiums for the property insurance of such building or
buildings if said increase is caused by Lessee's acts, omissions, use or
occupancy of the Premises.
(d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring
Party, the Lessor shall not be required to insure Lessee Owned Alterations
and Utility Installations unless the item in question has become the property
of Lessor under the terms of this Lease. If Lessee is the Insuring Party,
the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee
Owned Alterations and Utility Installations.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain
insurance coverage on all of Lessee's personal property, Lessee Owned
Alterations and Utility Installations in, on, or about the Premises similar
in coverage to that carried by the Insuring Party under Paragraph 8.3. Such
insurance shall be full replacement cost coverage with a deductible of not to
exceed $10,000 per occurrence. The proceeds from any such insurance shall be
used by Lessee for the replacement of personal property or the restoration of
Lessee Owned Alterations and Utility Installations. Lessee shall be the
Insuring Party with respect to the insurance required by this Paragraph 8.4
and shall provide Lessor with written evidence that such insurance is in
force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, or such other rating as may be required by a
Lender having a lien on the Premises, as set forth in the most current issue
of "Best's Insurance Guide." Lessee shall not do or permit to be done
anything which shall invalidate the insurance policies referred to in this
Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be
delivered to Lessor certified copies of policies of such insurance or
certificates evidencing the existence and amounts of such insurance with the
insureds and loss payable clauses as required by this Lease. No such policy
shall be cancellable or subject to modification except after thirty (30) days
prior written notice to Lessor. Lessee shall at least thirty (30) days prior
to the expiration of such policies, furnish Lessor with evidence of renewals
or "insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be
payable to Lessee to Lessor upon demand. If the Insuring Party shall fail to
procure and maintain the insurance required to be carried by the Insuring
Party under this Paragraph 8, the other Party may, but shall not be required
to, procure and maintain the same, but at Lessee's expense.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in
contract or in tort) against the other, for loss of or damage to the Waiving
Party's property arising out of or incident to the perils required to be
insured against under Paragraph 8. The effect of such releases and waivers
of the right to recover damages shall not be limited by the amount of
insurance carried or required, or by any deductibles applicable thereto.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, Lessor's master or ground lessor,
partners and Lenders, from and against any and all claims, loss of rents
and/or damages, costs, liens, judgments, penalties, permits, attorney's and
consultant's fees, expenses and/or liabilities arising out of, involving, or
in dealing with, the occupancy of the Premises by Lessee, the conduct of
Lessee's business, any act, omission or neglect of Lessee, its agents,
contractors, employees or invitees, and out of any Default or Breach by
Lessee in the performance in a timely manner of any obligation on Lessee's
part to be performed under this Lease. The foregoing shall include, but not
be limited to, the defense or pursuit of any claim or any action or
proceeding involved therein, and whether or not (in the case of claims made
against Lessor) litigated and/or reduced to judgment, and whether well
founded or not. In case any action or proceeding be brought against Lessor
by reason of any of the foregoing matters, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory
to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor
need not have first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or
any other person in or about the Premises, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, whether the said injury or damage results
from conditions arising upon the Premises or upon other portions of the
building of which the Premises are a part, or from other sources or places,
and regardless of whether the cause of such damage or injury or the means of
repairing the same is accessible or not. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall
under no circumstances be liable for injury to Lessee's business or for any
loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or
destruction to the improvements on the Premises, other than Lessee Owned
Alterations and Utility Installations, the repair cost of which damage or
destruction is less than 50% of the then Replacement Cost of the Premises
immediately prior to such damage or destruction, excluding from such
calculation the value of the land and Lessee Owned Alterations and Utility
Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations the repair cost of which damage or destruction is 50% or more
of the then Replacement Cost of the Premises immediately prior to such damage
or destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations. See Addendum attached
hereto.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible
amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to
their condition existing immediately prior thereto, including demolition,
debris removal and upgrading required by the operation of applicable building
codes, ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the
occurrence or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in,
on, or under the Premises.
9.2 PARTIAL DAMAGE--INSURED LOSS. If a Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but not Lessee's Trade Fixtures or Lessee Owned
Alterations and Utility Installations) as soon as reasonably possible and
this Lease shall continue in full force and effect; provided, however, that
Lessee shall, at Lessor's election, make the repair of any damage or
destruction the total cost to repair of which is $10,000 or less, and, in
such event, Lessor shall make the insurance proceeds available to Lessee on a
reasonable basis for that purpose. Notwithstanding the foregoing, if the
required insurance was not in force or the insurance proceeds are not
sufficient to effect such repair, the Insuring Party shall promptly
contribute the shortage in proceeds (except as to the deductible which is
Lessee's responsibility) as and when required to complete said repairs. In
the event, however, the shortage in proceeds was due to the fact that, by
reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor
shall have no obligation to pay for the shortage in insurance proceeds or to
fully restore the unique aspects of the Premises unless Lessee provides
Lessor with the funds to cover same, or adequate assurance thereof, within
ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance
thereof within said (10) day period, the party responsible for making the
repairs shall complete them as soon as reasonably possible and this Lease
shall remain in full force and effect. If Lessor does not receive such funds
or assurance within said period, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to make such restoration and
repair as is commercially reasonable with Lessor paying any shortage in
proceeds, in which case this Lease shall remain in full force and effect. If
in such case Lessor does not so elect, then this Lease shall terminate sixty
(60) days following the occurrence of the damage or destruction. Unless
otherwise agreed, Lessee shall in no event have any right to reimbursement
from Lessor for
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any funds contributed by Lessee to repair any such damage or destruction.
9.3 PARTIAL DAMAGE--UNINSURED LOSS. If a Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful
act of Lessee (in which event Lessee shall make the repairs at Lessee's
expense and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 13), Lessor may at Lessor's option,
either: (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect,
or (ii) give written notice to Lessee within thirty (30) days after receipt
by Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the giving of
such notice. In the event Lessor elects to give such notice of Lessor's
intention to terminate this Lease, Lessee shall have the right within ten
(10) days after the receipt of such notice to give written notice to Lessor
of Lessee's commitment to pay for the repair of such damage totally at
Lessee's expense and without reimbursement from Lessor. Lessee shall provide
Lessor with the required funds or satisfactory assurance thereof within
thirty (30) days following Lessee's said commitment. In such event this
Lease shall continue in full force and effect, and Lessor shall proceed to
make such repairs as soon as reasonably possible and the required funds are
available. If Lessee does not give such notice and provide the funds or
assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if a Premises Total Destruction occurs (including any destruction required by
any authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the
damage or destruction is an Insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage or destruction
was caused by Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 8.6. See Addendum
attached hereto.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six
(6) months of the term of this Lease there is damage for which the cost to
repair exceeds one (1) month's Base Rent, whether or not an Insured Loss,
Lessor may, at Lessor's option, terminate this Lease effective sixty (60)
days following the date of occurrence of such damage by giving written notice
to Lessee of Lessor's election to do so within thirty (30) days after the
date of occurrence of such damage. Provided, however, if Lessee at that time
has an exercisable option to extend this Lease or to purchase the Premises,
then Lessee may preserve this Lease by, within twenty (20) days following the
occurrence of the damage, or before the expiration of the time provided in
such option for its exercise, whichever is earlier ("EXERCISE PERIOD"), (i)
exercising such option and (ii) providing Lessor with any shortage in
insurance proceeds (or adequate assurance thereof) to cover any shortage in
insurance proceeds, Lessor shall, at Lessor's expense repair such damage as
soon as reasonably possible and this Lease shall continue in full force and
effect. If Lessee fails to exercise such option and provide such funds or
assurance during said Exercise Period, then Lessor may at Lessor's option
terminate this Lease as of the expiration of said sixty (60) day period
following the occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within ten (10) days after the expiration of the
Exercise Period, notwithstanding any term or provision in the grant of option
to the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage--Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in
a substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at
any time prior to the commencement of such repair or restoration, give
written notice to Lessor and to any Lenders of which Lessee has actual notice
of Lessee's election to terminate this Lease on a date not less than sixty
(60) days following the giving of such notice. If Lessee gives such notice
to Lessor and such Lenders and such repair or restoration is not commenced
within thirty (30) days after receipt of such notice, this Lease shall
terminate as of the date specified in said notice. If Lessor or a Lender
commences the repair or restoration of the Premises within thirty (30) days
after receipt of such notice, this Lease shall continue in full force and
effect. "COMMENCE" as used in this Paragraph shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance
Condition occurs, unless Lessee is legally responsible therefor (in which
case Lessee shall make the investigation and remediation thereof required by
Applicable Law and this Lease shall continue in full force and effect, but
subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option
either (i) investigate and remediate such Hazardous Substance Condition, if
required, as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) if the estimated
cost to investigate and remediate such condition exceeds twelve (12) times
the then monthly Base Rent or $100,000, whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge
of the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the giving of
such notice. In the event Lessor elects to give such notice of Lessor's
intention to terminate this Lease, Lessee shall have the right within ten
(10) days after the receipt of such notice to give written notice to Lessor
of Lessee's commitment to pay for the investigation and remediation of such
Hazardous Substance Condition totally at Lessee's expense and without
reimbursement from Lessor except to the extent of an amount equal to twelve
(12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with the funds required of Lessee or satisfactory
assurance thereof within thirty (30) days following Lessee's said commitment.
In such event this Lease shall continue in full force and effect, and Lessor
shall proceed to make such investigation and remediation as soon as
reasonably possible and the required funds are available. If Lessee does not
give such notice and provide the required funds or assurance thereof within
the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance
Condition occurs for which Lessee is not legally responsible, there shall be
abatement of Lessee's obligations under this Lease to the same extent as
provided in Paragraph 9.6(a) for a period of not to exceed twelve (12) months.
9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by
Lessor under the terms of this Lease.
9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions
of any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 (a) PAYMENT OF TAXES. See Addendum attached hereto. Lessee
shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable
to the Premises during the term of this Lease. Subject to Paragraph 10.1(b),
all such payments shall be made at least ten (10) days prior to the
delinquency date of the applicable installment. Lessee shall promptly
furnish Lessor with satisfactory evidence that such taxes have been paid. If
any such taxes to be paid by Lessee shall cover any period of time prior to
or after the expiration or earlier termination of the term hereof, Lessee's
share of such taxes shall be equitably prorated to cover only the period of
time within the tax fiscal year this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment after such proration. If Lessee shall
fail to pay any Real Property Taxes required by this Lease to be paid by
Lessee, Lessor shall have the right to pay the same, and Lessee shall
reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In order to insure payment when due
and before delinquency of any or all Real Property Taxes, Lessor reserves the
right, at Lessor's option, to estimate the current Real Property Taxes
applicable to the Premises, and to require such current year's Real Property
Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum
amount equal to the installment due, at least twenty (20) days prior to the
applicable delinquency date, or (ii) monthly in advance with the payment of
the Base Rent. If Lessor elects to require payment monthly in advance, the
monthly payment shall be that equal monthly amount which, over the number of
months remaining before the month in which the applicable tax installment
would become delinquent (and without interest thereon), would provide a fund
large enough to fully discharge before delinquency the estimated installment
of taxes to be paid. When the actual amount of the applicable tax bill is
known, the amount of such equal monthly advance payment shall be adjusted as
required to provide the fund needed to pay the applicable taxes before
delinquency. If the amounts paid to Lessor by Lessee under the provisions of
this Paragraph are insufficient to discharge the obligations of Lessee to pay
such Real Property Taxes as the same become due, Lessee shall pay to Lessor,
upon Lessor's demand, such additional sums as are necessary to pay such
obligations. All moneys paid to Lessor under this Paragraph may be
intermingled with other moneys of Lessor and shall not bear interest. In the
event of a Breach by Lessee in the performance of the obligations of Lessee
under this Lease, then any balance of funds paid to Lessor under the
provisions of this Paragraph may, subject to proration as provided in
Paragraph 10.1(a), at the option of Lessor, be treated as an additional
Security Deposit under Paragraph 5.
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"REAL PROPERTY TAXES" shall include any form of real estate tax or
assessment, general, special, ordinary or extraordinary, and any license fee,
commercial rental tax, improvement bond or bonds, levy or tax (other than
inheritance, personal income or estate taxes) imposed upon the Premises by
any authority having the direct or indirect power to tax, including any city,
state or federal government, or any school, agricultural, sanitary, fire,
street, drainage or other improvement district thereof, levied against any
legal or equitable interest of Lessor in the Premises or in the real property
of which the Premises are a part, Lessor's right to rent or other income
therefrom, and/or Lessor's business of leasing the Premises. The term "REAL
PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge,
or any increase therein, imposed by reason of events occurring, or changes in
applicable law taking effect, during the term of this Lease, including but
not limited to a change in the ownership of the Premises or in the
improvements thereon, the execution of this Lease, or any modification,
amendment or transfer thereof, and whether or not contemplated by the Parties.
10.3 JOINT ASSESSMENT. If the Premises are not separately
assessed, Lessee's liability shall be an equitable proportion of the Real
Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the
respective valuations
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assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal
property of Lessee contained in the Premises or elsewhere. When possible,
Lessee shall cause its Trade Fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property
of Lessor. If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to
Lessee within ten (10) days after receipt of a written statement setting
forth the taxes applicable to Lessee's property or, at Lessor's option, as
provided in Paragraph 10.1(b).
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to
be determined by Lessor, of all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or
in the Premises without Lessor's prior written consent given under and
subject to the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis,
of twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a
formal assignment or hypothecation of this Lease or Lessee's assets occurs,
which results or will result in a reduction of the Net Worth of Lessee, as
hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Lessee as it was represented to Lessor at
the time of the execution by Lessor of this Lease or at the time of the most
recent assignment to which Lessor has consented, or as it exists immediately
prior to said transaction or transactions constituting such reduction, at
whichever time said Net Worth of Lessee was or is greater, shall be
considered an assignment of this Lease by Lessee to which Lessor may
reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this
Lease shall be the net worth of Lessee (excluding any guarantors) established
under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be
a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to
treat such unconsented to assignment or subletting as a noncurable Breach,
Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon
thirty (30) days written notice ("Lessor's Notice"), increase the monthly
Base Rent to fair market rental value or one hundred ten percent (110%) of
the Base Rent then in effect, whichever is greater. Pending determination of
the new fair market rental value, if disputed by Lessee, Lessee shall pay the
amount set forth in Lessor's Notice, with any overpayment credited against
the next installment(s) of Base Rent coming due, and any underpayment for the
period retroactively to the effective date of the adjustment being due and
payable immediately upon the determination thereof. Further, in the event of
such Breach and market value adjustment, (i) the purchase price of any option
to purchase the Premises held by Lessee shall be subject to similar
adjustment to the then fair market value (without the Lease being considered
an encumbrance or any deduction for depreciation or obsolescence, and
considering the Premises at its highest and best use and in good condition),
or one hundred ten percent (110%) of the price previously in effect,
whichever is greater, (ii) any index-oriented rental or price adjustment
formulas contained in this Lease shall be adjusted to require that the base
index be determined with reference to the index applicable to the time of
such adjustment, and (iii) any fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the
market value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not; (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent or performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this
Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee
or to any subsequent or successive assignment or subletting by the sublessee.
However, Lessor may consent to subsequent sublettings and assignments of the
sublease or any amendments or modifications thereto without notifying Lessee
or anyone else liable on the Lease or sublease and without obtaining their
consent, and such action shall not relieve such persons from liability under
this Lease or sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors
or any one else responsible for the performance of the Lessee's obligations
under this Lease, including the sublessee, without first exhausting Lessor's
remedies against any other person or entity responsible therefor to Lessor,
or any security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination
as to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 or ten percent (10%) of the current monthly
Base Rent, whichever is greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may
be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to
be observed or performed by Lessee during the term of said assignment or
sublease, other than such obligations as are contrary to or inconsistent with
provisions of an assignment or sublease to which Lessor has specifically
consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.1(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a condition to Lessor's
consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment structure of the
rent payable under this Lease be adjusted to what is then the market value
and/or adjustment structure for property similar to the Premises as then
constituted.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a
portion of the Premises heretofore or hereafter made by Lessee, and Lessor
may collect such rent and income and apply same toward Lessee's obligations
under this Lease; provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of Lessee's obligations under
this Lease, Lessee may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Lessor shall not,
by reason of this or any other assignment of such sublease to Lessor, nor by
reason of the collection of the rents from a sublease, be deemed liable to
the sublessee for any failure of Lessee to perform and comply with any of
Lessee's obligations to such sublessee under such sublease. Lessee hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a
written notice from Lessor stating that a Breach exists in the performance of
Lessee's obligations under this Lease, to pay to Lessor the rents and other
charges due and to become due under the sublease. Sublessee shall rely upon
any such statement and request from Lessor and shall pay such rents and other
charges to Lessor without any obligation or right to inquire as to whether
such Breach exists and notwithstanding any notice from or claim from Lessee
to the contrary. Lessee shall have no right or claim against said sublessee,
or, until the Breach has been cured, against Lessor, for any such rents and
other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of
such sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or for any
other prior Defaults or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
12.4 ADDITIONAL PROVISIONS REGARDING SUBLETTING AND ASSIGNMENT. See
Addendum attached hereto
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee
to observe, comply with or perform any of the terms, covenants, conditions or
rules applicable to Lessee under this Lease. A "BREACH"
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is defined as the occurrence of any one or more of the following Defaults,
and, where a grace period for cure after notice is specified herein, the
failure by Lessee to cure such Default prior to the expiration of the
applicable grace period, shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third
party, as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which
endangers or threatens life or property, where such failure continues for a
period of three (3) days following written notice thereof by or on behalf of
Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable Law
per Paragraph 6.3, (ii) the inspection, maintenance and service contracts
required under Paragraph 7.1(b), (iii) the recission of an unauthorized
assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per
Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease
per Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37, (vii)
the execution of any document requested under Paragraph 42 (easements), or
(viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice by or on
behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than
those described in subparagraphs (a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or
on behalf of Lessor to Lessee; provided, however, that if the nature of
Lessee's Default is such that more than thirty (30) days are reasonably
required for its cure, then it shall not be deemed to be a Breach of this
Lease by Lessee if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment
of a trustee or receiver to take possession of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where
possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where such seizure is not discharged within thirty (30) days;
provided, however, in the event that any provision of this subparagraph (e)
is contrary to any applicable law, such provision shall be of no force or
effect, and not affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a
guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty, (iii) a guarantor's becoming insolvent or
the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the
guaranty, or (v) a guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such
event, to provide Lessor with written alternative assurance or security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the guarantors that
existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made under this
Lease by Lessee to be made only by cashier's check. In the event of a Breach
of this Lease by Lessee, as defined in Paragraph 13.1, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor.
In such event Lessor shall be entitled to recover from Lessee: (i) the worth
at the time of the award of the unpaid rent which had been earned at the time
of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss that the Lessee proves could
have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform
its obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom, including but not limited to the cost of
recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys'
fees, and that portion of the leasing commission paid by Lessor applicable to
the unexpired term of this Lease. The worth at the time of award of the
amount referred to in provision (iii) of the prior sentence shall be computed
by discounting such amount at the discount rate of the Federal Reserve Bank
of San Francisco at the time of award plus one percent (1%). Efforts by
Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease
shall not waive Lessor's right to recover damages under this Paragraph. If
termination of this Lease is obtained through the provisional remedy of
unlawful detainer, Lessor shall have the right to recover in such proceeding
the unpaid rent and damages as are recoverable therein, or Lessor may reserve
therein the right to recover all or any part thereof in a separate suit for
such rent and/or damages. If a notice and grace period required under
subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay
rent or quit, or to perform or quit, as the case may be, given to Lessee
under any statute authorizing the forfeiture of leases for unlawful detainer
shall also constitute the applicable notice for grace period purposes
required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable
grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful
detainer statute shall run concurrently after the one such statutory notice,
and the failure of Lessee to cure the Default within the greater of the two
such grace periods shall constitute both an unlawful detainer and a Breach of
this Lease entitling Lessor to the remedies provided for in this Lease and/or
by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach
and abandonment and recover the rent as it becomes due, provided Lessee has
the right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver
to protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters
occurring or accruing during the term hereof or by reason of Lessee's
occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by
Lessor for free or abated rent or other charges applicable to the Premises,
or for the giving or paying by Lessor to or for Lessee of any cash or other
bonus, inducement or consideration for Lessee's entering into this Lease, all
of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS,"
shall be deemed conditioned upon Lessee's full and faithful performance of
all of the terms, covenants and conditions of this Lease to be performed or
observed by Lessee during the term hereof as the same may be extended. Upon
the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph
13.1, any such inducement Provision shall automatically be deemed deleted from
this Lease and of no further force or effect, and any rent, other charge,
bonus, inducement or consideration theretofore abated, given or paid by Lessor
under such an Inducement Provision shall be immediately due and payable by
Lessee to Lessor, and recoverable by Lessor as additional rent due under this
Lease, notwithstanding any subsequent cure of said Breach by Lessee. The
acceptance by Lessor of rent or the cure of the Breach which initiated the
operation of this Paragraph shall not be deemed a waiver by Lessor of the
provisions of this Paragraph unless specifically so stated in writing by
Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within five (5)
days after such amount shall be due, then, without any requirement for notice
to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%)
of such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after
such notice are reasonably required for its performance, then Lessor shall
not be in breach of this Lease if performance is commenced within such thirty
(30) day period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "CONDEMNATION"), this Lease shall
terminate as to the part so taken as of the date the condemning authority
takes
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title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
land area not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
15. BROKER'S FEE.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of
this Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall
pay to said Brokers jointly, or in such separate shares as they may mutually
designate in writing, a fee as set forth in See Addendum attached hereto for
brokerage services rendered by said Brokers to Lessor in this transaction.
15.3
15.4 Any buyer or transferee of Lessor's interest in this Lease,
whether such transfer is by agreement or by operation of law, shall be deemed to
have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a
third party beneficiary of the provisions of this Paragraph 15 to the extent of
its interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.
15.5 Lessee and Lessor each represent and warrant to the other that
it has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorney's fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. TENANCY STATEMENT.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days
after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the
Premises, any part thereof, or the building of which the Premises are a part,
Lessee and all Guarantors of Lessee's performance hereunder shall deliver to
any potential lender or purchaser designated by Lessor such financial
statements of Lessee and such Guarantors as may be reasonably required by
such lender or purchaser, including but not limited to Lessee's financial
statements for the past three (3) years or for such lesser period during
which Lessee has been in business. All such financial statements shall be
received by Lessor and such lender or purchaser in confidence and shall be
used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or,
if this is a sublease, of the Lessee's interest in the prior lease. In the
event of a transfer of Lessor's title or interest in the Premises or in this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor at the time of such
transfer or assignment. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid,
the prior Lessor shall be relieved of all liability with respect to the
obligations and/or covenants under this Lease thereafter to be performed by
the Lessor provided that the new Lessor assumes the Lessor's obligations
under this Lease. Subject to the foregoing, the obligations and/or covenants
in this Lease to be performed by the Lessor shall be binding only upon the
Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains
all agreements between the Parties with respect to any matter mentioned
herein, and no other prior or contemporaneous agreement or understanding
shall be effective. Lessor and Lessee each represents and warrants to the
Brokers that it has made, and is relying solely upon, its own investigation
as to the nature, quality, character and financial responsibility of the
other Party to this Lease and as to the nature, quality and character of the
Premises. Brokers have no responsibility with respect thereto or with
respect to any default or breach hereof by either Party.
23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger or courier
service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile
transmission, and shall be deemed sufficiently given if served in a manner
specified in this Paragraph 23. The addresses noted adjacent to a Party's
signature on this Lease shall be that Party's address for delivery or mailing
of notice purposes. Either Party may by written notice to the other specify a
different address for notice purposes, except that upon Lessee's taking
possession of the Premises, the Premises shall constitute Lessee's address
for the purpose of mailing or delivering notices to Lessee. A copy of all
notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received
on a Sunday or legal holiday, it shall be deemed received on the next business
day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof.
Lessor's consent to, or approval of, any act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any preceding Default or Breach by Lessee of any provision hereof, other than
the failure of Lessee to pay the particular rent so accepted. Any payment
given Lessor by Lessee may be accepted by Lessor on account of moneys or
damages due Lessor, notwithstanding any qualifying statements or conditions
made by Lessee in connection therewith, which such statements and/or
conditions shall be of no force or effect whatsoever unless specifically
agreed to in writing by Lessor at or before the time of deposit of such
payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
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27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall
be subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not: (i)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets or
defenses which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT")
from the Lender that Lessee's possession and this Lease, including any options
to extend the term hereof, will not be disturbed so long as Lessee is not in
Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
such subordination or non-subordination, attornment and/or non-disturbance
agreement as is provided for herein. 30.5 See Addendum attached hereto
31. ATTORNEY'S FEES. If any Party or Broker brings an action or
proceeding to enforce the terms hereof or declare rights hereunder, the
Prevailing Party (as hereafter defined) or Broker in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorney's fees.
Such fees may be awarded in the same suit or recovered in a separate suit,
whether or not such action or proceeding is pursued to decision or judgment.
The term, "PREVAILING PARTY" shall include, without limitation, a Party or
Broker who substantially obtains or defeats the relief sought, as the case
may be, whether by compromise, settlement, judgment, or the abandonment by
the other Party or Broker of its claim or defense. The attorney's fees award
shall not be computed in accordance with any court fee schedule, but shall be
such as to fully reimburse all attorney's fees reasonably incurred. Lessor
shall be entitled to attorney's fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any
time place on or about the Premises or building any ordinary "For Sale" signs
and Lessor may at any time during the last one hundred twenty (120) days of the
term hereof place on or about the Premises any ordinary "For Lease" signs. All
such activities of Lessor shall be without abatement of rent or liability to
Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as
otherwise provided herein, wherever in this Lease the consent of a Party is
required to an act by or for the other Party, such consent shall not be
unreasonably withheld or delayed. Lessor's actual reasonable costs and
expenses (including but not limited to architects', attorneys', engineers' or
other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent pertaining to this Lease or the
Premises, including but not limited to consents to an assignment, a
subletting or the presence or use of a Hazardous Substance, practice or
storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice
and supporting documentation therefor. Subject to Paragraph 12.2(e)
(applicable to assignment or subletting), Lessor may, as a condition to
considering any such request by Lessee, require that Lessee deposit with
Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor
will incur in considering and responding to Lessee's request. Except as
otherwise provided, any unused portion of said deposit shall be refunded to
Lessee without interest. Lessor's consent to any act, assignment of this
Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the
time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease
are acknowledged by Lessee as being reasonable. The failure to specify herein
any particular condition to Lessor's consent shall not preclude the imposition
by Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. GUARANTOR.
37.1 If there are to be any Guarantors of this Lease per Paragraph
1.11, the form of the guaranty to be executed by each such Guarantor shall be in
the form most recently published by the American Industrial Real Estate
Association, and each said Guarantor shall have the same obligations as Lessee
under this Lease, including but not limited to the obligation to provide the
Tenancy Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease
if any such Guarantor fails or refuses, upon reasonable request by Lessor to
give: (a) evidence of the due execution of the guaranty called for by this
Lease, including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and
including in the case of a corporate Guarantor, a certified copy of a
resolution of its board of directors authorizing the making of such guaranty,
together with a certificate of incumbency showing the signature of the
persons authorized to sign on its behalf, (b) current financial statements of
Guarantor as may from time to time be requested by Lessor, (c) a Tenancy
Statement, or (d) written confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION"
has the following meaning: (a) the right to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal to leave the Premises or
the right of first offer to lease the Premises or the right of first refusal
to lease other property of Lessor or the right of first offer to lease other
property of Lessor; (c) the right to purchase the Premises, or the right of
first refusal to purchase the Premises, or the right of first offer to
purchase the Premises, or the right to purchase other property of Lessor, or
the right of first refusal to purchase other property of Lessor, or the right
of first offer to purchase other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1
hereof, and cannot be voluntarily or involuntarily assigned or exercised by any
person or entity other than said original Lessee while the original Lessee is in
full and actual possession of the Premises and without the intention of
thereafter assigning or subletting. The Options, if any, herein granted to
Lessee are not assignable, either as a part of an assignment of this Lease or
separately or apart therefrom, and no Option may be separated from this Lease in
any manner, by reservation or otherwise.
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39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple
Options to extend or renew this Lease, a later Option cannot be exercised
unless the prior Options to extend or renew this Lease have been validly
exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i)
during the period commencing with the giving of any notice of Default under
Paragraph 13.1 and continuing until the noticed Default is cured, or (ii)
during the period of time any monetary obligation due Lessor from Lessee is
unpaid (without regard to whether notice thereof is given Lessee), or (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessor has given to Lessee three (3) or more notices of Default under
Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12)
month period immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option
shall terminate and be of no further force or effect, notwithstanding Lessee's
due and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. MULTIPLE BUILDINGS.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time,
to grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or
general or limited partnership, each individual executing this Lease on
behalf of such entity represents and warrants that he or she is duly
authorized to execute and deliver this Lease on its behalf. If Lessee is a
corporation, trust or partnership, Lessee shall, within thirty (30) days
after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of
such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by
the Parties in interest at the time of the modification. The parties shall
amend this Lease from time to time to reflect any adjustments that are made
to the Base Rent or other rent payable under this Lease. As long as they do
not materially change Lessee's obligations hereunder, Lessee agrees to make
such reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the
property of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS
LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY
SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A
STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE
PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at Los Angeles Executed at 8/25/84
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on 8/25/94 on
---------------------------------------- ---------------------------------
By LESSOR: By LESSEE:
Herman and Florence W. Rosen Family Trust Future Media Productions, Inc.
- ------------------------------------------ -----------------------------------
Dated December 21, 1988 and the Howard and a California corporation
- ------------------------------------------ -----------------------------------
Carol Rosen Trust Dated April 8, 1975
By /s/ Herman Rosen By /s/ Alex Sandel
--------------------------------------- --------------------------------
Name Printed: Herman Rosen and Florence W. Name Printed: Alex Sandel
----------------------------- -------------------------------
Rosen
-----------------------------
Title: Trustees Title: President
------------------------------------ -----------------------------
By By
--------------------------------------- --------------------------------
Name Printed: Howard N. Rosen Name Printed:
----------------------------- -------------------------------
and Carol L. Rosen Title:
----------------------------- -----------------------------
Title: Trustees
------------------------------------
Address: 2759 Casiano Road Address:
---------------------------------- ---------------------------
Los Angeles, CA 90077
- ------------------------------------------ -----------------------------------
Tel. No.(310)471-5305 Fax No.(310)471-7015 Tel. No.(818)704-9100 Fax No.
------------- ------------- (818)713-0146
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ADDENDUM TO
STANDARD INDUSTRIAL/COMMERCIAL SINGLE TENANT LEASE - NET
DATED AS OF AUGUST 24, 1994 ("LEASE")
BY AND AMONG
HERMAN ROSEN AND FLORENCE W. ROSEN, TRUSTEES OF THE
HERMAN AND FLORENCE W. ROSEN FAMILY TRUST DATED DECEMBER 21, 1998
AND
HOWARD N. ROSEN AND CAROL L. ROSEN, TRUSTEES OF
THE HOWARD AND CAROL ROSEN TRUST DATED APRIL 8, 1975
AS THE "LESSOR"
AND
FUTURE MEDIA PRODUCTIONS, INC., A CALIFORNIA CORPORATION
AS THE "LESSEE"
This Addendum is attached to and made a part of the Lease between Lessor
and Lessee (all as described in the above title) for the Premises therein
described. In the event there is any conflict between the provisions of this
Addendum and the provisions of the Lease to which it is attached, the
provisions of this Addendum shall control.
A. CONTINUED PROVISIONS. The following provisions are a continuation of
certain of the provisions of the Lease as indicated by the applicable
paragraph number set forth below:
1.5 BASE RENT - ABATEMENT. Base Rent payable for the first two (2) full
months of the Original Term (i.e., for September, 1994 and October, 1994) at
the rate of Twenty Thousand Four Hundred Fifty-One and 60/100ths Dollars
($20,451.60) per month shall be fully abated and waived.
2.3 COMPLIANCE WITH COVENANTS, ETC.. Notwithstanding the foregoing
provisions of this Paragraph 2.3, no warranty or representation is made by
Lessor related to the compliance of the improvements of the Premises with the
provisions of the Americans with Disabilities Act, a federal law codified at
42 USC Section 12101 et. seq. ("ADA") and accordingly the provisions of
Paragraph 2.3 shall not extend to any ADA compliance matters.
6.2(b) DUTY TO INFORM LANDLORD. Lessee hereby represents, warrants and
covenants that, except as (i) permitted under Paragraph 6.2(a), (ii) provided
in the Paragraph 6.2(b), and (iii) disclosed on Exhibit "C" attached hereto,
Lessee's business operations in or about the Premises do not and will not
involve the use, manufacture, storage, handling, generation, transportation
or other release of Hazardous Substances (individually and collectively,
"Permitted Uses"). The reporting requirements of Paragraph 6.2(b) shall not
apply to any Permitted Uses described on Exhibit "C", provided the same do
not constitute a Reportable Use. Permitted Uses shall also include Hazardous
Substances which are proposed to be used by Lessee and which are
substantially similar to those described on Exhibit "C" related to Lessee's
business operations, provided Lessee submits to Lessor a list of the same,
and certifies to Lessor that such proposed Permitted Uses are consistent with
the existing Permitted Uses and do not constitute a Reportable Use.
6.2(c) LESSOR'S INDEMNIFICATION. Lessor shall indemnify, protect, defend
and hold Lessee, its agents, employees, and lenders, if any, and the
Premises, harmless from and against any and all damages, liabilities,
judgments, costs, claims, liens, expenses, penalties, permits and attorney's
and consultant's fees arising out of or involving any Hazardous Substance or
storage tank brought onto the Premises by or for Lessor or under Lessor's
control prior to the Commencement Date. Lessor's obligations under this
Paragraph 6.2(c) shall include, but not be limited to, the effects of any
contamination or inquiry to person, property or the environment created or
suffered by Lessor, and the cost of investigation (including consultant's and
attorney's fees and testing), removal, remediation, restoration and/or
abatement thereof, or of any contamination therein involved, and shall
survive the expiration or earlier termination of this Lease. No termination,
cancellation or release agreement entered into by the Lessor and Lessee shall
release Lessor from its obligations under this Lease with respect to
Hazardous Substances or storage tanks, unless specifically so agreed by
Lessee in writing at the time of such agreement.
6.3 COMPLIANCE WITH LAW. In connection with the definition of
Applicable Law under this Paragraph 6.3 (and without in any way limiting the
definition of Applicable Law), Lessee acknowledges that the Premises and this
Lease are subject to all of the provisions contained in the Valencia
Industrial
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Center Declaration of Covenants, Conditions and Restrictions dated July 11,
1985, as may be amended from time to time, a copy of which is attached to
this Lease as Exhibit "B".
6.4 INSPECTION. Except in the case of an emergency, Lessor shall give
Lessee at least 24-hours advance notice (written or oral) prior to
undertaking any such inspections. Lessor shall use commercially reasonable
efforts to minimize any interference with Lessee's business operations during
any such inspections.
7.2 LESSOR'S OBLIGATIONS -- STRUCTURAL REPAIRS. Subject to the
provisions of Paragraphs 9 (damage and destruction) and 14 (condemnation),
Lessor shall, at Lessor's expense, keep the foundations, structural membranes
of the exterior roof and other structural aspects of the Premises in good
order, condition and repair (collectively, "Structural Repair"). Lessor
shall not, however, be obligated to (i) paint the exterior surface of the
exterior walls, (ii) maintain or repair any other aspect of the roof, (iii)
maintain or repair the windows, doors or plate glass or the interior surface
of exterior walls, or (iv) undertake the Structural Repairs to the extent any
such Structural Repairs are required to be done by reason of the acts,
omissions or negligence of Lessee and/or its officers, directors, employees,
agents, contractors or invitees not otherwise an Insured Loss (as defined in
Paragraph 9.1(c) below) for which insurance proceeds and deductible amounts
are actually received by Lessor, all of which maintenance and repair shall be
the obligation of Lessee under Paragraph 7.1(a) of the Lease. Lessor shall
not, in any event, have any obligation to make any Structural Repairs until
Lessor receives written notice from Lessee of the need for such Structural
Repairs and thereafter shall commence to make and complete the Structural
Repairs in a commercially reasonable manner.
8.3(a) PROPERTY INSURANCE -- ALL RISKS. The Insuring Party shall insure
against all perils and risks of direct physical loss or damage, including
flood and earthquake insurance. The deductible amount of any insurance policy
maintained pursuant to this Paragraph 8.3(a) shall not exceed $10,000, except
that the deductible amount of a flood and/or earthquake policy shall not
exceed five percent (5%) of the policy coverage amount. In the event
of any Insured Loss (as defined in Paragraph 9.1(c) of the Lease), Lessee
shall pay to Lessor the full deductible amount under the insurance applicable
to the Insured Loss within ten (10) days after the date of the Insured Loss.
Lessor's obligation to undertake any repairs under Paragraph 9 of the Lease
and Lessee's right to receive any abatement of rent under Paragraph 9.6 of
the Lease are specifically conditioned upon Lessee's prompt payment of the
said deductible amount to Lessor.
9.1(b) AND 9.4 DEFINITION AND EFFECT OF "PREMISES TOTAL DESTRUCTION".
"Premises Total Destruction" shall also mean damage or destruction to the
Premises to such an extent that (i) as to an Insured Loss, Lessee is unable
to conduct its business operations in at least fifty percent (50%) of the
Premises for a consecutive period following the damage of more than one
hundred and eighty (180) days or (ii) as to damage which is not an Insured
Loss, Lessee is unable to conduct its business operations in at least fifty
percent (50%) of the Premises for a consecutive period following the damage
of more than one hundred twenty (120) days (individually and collectively, an
"Impaired Use"). In the event of Premises Total Destruction by reason of an
Impaired Use, and notwithstanding anything in Paragraph 9.4 of the Lease to
the contrary, this Lease shall terminate the next day following the last day
of the Impaired Use period; provided, however, Lessee may elect by written
notice to Lessor given within thirty (30) days after the date of damage which
otherwise might give rise to an Impaired Use to elect not to terminate this
Lease if an Impaired Use were to arise respecting such damage (in which event
this Lease shall not terminate even if such damage gives rise to an Impaired
Use).
10.1(a) PAYMENT OF TAXES. During the Original Term, Lessee shall not be
obligated to pay any portion of the Real Property Taxes applicable to the
Premises which arises by reason of an increase in the Real Property Taxes as
a result of a sale or exchange of the Premises by Lessor.
12.4 ADDITIONAL PROVISIONS REGARDING SUBLETTING AND ASSIGNMENT.
(a) ADDITIONAL CONDITIONS TO ASSIGNMENT. Notwithstanding any
contrary provision of the Lease (including any contrary provision of
Paragraphs 12 or 36), Lessor may withhold its consent to any proposed
sublease or assignment of the Lease (as used in this Addendum, an
"Assignment") if the following conditions have not been met:
(i) In connection with Paragraph 12.2(e) of the Lease,
Lessee shall notify Lessor of its desire to enter into the Assignment and of
all relevant facts in connection therewith, including (1) the name of the
sublessee or assignee, (2) the nature of the sublessee's or assignee's
business to be carried on in the Premises, (3) the terms of the sublease or
assignment and all other
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contracts, instruments and agreements relating to the Assignment, and (iv)
such other information as Lessor may reasonably request concerning the
Assignment.
(ii) The use to be made of the Premises by the proposed
assignee or sublessee is generally consistent with the character and nature
of the Premises and the permitted use under Paragraphs 1.8 and 6 of the Lease.
(iii) The character, moral stability, reputation and financial
condition of the proposed assignee or sublessee are satisfactory to Lessor in
its sole discretion and, as to an assignment, the proposed assignee's net
worth is acceptable to Lessor in its sole discretion.
(iv) As to any Assignment other than a sublease of less than
twenty percent (20%) of the improvements of the Premises, Lessee shall have
agreed to assign and pay to Lessor as additional rent hereunder fifty percent
(50%) of all Transfer Consideration (as defined in Paragraph 12.4(v) below).
(v) "Transfer Consideration" shall mean and include all
consideration paid or given, directly or indirectly, by the sublessee or
assignee to Lessee in exchange for entering into the Assignment other than
reimbursement for the security deposit, reimbursement of the depreciated
value of any improvements, fixtures or furnishings installed in the Premises
by Lessee and payment for merchandise or inventory of Lessee not in excess of
Lessee's cost thereof and, if the Assignment is a sublease, all consideration
paid or given, directly or indirectly, by the sublessee to Lessee over and
above monthly rent and all additional rent payable by Lessee to Lessor
allocable to the portion of the Premises subject to such sublease as
determined by Lessor in any reasonable manner. Transfer Consideration shall
include consideration in any form, including money, property, assumption of
liabilities and any other item or thing of value. Notwithstanding the form of
the Transfer Consideration, Lessee shall pay the same to Lessor in cash in an
amount equal to the sum of the cash portion of the Transfer Consideration
plus the fair market value of any non-cash Transfer Consideration; provided,
however, that Lessee may pay any Transfer Consideration which is payable in
cash installments to Lessor as it receives each such installment.
(b) PERMITTED ASSIGNMENT. Lessor's consent shall not be required,
and the provisions of Paragraph 12.4(a) above shall not apply, to any
Assignment of the Lease to an entity (a "Permitted Assignee") which meets one
of the following requirements as of the date of Assignment and provided that
the use to be made of the Premises by the assignee is generally consistent
with the character and nature of the Premises and the permitted use under
Paragraphs 1.8 and 6 of the Lease: (i) the entity owns or controls at least
fifty percent (50%) of the assets, stock and/or voting rights of Lessee; (ii)
at least fifty percent (50%) of the assets, stock and/or voting rights of
such entity is owned or controlled by Lessee; or (iii) the entity is under
common control with Lessee such that the controlling party owns at least
fifty percent (50%) of the assets, stock and/or voting rights of both Lessee
and such entity. In the event of any Assignment to a Permitted Assignee,
Lessee shall promptly provide Lessor with notice thereof and reasonable
evidence of compliance with the above requirements.
15. BROKER'S FEES. The total brokerage commissions payable under
Paragraph 15 of the Lease by reason of the execution and performance under
this Lease shall be Thirty Four Thousand Six Hundred Sixty-Four and 05/100
Dollars ($34,664.05), payable as follows:
(i) $17,529.94 upon the later of (i) Lessee taking possession
of the Premises, (ii) the date the cash portion of the Security
Deposit is received by Lessor in good funds, or (iii) the date
of compliance with the conditions of Paragraph 52 below.
(ii) $571.14 per month for thirty (30) months commencing on
October 1, 1994 and continuing thereafter on the first day of
each month through February 1, 1997.
30.5 LANDLORD WAIVER. Within thirty (30) days after written request by
Lessee, Lessor will execute any commercially reasonable form of a so-called
"Landlord Waiver" requested by a lender of Lessee with respect to Lessee's
financing of its equipment, inventory and other items of personal property.
Lessor shall have the right to negotiate directly with the Lessee's lender
with respect to any objections to the proposed form of Landlord Waiver.
Lessee shall reimburse Lessor for its reasonable attorneys fees and costs
incurred with respect to the review and negotiation of each requested
Landlord Waiver prior to the date Lessor is required to execute the same.
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B. NEW PROVISIONS. The following provisions are additional provisions of the
Lease as indicated by the applicable paragraph number set forth below:
49. "AS IS". Except as otherwise specifically provided in the Lease,
Lessee acknowledges and agrees that no additional work shall be required with
respect to the Premises by Lessor as a result of this Lease, that it has
inspected the Premises as of the date of the Lease and is fully satisfied with
the physical condition thereof, including all Utility Installations, and that
it hereby accepts possession of the Premises as of the commencement of the
Original Term strictly in its "as is" condition and hereby waives all rights
and remedies it may at any time have against Lessor under this Lease or
otherwise as a result of any latent or patent deficiency in the Premises as
of such date. Notwithstanding the foregoing, Lessee is hereby advised that
(i) certain damages were caused to the Premises as a result of the January 17,
1994 Northridge earthquake and subsequent after shocks (the "Earthquake
Damages") and (ii) to the knowledge of Lessor, Lessor and/or its existing
tenant of the Premises, BE Aerospace ("Exiting Tenant"), have repaired all
Earthquake Damages of which the Lessor has been made aware.
50. OPTION. Lessee shall have one (1) option (each such option is
herein referred to as an "Option") to extend the Original Term of the Lease
for a period of five (5) years commencing March 1, 1997 and ending February
28, 2002 (herein referred to as the "Option Period").
(a) MANNER OF EXERCISE. Lessee shall exercise the Option only by
delivering written notice to the Lessor identifying the Option being
exercised, provided that the Option may not be exercised any earlier than
eight (8) months nor later than six (6) months prior to the expiration of the
Original Term of the Lease, time being of the strictest essence. If Lessee
fails to timely exercise the Option in the manner herein specified, then all
of the terms contained in this Paragraph 50 as to the Option shall
immediately and automatically terminate and be of no further force or effect.
(b) LEASE TERMS. Except as otherwise provided in this Addendum,
all provisions of the Lease shall continue in full force and effect during
the Option Period and the Option Period shall be considered part of the Term
of this Lease.
(c) CONDITIONS. The provisions of Paragraph 39 of the Lease,
including those relating to a Default of Lessee as set forth in Paragraph
39.4 of the Lease, are all conditions to the exercise of the Option.
(d) ADJUSTMENTS TO BASE RENT DURING OPTION PERIOD.
(i) The amount of Base Rent payable commencing on March 1,
1997, on March 1, 1999 and on March 1, 2001 shall be adjusted as of said
dates (the "Rent Adjustment Date") in accordance with this Paragraph 50(d).
As of each Rent Adjustment Date, the Base Rent shall be equal the greater of
(1) the Base Rent in effect immediately preceding the Rent Adjustment Date,
or (2) the product of the Base Rent in effect immediately preceding the Rent
Adjustment Date multiplied by the percentage obtained by dividing the Index
(defined below) for the third month preceding the Rent Adjustment Date by the
Index for the third month preceding the Comparison Month. The "Comparison
Month" for each Rent Adjustment Date is as follows: For March 1, 1997, the
Comparison Month is August 1994; for March 1, 1999, the Comparison Month is
March 1997; for March 2001, the Comparison Month is March 1999.
(ii) When the Base Rent for a Rent Adjustment Date is
determined, Lessor shall give Lessee notice setting forth that figure and
describing how it was computed; provided, however that Lessor's failure to
timely determine such adjustments or to notify Lessee of the same shall not
relieve Lessee of its obligation to pay such adjusted Base Rent. Within five
(5) days after Lessor has notified Lessee of any such adjustment, Lessee
shall pay to Lessor the excess of (1) the aggregate Base Rent due hereunder
from and after such Rent Adjustment Date computed at such adjusted amount,
over (2) the actual payments of Base Rent which have been previously made by
Lessee for the period from and after such Rent Adjustment Date.
(iii) The "Index" shall be the United States Department of
Labor, Bureau of Labor Statistics, Consumer Price Index for all Urban
Consumers, Los Angeles-Anaheim-Riverside, California, All Items, 1982-84=100.
In the event the base of the Index is changed, the new base shall be
converted to the base of the Index in accordance with the tables issued by
the Bureau of Labor Statistics and the base so converted shall continue to be
used. In the event the Index otherwise ceases to exist in its current format,
the parties shall substitute any official index published by the Bureau of
Labor Statistics or successor or similar governmental agency as may then be
in existence which is most nearly
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equivalent to the Index. If the parties are unable to agree upon a successor
Index, either party may refer the determination thereof to arbitration in
accordance with the then applicable rules of the American Arbitration
Association.
51. ARBITRATION. In the event any dispute (other than an Excluded
Matter as defined in Paragraph 51 (a) below) should hereafter arise between
Lessor and Lessee regarding the duties, rights and obligations of each with
respect to the matters covered by this Lease or regarding the validity,
construction, enforceability or performance of this Lease or any of its
provisions, then such dispute shall be settled by arbitration in accordance
with the Rules of the American Arbitration Association, except to the extent
modified below, and judgment upon the award rendered by the arbitrators may
be entered in any court having jurisdiction thereof. Arbitration between the
parties shall be conducted in Los Angeles, California and shall be guided by
the following principles:
(a) EXCLUDED MATTERS. The provisions of this Paragraph 51 shall
not apply to the following matters, which may be brought in a court of
competent jurisdiction (the "Excluded Matters"): (i) any summary proceeding
brought by Lessor under any of California's unlawful detainer, eviction or
any similar statutes which give a landlord the right to obtain possession of
premises and/or to remove parties and/or property from premises or (ii) any
immediate remedy of a temporary restraining order, preliminary injunction or
such other form of injunctive or equitable relief as may be issued by any
court of competent jurisdiction to (1) restrain or enjoin any of the parties
hereto from breaching any covenant, representation, warranty or provision of
this Lease or from frustrating the attainment of any of the purposes of this
Lease, (2) specifically enforce the provisions hereof, and/or (3) mandate and
require a party to this Lease to perform the obligations of such party
hereunder (including the obligation to execute, acknowledge and deliver such
instructions, documents and instruments as may be required pursuant to the
provisions of this Lease) or (iii) any provisional relief contemplated under
Paragraph 50(c) below.
(b) SELECTION OF ARBITRATOR. The arbitration proceedings shall be
conducted before a panel of three neutral arbitrators, all of whom shall be
members of the Bar of the State of California, actively engaged in the
practice of law for at least ten years, with expertise in deciding disputes
and interpreting contracts relating to industrial and/or commercial leases.
Each of the parties shall have the right to appoint one arbitrator. The two
arbitrators appointed by the parties shall appoint a third arbitrator, who
shall serve as the chairperson of the tribunal. The written decision of any
two of the three appointed arbitrators shall be binding and conclusive on
both parties to this Agreement. In lieu thereof, the parties may agree upon
one arbitrator to serve as the sole arbitrator.
(c) PROVISIONAL RELIEF PENDING COMPLETION OF ARBITRATION. Any
party may seek from a court of competent jurisdiction any interim or
provisional relief that may be necessary to protect the rights or property of
that party, pending the arbitration tribunal's determination of the merits of
the controversy.
(d) DISCOVERY. The parties shall allow and participate in
discovery in accordance with the Federal Rules of Civil Procedure for a
period of ninety (90) days after the filing of the answer or other responsive
pleading. Unresolved discovery disputes may be brought to the attention of
the chairperson of the arbitration panel and may be disposed of by such
chairperson.
(e) ATTORNEYS FEES. The unsuccessful party to such arbitration
shall pay to the successful party all costs and expenses, including
arbitration filing fees and actual fees and costs of attorneys', accountants,
experts and consultants incurred with respect to the arbitration proceedings
by such successful party. Regardless of the outcome of the arbitration, there
shall be but one successful party as determined by the arbitrators.
(f) DETERMINATION OF ARBITRATOR. In rendering the award the
arbitrator shall determine the rights and obligations of the parties
according to the substantive and procedural laws of the State of California.
The award may be limited to a statement that one party pay the other a sum of
money. However, upon the request of a party, the arbitrators' award shall
include findings of fact and conclusions of law. The arbitrators do not
exceed their powers (per California Code of Civil Procedure Section 1286.2 or
1286.6) by committing an error of law or legal reasoning. The decision of the
arbitrators shall be final and unreviewable for errors of law or legal
reasoning of any kind. The arbitrators shall have the power to grant all
legal and equitable remedies and award compensatory damages provided by
California law, including punitive damages, with respect to the disputes
covered by these arbitration provisions.
Initials [ILLEGIBLE] Addendum - Page 5 Initials [ILLEGIBLE]
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<PAGE>
NOTICE: BY INITIALLING IN THE SPACE BELOW EACH PARTY IS AGREEING TO HAVE
ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF
DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY
CALIFORNIA LAW AND IS GIVING UP ANY RIGHTS SUCH PARTY MIGHT POSSESS TO
HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALLING IN
THE SPACE BELOW EACH PARTY IS GIVING UP ITS JUDICIAL RIGHTS TO DISCOVERY
AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE
"ARBITRATION OF DISPUTES" PROVISION. IF A PARTY REFUSES TO SUBMIT TO
ARBITRATION AFTER AGREEING TO THIS PROVISION, SUCH PARTY MAY BE COMPELLED
TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL
PROCEDURE. EACH PARTY'S AGREEMENT TO THE ARBITRATION PROVISION IS
VOLUNTARY.
THE UNDERSIGNED PARTIES HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE
TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE
"ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION.
Lessor: [ILLEGIBLE] Lessee: [ILLEGIBLE]
--------------- --------------
52. CONDITIONS OF LEASE. In addition to any other conditions contained
in this Lease, Lessor's obligations under this Lease are specifically
conditioned upon (i) its ability to enter into an agreement with the Existing
Tenant, in a form acceptable to Lessor in its sole discretion, to terminate
the Existing Tenant's lease (the Existing Tenant has previously vacated the
Premises), (ii) Lessor's approval of the financial condition, including a
recent financial statement, of Alex Sandel (who will be executing a Guaranty
of this Lease covering damages not to exceed $120,000.00), (iii) the
execution by Alex Sandel of such Guaranty of Lease, and (iv) Lessee providing
Lessor with a Certificate of Secretary and Incumbency Certificate indicating
the authorization by the Board of Directors of Lessee to enter into this
Lease and the authority of the person executing the same.
53. ADA DISCLOSURE. Lessor hereby advises Lessee that a tenant of real
property may be subject to the ADA. Among other requirements of the ADA that
could apply to the Premises, Title III of the ADA requires tenants of "public
accommodations" to remove barriers to access by disabled persons and provide
auxiliary aids and services for hearing, vision or speech impaired persons.
The regulations under Title III of the ADA are codified at 28 CFR Part 36.
The Brokers have recommended that Lessee and Lessee's attorneys, engineers
and/or architects review the ADA and the regulations, to determine if and how
the ADA may apply to Lessee after the Commencement Date, and the nature of
the requirements.
54. DRIVEWAY EASEMENT. Lessee acknowledges and agrees that (i) its right
to use the western driveway is nonexclusive and occupants of the contiguous
building thereto have the same nonexclusive rights and (ii) the easement for
said driveway prohibits Lessee from constructing any fence or wall, or
otherwise doing any act, which in any way may restrict or block the use of
said driveway by the neighboring property occupants.
55. FLOOR WEIGHT LIMITS. Lessee hereby acknowledges and agrees that (i)
the designed weight limit of the main and mezzanine floors are eight hundred
(800) pounds per square foot and one hundred twenty-five (125) pounds per
square foot, respectively and (ii) Lessee shall not use the Premises in any
way which would allow these limits to be exceeded.
56. FAX SIGNATURE OF HOWARD ROSEN. The parties acknowledge that Howard
Rosen, the signator for one of the trusts composing Lessor, is currently in
Alaska and will not return to Los Angeles until about September 1, 1994.
Accordingly, this Lease shall be effective as to Howard Rosen's execution if
he signs the signature page only by facsimile transmission. However, Lessor
agrees that upon his return, Howard Rosen will initial where required and
sign all signature copies of this Lease.
Initials [ILLEGIBLE] Addendum - Page 6 Initials [ILLEGIBLE]
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<PAGE>
INDUSTRIAL REAL ESTATE LEASE - EXHIBIT "A"
DESCRIPTION OF PROPERTY
Property Address: 25136 West Anza Drive, Santa Clarita, CA 91355
Legal Description: Parcel A: Parcel 18 in the County of Los Angeles,
State of California, as shown upon Parcel Map No.
12009 filed in Book 182 Pages 47 to 54 inclusive of
Parcel Maps, in the office of the County Recorder of
said County.
Parcel B: A non-exclusive easement for purposes of
ingress and egress over the easterly 13 feet of
Parcel 17 of said Parcel Map No. 12009, filed in Book
182 pages 47 to 54 inclusive of Parcel Maps,
extending from the most northerly terminus of the
easterly line of said Parcel 17 a distance of 356.00
feet in a southerly direction.
[GRAPHIC]
Initials [ILLEGIBLE] Exhibit "A" Initials [ILLEGIBLE]
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<PAGE>
[STAMP]
VALENCIA INDUSTRIAL CENTER
--------------------------
DECLARATION OF COVENANTS, CONDITIONS, AND RESTRICTIONS
------------------------------------------------------
PREAMBLE
--------
This DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS is made and
entered into as of this 11 day of July, 1985, by VALENCIA COMPANY, a division
of The Newhall Land and Farming Company (a California Limited Partnership),
as owner of that certain real property located in the County of Los Angeles,
State of California, as more particularly described in Exhibit "A" attached
hereto and incorporated herein by this reference.
The real property described in Exhibit "A" is a part of a larger
land area owned by VALENCIA COMPANY, which is being developed as a
planned community, named Valencia. The real property which is the subject
of this DECLARATION OF COVENANTS, CONDITIONS, AND RESTRICTIONS is known
as VALENCIA INDUSTRIAL CENTER.
VALENCIA INDUSTRIAL CENTER is being developed as a planned
industrial complex which will provide employment opportunities for the
residents of Los Angeles County and the surrounding areas. VALENCIA
COMPANY intends that the design and development as well as the continuing
use and operation of the
EXHIBIT "B"
<PAGE>
real property subject to this DECLARATION OF COVENANTS, CONDITIONS AND
RESTRICTIONS shall be consistent with the aims and ideals of Valencia. It is
the purpose of this DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS to
provide the means for maintaining and controlling such development and use so
that the design and integrity and amicable environment of Valencia will be
maintained. This DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS, is
designed to compliment local government and municipal regulations and where
conflicts occur, it is intended that the most rigid requirements shall
prevail. It is assumed that the owners and users of industrial sites in the
VALENCIA INDUSTRIAL CENTER will be motivated to preserve these qualities
through mutual cooperation and by enforcing not only the letter but the
spirit of this DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS.
IN WITNESS WHEREOF, VALENCIA COMPANY, has executed this DECLARATION OF
COVENANTS, CONDITIONS AND RESTRICTIONS the day and year first above written.
VALENCIA COMPANY, A division of
The Newhall Land and Farming Company
(a California Limited Partnership),
By /s/ Thomas E. Dierckman
-----------------------------------
Authorized Agent
By /s/ Donald L. Puente
-----------------------------------
Authorized Agent
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<PAGE>
STATE OF CALIFORNIA )
) ss
COUNTY OF LOS ANGELES )
On this 11th Day of July, 1985, before the undersigned a notrary public
in and for the State of California personally appeared Thomas E. Dierckman
and Donald L. Puente, the authorized agents, respectively, of VALENCIA
COMPANY a Division of THE NEWHALL LAND AND FARMING COMPANY (a California
Limited Partnership), personally known to be (or proved to me on the basis of
satisfactory evidence) to be the persons who executed the within instrument
on behalf of VALENCIA COMPANY, the division that executed the within
instrument on behalf of said partnership, and acknowledged to me that
VALENCIA COMPANY executed the same on behalf of said partnership and
acknowledged to me that said VALENCIA COMPANY and said partnership executed
the same pursuant to the Limited Partnership Agreement of said partnership.
WITNESS MY HAND AND OFFICIAL SEAL
[STAMP] /s/ Debbie Landaker
-----------------------------------
NOTARY PUBLIC IN AND FOR SAID STATE
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<PAGE>
ARTICLE I
DEFINITIONS
-----------
Unless the context otherwise specifies or requires, the terms defined in
this Article I shall, for all purposes of this DECLARATION OF COVENANTS,
CONDITIONS AND RESTRICTIONS have the meanings herein specified.
ARCHITECT The term "Architect" shall mean a person holding a
certificate to practice architecture in the State of California under
authority of Division 3, Chapter 3 of the Business and Professions Code of
the State of California, or under such other sections as may hereafter
regulate the practice of architecture in the State of California.
BENEFICIARY The term "Beneficiary" shall mean a mortgagee under a
mortgage, as well as a beneficiary under a deed of trust.
DECLARANT The term "Declarant" shall mean VALENCIA COMPANY, a division
of The Newhall Land and Farming Company (a California Limited Partnership),
and all of its successors, assigns, or designees who shall assume the
obligations provided for herein, and to whom Declarant shall specifically
assign in writing the right to enforce these restrictions provided for herein.
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<PAGE>
DECLARATION The term "Declaration" shall mean this DECLARATION OF
COVENANTS, CONDITIONS, AND RESTRICTIONS.
DEED OF TRUST The term "Deed of Trust" or "Trust Deed" shall mean a
mortgage as well as a deed of trust.
FILE The term "File" shall mean, with reference to any subdivision map,
the filing of said map in the Office of the Recorder of the County of Los
Angeles, State of California.
IMPROVEMENTS The term "Improvements" shall include buildings,
outbuildings, roads, driveways, parking areas, fences, screening walls and
barriers, retaining walls, stairs, decks, hedges, windbreaks, plantings,
planted trees and shrubs, poles, signs, loading areas and all other
structures or landscaping improvements of every type and kind, and any
replacements, additions, repairs or alterations thereto of any kind
whatsoever.
OWNER The term owner shall mean each and every owner of the real
property or any portion thereof or interest therein during the term of its
ownership and each lessee or other occupant in possession thereof as may be
appropriate under the context.
MORTGAGEE The term "Mortgagee" shall mean a beneficiary under, or a
holder of a deed of trust as well as a mortgage.
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<PAGE>
OFFICE BUILDING(S) AND HIGH-TECH BUILDING(S) The Term "Office
Building(s) and High-Tech Buildings(s)" shall mean buildings improved with a
high percentage of offices and/or suites, used primarily for non-warehousing
types of purposes and requiring a substantially greater amount of parking
than building(s) used primarily for warehousing types of purposes.
REAL PROPERTY The Term "Real Property" shall mean all or any portion of
the property subject to the terms and provisions of the Declaration,
including the real property described in Exhibit "A" attached hereto and such
additional property that shall from time to time hereafter become subject to
the Declaration, in accordance with the provisions contained in Section 2.2
hereafter.
RECORD; RECORDED The term "Record" shall mean, with respect to any
document, the recordation of said document in the Office of the County
Recorder of the County of Los Angeles, State of California.
SITE The term "Site" shall mean an area of land shown as one lot on a
recorded subdivision map or so designated in a deed or lease in which
Declarant is the grantor or lessor included within the real property
described in Exhibit A or added thereto pursuant to Article II hereafter. If
an easement or easements over any portion or portions of a Site established
by recorded plan or recorded instrument is or are reserved by
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<PAGE>
Declarant for any purpose whatsoever, the area of such portion or portions
shall be included in computing the area of that Site. If subsequent to the
establishment of a Site by recorded plan or recorded instrument, any portion
or portions thereof are, for railroad, street, highway, utility or public
purpose, taken by right of eminent domain, or deed in lieu thereof, or
dedicated or conveyed pursuant to reservation by Declarant, the area of such
portion or portions shall continue to be included thereafter in computing the
area of that Site.
SUBDIVISION The term "Subdivision" shall mean the division of any Site
or Sites of improved or unimproved property, or any portion thereof, shown on
the latest equalized county assessment roll as a unit or as contiguous units,
for the purpose of sale, lease, or financing whether immediate or future, in
accordance with the terms and provisions of the Subdivision Map Act contained
in Section 66410 et seq of the California Government Code, and the Los
Angeles County Subdivision Ordinance enacted pursuant thereto.
VISIBLE FROM NEIGHBORING SITES The term "Visible from Neighboring Sites"
shall mean, with respect to any given object, that such object is or would be
visible to a person six feet tall, standing on any part of such neighboring
Sites at an elevation no greater than the elevation of the base of the object
being viewed.
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<PAGE>
VALENCIA INDUSTRIAL CENTER The term "Valencia Industrial Center" shall
mean all of the real property now or hereafter made subject to the
DECLARATION.
VALENCIA INDUSTRIAL CENTER RESTRICTIONS The term "Valencia Industrial
Center Restrictions" shall mean the covenants, conditions, and restrictions
set forth in this DECLARATION, as it may from time to time be amended and
supplemented.
ARTICLE II
PROPERTY SUBJECT TO THE VALENCIA INDUSTRIAL CENTER RESTRICTIONS
SECTION 2.1 GENERAL DECLARATION CREATING VALENCIA
INDUSTRIAL CENTER
DECLARANT hereby declares that all of the real property located in the
County of Los Angeles, State of California, described in Exhibit A, which is
attached hereto and incorporated herein by this reference, is and shall be,
conveyed, hypothecated, encumbered, leased, occupied, built upon or otherwise
used, improved or transferred in whole or in part subject to the VALENCIA
INDUSTRIAL CENTER RESTRICTIONS, meaning the covenants conditions and
restrictions set forth in this DECLARATION. All of said covenants, conditions
and restrictions are declared and agreed to be in furtherance of a general
plan
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<PAGE>
for the subdivision, improvement and sale of said real property and are
established for the purpose of enhancing and perfecting the value,
desirability and attractiveness of said real property and every part thereof.
ALL OF THE VALENCIA INDUSTRIAL CENTER RESTRICTIONS SHALL RUN WITH ALL OF SAID
REAL PROPERTY FOR ALL PURPOSES AND SHALL BE BINDING UPON AND INURE TO THE
BENEFIT OF DECLARANT AND ALL OWNERS, LESSEES, LICENSEES, OCCUPANTS AND THEIR
SUCCESSORS IN INTEREST AS SET FORTH IN THIS DECLARATION.
SECTION 2.2 ADDITION OF OTHER PROPERTY OWNED BY DECLARANT
A. DECLARANT'S POWER Declarant may at any time during the pendency of
this DECLARATION add all or any portion of any property now or hereafter
owned by DECLARANT to the real property which is covered by this DECLARATION,
AND UPON RECORDING OF A NOTICE OF ADDITION OF PROPERTY CONTAINING AT LEAST
THE PROVISIONS SET FORTH IN SECTION 2.2B OF THIS ARTICLE II, THE PROVISIONS
OF THIS DECLARATION specified in said notice shall apply to such added
property in the same manner as if it were originally covered by this
DECLARATION. Thereafter, to the extent this DECLARATION is made applicable
thereto, the rights, powers and responsibilities of DECLARANT and the owners,
lessees, licensees and occupants of Sites within such added property shall be
the same as in the case of the real property described in Exhibit "A".
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<PAGE>
B NOTICE OF ADDITION OF PROPERTY The notice of addition of real
property referred to in Section 2.2A above shall contain at least the
following provisions:
1. A reference to this DECLARATION stating the date of recording
hereof and the book or books of the records of Los Angeles County,
California, and the page numbers where this DECLARATION is recorded;
2. A statement that the provisions of this DECLARATION, or some
specified part thereof, shall apply to such added property;
3. An exact description of such added property; and
4. Such other or different covenants, conditions and
restrictions as DECLARANT shall, in its discretion, specify to regulate and
control the use, occupancy and improvement of such added property.
SECTION 2.3 SUBDIVISION OF SITES
There shall be no subdivision of any Site subject to the Valencia
Industrial Center Restrictions without the prior written consent of Declarant
which consent Declarant may withhold for any reason Declarant in its sole
discretion deems reasonable. In addition, further subdivision or division of
any Site shall not
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<PAGE>
serve to make the parts into which such Site is subdivided themselves Sites
for the purpose hereof in such instances where the prior written approval of
the DECLARANT has not been received. The restrictions contained in the
Valencia Industrial Center Restrictions shall, in such events, remain
applicable to the entire Site as originally defined for the duration hereof.
ARTICLE III
REGULATION OF IMPROVEMENTS
--------------------------
SECTION 3.1 APPROVAL OF PLANS
-----------------
No Improvements of any nature whatsoever (including but not limited to
any alteration or addition to any Improvements existing from time to time)
shall be constructed, erected, placed, altered, maintained or permitted to
remain on any Site subject to this DECLARATION until final plans and
specifications showing the plot layout, all ingress and egress for persons
and vehicles, all vehicle parking, all exterior elevations with materials and
colors therefor, exterior signs; exterior hardscape, landscape, and
irrigation, walls and fences, shall have first been submitted to and approved
in writing by DECLARANT. Such final plans and specifications shall be
submitted in writing in duplicate over the authorized signature of the owner,
lessee, licensee or other occupant of the Site or
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<PAGE>
his authorized agent. Under no circumstances shall the DECLARANT approve
metal-clad buildings of any type or design. All roof equipment including but
not limited to heating, air-conditioning and ventilation equipment, antennas
and communication equipment shall be so located or screened so as not to be
visible from neighboring sites and or adjacent streets. Changes in approved
plans which materially affect building size, placement or external appearance
shall similarly be submitted to and approved by DECLARANT.
SECTION 3.2 BASIS FOR APPROVAL
------------------
Architectual Guidelines as may be amended from time to time to
assist in the design and development of an individual Site within Valencia
Industrial Center shall be made available from Declarant. Approval by
Declarant of Plans and Specifications shall be based, among other things on
Site plot plan dimensions, landscaped areas, and building design in
conformity and harmony of external design with neighboring structures; effect
of location and use of proposed improvements on neighboring Sites; the nature
of improvements on neighboring Sites and the types of operations and uses
thereof; relation of topography, grade and finish ground elevation of the
Site being approved to that of neighboring Sites; proper facing of main
elevation with respect to nearby streets and conformity of the plans and
specifications to the purpose and general plan and
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<PAGE>
intent of this DECLARANTION. DECLARANT shall not arbitrarily or unreasonably
withhold its approval of such plans and specifications.
SECTION 3.3 RESULT OF INACTION
If DECLARANT fails either to approve or disapprove such plans and
specifications within thirty (30) days after the same have been submitted to
it, it shall be conclusively presumed that DECLARANT has approved said plans
and specifications; provided, however, that if within said thirty (30) day
period, DECLARANT gives written notice of the fact that a reasonable
additional period is required for the approval of such plans and
specifications, there shall be no presumption that the same are approved
until the expiration of the extended period set forth in said notice.
SECTION 3.4 PROCEEDING WITH WORK
Upon receipt of approval of plans and specifications from DECLARANT
pursuant to this section, the owner or lessee to whom the same is given
shall, as soon as practicable, satisfy all conditions thereof and diligently
proceed with the commencement and completion of all approved construction,
refinishing, alterations and excavations. In all cases work shall be
commenced within one year from the date of such approval. If there is a
failure to comply with this paragraph, then the approval given
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<PAGE>
pursuant to this section shall be deemed revoked unless DECLARANT upon
request made prior to the expiration of said one year period extends the time
for commencing work.
SECTION 3.5 COMPLETION OF WORK
In any event completion, reconstruction, refinishing or alteration of
any such improvement shall be within two years after the commencement thereof
except for so long as such completion is rendered impossible or would result
in great hardship due to strikes, fires, national emergencies, natural
calamities or other supervening forces beyond the control of the owner,
lessee, licensee or occupant or his agents and of a non-financial nature.
Failure to comply with this paragraph shall constitute a breach of the
VALENCIA INDUSTRIAL CENTER RESTRICTIONS and subject the defaulting party or
parties to all enforcement procedures set forth in this DECLARATION and any
other remedies provided by law or in equity.
SECTION 3.6 ESTOPPEL CERTIFICATE
Within thirty (30) days after written demand is delivered to the
DECLARANT and upon payment of a reasonable fee established
by DECLARANT, there shall be recorded an estoppel certificate executed by
DECLARANT and certifying that as of the date thereof either (a) all
improvements made or other work done on or within a Site complies with the
VALENCIA INDUSTRIAL CENTER
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<PAGE>
RESTRICTIONS or (b) such improvements or work do not so comply in which event
the certificate shall identify the non-complying improvements or work and set
forth with particularity the cause or causes for such non-compliance. Any
lessee, purchaser or encumbrancer in good faith for value shall be entitled
to rely on said certificate with respect to the matters set forth therein,
such matters being conclusive as between the DECLARANT and all such
subsequent parties in interest.
SECTION 3.7 LIABILITY
DECLARANT shall not be liable for any damage, loss or prejudice
suffered or claimed on account of (a) the approval or disapproval of any
plans, drawings and specifications whether or not defective; (b) the
construction or performance of any work whether or not pursuant to approved
plans, drawings and specifications; (c) the development of any Site within
the VALENCIA INDUSTRIAL CENTER; or (d) the execution and filing of an
estoppel certificate pursuant to the preceding paragraph whether or not the
facts therein are correct, provided that DECLARANT has acted in good faith.
In addition to the foregoing, Declarant makes no representation, warranty or
guarantee of any kind whatsoever as to the propriety, feasibility or
integrity of any plans, drawings and specifications approved by Declarant
pursuant to the provisions contained herein.
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<PAGE>
SECTION 3.8 REVIEW FEE
A reasonable architectural review fee shall be paid to DECLARANT at
such time as plans and specifications are submitted to it for approval. The
determination of the exact amount of such fee shall be made from time to time
by Declarant.
ARTICLE IV
LIMITATIONS ON IMPROVEMENTS
SECTION 4.1 MINIMUM SETBACK LINES AND BUILDING TYPES
No building or parking (except as expressly provided for in Sections
4.2 and 4.3 below) shall be maintained upon any Site within forty (40) feet
of any street, and no building shall be maintained within fifteen (15) feet
of the property line of any other Site, nor have exterior walls constructed
of other than substantial construction including concrete and masonry, nor
shall more than fifty percent (50%) of the area of any Site be built upon;
nor shall any building be constructed upon any Site with a roof having a
difference in elevation of more than two (2) feet unless approved in the
manner hereinafter provided.
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<PAGE>
SECTION 4.2 OFFICE BUILDING(S) AND "HIGH TECH" BUILDING(S)
Notwithstanding anything to the contrary contained in Section 4.1 above,
any office building(s) and "high-tech" building(s) requiring a greater
parking ratio than standard industrial buildings and whose location on the
Site has a substantial setback from the street, may request a variance of the
parking restriction within the forty (40') feet setback area from any street,
provided a minimum of twenty-five (25') feet from the street curb is mounded
or bermed to a height of not less than four (4') feet and landscaped so as to
assure that all automobile parking within the forty (40') feet setback area
is hidden from view from the street. Similarly, owners of Sites bordering
dedicated streets on two sides may likewise request a variance of the forty
(40') feet setback area on one street frontage (that being the street away
from the building(s) or improvement(s) front) provided a minimum of
twenty-five (25') feet from the street curb is mounded or bermed to a height
of not less than four (4') feet and landscaped so as to assure that all
automobile parking within the forty (40') feet setback area is hidden from
view from the street. Nothing indicated herein shall be construed so to
permit the granting of a variance providing for a landscaped setback area of
less than twenty-five (25') feet within the Valencia Industrial Center.
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<PAGE>
SECTION 4.3 USE OF SETBACK AREAS
Within the required setback area from streets there shall be maintained
on each Site only paved walkways, paved driveways (hardscape), and lawns and
landscaping, with the surface of each Site not covered by improvements being
at all times maintained so as to be dust free. At least two-thirds (2/3) of
the surface of the required setback area from streets shall be maintained in
landscaping.
SECTION 4.4 LANDSCAPING
Every Site on which a building shall have been placed shall have
landscape and exterior hardscape constructed in accordance with plans and
specifications submitted to and approved by DECLARANT pursuant to Section 3.1
above. With the exception of those areas planted in shrubs or trees, the
landscaped areas shall be maintained in grass lawn or approved ground cover.
Landscaping and hardscape as approved by DECLARANT shall be installed within
thirty (30) days of occupancy or completion of the building, whichever occurs
first, unless DECLARANT approved in writing another completion date. After
completion such landscaping and hardscape shall at all times be maintained in
an attractive and well-kept condition.
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<PAGE>
SECTION 4.5 DRAINAGE
No water shall be drained or discharged from any Site or Improvements
thereon, and no Owner shall interfere with the drainage established as of the
date of this Declaration, in or over the remainder of the real property or
any other property adjacent to such Site, except in accordance with plans
therefor approved by all public agencies having jurisdiction; provided that
no water shall be drained or discharged at any time onto or diverted from any
adjacent properties owned by Declarant.
SECTION 4.6 SIGNS
A. No signs projecting above the highest point on the roof line of
any building or employing letters exceeding four (4) feet in height shall be
used. No more than two business identification signs shall be used on any
Site and no signs shall be painted on any structure. No flashing or moving
lights shall be used.
B. No signs shall be permitted other than those identifying the
name, business and products of the person or firm occupying the premises
constructed on any Site and those offering the premises for sale or for
lease. The size and style of sale or lease signs shall first be approved by
DECLARANT in writing. No more than one sign relating to the sale or leasing
of the Site
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<PAGE>
may be used, and such sign shall not exceed fifteen (15) square feet.
Monument signs identifying each building shall be encouraged however, the
design, colors, materials and size shall first be approved by DECLARANT.
C. Notwithstanding anything to the contrary contained in this
Section 4.6, multi-tenant buildings shall be permitted one Tenant Directory
Sign for each building. Said sign shall not exceed twelve (12) square feet
and shall be approved by DECLARANT in writing as to design, color, and
location of the sign on each Site.
D. The location of all signs shall first be approved by DECLARANT.
E. Signs and identifying markings on buildings or building Sites
shall only be of such size, design and color as is first specifically
approved by DECLARANT in writing.
SECTION 4.7 PARKING AREAS
Adequate off-street parking shall at all times be provided to
accommodate all parking needs for employee, visitor and company vehicles on
the Site. The intent of this provision is to eliminate the need for any
on-street parking. No use shall be made of any Site at anytime which will
attract parking in excess of the parking spaces then available thereon.
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<PAGE>
SECTION 4.8 STORAGE AND LOADING AREAS
A. Unless specifically approved by DECLARANT in writing, no
materials, supplies or equipment, including company-owned or operated trucks,
mobile homes, boats, trailers, or recreation vehicles, shall at any time be
stored in any area on a Site except inside a closed building, or behind a
visual barrier screening such areas so that they are not visible from the
neighboring Sites or public streets. Visual barrier screening to a height of
not more than eight (8) feet shall be permitted only with the prior written
approval of DECLARANT.
B. Loading areas shall not encroach into setback areas.
C. Loading docks shall be set back and screened to minimize the
effect of their appearance from the street and so as not be visible from
neighboring Sites. Docks shall not be closer than seventy (70) feet to the
street property line, unless specifically approved by DECLARANT in writing.
Loading whall be permitted to the rear of the setback line from that portion
of a structure not fronting a street.
SECTION 4.9 FENCING AND SCREENING OF STORAGE AREAS
All areas requiring fencing shall be enclosed with a minimum six foot
(6') high and maximum eight foot (8') high masonry wall, such as slumpstone,
split face block wall with cap
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or brick. Chain link fence shall be prohibited throughout the VALENCIA
INDUSTRIAL CENTER. Gate construction shall be of wrought iron or other
materials first approved by DECLARANT.
SECTION 4.10 SCREENING - TRASH AREAS
All trash areas shall be enclosed with a minimum six foot (6') high
masonry wall, such as slumpstone, split face block wall with cap, or brick.
All trash enclosures shall have blinds or gates. Chainlink gates shall only
be permitted if faced with wooden slats so as to obscure view of trash
containers. No trash containers or bins shall be maintained on any Site
unless contained within a masonry trash enclosure.
ARTICLE V
REGULATION OF OPERATIONS AND USES
SECTION 5.1 PERMITTED USES
Each Site shall only be used for manufacturing, processing, storage,
wholesale, office, laboratory, professional, research and development
activities and/or other like uses which are permitted by the applicable
zoning designation; No junk or salvage yard or any other use offensive to the
neighborhood by reason of odor, fumes, dust, smoke, noise, or pollution or
hazardous by reason of danger of fire or explosion, radiation,
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electro-magnetic disturbances, toxic or non-toxic matter shall be permitted
regardless of whether or not permitted by applicable zoning laws or
ordinances.
SECTION 5.2 RESTRICTIONS AND PROHIBITED USES
A. PROHIBITED USES The following are examples of operations and
uses which shall specifically not be permitted on any Site subject to the
Valencia Industrial Center Restrictions
1. Residential
2. Commercial
3. Restaurants of all types
4. Trailer Courts
5. Labor Camps
6. Junk Yards
7. Drilling for and/or the removal of oil, gas or other
hydrocarbon substances (except that this provision shall not be deemed to
prohibit the entry of subject property below a depth of 500 feet for such
purposes)
8. Commercial excavation of building or construction materials
9. Distillation of bones
10. Dumping, disposal, incineration or reduction of garbage,
sewage, offal, dead animals or refuse
11. Fat Rendering
12. Stockyard or Slaughter of Animals
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13. Refining of Petroleum or of its Products
14. Smelting of Iron, Tin, Zinc or other Ores
15. Cemetaries
16. Jail or Honor Farms
17. Any and all operations and uses not compatible or harmonious
with the establishment and maintenance of a high quality industrial park.
B. NUISANCES No rubbish or debris of any kind shall be placed or
permitted to accumulate upon or adjacent to any Site, and no odors shall be
permitted to arise therefrom so as to render any Site or portion thereof
unsanitary, unsightly, offensive or detrimental to any Site or property in
the vicinity thereof or to the occupants thereof. No nuisance shall be
permitted to exist or operate upon any Site so as to be offensive or
detrimental to any property in the vicinity thereof or to its occupants.
C. MAINTENANCE AND REPAIRS OF IMPROVEMENTS Each Site and all
Improvements thereon shall at all times be constructed, kept and maintained
in first class condition, repair and appearance similar to that maintained by
DECLARANT and other owners of high-class properties of similar class and
construction in Los Angeles County, ordinary wear and tear excepted. All
repairs, alterations, replacements, or additions to Improvements shall be at
least equal to the original work in class and quality. The
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necessity and adequacy of such repairs shall be measured by the same standard
as set forth above for the original construction and maintenance. Each owner
shall also be responsible at all times for determining that all Improvements
and the plans and specifications therefor shall conform and comply in all
respects with the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, all other
restrictions of record, all applicable governmental regulations, and all
exterior architectural design, location and color specifications as may be
approved by DECLARANT. Each Owner shall also adopt and maintain such
standards of property space maintenance, appearance, and housekeeping as
shall be reasonable and customary for similar operations or enterprises and
shall enforce compliance with such standards by all tenants, occupants, or
users of space. On request, DECLARANT shall be entitled receive copies of all
such standards or similar rules or regulations in effect from time to time.
Notwithstanding anything to the contrary contained in the foregoing all
exterior surfaces shall be maintained in first-class condition and shall be
repainted at least once in every four (4) years.
D. MAINTENANCE OF UNIMPROVED SITES. Each and every Site shall be
maintained at all times in a weed-free, clean, and presentable condition
prior to such Site being improved with buildings and landscaping.
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E. RIGHT OF ENTRY During reasonable hours, and subject to
reasonable security requirements, DECLARANT, or its authorized
representatives, shall have the right to enter upon and inspect any Site and
the improvements thereon embraced for the purpose of ascertaining whether or
not the provisions of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS have been
or are presently being complied with and shall not be deemed guilty of
trespass by reason of such entry.
SECTION 5.3 OTHER OPERATIONS AND USES
Operations and uses which are neither specifically prohibited nor
specifically authorized by the VALENCIA INDUSTRIAL CENTER RESTRICTIONS shall
be permitted in a specific case only if operational plans and specifications
are first submitted to and approved in writing by DECLARANT. Approval or
disapproval of such operational plans and specifications shall be based upon
the effect of such operations or uses on other Sites subject to these
restrictions or upon the occupants thereof, but shall be in the sole
discretion of DECLARANT.
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ARTICLE VI
DURATION, MODIFICATION AND REPEAL
SECTION 6.1 DURATION OF RESTRICTIONS
The VALENCIA INDUSTRIAL CENTER RESTRICTIONS shall continue and
remain in full force and effect at all times with respect to all Sites
included in the VALENCIA INDUSTRIAL CENTER and each part thereof, now or
hereafter made subject thereto (subject, however, to the right to amend and
repeal as provided for herein) until January 1, 2015. However, unless within
one year prior to January 1, 2015, there shall be recorded an instrument
directing the termination of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS
signed by owners of not less than two-thirds of the area of the real property
then subject to the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, (based on the
number of square feet of real property subject to the VALENCIA INDUSTRIAL
CENTER RESTRICTIONS), the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, as in
effect immediately prior to the expiration date shall be continued
automatically without any further notice for an additional period of ten (10)
years and thereafter for successive periods of ten (10) years unless within
one (1) year prior to the expiration of any such period the VALENCIA
INDUSTRIAL CENTER RESTRICTIONS are terminated as set forth above in this
Section.
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SECTION 6.2 TERMINATION AND MODIFICATION
This DECLARATION, or any provision hereof, or any covenant, condition or
restriction contained herein, may be terminated, extended, modified or
amended, as to the whole of the real property or any portion thereof, with
the written consent of the owners of seventy-five percent (75%) of the area
of the real property subject to the VALENCIA INDUSTRIAL CENTER RESTRICTIONS,
based on the number of square feet of real property owned as compared to the
total number of square feet of real property subject to the VALENCIA
INDUSTRIAL CENTER RESTRICTIONS, provided, however, that so long as DECLARANT
owns at least twenty-five percent (25%) of the real property subject to the
VALENCIA INDUSTRIAL CENTER RESTRICTIONS, or for a period of fifteen (15)
years from the effective date hereof, whichever period is longer, no such
termination, extension, modification or amendment shall be effective without
the written approval of DECLARANT thereto. No such termination, extension,
modification or amendment shall be effective until a proper instrument in
writing has been executed and acknowledged and recorded in the County where
the real property affected thereby is situated.
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ARTICLE VII
ENFORCEMENT
SECTION 7.1 ABATEMENT AND SUIT
The conditions, convenants, restrictions and reservations
herein contained shall run with the real property, and shall be binding
upon and inure to the benefit of the DECLARANT, and the Owners of every Site
on the real property. These conditions, convenants, reservations and
restrictions may be enforced as provided hereinafter by DECLARANT acting for
itself or as DECLARANT acting as trustee, on behalf of all of the Owners of
Sites. Each Owner by acquiring an interest in a Site shall appoint
irrevocably the DECLARANT as its attorney-in-fact for such purposes;
provided, however that if an Owner of a Site notifies DECLARANT of a claimed
violation of these conditions, convenants, restrictions and reservations in
writing and DECLARANT fails to act within sixty (60) days after receipt of
such notification, then, and in that event only, an Owner may separately, at
its own cost and expense, enforce the conditions, covenants, restrictions and
reservations herein contained and have all of the remedies provided for in
Section 7.2 hereafter.
SECTION 7.2 DEFAULT AND REMEDIES
In the event of any breach, violation of failure to perform or
satisfy any of the VALENCIA INDISTRIAL CENTER
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RESTRICTIONS which has not been cured within thirty (30) days after written
notice from DECLARANT to do so, DECLARANT in its sole option and discretion
may enforce any one or more of the following remedies or any other rights or
remedies to which DECLARANT may be entitled by law or equity, whether or not
set forth herein. All remedies provided for herein or by law or in equity
shall be cumulative and not mutually exclusive.
A. DAMAGES DECLARANT may bring a suit for damages for any
compensable breach of or noncompliance with any of the VALENCIA INDUSTRIAL
CENTER RESTRICTIONS, or declaratory relief to determine the enforceability of
any of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS.
B. EQUITY It is recognized that a violation by an Owner of one or
more of the foregoing restrictions may cause DECLARANT to suffer material
injury or damage not compensable in money and that DECLARANT shall be
entitled to bring an action in equity or otherwise for specific performance
to enforce compliance with the VALENCIA INDUSTRIAL CENTER RESTRICTIONS or an
injunction to enjoin the continuance of any such breach or violation thereof.
C. ABATEMENT AND LIEN RIGHTS Any such breach or violation of the
VALENCIA INDUSTRIAL CENTER RESTRICTIONS or any provision hereof is hereby
declared to be a nuisance, and DECLARANT shall be entitled to enter the Site
or any portion
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thereof as to which the breach or violation exists and summarily abate and
remove, without further legal process to the maximum extent permitted by law,
any structure, thing or condition that may exist in violation of any of the
VALENCIA INDUSTRIAL CENTER RESTRICTIONS, or to prosecute any remedy allowed
by law or equity for the abatement of such nuisance against any person or
entity acting or failing to act in violation of the VALENCIA INDUSTRIAL
CENTER RESTRICTIONS, all at the sole cost and expense of Owner or any person
having possession under Owner. Any costs or expenses paid or incurred by
DECLARANT in abating such nuisance or prosecuting any such remedy (including
all reasonable attorneys' fees and costs of collection), together with
interest thereon at the maximum rate permitted by law shall be a charge
against the Site or any portion thereof as to which the breach or violation
exists, shall be a continuing lien thereon until paid, and shall also be the
personal obligation of that person or entity who was Owner when such charges
became due and committed such breach or violation. In addition to any other
rights or remedies hereunder, DECLARANT may deliver to Owner and record with
the Los Angeles County Recorder a certificate or notice of claim of lien
(which, among other things, may but need not recite the nature of the
violation, the legal description of the Site or portion thereof affected by
such violation, the record or reputed Owner thereof, DECLARANT'S name and
address, and the remedies being pursued or the amount of any such claim being
changed). If the
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violation recited in such lien claim has not been cured to DECLARANT'S
satisfaction and any recited amounts so charged have not been paid within 30
days thereafter, DECLARANT or DECLARANT'S authorized representatives may
foreclose such lien by a sale conducted pursuant to Sections 2924, 2924b, and
2924c of the California Civil Code, as amended from time to time, or such
other statutes applicable to the exercise of powers of sale in mortgages or
deeds of trust, or in any other manner permitted by law. DECLARANT, through
its authorized representatives, may bid on and acquire any Site or portion
thereof subject to such lien at any such foreclosure sale. If the violations
recited in such lien claim are timely cured and any recited amounts timely
paid as provided above, an appropriate release of such lien shall be recorded
by DECLARANT at Owner's sole cost and expense.
SECTION 7.3 WAIVER
No waiver by DECLARANT of a breach of any of the VALENCIA INDUSTRIAL
CENTER RESTRICTIONS and no delay or failure to enforce any of the VALENCIA
INDUSTRIAL CENTER RESTRICTIONS shall be construed or held to be a waiver of
any succeeding or preceding breach of the same or any other of the VALENCIA
INDUSTRIAL CENTER RESTRICTIONS by that Owner or any other Owner of the Site,
or any other Site. No waiver by DECLARANT of and breach or default hereunder
shall be implied from any omission by DECLARANT to take any action on account
of such breach or default
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if such breach or default persists or is repeated, and no express waiver
shall affect a breach or default other than as specified in said waiver. The
consent or approval by DECLARANT to or of any act by an Owner requiring
DECLARANT'S consent or approval shall not be deemed to waive or render
unnecessary DECLARANT'S consent or approval to or of any subsequent similar
acts by Owner.
SECTION 7.4 COSTS OF ENFORCEMENT
In the event any legal or equitable action or proceeding shall be
instituted to enforce any provision of the VALENCIA INDUSTRIAL CENTER
RESTRICTIONS, the party prevailing in such action shall be entitled to
recover from the losing party all of its costs, including court costs and
reasonable attorney's fees.
SECTION 7.5 RIGHTS OF LENDERS
No breach or violation of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS
shall defeat or render invalid the lien of any mortgage, deed of trust or
similar instrument securing a loan made in good faith and for value with
respect to the development or permanent financing of and Site or portion
thereof; provided, however, all of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS
shall be binding upon and effective against any subsequent Owner of the Site
or any portion thereof whose title is acquired by foreclosure, trustee's sale,
deed in lieu of foreclosure or
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otherwise pursuant to such lien rights, but such subsequent Owner shall take
title free and clear of any violations of the VALENCIA INDUSTRIAL CENTER
RESTRICTIONS occurring prior to such transfer of title.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
SECTION 8.1 ASSIGNMENT OF RIGHTS AND DUTIES Any and all of the rights,
powers and reservations of DECLARANT herein contained may be assigned to any
person, corporation or association which will assume the duties of DECLARANT
pertaining to the particular rights, powers and reservations assigned, and
upon any such person, corporation or association's evidencing its consent in
writing to accept such assignment and assume such duties, he or it shall, to
the extent of such assignment, have the same rights and powers and be subject
to the same obligations and duties as are given to and assumed by DECLARANT
herein. The term DECLARANT as used herein includes all such assignees and
their heirs, successors and assigns. If at any time DECLARANT ceases to exist
and has not made such an assignment, a successor DECLARANT may be appointed
in the same manner as the VALENCIA INDUSTRIAL CENTER RESTRICTIONS may be
terminated, extended, modified or amended under Section 6.2 of Article VI. Any
assignment or appointment made under this section shall be in record-
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able form and shall be recorded in the County where the real property
affected is situated.
SECTION 8.2 CONSTRUCTIVE NOTICE AND ACCEPTANCE
Every person or other entity who now or hereafter owns or acquires any
right, title or interest in or to any portion of the real property made
subject to the VALENCIA INDUSTRIAL CENTER RESTRICTIONS is and shall be
conclusively deemed to have consented and agreed to every covenant, condition
and restriction contained herein, whether or not any reference to this
DECLARATION is contained in the instrument by which such person or entity
acquired an interest in said real property.
SECTION 8.3 WAIVER
Neither DECLARANT nor its successors or assigns shall be liable to any
owner, lessee, licensee, or occupant of a Site or of any portion of the real
property subject to the VALENCIA INDUSTRIAL CENTER RESTRICTIONS by reason of
any mistake in judgment, negligence, nonfeasance, action or inaction or for
the enforcement or failure to enforce any provision of this DECLARATION.
Every owner, lessee, licensee or occupant of any of Sites or any portion of
the real property by acquiring his interest therein agrees that he will not
bring any action or suit against DECLARANT to recover any such damages or to
seek equitable relief.
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SECTION 8.4 MUTUALITY, RECIPROCITY: RUNS WITH LAND
All covenants, conditions, restrictions and agreements contained herein
are made for the direct, mutual and reciprocal benefit of each and every Site
and portion of the real property now or hereafter made subject to this
DECLARATION; shall create mutual, equitable servitudes upon each Site and
portion of the real property in favor of every other Site and portion of the
real property; shall create reciprocal rights and obligations between the
respective owners of all Sites and portions of the real property and privity
of contract and estate between all grantees of said Sites and portions of the
real property, their heirs, successors and assigns; and shall, as to the
owner of each Site and portions of the real property, his heirs, successors
and assigns, operate as covenants running with the land, for the benefit of
all other Sites and portion of the real property.
SECTION 8.5 NOTICES
All notices, consents, requests, demands and other communications
provided for herein shall be in writing and shall be deemed to have been duly
given if and when personally served or 24 hours after being sent by United
States registered or certified mail, return receipt requested, postage
prepaid, to the intended party at its last known address.
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SECTION 8.6 PARAGRAPH HEADINGS
Paragraph headings, where used herein, are inserted for convenience only
and are not intended to be a part of this DECLARATION or in any way to
define, limit or describe the scope and intent of the particular paragraphs
to which they refer.
SECTION 8.7 EFFECT OF INVALIDATION
If any provision of this DECLARATION is held to be invalid by any court,
the invalidity of such provision shall not affect the validity of the
remaining provisions hereof.
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PERMITTED USES - HAZARDOUS SUBSTANCES
1. Not more than 10 gallons of 9% caustic soda solution.
2. Not more than 5 gallons of 3% hydrochloric acid solution.
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INITIAL INITIAL
HERE EXHIBIT "C" HERE
NR JJ
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<PAGE>
GUARANTY OF LEASE
The undersigned, ALEX SANDEL ("Guarantor"), whose address for notice and
other purposes is 10445 Wilshire Boulevard, Apartment No. 1605, Los Angeles,
California, 90024 in order to induce HERMAN ROSEN AND FLORENCE W. ROSEN,
TRUSTEES OF THE HERMAN AND FLORENCE W. ROSEN FAMILY TRUST DATED DECEMBER 21,
1988, and HOWARD N. ROSEN AND CAROL L. ROSEN, TRUSTEES OF THE HOWARD AND CAROL
ROSEN TRUST DATED APRIL 8, 1975 (individually and collectively, "Landlord"), to
enter into that certain Standard Industrial/Commercial Single Tenant Lease-Net
of even date herewith (the "Lease Agreement") pursuant to which Landlord has
leased certain premises in the County of Los Angeles, State of California,
located at 25136 Anza Drive, Valencia, California 91355 to FUTURE MEDIA
PRODUCTIONS, INC., a California corporation ("Tenant"), does hereby covenant and
agree as follows:
1. Guarantor hereby absolutely and unconditionally guarantees to
Landlord the timely payment of all amounts that Tenant may at any time owe under
the Lease Agreement or any extensions, holdovers, renewals or modifications
thereof (collectively, the "Lease") and further guarantees to Landlord the full,
faithful and timely performance by Tenant of all of the covenants, terms and
conditions of the Lease. In the event Tenant shall default at any time in the
payment of any rent or other sum whatsoever or in the performance of any of
other covenant or obligation of Tenant under the Lease, then Guarantor, at its
expense, shall on demand by Landlord (a) fully and promptly pay all such rent
and sums (including, without limitation, all late charges and interest owing as
a result of past due obligations of Tenant) and perform or cause to be performed
all such covenants and obligations, and (b) pay to Landlord all costs and
expenses reasonably incurred by Landlord (including, without limitation, court
costs and actual attorneys' fees) as a result of or in connection with Tenant's
default. Notwithstanding the foregoing, the total liability of Guarantor
pursuant to this Guaranty shall not exceed One Hundred Twenty Thousand Dollars
($120,000.00), plus fees and costs (including attorneys fees and court costs)
incurred by Landlord in the enforcement of this Guaranty. Guaranty agrees that
the provisions of Paragraph 51 of the Lease dealing with arbitration of disputes
shall be applicable to any disputes under this Guaranty.
2. Guarantor hereby authorizes Landlord, without notice or demand
and without affecting Guarantor's liability hereunder, to from time to time (a)
consent to any extension, acceleration or other modification in the time for any
payment required under the Lease or consent to any other alteration of or
otherwise waive the performance of any covenant, term or condition of the Lease
in any respect; (b) consent to any act or event requiring Landlord's approval
under the Lease, including, without limitation, any assignment or sublease
thereof; (c) take and hold security for any payment or the performance of any
covenant, term or condition of the Lease or exchange, waive or release any such
security; and (d) apply such security or direct the order or manner of sale
thereof in any fashion. Notwithstanding any termination of the Lease, this
Guaranty of Lease shall survive and continue until all covenants and obligations
of Tenant have been fully satisfied and Guarantor shall not be released from any
obligation or liability hereunder, nor shall Guarantor have any right of
subrogation against Tenant or any right to participate in any security held on
Tenant's behalf, so long as Landlord shall have any claim against Tenant
(including, without limitation, claims for future rent and other charges under
the Lease) arising out of the Lease that has not been settled or discharged in
full, except to the extent the amount of such security exceeds the amount of all
such claims.
3. Guarantor hereby acknowledges that its obligations under this
Guaranty of Lease are independent of and may exceed the obligations of Tenant
under the Lease. Accordingly, Guarantor agrees that Landlord may bring a
separate action against Guarantor, whether or not any action has been previously
or will be subsequently brought against Tenant or Tenant is joined in such
action, and may join Guarantor in any action or proceeding between Landlord
against Tenant relating to the Lease. In addition, Guarantor waives all rights
it may otherwise have to (a) require Landlord to proceed against Tenant or any
other person or pursue any other remedy whatsoever; (b) complain of any delay in
the enforcement of Landlord's rights under the Lease; or (c) require Landlord to
proceed against or exhaust any security held on Tenant's or Guarantor's behalf.
Guarantor further waives all defenses it may otherwise have arising by reason of
any disability, defense or cessation of liability of Tenant (excluding, however,
the defense of due performance under the Lease). Guarantor further waives the
benefit of any statute of limitations affecting Guarantor's liability under this
Guaranty of Lease.
4. Until all Tenant's obligations to Landlord have been discharged
in full, Guarantor has no right of subrogation against Tenant. Guarantor waives
its right to enforce any remedies that Landlord now has, or later may have,
against Tenant. Guarantor waives all presentments, demands for performance,
notices of nonperformance, protests, notices of protest, notices of dishonor,
and notices of acceptance of this Guaranty of Lease, and waives all notices of
the existence, creation, or incurring of new or additional obligations.
5. Guarantor agrees that the term "Tenant" hereunder shall mean and
include all licensees, assignees, subtenants and other persons directly or
indirectly leasing or occupying any part of the premises under the Lease or
operating or conducting any business in or from such premises; excluding,
however, business invitees. If Landlord disposes of its interest in the lease,
"Landlord", as used in this Guaranty of Lease, shall mean Landlord's successors.
Without limiting the generality of the foregoing, Guarantor further
<PAGE>
agrees that Landlord, without notice to Guarantor, may assign or transfer the
Lease, the right to receive rents or other sums payable under the Lease and/or
this Guaranty of Lease, and no such assignment or transfer shall extinguish or
diminish the liability of Guarantor, under this Guaranty of Lease.
6. Guarantor hereby assumes full responsibility for monitoring and
making all necessary inquiries regarding all circumstances affecting Tenant's
ability to perform its obligations under the Lease and releases Landlord from
any duty it may otherwise have to make disclosures to Guarantor in this or any
other regard.
7. Guarantor agrees that in the event Tenant, during the term of
this Guaranty of Lease, shall become insolvent or shall be adjudicated a
bankrupt, or shall file a petition for reorganization, arrangement or similar
relief under any present or future provision of any federal or state
bankruptcy laws or act, or if such a petition filed by creditors of Tenant
shall be approved by court, or if Tenant shall seek a judicial readjustment
of the rights of its creditors under any present or future federal or state
law or if a receiver of all or part of its property and assets is appointed
by any federal or state court, and in any such proceeding the lease shall be
terminated or rejected, or the obligations of Tenant thereunder shall be
modified, the liability of the Guarantor hereunder shall not be impaired,
modified, changed or released.
8. If Guarantor is more than one person, Guarantor's obligations
are joint and several and are independent of Tenant's obligations. A separate
action may be brought or prosecuted against any Guarantor whether the action
is brought or prosecuted against any other Guarantor or Tenant, or all, or
whether any other Guarantor or Tenant, or all, are joined in the action. The
release or limitation of liability of any Guarantor hereunder shall not
release or limit the liability of any other Guarantor hereunder.
9. The provisions of the Lease may be changed by agreement between
Landlord and Tenant at any time, or by course of conduct, without the consent of
or without notice to Guarantor. This Guaranty of Lease shall guarantee the
performance of the lease as changed. Assignment of the Lease (as permitted by
the Lease) shall not affect this Guaranty of Lease.
10. This Guaranty of Lease shall not be affected by Landlord's
failure or delay to enforce any of its rights.
11. This Guaranty of Lease shall be binding upon Guarantor and its
successors, heirs, personal representatives and assigns and shall inure to the
benefit of Landlord and its successors, heirs, personal representatives and
assigns.
12. In the event of any action or proceeding between Guarantor and
Landlord arising out of or relating to this Guaranty of Lease, the unsuccessful
party thereto shall pay to the successful party all costs and expenses,
including, without limitation court costs and reasonable attorneys' fees,
incurred by it therein and if such successful party shall recover judgment in
any such action or proceeding, such costs, expenses and attorneys' fees may be
included in and as part of such judgment. The successful party shall be the
party who is entitled to recover its costs of suit, whether or not the suit
proceeds to final judgment.
13. This Guaranty of Lease shall be deemed to be made under and
shall be governed by the laws of the State of California in all respects,
including matters of construction, validity and performance, and the terms and
provisions hereunder may not be waived, altered, modified or amended except in a
writing duly signed by both Landlord and Guarantor.
14. If any of the provisions of this Guaranty of Lease shall
contravene or be held invalid for any reason, this Guaranty of Lease shall be
construed as if it did not contain those provisions and the rights and
obligations of the parties hereof shall be enforced accordingly.
IN WITNESS WHEREOF, Guarantor has executed this Guaranty of
Lease as of August 24, 1994.
/s/ ALEX SANDEL
---------------------------------------
ALEX SANDEL
2.
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
SECRETARY'S CERTIFICATE
OF
BOARD OF DIRECTORS RESOLUTIONS
I, Mike Lev, do hereby certify that I am the Secretary of Future Media
Productions, Inc. ("Corporation"), a corporation duly organized and existing
under and by virtue of the laws of the State of California and am keeper of the
records and seal thereof; that the following is true, correct and complete copy
of the resolution duly adopted by the unanimous consent of all of the members of
the Board of Directors of said Corporation on August 24, 1994, and that said
resolutions are still in full force and effect.
WHEREAS, the Corporation has negotiated for lease of premises at 25136 Anza
Drive, Valencia, California and;
WHEREAS, it has been determined by the Directors that execution of said
lease is in the best interest of the Corporation.
THEREFORE, BE IT RESOLVED that Alex Sandel, President of the Corporation
and Mike Lev, Secretary of the Corporation are hereby authorized to execute on
behalf of the Corporation a lease agreement in accordance with Exhibit "A", a
copy of which is attached hereto, and made a part hereof.
RESOLVED further that the foregoing officers are hereby authorized to take
any and all actions necessary to carry out the purpose of the said lease
agreement.
The foregoing action is taken by the unanimous written consent of the
directors of the Corporation acting without a meeting pursuant to the provisions
of Section 307 (b) of the California Corporation Code, and such action shall be
deemed taken as of the 24th day of August, 1994.
I DO CERTIFY, that the transactions contemplated by this resolution has
been authorized by the unanimous consent of the Board of Directors of the
Corporation, which authorization is still in full force and effect.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Seal of the
Corporation at Woodland Hills, California this 24th day of August 1994.
/s/ Mike Lev
-------------------------
Mike Lev, Secretary
AFFIX CORPORATE SEAL
<PAGE>
INDUSTRIAL REAL ESTATE LEASE - EXHIBIT "A"
DESCRIPTION OF PROPERTY
Property Address: 25136 West Anza Drive, Santa Clarita, CA 91355
Legal Description: Parcel A: Parcel 18 in the County of Los Angeles,
State of California, as shown upon Parcel Map No. 12009
filed in Book 182 Pages 47 to 54 inclusive of Parcel
Maps, in the office of the County Recorder of said
County.
Parcel B: A non-exclusive easement for purposes of
ingress and egress over the easterly 13 feet of Parcel
17 of said Parcel Map No. 12009, filed in Book 182
pages 47 to 54 inclusive of Parcel Maps, extending from
the most northerly terminus of the easterly line of
said Parcel 17 a distance of 356.00 feet in a southerly
direction.
[SITE AND ROOF PLAN GRAPHIC]
SITE AND ROOF PLAN
----------------------------------------------------[LOGO]
Initials Exhibit "A" Initials:
--------- -----------
<PAGE>
[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only,
May 1, 1997, is made by and between Bascal Properties II, 9314 Eton Ave.,
Chatsworth, CA 91311 ("Lessor") and Future Media Productions, 25136 Anza Dr.,
Valencia, CA 91355, ("Lessee") (collectively the "PARTIES," or individually a
"PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 24833 Anza Dr., Valencia, CA 91355 located in the County of Los
Angeles, State of California and generally described as (describe briefly the
nature of the property and, if applicable, the "PROJECT", if the property is
located within a Project) 28,495 square foot concrete tilt-up building situated
on approximately 58,256 square feet on BP zoned land. (PREMISES). (See also
Paragraph 2)
1.3 TERM: Ten years and No months ("ORIGINAL TERM") commencing June 1,
1997 ("COMMENCEMENT DATE" and ending May 31, 2007 ("EXPIRATION DATE"). (See also
Paragraph 3)
1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). See also
Paragraphs 3.2 and 3.3)
1.5 BASE RENT: $ 20,000 per month ("BASE RENT"), payable on the 26th day
of each month commencing see addendum Paragraph 50 (See also Paragraph 4)
/ / if this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $20,000 as Base Rent for the period
June 1997.
1.7 SECURITY DEPOSIT: $20,000 upon execution ("SECURITY DEPOSIT"). (See
also Paragraph 5)
1.8 AGREED USE: Any legal purpose. (See also Paragraph 6)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY" unless otherwise
stated herein. (See also Paragraph 8)
1.10 REAL ESTATE BROKERS: (See also Paragraph 15)
(a) REPRESENTATION: The following real estate brokers (collectively,
the "BROKERS") and brokerage relationships exist in this transaction (check
applicable boxes):
/ / N/A represents Lessor exclusively ("LESSOR'S BROKER");
/ / N/A represents Lessee exclusively ("LESSEE'S BROKER"); or
/ / N/A represents both Lessor and Lessee ("DUAL AGENCY").
(b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by
both Parties, Lessor shall pay to the Broker the fee agreed to in their separate
written agreement (or if there is no such agreement, the sum of N/A % of the
total Base Rent for the brokerage services rendered by said Broker).
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed N/A ("GUARANTOR"). (See also Paragraph 37).
2.23 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through ______ and Exhibit N/A, all of which
constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided therein, any statement of size set forth in this Lease, or that may
have been used in calculating rental, is an approximation which the Parties
agree is reasonable and the rental based thereon is not subject to revision
whether or not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom clean
and free of debris on the Commencement Date or the Early Possession Date,
whichever first occurs ("START DATE"), and, so long as the required service
contracts described in Paragraph 7.1(b) below are obtained by Lessee within
thirty (30) days following the Start Date, warrants that existing electrical,
plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning
systems ("HVAC"), loading doors, if any, all other such elements in the
Premises, other than those constructed by Lessee, shall be in good operating
condition on said date and that the structural elements of the roof, bearing
walls and foundation of any buildings on the Premises (the "BUILDING") shall be
free of material defects. If a non-compliance with said warranty exists as of
the Start Date, Lessor shall, as Lessor's sole obligation with respect to such
matter, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If, after the start
Date, Lessee does not give Lessor written notice of any non-compliance with this
warranty within: (i) one year as to the surface of the roof and the structural
portions of the roof, foundations and bearing walls, (ii) six (6) months as to
the HVAC systems, (iii) sixty (6) days as to the remaining systems and other
elements of the Building, correction of such non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense. SEE ADDENDUM 51
2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises
comply with all applicable laws, covenants or restrictions of record, building
codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect on the
Start Date. Said warranty does not apply to the use to which Lessee will put
the Premises or to any Alterations or Utility Installations (as defined in
Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessee's intended use,
and acknowledges that past uses of the Premises may no longer be allowed. If
the Premises do not comply with said warranty. Lessor shall, except as
otherwise provided, promptly after receipt of written notice from Lessee setting
forth with specificity the nature and extent of such non-compliance, rectify the
same at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within six (6) months following the Start
Date, correction of the non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense. If the Applicable Requirements are hereafter
changed (as opposed to being in existence at the Start Date, which is addressed
in Paragraph 6.2(e) below) so as to require during the term of this Lease the
construction of an addition to or an alteration of the Building, the remediation
of any Hazardous Substance, or the reinforcement or other physical modification
of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the
cost of such work as follows:
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(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures
are required as a result of the specific and unique use of the Premises by
Lessee as compared with uses by tenants in general, Lessee shall be fully
responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last two (2) years of this Lease and the cost
thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this
Lease unless Lessor notifies Lessee, in writing, within ten (10) days after
receipt of Lessee's termination notion that Lessor has elected to pay the
difference between the actual cost thereof and the amount equal to six (6)
months' Base Rent. If Lessee elects termination, Lessee shall immediately cease
the use of the Premises which requires such Capital Expenditure and deliver to
Lessor written notice specifying a termination date at least ninety (90) days
thereafter. Such termination date shall, however, in no event be earlier than
the last day that Lessee could legally utilize the Premises without commencing
such Capital Expenditure.
(b) if such Capital Expenditure is not the result of the specific
and unique use of the Premises by Lessee (such as, governmentally mandated
seismic modifications), then Lessor and Lessee shall allocate the obligation to
pay for such costs pursuant to the provisions of Paragraph 7.1(c); provided,
however, that if such Capital Expenditure is required during the last two years
of this Lease or if Lessor reasonably determines that it is not economically
feasible to pay its share thereof, Lessor shall have the option to terminate
this Lease upon ninety (90) days prior written notice to Lessee unless Lessee
notifies Lessor, in writing, within ten (10) days after receipt of Lessor's
termination notice that Lessee will pay for such Capital Expenditure. If Lessor
does not elect to terminate, and falls to tender its shares of any such Capital
Expenditure, Lessee may advance such funds and deduct same, with interest, from
Rent until Lessor's share of such costs have been fully paid. If Lessee is
unable to finance Lessor's share, or if the balance of the Rent due and payable
for the remainder of this Lease is not sufficient to fully reimburse Lessee on
an offset basis, Lessee shall have the right to terminate this Lease upon thirty
(30) days written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in the that event, Lessee
shall be fully responsible for the cost thereof, and Lessee shall not have any
right to terminate this Lease.
2.4 ACKNOWLEDGMENTS. Lessee acknowledges that: (a) it has been advised
by Lessor to satisfy itself with respect to the condition of the Premises
(including but not limited to the electrical, HVAC and fire sprinkler systems,
security, environmental aspects, and compliance with Applicable Requirements),
and their suitability for Lessee's intended use, (b) Lessee has made such
investigation as it deems necessary with reference to such matters and assumes
all responsibility therefor as the same relate to its occupancy of the Premises,
and (c) neither Lessor, Lessor's agents has made any oral or written
representations or warranties with respect to said matters other than as set
forth in this Lease. In addition, Lessor acknowledges that: and (b) it is
Lessor's sole responsibility to investigate the financial capability and/or
suitability of all proposed tenants.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease (including but not limited to the obligations to pay Real Property Taxes
and insurance premiums and to maintain the Premises) shall, however, be in
effect during such period. Any such early possession shall not affect the
Expiration Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not,
however, be obligated to pay Rent or perform its other obligations until it
receive possession of the Premises. If possession is not delivered within sixty
(60) days after the Commencement Date. Lessee may, at its option, by notice in
writing within ten (10) days after the end of such sixty (60) day period, cancel
this Lease, in which event the Parties shall be discharged from all obligations
hereunder. If such written notice is not received by Lessor within said ten
(10) day period, Lessee's right to cancel shall terminate. Except as otherwise
provided, if possession is not tendered to Lessee when required and Lessee does
not terminate this Lease, as aforesaid, any period of rent abatement that Lessee
would otherwise have enjoyed shall run from the date of delivery of possession
and continue for a period equal to what Lessee would otherwise have enjoyed
under the terms hereof, but minus any days of delay caused by the acts or
omissions of Lessee. If possession of the Premises is not delivered within four
(4) months after the Commencement Date. (this Lease shall terminate unless other
agreements are reached between Lessor and Lessee, in writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its
obligation to provide evidence of insurance (Paragraph 8.5). Pending
delivery of such evidence, Lessee shall be required to perform all of its
obligations under this Lease from and after the Start Date, including the
payment of Rent, notwithstanding Lessor's election to withhold possession
pending receipt of such evidence of insurance. Further, if Lessee is required
to perform any other conditions prior to or concurrent with the Start Date,
the Start Date shall occur but Lessor may elect to withhold possession until
such conditions are satisfied.
4. RENT.
4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("RENT").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction, on
or before the day on which it is due. Rent for any period during the term
hereof which is for less than one (1) full calendar month shall be prorated
based upon the actual number of days of said month. Payment of Rent shall be
made to Lessor at its address stated herein or to such other persons or place
as Lessor may from time to time designate in writing. Acceptance of a
payment which is less than the amount then due shall not be a waiver of
Lessor's rights to the balance of such Rent, regardless of Lessor's
endorsement of any check so stating.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution thereof
the Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise
Defaults under this Lease, Lessor may use, apply or retain all or any portion of
said Security Deposit for the payment of any amount due Lessor or to reimburse
or compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request thereof deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional moneys with Lessor so that the total amount of the Security
Deposit shall at all times bear the same proportion to the increased Base
Rent as the initial Security Deposit bore to the initial Base Rent. Should
the Agreed Use be amended to accommodate a material change in the business of
Lessee or to accommodate a sublessee or assignee, Lessor shall have the right
to increaseth Security Deposit to the extent necessary, in Lessor's reasonable
judgement, to account for any increased wear and tear that the Premises may
suffer as a result thereof. If a change in control of Lessee occurs during
this Lease and following such change the financial condition of Lessee is, in
Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such
additional monies with Lessor as shall be sufficient to cause the Security
Deposit be at a commercially reasonable level based on said change in
financial condition. Lessor shall not be required to keep the Security Deposit
separate from its general accounts. Within fourteen (14) days after the
expiration or termination of this Lease, if Lessor elects to apply the Security
Deposit only to unpaid Rent and otherwise within thirty (30) days after the
Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall
return that portion of the Security Deposit not used or applied by Lessor. No
part of the Security Deposit shall be considered to be held in trust, to bear
interest or to be prepayment for any monies to be paid by Lessee under this
Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the Agreed
Use, or any other legal use which is reasonably comparable thereto, and for no
other purpose. Lessee shall not use or permit the use of the Premises in a
manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to neighboring properties. Lessor
shall not unreasonably withhold
PAGE 2
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or delay its consent to any written request for a modification of the Agreed
Use, so long as the same will not impair the structural integrity of the
improvements on the Premises or the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises. If Lessor elects to withhold
consent, Lessor shall within five (5) business days after such request give
written notification of same, which notice shall include an explanation of
Lessor's objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, or waste whose
presence, use, manufacture, disposal, transportation, or release, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the Premises and/or the environment against damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises, other than as previously consented to by Lessor, Lessee
shall immediately give written notice of such fact to Lessor, and provide Lessor
with a copy of any report, notice, claim or other documentation which it has
concerning the presence of such Hazardous Substance.
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any Hazardous
Substance brought onto the Premises during the term of this Lease, by or for
Lessee, or any third party.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, harmless from
and against any and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and attorneys' and consultants' fees arising out of
or involving any Hazardous Substance brought onto the Premises by or for Lessee,
or any third party (provided, however, that Lessee shall have no liability under
this Lease with respect to underground migration of any Hazardous Substance
under the Premises from adjacent properties). Lessee's obligations shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the cost
of investigation, removal, remediation, restoration and/or abatement, and shall
survive the expiration or termination of this Lease. NO TERMINATION,
CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL
RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS
SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF
SUCH AGREEMENT.
(e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages which existed as a
result of Hazardous Substances on the Premises prior to the Start Date or which
are caused by the gross negligence, or intentional acts of Lessor, its agents or
employees. Lessor's obligations, as and when required by the Applicable
Requirements, shall include, but not be limited to, the cost of investigation,
removal, remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Start Date. Lessee shall
cooperate fully in any such activities at the request of Lessor, including
allowing Lessor and Lessor's agents to have reasonable access to the Premises at
reasonable times in order to carry out Lessor's investigative and remedial
responsibilities.
(g) LANDLORD TERMINATION OPTION. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue in
full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and
Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and
remediate such Hazardous Substance Condition, if required, as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect, or (ii) if the estimated cost to remediate such condition
exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater, give written notice to Lessee, within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of
Lessor's desire to terminate this Lease as of the date sixty (60) days following
the date of such notice. In the event Lessor elects to give a termination
notice, Lessee may, within ten (10) days thereafter, give written notice to
Lessor of Lessee's commitment to pay the amount by which the cost of the
remediation of such Hazardous Substance Condition exceeds an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with said funds or satisfactory assurance thereof
within thirty (30) days following such commitment. In such event, this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee, shall, at Lessee's sole expense,
fully, diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure of
Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender and
consultants shall have the right to enter into Premises at any time, in the
case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease. The cost of any such inspections shall be paid by Lessor,
unless a violation of Applicable Requirements, or a contamination is found to
exist or be imminent, or the inspection is requested or ordered by a
governmental authority. In such case, Lessee shall upon request reimburse Lessor
for the cost of such inspections, so long as such inspection is reasonably
related to the violation or contamination.
7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep
PAGE 3 Initials
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the Premises, Utility Installations, and Alterations in good order, condition
and repair (whether or not the portion of the Premises requiring repairs, or the
means of repairing the same, are reasonably or readily accessible to Lessee, and
whether or not the need for such repairs occurs as a result of Lessee's use, any
prior use, the elements or the age of such portion of the Premises), including,
but not limited to, all equipment or facilities, such as plumbing, HVAC,
electrical, lighting facilities, boilers, pressure vessels, fire protection
system, fixtures, walls (interior and exterior), foundations, ceilings, roofs,
floors, windows, doors, plate glass, skylights, landscaping, driveways, parking
lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or
adjacent to the Premises. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices,
specifically including the procurement and maintenance of the service contracts
required by Paragraph 7.1(b) below. Lessee's obligations shall include
restorations, replacements or renewals when necessary to keep the Premises and
all improvements thereon or a part thereof in good order, condition and state of
repair. Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition consistent with the
exterior appearance of other similar facilities of comparable age and size in
the vicinity, including, when necessary, the exterior repainting of the
Building.
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, ("BASIC ELEMENTS"), if
any, as and when installed on the Premises: (i) HVAC equipment, (iii) fire
protection systems, (iv) landscaping, (v) and (viii) any other equipment, if
reasonably required by Lessor.
(c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set
forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of replacing
such Basic Elements, then such Basic Elements shall be replaced by Lessor, and
the cost thereof shall be prorated between the Parties and Lessee shall only be
obligated to pay, each month during the remainder of the term of this Lease, on
the date on which Base Rent is due, an amount equal to the product of
multiplying the cost of such replacement by a fraction, the numerator of which
is one, and the denominator of which is the number of months of the useful life
of such replacement as such useful life is specified pursuant to Federal income
tax regulations or guidelines for depreciation thereof (including interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its obligation
at any time.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation),
it is intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, or the equipment
therein, all of which obligations are intended to be that of the Lessee.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. SEE ADDENDUM
PARAGRAPH 52
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
refers to all floor and window coverings, air lines, power panels, electrical
distribution, security and fire protection systems, communication systems,
lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises.
The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can
be removed without doing material damage to the Premises. The term "ALTERATIONS"
shall mean any modification of the improvements, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED
ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor pursuant
to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations to the Premises without Lessor's prior written consent. Lessee
may, however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof) without such consent but upon notice to Lessor, as
long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, and the cumulative cost
thereof during this Lease as extended does not exceed $50,000 in the aggregate
or $10,000 in any one year.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility. If Lessee shall contest the validity of any such
lien, claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof. If Lessor shall require, Lessee shall furnish a surety bond in an
amount equal to one and one-half times the amount of such contested lien, claim
or demand, indemnifying Lessor against liability for the same. If Lessor elects
to participate in any such action, Lessee shall pay Lessor's attorneys' fees and
costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered
a part of the Premises. Lessor may, at any time, elect in writing to be the
owner of all or any specified part of the Lessee Owned Alterations and
Utility Installations. Unless otherwise instructed per Paragraph 7.4(b)
hereof, all Lessee Owned Alterations and Utility Installations shall, at the
expiration or termination of this Lease, become the property of Lessor and be
surrendered by Lessee with the Premises.
(b) REMOVAL. By delivery to Lessee of written notice from Lessor not
later than ninety (90) days prior to the end of the term of this Lease, Lessor
may require that any or all Lessee Owned Alterations or Utility Installations be
removed by the expiration or termination of this Lease. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and
in good operating order, condition and state of repair, ordinary wear and
tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice.
Lessee shall repair any damage occasioned by the installation, maintenance or
removal of Trade Fixtures, furnishings, and equipment as well as the removal
of any storage tank installed by or for Lessee, and the removal, replacement,
or remediation of any soil, material or groundwater contaminated by Lessee.
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee. The failure by Lessee to timely vacate the Premises pursuant to this
Paragraph 7.4(c) without the express written consent of Lessor shall
constitute a holdover under the provisions of Paragraph 26 below.
8. INSURANCE; INDEMNITY. SEE ADDENDUM PARAGRAPH 53
8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance
required under Paragraph 8 except to the extent of the cost attributable to
liability insurance carried by Lessor under Paragraph 8.2(b) in excess of
$2,000,000 per occurrence. Premiums for policy periods commencing prior to or
extending beyond the Lease term shall be prorated to correspond to the Lease
term. Payment shall be made by Lessee to Lessor within ten (10) days following
receipt of an invoice.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee
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and Lessor against claims for bodily injury, personal injury and property damage
based upon or arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing single limit coverage in an amount not less than
$2,000,000 per occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF
PREMISES ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION
ENDORSEMENT" for damage caused by heat, smoke or fumes from a hostile fire. The
Policy shall not contain any intra-insured exclusions as between insured persons
or organizations, but shall include coverage for liability assumed under this
Lease as an "insured contract" for the performance of Lessee's indemnity
obligations under this Lease. The limits of said insurance shall not, however,
limit the liability of Lessee nor relieve Lessee of any obligation hereunder.
All insurance carried by Lessee shall be primary to and not contributory with
any similar insurance carried by Lessor, whose insurance shall be considered
excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall maintain liability
insurance as described in Paragraph 8.2(a), in addition to, and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss
payable to Lessor and to any Lender insuring loss or damage to Premises. The
amount of such insurance shall be equal to the full replacement cost of the
Premises, as the same shall exist from time to time, or the amount required
by any Lenders, but in not event more than the commercially reasonable and
available insurable value thereof. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations, Trade Fixtures, and
Lessee's personal property shall be insured by Lessee under Paragraph 8.4
rather than by Lessor. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of direct
physical loss or damage (except the perils of flood and/or earthquake unless
required by a Lender), including coverage for debris removal and the
enforcement of any Applicable Requirements requiring the upgrading,
demolition, reconstruction or replacement of any portion of the Premises as
the result of a covered loss. Said policy or policies shall also contain an
agreed valuation provision in lieu of any coinsurance clause, waiver of
subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located. If such insurance coverage
has a deductible clause, the deductible amount shall not exceed $1,000 per
occurrence, and Lessee shall be liable for such deductible amount in the
event of an Insured Loss.
(b) RENTAL VALUE. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable to Lessor
and any Lender, insuring the loss of the full Rent for one (1) year. Said
insurance shall provide that in the event the Lease is terminated by reason
of an insured loss, the period of indemnity for such coverage shall be
extended beyond the date of the completion of repairs or replacement of the
Premises, to provide for one full year's loss of Rent from the date of any
such loss. Said insurance shall contain an agreed valuation provision in lieu
of any coinsurance clause, and the amount of coverage shall be adjusted
annually to reflect the projected Rent otherwise payable by Lessee, for the
next twelve (12) month period. Lessee shall be liable for any deductible
amount in the event of such loss.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) BUSINESS INTERRUPTION. If reasonably available, and if Lessor
requests Lessee to do so in writing, Lessee shall obtain and maintain loss of
income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and
waive their entire right to recover damages against the other, for loss or
damage to its property arising out of or incident to the perils required to
be insured against herein. The effect of such releases and waivers is not
limited by the amount of insurance carried or required, or by any deductibles
applicable hereto. The Parties agree to have their respective property damage
insurance carriers waive any right to subrogation that such companies may
have against Lessor or Lessee, as the case may be, so long as the insurance
is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's sole negligence, Lessee shall
indemnify, protect, defend and hold harmless the Premises, Lessor and its
agents, Lessor's master or ground lessor, partners and Lenders, from and
against any and all claims, loss of rents and/or damages, liens, judgments,
penalties, attorneys' and consultants' fees, expenses and/or liabilities
arising out of, involving, or in connection with, the use and/or occupancy of
the Premises by Lessee. If any action or proceeding is brought against Lessor
by reason of any of the foregoing matters, Lessee shall upon notice defend
the same at Lessee's expense by counsel reasonably satisfactory to Lessor and
Lessor shall cooperate with Lessee in such defense. Lessor need not have
first paid any such claim in order to be defended or indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY UNLESS CAUSED BY THE
NEGLIGENCE OR INTENTIONALLY WRONGFUL ACTS OR OMISSIONS OF LESSOR OR ITS
AGENTS. Lessor shall not be liable for injury or damage to the person or
goods, wares, merchandise or other property of Lessee, Lessee's employees,
contractors, invitees, customers, or any other person in or about the
Premises, whether such damage or injury is caused by or results from fire,
steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, fire sprinklers, wires, appliances,
plumbing, HVAC or lighting fixtures, or from any other cause, whether the
said injury or damage results from conditions arising upon the Premises or
upon other portions of the Building of which the Premises are a part, or from
other sources or places. Lessor shall not be liable for any damages arising
from any act or neglect of any other tenant of Lessor. Notwithstanding
Lessor's negligence or breach of this Lease, Lessor shall under no
circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in three (3) months
or less from the date of the damage or destruction. Lessor shall notify
Lessee in writing within thirty (30) days from the date of the damage or
destruction as to whether or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations, which cannot reasonably be repaired in three (3) months or
less from the date of the damage or destruction. Lessor shall notify Lessee
in writing within thirty (30) days from the date of the damage or destruction
as to whether or not the damage is Partial or Total.
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(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to
their condition existing immediately prior thereto, including demolition,
debris removal and upgrading required by the operation of Applicable
Requirements, and with deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that
is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect; provided, however, that Lessee shall, at
Lessor's election, make the repair of any damage or destruction the total
cost to repair of which is $10,000 or less, and, in such event, Lessor shall
make any applicable insurance proceeds available to Lessee on a reasonable
basis for that purpose. Notwithstanding the foregoing, if the required
insurance was not in force or the insurance proceeds are not sufficient to
effect such repair, the Insuring Party shall promptly contribute the shortage
in proceeds (except as to the deductible which is Lessee's responsibility) as
and when required to complete said repairs. In the event, however, such
shortage was due to the fact that, by reason of the unique nature of the
improvements, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor. If Lessor receives said funds
or adequate assurance thereof within said ten (10) day period, the party
responsible for making the repairs shall complete them as soon as reasonably
possible and this Lease shall remain in full force and effect. If such funds
or assurance are not received, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to: (i) make such
restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee
shall not be entitled to reimbursement of any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood
or earthquake shall be subject to Paragraph 9.3, notwithstanding that there
may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage
that is not an insured Loss occurs, unless caused by a negligent or willful
act of Lessee (in which event Lessee shall make the repairs at Lessee's
expense), Lessor may either: (i) repair such damage as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in
full force and effect, or (ii) if the uninsured loss exceeds $500,000
terminate this Lease by giving written notice to Lessee within thirty (30)
days after receipt by Lessor of knowledge of the occurrence of such damage.
Such termination shall be effective sixty (60) days following the date of
such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within ten (10) days after receipt of the termination notice
to give written notice to Lessor of Lessee's commitment to pay for the repair
of such damage without reimbursement from Lessor. Lessee shall provide Lessor
with said funds or satisfactory assurance thereof within thirty (30) days
after making such commitment. In such event this Lease shall continue in full
force and effect, and Lessor shall proceed to make such repairs as soon as
reasonably possible after the required funds are available. If Lessee does
not make the required commitment, this Lease shall terminate as of the date
specified in the termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if a Premises Total Destruction occurs, this Lease shall terminate sixty (60)
days following such Destruction. If the damage or destruction was caused by the
gross negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee except as provided in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period
and provides Lessor with funds (or adequate assurance thereof) to cover any
shortage in insurance proceeds, Lessor shall, at Lessor's commercially
reasonable expense, repair such damage as soon as reasonably possible and this
Lease shall continue in full force and effect. If Lessee fails to exercise such
option and provide such funds or assurance during such period, then this Lease
shall terminate on the date specified in the termination notice and Lessee's
option shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which Lessee
is not responsible under this Lease, the Rent payable by Lessee for the period
required for the repair, remediation or restoration of such damage shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired, but not to exceed the proceeds received from the Rental Value
insurance. All other obligations of Lessee hereunder shall be performed by
Lessee, and Lessor shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or
restore the Premises and does not commence, in a substantial and meaningful
way, such repair or restoration within ninety (90) days after such obligation
shall accrue, Lessee may, at any time prior to the commencement of such
repair or restoration, give written notice to Lessor and to any Lenders of
which Lessee has actual notice, of Lessee's election to terminate this Lease
on a date not less than sixty (60) days following the giving of such notice.
If Lessee gives such notice and such repair or restoration is not commenced
within thirty (30) days thereafter, this Lease shall terminate as of the date
specified in said notice. If the repair or restoration is commenced within
said thirty (30) days, this Lease shall continue in full force and effect.
"COMMENCE" shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.
9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by Lessee
to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"REAL PROPERTY TAXES" shall include any form of assessment; real estate,
general, special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises. Lessor's right to other income therefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect power to tax and
where the funds are generated with reference to the Building address and where
the proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. The
term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring during
the term of this Lease, but not including, a change in the ownership of the
Premises.
10.2
(a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes shall cover any
period of time prior to or after the expiration or
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termination of this Lease, Lessee's share of such taxes shall be prorated to
cover only that portion of the tax bill applicable to the period that this
Lease is in effect, and Lessor shall reimburse Lessee for any overpayment. If
Lessee shall fail to pay any required Real Property Taxes, Lessor shall have
the right to pay the same, and Lessee shall reimburse Lessor therefor upon
demand.
(b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on
any Rent payment, Lessor may, at Lessor's option, estimate the current Real
Property Taxes, and require that such taxes be paid in advance to Lessor by
Lessee, either: (i) in a lump sum amount equal to the installment due, at
least twenty (20) days prior to the applicable delinquency date, or (ii)
monthly in advance with the payment of the Base Rent. If Lessor elects to
require payment monthly in advance, the monthly payment shall be an amount
equal to the amount of the estimated installment of taxes divided by the
number of months remaining before the month in which said installment becomes
delinquent. When the actual amount of the applicable tax bill is known, the
amount of such equal monthly advance payments shall be adjusted as required
to provide the funds needed to pay the applicable taxes. If the amount
collected by Lessor is insufficient to pay such Real Property Taxes when due,
Lessee shall pay Lessor, upon demand, such additional sums as are necessary
to pay such obligations. All moneys paid to Lessor under this Paragraph may
be intermingled with other moneys of Lessor and shall not bear interest. In
the event of a Breach by Lessee in the performance of Its obligations under
this Lease, then any balance of funds paid to Lessor under the provisions of
this Paragraph may at the option of Lessor, be treated as an additional
Security Deposit.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property
Taxes for all of the land and improvements included within the tax parcel
assessed, such proportion to be conclusively determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency,
all taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal
property of Lessee. When possible, Lessee shall cause such property to be
assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee's property
within ten (10) days after receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING. SEE ADDENDUM PARAGRAPH 54
12.1 LESSOR'S CONSENT REQUIRED.
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13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee
to comply with or perform any of the material terms, covenants, conditions or
rules under this Lease. A "BREACH" is defined as the occurrence of one or
more of the following Defaults, and the failure of Lessee to cure such
Default within any applicable grace period:
(a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or
where the coverage of the property insurance described in Paragraph 8.3 is
jeopardized as a result thereof, or without providing reasonable assurances
to minimize potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any other
monetary payment required to be made by Lessee hereunder, whether to Lessor
or to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of
three (3) business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service
contracts, (iii) the rescission of an unauthorized assignment or subletting,
(iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence
concerning any guaranty and/or Guarantor, (vii) any document requested under
Paragraph 42 (easements), or (viii) any other documentation or information
which Lessor may reasonably require of Lessee under the terms of this Lease,
where any such failure continues for a period of ten (10) days following
written notice to Lessee.
(d) A Default by Lessee as to the material terms, covenants,
conditions or provisions of this Lease, or of the rules adopted under
Paragraph 40 hereof, other than those described in subparagraphs 13.1(a),(b)
or (c), above, where such Default continues for a period of thirty (30) days
after written notice; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for
its cure, then it shall not be deemed to be a Breach if Lessee commences such
cure within said thirty (30) day period and thereafter diligently prosecutes
such cure to completion.
(e) The occurrence of any of the following events: (i) the making
of any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days); (iii) the appointment of a trustee
or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where
possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where such seizure is not discharged within thirty (30) days;
provided, however, in the event that any provision of this subparagraph (e)
is contrary to any applicable law, such provision shall be of no force or
effect, and not affect the validity of the remaining provisions.
(f) The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (ii) the termination of a Guarantor's liability with respect to
this Lease other than in accordance with the terms of such guaranty, (iii) a
Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a
Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its
guaranty obligation on an anticipatory basis, and Lessee's failure, within
sixty (60) days following written notice of any such event, to provide
written alternative assurance or security, which, when coupled with the then
existing resources of Lessee, equals or exceeds the combined financial
resources of Lessee and the Guarantors that existed at the time of execution
of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties
or obligations, within ten (10) days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses,
permits or approvals. The costs and expenses of any such performance by
Lessor shall be due and payable by Lessee upon receipt of invoice therefor.
If any check given to Lessor by Lessee shall not be honored by the bank upon
which it is drawn, Lessor, at its option, may require all future payments to
be made by Lessee to be by cashier's check. In the event of a Breach, Lessor
may, with or without further notice or demand, and without limiting Lessor in
the exercise of any right or remedy which Lessor may have by reason of such
Breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss that the Lessee
proves could have been reasonably avoided; (iii) the worth at the time of
award of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of such rental loss that the
Lessee proves could be reasonably avoided; and (iv) any other amount
necessary to compensate Lessor for all the detriment proximately caused by
the Lessee's failure to perform its obligations under this Lease or which in
the ordinary course of things would be likely to result therefrom, including
but not limited to the cost of recovering possession of the Premises,
expenses of reletting, including necessary renovation and alteration of the
Premises, reasonable attorneys' fees, and that portion of any leasing
commission paid by Lessor in connection with this Lease applicable to the
unexpired term of this Lease. The worth at the time of award of the amount
referred to in provision (iii) of the immediately preceding sentence shall be
computed by discounting such amount at the discount rate of the Federal
Reserve Bank of the District within which the Premises are located at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Breach of this Lease shall not waive Lessor's right to
recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the
right to recover in such proceeding any unpaid Rent and damages as are
recoverable therein, or Lessor may reserve the right to recover all or any
part thereof in a separate suit. If a notice and grace period required under
Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to
perform or quit given to Lessee under the unlawful detainer statute shall
also constitute the notice required by Paragraph 13.1. In such case, the
applicable grace period required by Paragraph 13.1 and the unlawful detainer
statute shall run concurrently, and the failure of Lessee to cure the Default
within the greater of the two such grace periods shall constitute both an
unlawful detainer and a Breach of this Lease entitling Lessor to the remedies
provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or
assign, subject only to reasonable limitations. Acts of maintenance, efforts
to relet, and/or the appointment of a receiver to protect the Lessor's
interests, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available under the
laws or judicial decisions of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's
right to possession shall not relieve Lessee from liability under any
indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
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13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any
Rent shall not be received by Lessor within five (5) days after such amount
shall be due, then, without any requirement for notice to Lessee, Lessee shall
pay to Lessor a one-time late charge equal to ten percent (10%) of each such
overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of such
late payment. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's Default or Breach with respect to such overdue
amount, nor prevent the exercise of any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding any provision of this Lease to the contrary, Base Rent shall, at
Lessor's option, become due and payable quarterly in advance.
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and any Lender whose name and address shall have been furnished Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more the thirty (30) days are
reasonably required for its performance, then Lessor shall not be in breach if
performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event
that neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "CONDEMNATION"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building, or more than
twenty-five percent(25%) of the land area not occupied by any building, is taken
by Condemnation, Lessee may, at Lessee's option, to be exercised in writing
within ten (10) days after Lessor shall have given Lessee written notice of such
taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease as of the
date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall remain
in full force and effect as to the portion of the Premises remaining, except
that the Base Rent shall be reduced in proportion to the reduction in utility of
the Premises caused by such Condemnation. Condemnation awards and/or payments
shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold, the value of the part
taken, or for severance damages; provided, however, that Lessee shall be
entitled to any compensation for Lessee's relocation expenses, loss of business
goodwill and/or Trade Fixtures, without regard to whether or not this Lease is
terminated pursuant to the provisions of this Paragraph. All Alterations and
Utility Installations made to the Premises by Lessee, for purposes of
Condemnation only, shall be considered the property of the Lessee and Lessee
shall be entitled to any and all compensation which is payable therefor. In the
event that this Lease is not terminated by reason of the Condemnation, Lessor
shall repair any damage to the Premises caused by such Condemnation.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee
and Lessor each represent and warrant to the other that it has had no dealings
with any person, firm, broker or finder in connection with this Lease, and that
no one is entitled to any commission or finder's fee in connection herewith.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fee reasonably incurred with respect thereto.
16. TENANCY STATEMENT/ESTOPPEL CERTIFICATE.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days
after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party an estoppel certificate in
writing, in form similar to the then most current "Tenancy Statement" form
published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
16.2 If Lessor desires to finance, refinance, or sell the premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. DEFINITION OF LESSOR. The term "Lessor" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event
of a transfer of Lessor's title or interest in the Premises of this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor. Except as provided in Paragraph 15 upon
such transfer or assignment and delivery of the Security Deposit, as aforesaid,
the prior Lessor shall be relieved of all liability with respect to the
obligations and/or covenants under this Lease thereafter to be performed by the
Lessor. Subject to the foregoing, the obligations and/or covenants in this
Lease to be performed by the Lessor shall be binding only upon the Lessor as
hereinabove defined. Notwithstanding the above, the original Lessor under this
Lease, and all subsequent holders of the Lessor's interest in this Lease shall
remain liable and responsible with regard to the potential duties and
liabilities of Lessor pertaining to Hazardous Substances as outlined in
Paragraph 6 above.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
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19. DAYS Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Except with respect to Lessor's fraud, gross
negligence or willful misconduct, the obligations of Lessor under this Lease
shall not constitute personal obligations of Lessor, the individual partners
of Lessor or its or their individual partners, directors, officers or
shareholders, and Lessee shall look to the Premises and to no other assets
of Lessor, for the satisfaction of any liability of Lessor with respect to
this Lease, and shall not seek recourse against and rents, issues, and profits
there from the individual partners of Lessor, or its or their individual
partners, directors, officers or shareholders, or any of their personal
assets for such satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the Parties
under this Lease.
22. NO PRIOR OR OTHER ARRANGEMENTS; BROKER DISCLAIMER. This Lease
contains all agreements between the Paries with respect to any matter
mentioned herein, and no other prior or contemporaneous agreement or
understanding shall be effective. Lessor and Lessee each represents and
warrants to the Brokers that it has made, and is relying solely upon, its own
investigation as to the nature, quality, character and financial
responsibility of the other Party to this Lease and as to the nature, quality
and character of the Premises. Brokers have no responsibility with
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by
this Lease shall be in writing and may be delivered in person (by hand or by
courier) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile
transmission, and shall be deemed sufficiently given if served in a manner
specified in this Paragraph 23. The addresses noted adjacent to a Party's
signature on this Lease shall be that Party's address for delivery or mailing
of notices. Either Party may by written notice to the other specify a
different address for notice, except that upon Lessee's taking possession of
the Premises, the Premises shall constitute Lessee's address for notice. A
copy of all notices to Lessor shall be concurrently transmitted to such party
or parties at such addresses as Lessor may from time to time hereafter
designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified
mail, return receipt requested, shall be deemed given on the date of delivery
shown on the receipt card, or if no delivery date is shown, the postmark
thereon. If sent by regular mail the notice shall be deemed given
forty-eight (48) hours after the same is addressed as required herein and
mailed with postage prepaid. Notices delivered by United States Express Mail
or overnight courier that guarantee next day delivery shall be deemed given
twenty-four (24) hours after delivery of the same to the Postal Service or
courier. Notices transmitted by facsimile transmission or similar means
shall be deemed delivered upon telephone confirmation of receipt, provided a
copy is also delivered via delivery or mail. If notice is received on a
Saturday, Sunday or legal holiday, it shall be deemed received on the next
business day.
24. WAIVERS. No waiver of the Default or Breach of any term, covenant or
condition hereof shall be deemed a waiver of any other term, covenant or
condition hereof, or of any subsequent Default or Breach of the same or of any
other term, covenant or condition hereof. Lessor's consent to, or approval of,
any act shall not be deemed to render unnecessary the obtaining of Lessor's
consent to, or approval of, any subsequent or similar act by Lessee, or be
construed as the basis of an estoppel to enforce the provision or provisions of
this Lease requiring such consent. The acceptance of Rent by Lessor shall not
be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be
accepted by Lessor on account of moneys or damage due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
one hundred twenty-five percent (125%) of the Base Rent applicable during the
month immediately preceding the expiration or termination. Nothing contained
herein shall be construed as consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of
this Lease to be observed or performed by Lessee are both covenants and
conditions. In construing this Lease, all headings and titles are for the
convenience of the parties only and shall not be considered a part of this
Lease. Whenever required by the context, the singular shall include the plural
and vice versa. This Lease shall not be construed as if prepared by one of the
parties, but rather according to its fair meaning as a whole, as if both parties
had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices shall have no liability or
obligation to perform any of the obligations of Lessor under this Lease. Any
Lender may elect to have this Lease and/or any Option granted hereby superior to
the lien of its Security Device, by giving written notice thereof to Lessee,
this Lease and such Options shall be deemed prior to such Security Device,
notwithstanding the relative dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not: (i)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership; (ii) be subject to any offsets or
defenses which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor is unable to provide the
Non-Disturbance Agreement within said sixty (60) days, then Lessee's option,
directly contact Lessor's lender and attempt to negotiate for the execution and
delivery of a Non-Disturbance Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises. Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or
proceeding to enforce the terms hereof or declare rights hereunder, the
Prevailing Party (as hereafter defined) in any such proceeding, action, or
appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees
may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decision or
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judgment. The term, "Prevailing Party" shall include, without limitation, a
Party who substantially obtains or defeats the relief sought, as the case may
be, whether by compromise, settlement, judgment, or the abandonment by the
other Party of its claim or defense. The attorneys' fees award shall not be
computed in accordance with any court fee schedule, but shall be such as to
fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor
shall be entitled to attorneys' fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times upon reasonable advance notice
for the purpose of showing the same to prospective purchasers, lenders, or
lessees, and making such alterations, repairs, improvements or additions to
the Premises as Lessor may deem necessary. All such activities shall be
without abatement of rent or liability to Lessee. Lessor may at any time
place on the Premises any ordinary "For Sale" signs and Lessor may during the
last six (6) months of the term hereof place on the Premises any ordinary
"For Lease" signs. Lessee may at any time place on or about the Premises any
ordinary "For Sublease" sign.
33. AUCTIONS. Lessee shall not conduct, not permit to be conducted, any
auction upon the Premises without Lessor's reasonable prior written consent.
34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place
any sign upon the Premises without Lessor's prior written consent. All signs
must comply with all Applicable Requirements.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, that Lessor may elect to continue any one
or all existing subtenancies. Lessor's failure within ten (10) days following
any such event to elect to the contrary by written notice to the holder of
any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such
consent shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including but not limited to architects',
attorneys', engineers' and other consultants' fees) incurred in the
consideration of, or response to, a request by Lessee for any Lessor consent,
including but not limited to consents to an assignment, a subletting or the
presence or use of a Hazardous Substance, shall be paid by Lessee upon
receipt of an invoice and supporting documentation therefor. Lessor's consent
to any act, assignment or subletting shall not constitute an acknowledgment
that no Default or Breach by Lessee of this Lease exists, nor shall such
consent be deemed a waiver of any then existing Default or Breach, except as
may be otherwise specifically stated in writing by Lessor at the time of such
consent. The failure to specify herein any particular condition to Lessor's
consent shall not preclude the imposition by Lessor at the time of consent of
such further or other conditions as are then reasonable with reference to the
particular matter for which consent is being given. In the event that either
Party disagrees with any determination made by the other hereunder and
reasonably requests the reasons for such determination, the determining party
shall furnish its reasons in writing and in reasonable detail within ten (10)
business days following such request.
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and
performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession and quiet enjoyment of the Premises during the term hereof.
39. OPTIONS. SEE ADDENDUM PARAGRAPH 55
39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term
of; (b) the right of first refusal or first offer to lease either the
Premises; (c) the right to purchase or the right of first refusal to purchase
the Premises.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the
original Lessee is in full possession of the Premises and, if requested by
Lessor, with Lessee certifying that Lessee has no intention of thereafter
assigning or subletting.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option: (i) during the
period commencing with the giving of any notice of Default and continuing
until said Default is cured, (ii) during the period of time any Rent is
unpaid (without regard to whether notice thereof is given Lessee), (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessee has been given three (3) or more notices of Default, whether or not
the Defaults are cured, during the twelve (12) month period immediately
preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, if, after
such exercise and prior to the commencement of the extended term, (i) Lessee
fails to pay Rent for a period of thirty (30) days after such Rent becomes
due (without any necessity of Lessor to give notice thereof), (ii) Lessor
gives to Lessee three (3) or more notices of separate Default during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide
same. Lessee assumes all responsibility for the protection of the Premises,
Lessee, its agents and invitees and their property from the acts of third
parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of
parcel maps and restrictions, so long as such easements, rights, dedications,
maps and restrictions do not unreasonably interfere with the use of the
Premises by Lessee. Lessee agrees to sign any documents reasonably requested
by Lessor to effectuate any such easement rights, dedication, map or
restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall survive
the right on the part of said Party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said Party to pay such sum or any part thereof, said Party shall be
entitled to recover such sum or so much thereof as it was not legally required
to pay.
44. AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each party
shall, within thirty (30) days after request, deliver to the other party
satisfactory evidence of such authority.
PAGE 11 Initials ____ ___
<PAGE>
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease
to the other Party. This Lease is not intended to be binding until executed
and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. MULTIPLE PARTIES. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the
Mediation and/or the Arbitration of all disputes between the Parties and/or
Brokers arising out of this Lease / / is / / is not attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
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ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES, THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND
THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
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The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: Executed at:
------------------------- ---------------------------
on: on:
---------------------------------- -------------------------------------
By LESSOR: By LESSOR:
BASCAL PROPETIES II a FUTURE MEDIA PRODUCTIONS
- ------------------------------------- -------------------------------------
California general partnership
- ------------------------------------- -------------------------------------
By: /s/ ALEX SANDEL /s/ ALEX SANDEL
---------------------------------- -------------------------------------
Name Printed: Alex Sandel Name Printed: Alex Sandel
----------------------- -----------------------
Title: General Partner Title: President
------------------------------- ------------------------------
By:
---------------------------------- -------------------------------------
Name Printed: Name Printed:
------------------------ ------------------------
Title: Title:
------------------------------- -------------------------------
Address: 9314 Eton Ave. Address: 25136 Anza Dr.
----------------------------- -----------------------------
Chatsworth, CA 91311 Valencia, CA 91355
----------------------------- -----------------------------
Telephone: (818) 773-5530 Telephone: (805) 294-5575
--------------------- ---------------------
Facsimile: ( ) Facsimile: ( )
--------------------- ---------------------
Federal ID No. Federal ID No.
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PAGE 12
<PAGE>
ADDENDUM to STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET, dated
as of May 1, 1997, by and between BASCAL PROPERTIES II, a California general
partnership, as a Lessor, and Future Media corporation, as Lessee, for
Premises commonly known as 24833 Anza Drive, Valencia, CA 91355
- -------------------------------------------------------------------------------
50. BASE RENT. Base Rent is to be paid, in advance, on the twenty-sixth day
of the preceding month. A ten percent (10%) penalty shall be paid by Lessee
to Lessor if Base Rent is received by the Lessor later than the twenty-sixth
(26th) day of the month. The initial $20,000 Base Rent shall increase or
decrease annually, commencing June 1, 1998, by the annual change in the
Consumer Price Index for the prior calendar year, provided, however, in no
event shall the Base Rent be less than $20,000 per month. "Consumer Price
Index" shall mean the Consumer Price Index published by the Bureau of Labor
Statistics of the United States Department of Labor for urban consumers in
the Los Angeles metropolitan area.
51. CONDITION. Time periods for notices in this Paragraph 2.2 shall run
from the date of discovery of a defect if the defect was not readily
discoverable as of the Start Date.
52. UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. Notwithstanding
Paragraph 7.3, at all times prior to June 1, 1997 Lessee may make Utility
Installations and Alterations and install Trade Fixture without the consent
of Lessor being required, and any such actions by Lessee shall be deemed
consented to by Lessor. Notwithstanding Paragraph 7.4, such installations or
alterations by Lessee shall not be subject to the removal or restoration
requirements of Paragraph 7.4.
53. INSURANCE; INDEMNITY. The Insuring Party under this Lease shall be the
Lessee.
54. ASSIGNMENT AND SUBLETTING. Lessee may voluntarily or by operation of law
assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or
any part of Lessee's interest in this Lease or in the Premises, without
Lessor's prior written consent. No mortgage, subletting, assignment or other
transfer or encumbrance shall release Lessee or Lessee's obligations or alter
the primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. The acceptance of rent by
Lessor from any other person shall not be deemed to be a waiver by Lessor of
any provision hereof. In the event of default by an assignee of Lessee or any
successor of Lessee, in the performance of any of the terms hereof, Lessor
may proceed directly against Lessee without the necessity of exhausting
remedies against said assignee.
55. OPTION. Lessor hereby grants to Lessee two (2) consecutive five (5)
year Option to extend the term of this Lease from June 1, 2007 through and
including May 31, 2012, the first option, and June 1, 2012 through and
including May 31, 2017, the second option. The Base Rent shall continue being
adjusted each year as though the Option periods were part of the original
term. Lessee may exercise the Option by giving Lessor written notice of
Lessee's election to do so no later than September 31, 2006, the first
option, and no later than September 31, 2011 for the second option.
Bascal Properties II (Lessor) Future Media (Lessee)
By: , Partner By:
------------------ --------------------
By: , Partner Title:
------------------ -----------------
By: , Partner
------------------
<PAGE>
[LOGO]
LOAN AND SECURITY AGREEMENT
BORROWER: FUTURE MEDIA PRODUCTIONS, INC.
ADDRESS: 25136 ANZA DRIVE
VALENCIA, CALIFORNIA 91355
DATE: FEBRUARY 26, 1997
This Loan and Security Agreement is entered into on the above date between
GREYROCK BUSINESS CREDIT, a Division of NationsCredit Commercial Corporation
("GBC"), whose address is 10880 Wilshire Blvd. Suite 950, Los Angeles, CA
90024 and the borrower named above ("Borrower"), whose chief executive office is
located at the above address ("Borrower's Address"). The Schedule to this
Agreement (the "Schedule") being signed concurrently is an integral part of this
Agreement. (Definitions of certain terms used in this Agreement are set forth
in Section 8 below.)
1. LOANS.
1.1 LOANS. GBC will make loans to Borrower (the "Loans"), in amounts
determined by GBC in its sole discretion, up to the amounts (the "Credit Limit")
shown on the Schedule, provided no Default or Event of Default has occurred and
is continuing. If at any time or for any reason the total of all outstanding
Loans and all other Obligations exceeds the Credit Limit, Borrower shall
immediately pay the amount of the excess to GBC, without notice or demand.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement or in another written agreement signed by GBC and
Borrower. Interest shall be payable monthly, on the last day of the month.
Interest may, in GBC's discretion, be charged to Borrower's loan account, and
the same shall thereafter bear interest at the same rate as the other Loans.
1.3 FEES. Borrower shall pay GBC the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to GBC and are not
refundable.
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of
the Obligations when due, Borrower hereby grants to GBC a security interest in
all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): All Inventory,
Equipment, Receivables, and General Intangibles, including, without limitation,
all of Borrower's Deposit Accounts, all money, all collateral in which GBC is
granted a security interest pursuant to any other present or future agreement,
all property now or at any time in the future in GBC's possession, and all
proceeds (including proceeds of any insurance policies, proceeds of proceeds and
claims against third parties), all products of the foregoing, and all books and
records related to any of the foregoing.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce GBC to enter into this Agreement and to make Loans,
Borrower represents and warrants to GBC as follows, and Borrower covenants that
the following representations will continue to be true, and that Borrower will
at all times comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will
continue to be qualified and licensed to do business in all jurisdictions in
which any failure to do so would have a material adverse effect on Borrower.
The execution, delivery and performance by Borrower of this Agreement, and all
other documents contemplated hereby (i) have been duly and validly authorized,
(ii) are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), (iii) do not violate Borrower's articles or certificate of
incorporation, or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give GBC 30 days' prior written notice before changing its name
or doing business under any other name. Borrower has complied, and will in the
future comply, with all laws relating to the conduct of business under a
fictitious business name.
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<PAGE>
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In
addition, Borrower has places of business and Collateral is located only at the
locations set forth on the Schedule. Borrower will give GBC at least 30 days
prior written notice before opening any additional place of business, changing
its chief executive office, or moving any of the Collateral to a location other
than Borrower's Address or one of the locations set forth on the Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. GBC now has, and
will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend GBC and the Collateral against all claims of
others. So long as any Loan is outstanding which is a term loan, none of the
Collateral now is or will be affixed to any real property in such a manner, or
with such intent, as to become a fixture. Borrower is not and will not become a
lessee under any real property lease pursuant to which the lessor may obtain any
rights in any of the Collateral and no such lease now prohibits, restrains,
impairs or will prohibit, restrain or impair Borrower's right to remove any
Collateral from the leased premises. Whenever any Collateral is located upon
premises in which any third party has an interest (whether as owner, mortgagee,
beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever
requested by GBC, use its best efforts to cause such third party to execute and
deliver to GBC, in form acceptable to GBC, such waivers and subordinations as
GBC shall specify, so as to ensure that GBC's rights in the Collateral are, and
will continue to be, superior to the rights of any such third party. Borrower
will keep in full force and effect, and will comply with all the terms of, any
lease of real property where any of the Collateral now or in the future may be
located.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, ordinary wear and tear excepted, and Borrower will not
use the Collateral for any unlawful purpose. Borrower will immediately advise
GBC in writing of any material loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to GBC have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and fairly reflect the financial condition of Borrower,
at the times and for the periods therein stated. Between the last date covered
by any such statement provided to GBC and the date hereof, there has been no
material adverse change in the financial condition or business of Borrower.
Borrower is now and will continue to be solvent.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by applicable
law, and Borrower has timely paid, and will timely pay, all applicable taxes,
assessments, deposits and contributions now or in the future owed by Borrower.
Borrower may, however, defer payment of any contested taxes, provided that
Borrower (i) in good faith contests Borrower's obligation to pay the taxes by
appropriate proceedings promptly and diligently instituted and conducted, (ii)
notifies GBC in writing of the commencement of, and any material development in,
the proceedings, and (iii) posts bonds or takes any other steps required to keep
the contested taxes from becoming a lien upon any of the Collateral. Borrower
is unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or any other governmental agency. Borrower shall, at all
times, utilize the services of an outside payroll service providing for the
automatic deposit of all payroll taxes payable by Borrower.
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all applicable laws and regulations,
including, but not limited to, those relating to Borrower's ownership of real or
personal property, the conduct and licensing of Borrower's business, and all
environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform GBC in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes.
4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to GBC as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed, bona fide, existing, unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services, in the ordinary course of Borrower's business.
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<PAGE>
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to GBC as follows: All statements made and all unpaid
balances appearing in all invoices, instruments and other documents evidencing
the Receivables are and shall be true and correct and all such invoices,
instruments and other documents and all of Borrower's books and records are and
shall be genuine and in all respects what they purport to be, and all
signatories and endorsers have the capacity to contract. All sales and other
transactions underlying or giving rise to each Receivable shall comply with all
applicable laws and governmental rules and regulations. All signatures and
indorsements on all documents, instruments, and agreements relating to all
Receivables are and shall be genuine, and all such documents, instruments and
agreements are and shall be legally enforceable in accordance with their terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to GBC transaction reports and loan requests, schedules and assignments
of all Receivables, and schedules of collections, all on GBC's standard forms;
provided, however, that Borrower's failure to execute and deliver the same shall
not affect or limit GBC's security interest and other rights in all of
Borrower's Receivables, nor shall GBC's failure to advance or lend against a
specific Receivable affect or limit GBC's security interest and other rights
therein. Together with each such schedule and assignment, or later if requested
by GBC, Borrower shall furnish GBC with copies (or, at GBC's request, originals)
of all contracts, orders, invoices, and other similar documents, and all
original shipping instructions, delivery receipts, bills of lading, and other
evidence of delivery, for any goods the sale or disposition of which gave rise
to such Receivables, and Borrower warrants the genuineness of all of the
foregoing. Borrower shall also furnish to GBC an aged accounts receivable trial
balance in such form and at such intervals as GBC shall request. In addition,
Borrower shall deliver to GBC the originals of all instruments, chattel paper,
security agreements, guarantees and other documents and property evidencing or
securing any Receivables, immediately upon receipt thereof and in the same form
as received, with all necessary indorsements.
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect
all Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
GBC, and Borrower shall deliver all such payments and proceeds to GBC, within
one business day after receipt of the same, in their original form, duly
endorsed, to be applied to the Obligations in such order as GBC shall determine.
4.5 DISPUTES. Borrower shall notify GBC promptly of all disputes or
claims relating to Receivables on the regular reports to GBC. Borrower shall
not forgive, or settle any Receivable for less than payment in full, or agree to
do any of the foregoing, except that Borrower may do so, provided that: (i)
Borrower does so in good faith, in a commercially reasonable manner, in the
ordinary course of business, and in arm's length transactions, which are
reported to GBC on the regular reports provided to GBC; (ii) no Default or Event
of Default has occurred and is continuing; and (iii) taking into account all
such settlements and forgiveness, the total outstanding Loans and other
Obligations will not exceed the Credit Limit.
4.6 RETURNS. Provided no Event of Default has occurred and is continuing,
if any Account Debtor returns any Inventory to Borrower in the ordinary course
of its business, Borrower shall promptly determine the reason for such return
and promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to GBC). In the event any attempted return occurs after
the occurrence of any Event of Default, Borrower shall (i) not accept any return
without GBC's prior written consent, (ii) hold the returned Inventory in trust
for GBC, (iii) segregate all returned Inventory from all of Borrower's other
property, (iv) conspicuously label the returned Inventory as GBC's property, and
(v) immediately notify GBC of the return of any Inventory, specifying the reason
for such return, the location and condition of the returned Inventory, and on
GBC's request deliver such returned Inventory to GBC.
4.7 VERIFICATION. GBC may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or GBC or such other name as GBC may choose, and GBC or its designee
may, at any time, notify Account Debtors that it has a security interest in the
Receivables.
4.8 NO LIABILITY. GBC shall not under any circumstances be responsible or
liable for any shortage or discrepancy in, damage to, or loss or destruction of,
any goods, the sale or other disposition of which gives rise to a Receivable, or
for any error, act, omission, or delay of any kind occurring in the settlement,
failure to settle, collection or failure to collect any Receivable, or for
settling any Receivable in good faith for less than the full amount thereof, nor
shall GBC be deemed to be responsible for any of Borrower's obligations under
any contract or agreement giving rise to a Receivable. Nothing herein shall,
however, relieve GBC from liability for its own gross negligence or willful
misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 INSURANCE. Borrower shall, at all times, insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to GBC, in such form and amounts as GBC may
reasonably require, and Borrower shall provide evidence of such insurance to
GBC, so that GBC is satisfied that such insurance is, at all times, in full
force and effect. All such insurance policies shall name GBC as an additional
loss payee, and shall contain a lenders loss payee endorsement in form
reasonably acceptable to GBC. Upon receipt of the proceeds of any such
insurance, GBC shall apply such proceeds in reduction of the Obligations as GBC
shall determine in its sole discretion, except that, provided no Default or
Event of Default has occurred and is continuing, GBC shall release to Borrower
insurance proceeds with respect to Equipment totaling less than $100,000, which
shall be utilized by Borrower for the replacement of the Equipment with respect
to which the insurance proceeds were paid. GBC may require reasonable assurance
that the insurance proceeds so released will be so used. If Borrower fails to
provide or pay for any insurance, GBC may, but is not obligated to, obtain the
same at Borrower's expense. Borrower shall promptly deliver to GBC copies of
all reports made to insurance companies.
-3-
<PAGE>
5.2 REPORTS. Borrower, at its expense, shall provide GBC with the written
reports set forth in the Schedule, and such other written reports with respect
to Borrower (including budgets, sales projections, operating plans and other
financial documentation), as GBC shall from time to time reasonably specify.
5.3 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on
one business day's notice, GBC, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy Borrower's books and records.
GBC shall take reasonable steps to keep confidential all information obtained in
any such inspection or audit, but GBC shall have the right to disclose any such
information to its auditors, regulatory agencies, and attorneys, and pursuant to
any subpoena or other legal process. The foregoing inspections and audits shall
be at Borrower's expense and the charge therefor shall be $600 per person per
day (or such higher amount as shall represent GBC's then current standard charge
for the same), plus reasonable out-of-pockets expenses. Borrower shall not be
charged more than $3,000 per audit (plus reasonable out-of-pockets expenses),
nor shall audits be done more frequently than four times per calendar year,
provided that the foregoing limits shall not apply after the occurrence of a
Default or Event of Default, nor shall they restrict GBC's right to conduct
audits at its own expense (whether or not a Default or Event of Default has
occurred). Borrower will not enter into any agreement with any accounting firm,
service bureau or third party to store Borrower's books or records at any
location other than Borrower's Address, without first obtaining GBC's written
consent, which may be conditioned upon such accounting firm, service bureau or
other third party agreeing to give GBC the same rights with respect to access to
books and records and related rights as GBC has under this Agreement.
5.4 REMITTANCE OF PROCEEDS. All proceeds arising from the sale or other
disposition of any Collateral shall be delivered, in kind, by Borrower to GBC in
the original form in which received by Borrower not later than the following
business day after receipt by Borrower, to be applied to the Obligations in such
order as GBC shall determine; provided that, if no Default or Event of Default
has occurred and is continuing, and if no term loan is outstanding hereunder,
then Borrower shall not be obligated to remit to GBC the proceeds of the sale of
Equipment which is sold in the ordinary course of business, in a good-faith
arm's length transaction. Except for the proceeds of the sale of Equipment as
set forth above, Borrower shall not commingle proceeds of Collateral with any of
Borrower's other funds or property, and shall hold such proceeds separate and
apart from such other funds and property and in an express trust for GBC.
Nothing in this Section limits the restrictions on disposition of Collateral set
forth elsewhere in this Agreement.
5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule,
Borrower shall not, without GBC's prior written consent, do any of the
following: (i) merge or consolidate with another corporation or entity; (ii)
acquire any assets, except in the ordinary course of business; (iii) enter into
any other transaction outside the ordinary course of business; (iv) sell or
transfer any Collateral, except that, provided no Default or Event of Default
has occurred and is continuing, Borrower may (a) sell finished Inventory in the
ordinary course of Borrower's business, and (b) if no term loan is outstanding
hereunder, sell Equipment in the ordinary course of business, in good-faith
arm's length transactions; (v) store any Inventory or other Collateral with any
warehouseman or other third party; (vi) sell any Inventory on a sale-or-return,
guaranteed sale, consignment, or other contingent basis; (vii) make any loans of
any money or other assets; (viii) incur any debts, outside the ordinary course
of business, which would have a material, adverse effect on Borrower or on the
prospect of repayment of the Obligations; (ix) guarantee or otherwise become
liable with respect to the obligations of another party or entity; (x) pay or
declare any dividends on Borrower's stock (except for dividends payable solely
in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire,
directly or indirectly, any of Borrower's stock; (xii) make any change in
Borrower's capital structure which would have a material adverse effect on
Borrower or on the prospect of repayment of the Obligations; or (xiii) dissolve
or elect to dissolve; or (xiv) agree to do any of the foregoing.
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against GBC with respect to any Collateral or in any manner
relating to Borrower, Borrower shall, without expense to GBC, make available
Borrower and its officers, employees and agents, and Borrower's books and
records, without charge, to the extent that GBC may deem them reasonably
necessary in order to prosecute or defend any such suit or proceeding.
5.7 NOTIFICATION OF CHANGES. Borrower will promptly notify GBC in writing
of any change in its officers or directors, the opening of any new bank account
or other deposit account, and any material adverse change in the business or
financial affairs of Borrower.
5.8 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
GBC, to execute all documents and take all actions, as GBC may deem reasonably
necessary or useful in order to perfect and maintain GBC's perfected security
interest in the Collateral, and in order to fully consummate the transactions
contemplated by this Agreement.
5.9 INDEMNITY. Borrower hereby agrees to indemnify GBC and hold GBC
harmless from and against any and all claims, debts, liabilities, demands,
obligations, actions, causes of action, penalties, costs and expenses (including
attorneys' fees), of every nature, character and description, which GBC may
sustain or incur based upon or arising out of any of the Obligations, any actual
or alleged failure to collect and pay over any withholding or other tax relating
to Borrower or its employees, any relationship or agreement between GBC and
Borrower, any actual or alleged failure of GBC to comply with any writ of
attachment or other legal process relating to Borrower or any of its property,
or any other matter, cause or thing whatsoever occurred, done, omitted or
suffered to be done by GBC relating to Borrower or the Obligations (except any
such amounts sustained or incurred as the result of the gross negligence or
willful misconduct of GBC or any of its directors, officers, employees, agents,
attorneys, or any other person affiliated with or representing GBC).
Notwithstanding any provision in this Agreement to the contrary, the indemnity
agreement set forth in this Section shall survive any termination of this
Agreement and shall for all purposes continue in full force and effect.
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6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three business days after
written notice of termination is given to GBC; or (ii) by GBC at any time after
the occurrence of an Event of Default, without notice, effective immediately.
If this Agreement is terminated by Borrower or by GBC under this Section 6.2,
Borrower shall pay to GBC a termination fee (the "Termination Fee") in the
amount shown on the Schedule. The Termination Fee shall be due and payable on
the effective date of termination and thereafter shall bear interest at a rate
equal to the highest rate applicable to any of the Obligations.
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Without limiting the generality of the foregoing, if on the Maturity Date, or on
any earlier effective date of termination, there are any outstanding letters of
credit issued based upon an application, guarantee, indemnity or similar
agreement on the part of GBC, then on such date Borrower shall provide to GBC
cash collateral in an amount equal to 110% of the face amount of all such
letters of credit plus all interest, fees and costs due or (in GBC's estimation)
likely to become due in connection therewith, to secure all of the Obligations
relating to said letters of credit, pursuant to GBC's then standard form cash
pledge agreement. Notwithstanding any termination of this Agreement, all of
GBC's security interests in all of the Collateral and all of the terms and
provisions of this Agreement shall continue in full force and effect until all
Obligations have been paid and performed in full; provided that, without
limiting the fact that Loans are subject to the discretion of GBC, GBC may, in
its sole discretion, refuse to make any further Loans after termination. No
termination shall in any way affect or impair any right or remedy of GBC, nor
shall any such termination relieve Borrower of any Obligation to GBC, until all
of the Obligations have been paid and performed in full. Upon payment and
performance in full of all the Obligations and termination of this Agreement,
GBC shall promptly deliver to Borrower termination statements, requests for
reconveyances and such other documents as may be reasonably required to
terminate GBC's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 Events of Default. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and Borrower shall
give GBC immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to GBC by Borrower or any of
Borrower's officers, employees or agents, now or in the future, shall be untrue
or misleading in a material respect; or (b) Borrower shall fail to pay when due
any Loan or any interest thereon or any other monetary Obligation; or (c) the
total Loans and other Obligations outstanding at any time shall exceed the
Credit Limit; or (d) Borrower shall fail to perform any non-monetary Obligation
which by its nature cannot be cured; or (e) Borrower shall fail to perform any
other non-monetary Obligation, which failure is not cured within 5 business days
after the date performance is due; or (f) any levy, assessment, attachment,
seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any
part of the Collateral which is not cured within 10 days after the occurrence of
the same; or (g) any default or event of default occurs under any obligation
secured by a Permitted Lien, which is not cured within any applicable cure
period or waived in writing by the holder of the Permitted Lien; or (h) Borrower
breaches any material contract or obligation, which has or may reasonably be
expected to have a material adverse effect on Borrower's business or financial
condition; or (i) dissolution, termination of existence, insolvency or business
failure of Borrower or any Guarantor; or appointment of a receiver, trustee or
custodian, for all or any part of the property of, assignment for the benefit of
creditors by, or the commencement of any proceeding by Borrower or any Guarantor
under any reorganization, bankruptcy, insolvency, arrangement, readjustment of
debt, dissolution or liquidation law or statute of any jurisdiction, now or in
the future in effect; or (j) the commencement of any proceeding against Borrower
or any Guarantor under any reorganization, bankruptcy, insolvency, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, now or in the future in effect, which is not cured by the
dismissal thereof within 45 days after the date commenced; or (k) revocation or
termination of, or limitation or denial of liability upon, any guaranty of the
Obligations or any attempt to do any of the foregoing; or (l) revocation or
termination of, or limitation or denial of liability upon, any pledge of any
certificate of deposit, securities or other property or asset pledged by any
third party to secure any or all of the Obligations, or any attempt to do any of
the foregoing, or commencement of proceedings by or against any such third party
under any bankruptcy or insolvency law; or (m) Borrower makes any payment on
account of any indebtedness or obligation which has been subordinated to the
Obligations other than as permitted in the applicable subordination agreement,
or if any Person who has subordinated such indebtedness or obligations
terminates or in any way limits or terminates its subordination agreement; or
(n) there shall be a change in the record or beneficial ownership of an
aggregate of more than 20% of the outstanding shares of stock of Borrower, in
one or more transactions, compared to the ownership of outstanding shares of
stock of Borrower in effect on the date hereof, without the prior written
consent of GBC; or (o) Borrower shall generally not pay its debts as they become
due, or Borrower shall conceal, remove or transfer any part of its property,
with intent to hinder, delay or defraud its creditors, or make or suffer any
transfer of any of its property which may be fraudulent under any bankruptcy,
fraudulent conveyance or similar law; or (p) there shall be a material adverse
change in Borrower's business or financial condition. GBC may cease making any
Loans
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hereunder during any of the above cure periods, and thereafter if an Event of
Default has occurred.
7.2 REMEDIES. Upon the occurrence and during the continuance of any Event
of Default, and at any time thereafter, GBC, at its option, and without notice
or demand of any kind (all of which are hereby expressly waived by Borrower),
may do any one or more of the following: (a) Cease making Loans or otherwise
extending credit to Borrower under this Agreement or any other document or
agreement; (b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable, and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any
Obligation; (c) Take possession of any or all of the Collateral wherever it may
be found, and for that purpose Borrower hereby authorizes GBC without judicial
process to enter onto any of Borrower's premises without interference to search
for, take possession of, keep, store, or remove any of the Collateral, and
remain on the premises or cause a custodian to remain on the premises in
exclusive control thereof, without charge for so long as GBC deems it reasonably
necessary in order to complete the enforcement of its rights under this
Agreement or any other agreement; provided, however, that should GBC seek to
take possession of any of the Collateral by Court process, Borrower hereby
irrevocably waives: (i) any bond and any surety or security relating thereto
required by any statute, court rule or otherwise as an incident to such
possession; (ii) any demand for possession prior to the commencement of any suit
or action to recover possession thereof; and (iii) any requirement that GBC
retain possession of, and not dispose of, any such Collateral until after trial
or final judgment; (d) Require Borrower to assemble any or all of the Collateral
and make it available to GBC at places designated by GBC which are reasonably
convenient to GBC and Borrower, and to remove the Collateral to such locations
as GBC may deem advisable; (e) Complete the processing, manufacturing or repair
of any Collateral prior to a disposition thereof and, for such purpose and for
the purpose of removal, GBC shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time GBC obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. GBC shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as GBC deems reasonable, or on GBC's premises, or elsewhere and the
Collateral need not be located at the place of disposition. GBC may directly or
through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale; (g) Demand payment
of, and collect any Receivables and General Intangibles comprising Collateral
and, in connection therewith, Borrower irrevocably authorizes GBC to endorse or
sign Borrower's name on all collections, receipts, instruments and other
documents, to take possession of and open mail addressed to Borrower and remove
therefrom payments made with respect to any item of the Collateral or proceeds
thereof, and, in GBC's sole discretion, to grant extensions of time to pay,
compromise claims and settle Receivables, General Intangibles and the like for
less than face value; and (h) Demand and receive possession of any of Borrower's
federal and state income tax returns and the books and records utilized in the
preparation thereof or referring thereto. All reasonable attorneys' fees,
expenses, costs, liabilities and obligations incurred by GBC with respect to the
foregoing shall be added to and become part of the Obligations, shall be due on
demand, and shall bear interest at a rate equal to the highest interest rate
applicable to any of the Obligations.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and GBC
agree that a sale or other disposition (collectively, "sale") of any Collateral
which complies with the following standards will conclusively be deemed to be
commercially reasonable: (i) Notice of the sale is given to Borrower at least
seven days prior to the sale, and, in the case of a public sale, notice of the
sale is published at least seven days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted; (ii) Notice of the
sale describes the collateral in general, non-specific terms; (iii) The sale is
conducted at a place designated by GBC, with or without the Collateral being
present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m;
(v) Payment of the purchase price in cash or by cashier's check or wire transfer
is required; (vi) With respect to any sale of any of the Collateral, GBC may
(but is not obligated to) direct any prospective purchaser to ascertain directly
from Borrower any and all information concerning the same. GBC shall be free to
employ other methods of noticing and selling the Collateral, in its discretion,
if they are commercially reasonable.
7.4 POWER OF ATTORNEY. Upon the occurrence and during the continuance of
any Event of Default, without limiting GBC's other rights and remedies, Borrower
grants to GBC an irrevocable power of attorney coupled with an interest,
authorizing and permitting GBC (acting through any of its employees, attorneys
or agents) at any time, at its option, but without obligation, with or without
notice to Borrower, and at Borrower's expense, to do any or all of the
following, in Borrower's name or otherwise, but GBC agrees to exercise the
following powers in a commercially reasonable manner: (a) Execute on behalf of
Borrower any documents that GBC may, in its sole discretion, deem advisable in
order to perfect and maintain GBC's security interest in the Collateral, or in
order to exercise a right of Borrower or GBC, or in order to fully consummate
all the transactions contemplated under this Agreement, and all other present
and future agreements; (b) Execute on behalf of Borrower any document
exercising, transferring or assigning any option to purchase, sell or otherwise
dispose of or to lease (as lessor or lessee) any real or personal property which
is part of GBC's Collateral or in which GBC has an interest; (c) Execute on
behalf of Borrower, any invoices relating to any Receivable, any draft against
any Account Debtor and any notice to any Account Debtor, any proof of claim
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in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other
lien, or assignment or satisfaction of mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of payment or
proceeds of Collateral; endorse the name of Borrower upon any instruments, or
documents, evidence of payment or Collateral that may come into GBC's
possession; (e) Endorse all checks and other forms of remittances received by
GBC; (f) Pay, contest or settle any lien, charge, encumbrance, security interest
and adverse claim in or to any of the Collateral, or any judgment based thereon,
or otherwise take any action to terminate or discharge the same; (g) Grant
extensions of time to pay, compromise claims and settle Receivables and General
Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give GBC the same rights of access and other rights with respect
thereto as GBC has under this Agreement; and (k) Take any action or pay any sum
required of Borrower pursuant to this Agreement and any other present or future
agreements. Any and all reasonable sums paid and any and all reasonable costs,
expenses, liabilities, obligations and reasonable attorneys' fees incurred by
GBC with respect to the foregoing shall be added to and become part of the
Obligations, shall be payable on demand, and shall bear interest at a rate equal
to the highest interest rate applicable to any of the Obligations. In no event
shall GBC's rights under the foregoing power of attorney or any of GBC's other
rights under this Agreement be deemed to indicate that GBC is in control of the
business, management or properties of Borrower.
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
sale or other disposition of the Collateral shall be applied by GBC first to the
reasonable costs, expenses, liabilities, obligations and attorneys' fees
incurred by GBC in the exercise of its rights under this Agreement, second to
the interest due upon any of the Obligations, and third to the principal of the
Obligations, in such order as GBC shall determine in its sole discretion. Any
surplus shall be paid to Borrower or other persons legally entitled thereto;
Borrower shall remain liable to GBC for any deficiency. If GBC, in its sole
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, GBC shall have
the option, exercisable at any time, in its sole discretion, of either reducing
the Obligations by the principal amount of purchase price or deferring the
reduction of the Obligations until the actual receipt by GBC of the cash
therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth
in this Agreement, GBC shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between GBC and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
GBC of one or more of its rights or remedies shall not be deemed an election,
nor bar GBC from subsequent exercise or partial exercise of any other rights or
remedies. The failure or delay of GBC to exercise any rights or remedies shall
not operate as a waiver thereof, but all rights and remedies shall continue in
full force and effect until all of the Obligations have been fully paid and
performed.
8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"ACCOUNT DEBTOR" means the obligor on a Receivable.
"AFFILIATE" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"AGREEMENT" and "THIS AGREEMENT" means this Loan and Security Agreement and
all modifications and amendments thereto, extensions thereof, and replacements
therefor.
"BUSINESS DAY" means a day on which GBC is open for business.
"CODE" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"COLLATERAL" has the meaning set forth in Section 2.1 above.
"DEFAULT" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"DEPOSIT ACCOUNT" has the meaning set forth in Section 9105 of the Code.
"ELIGIBLE RECEIVABLES" means Receivables arising in the ordinary course of
Borrower's business from the completed sale of goods or rendition of services,
which GBC, in its sole judgment, shall deem eligible for borrowing, based on
such considerations as GBC may from time to time deem appropriate.
"EQUIPMENT" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"EVENT OF DEFAULT" means any of the events set forth in Section 7.1 of this
Agreement.
"GENERAL INTANGIBLES" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in
all litigation presently or hereafter pending for any cause or claim
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(whether in contract, tort or otherwise), and all judgments now or hereafter
arising therefrom, all claims of Borrower against GBC, rights to purchase or
sell real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including life insurance, key man insurance,
credit insurance, liability insurance, property insurance and other insurance),
tax refunds and claims, computer programs, discs, tapes and tape files, claims
under guaranties, security interests or other security held by or granted to
Borrower, all rights to indemnification and all other intangible property of
every kind and nature (other than Receivables).
"GUARANTOR" means any Person who has guaranteed any of the Obligations.
"INVENTORY" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including all raw materials,
work in process, finished goods and goods in transit), and all materials and
supplies of every kind, nature and description which are or might be used or
consumed in Borrower's business or used in connection with the manufacture,
packing, shipping, advertising, selling or finishing of such goods, merchandise
or other personal property, and all warehouse receipts, documents of title and
other documents representing any of the foregoing.
"LIBOR RATE" means (i) the one-month London Interbank Offered Rate for
deposits in U.S. dollars, as shown each day in The Wall Street Journal (Eastern
Edition) under the caption "Money Rates - London Interbank Offered Rates
(LIBOR)"; or (ii) if the Wall Street Journal does not publish such rate, the
offered one-month rate for deposits in U.S. dollars which appears on the Reuters
Screen LIBO Page as of 10:00 a.m., New York time, each day, PROVIDED that if at
least two rates appear on the Reuters Screen LIBO Page on any day, the "LIBOR
Rate" for such day shall be the arithmetic mean of such rates; or (iii) if the
Wall Street Journal does not publish such rate on a particular day and no such
rate appears on the Reuters Screen LIBO Page on such day, the rate per annum at
which deposits in U.S. dollars are offered to the principal London office of The
Chase Manhattan Bank, in the London interbank market at approximately 11:00
A.M., London time, on such day in an amount approximately equal to the
outstanding principal amount of the Loans, for a period of one month, in each of
the foregoing cases as determined in good faith by GBC, which determination
shall be conclusive absent manifest error.
"OBLIGATIONS" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to GBC, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by GBC in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, loan fees,
termination fees, minimum interest charges and any other sums chargeable to
Borrower under this Agreement or under any other present or future instrument or
agreement between Borrower and GBC.
"PERMITTED LIENS" means the following: (i) purchase money security
interests in specific items of Equipment; (ii) leases of specific items of
Equipment; (iii) liens for taxes not yet payable; (iv) additional security
interests and liens which are subordinate to the security interest in favor of
GBC and are consented to in writing by GBC (which consent shall not be
unreasonably withheld); (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. GBC will have the
right to require, as a condition to its consent under subparagraph (iv) above,
that the holder of the additional security interest or lien sign an
intercreditor agreement on GBC's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of GBC, and
agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.
"PERSON" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"RECEIVABLES" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents and all other forms of
obligations at any time owing to Borrower, all guaranties and other security
therefor, all merchandise returned to or repossessed by Borrower, and all rights
of stoppage in transit and all other rights or remedies of an unpaid vendor,
lienor or secured party.
OTHER TERMS. All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by GBC (including
proceeds of Receivables and payment of the Obligations in full) shall
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be deemed applied by GBC on account of the Obligations three Business Days after
receipt by GBC of immediately available funds. GBC shall not, however, be
required to credit Borrower's account for the amount of any item of payment
which is unsatisfactory to GBC in its discretion, and GBC may charge Borrower's
Loan account for the amount of any item of payment which is returned to GBC
unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations
may be applied, and in GBC's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as GBC shall determine in its sole
discretion.
9.3 CHARGES TO ACCOUNT. GBC may, in its discretion, require that Borrower
pay monetary Obligations in cash to GBC, or charge them to Borrower's Loan
account, in which event they will bear interest at the same rate applicable to
the Loans.
9.4 MONTHLY ACCOUNTINGS. GBC shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by GBC), unless Borrower
notifies GBC in writing to the contrary within sixty days after each account is
rendered, describing the nature of any alleged errors or admissions.
9.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to GBC or Borrower at the addresses shown in the heading to
this Agreement, or at any other address designated in writing by one party to
the other party. All notices shall be deemed to have been given upon delivery
in the case of notices personally delivered, or at the expiration of one
business day following delivery to the private delivery service, or two business
days following the deposit thereof in the United States mail, with postage
prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and GBC and supersede all
prior and contemporaneous negotiations and oral representations and agreements,
all of which are merged and integrated in this Agreement. THERE ARE NO ORAL
UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE PARTIES WHICH ARE NOT
SET FORTH IN THIS AGREEMENT OR IN OTHER WRITTEN AGREEMENTS SIGNED BY THE PARTIES
IN CONNECTION HEREWITH.
9.8 WAIVERS. The failure of GBC at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and GBC shall not waive or diminish
any right of GBC later to demand and receive strict compliance therewith. Any
waiver of any default shall not waive or affect any other default, whether prior
or subsequent, and whether or not similar. None of the provisions of this
Agreement or any other agreement now or in the future executed by Borrower and
delivered to GBC shall be deemed to have been waived by any act or knowledge of
GBC or its agents or employees, but only by a specific written waiver signed by
an authorized officer of GBC and delivered to Borrower. Borrower waives demand,
protest, notice of protest and notice of default or dishonor, notice of payment
and nonpayment, release, compromise, settlement, extension or renewal of any
commercial paper, instrument, account, General Intangible, document or guaranty
at any time held by GBC on which Borrower is or may in any way be liable, and
notice of any action taken by GBC, unless expressly required by this Agreement.
9.9 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of GBC.
9.10 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
9.11 ATTORNEYS FEES AND COSTS. Borrower shall reimburse GBC for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by GBC, pursuant to, or in
connection with, or relating to this Agreement (whether or not a lawsuit is
filed), including, but not limited to, any reasonable attorneys' fees and costs
GBC incurs in order to do the following: prepare and negotiate this Agreement
and the documents relating to this Agreement; obtain legal advice in connection
with this Agreement or Borrower; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, Account Debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of Borrower's books and records;
protect, obtain possession of, lease, dispose of, or otherwise enforce GBC's
security interest in, the Collateral; and otherwise represent GBC in any
litigation relating to Borrower. If either GBC or Borrower files any lawsuit
against the other predicated on a breach of this Agreement, the prevailing party
in such action shall be entitled to recover its reasonable costs and attorneys'
fees, including (but not limited to) reasonable attorneys' fees and costs
incurred in the enforcement of, execution upon or defense of any order, decree,
award or judgment. All attorneys' fees and costs to which GBC may be entitled
pursuant to this Paragraph shall immediately become part of Borrower's
Obligations, shall be due on demand, and shall bear interest at a rate equal to
the highest interest rate applicable to any of the Obligations.
9.12 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and GBC; provided, however,
that Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of GBC, and any prohibited assignment shall be
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<PAGE>
void. No consent by GBC to any assignment shall release Borrower from its
liability for the Obligations.
9.13 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.14 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower
against GBC, its directors, officers, employees, agents, accountants or
attorneys, based upon, arising from, or relating to this Loan Agreement, or any
other present or future document or agreement, or any other transaction
contemplated hereby or thereby or relating hereto or thereto, or any other
matter, cause or thing whatsoever, occurred, done, omitted or suffered to be
done by GBC, its directors, officers, employees, agents, accountants or
attorneys, shall be barred unless asserted by Borrower by the commencement of an
action or proceeding in a court of competent jurisdiction by the filing of a
complaint within one year after the first act, occurrence or omission upon which
such claim or cause of action, or any part thereof, is based, and the service of
a summons and complaint on an officer of GBC, or on any other person authorized
to accept service on behalf of GBC, within thirty (30) days thereafter.
Borrower agrees that such one-year period is a reasonable and sufficient time
for Borrower to investigate and act upon any such claim or cause of action. The
one-year period provided herein shall not be waived, tolled, or extended except
by the written consent of GBC in its sole discretion. This provision shall
survive any termination of this Loan Agreement or any other present or future
agreement.
9.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used
in this Agreement for convenience. Borrower and GBC acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against GBC or Borrower under any rule of
construction or otherwise.
9.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of GBC and Borrower shall
be governed by the laws of the State of California. As a material part of the
consideration to GBC to enter into this Agreement, Borrower (i) agrees that all
actions and proceedings relating directly or indirectly to this Agreement shall,
at GBC's option, be litigated in courts located within California, and that the
exclusive venue therefor shall be Los Angeles County; (ii) consents to the
jurisdiction and venue of any such court and consents to service of process in
any such action or proceeding by personal delivery or any other method permitted
by law; and (iii) waives any and all rights Borrower may have to object to the
jurisdiction of any such court, or to transfer or change the venue of any such
action or proceeding.
9.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND GBC EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN GBC AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF GBC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH GBC OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
FUTURE MEDIA PRODUCTIONS, INC.
BY /s/ ALEX SANDEL
-------------------------------
PRESIDENT OR VICE PRESIDENT
BY
-------------------------------
SECRETARY OR ASS'T SECRETARY
GBC:
GREYROCK BUSINESS CREDIT,
A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION
BY /s/ {Illegible}
-------------------------------
TITLE
------------------------------
44,553-1
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<PAGE>
SCHEDULE TO LOAN AND SECURITY AGREEMENT -.S.
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<PAGE>
[LOGO]
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: FUTURE MEDIA PRODUCTIONS, INC.
ADDRESS: 25136 ANZA DRIVE
VALENCIA, CALIFORNIA 91355
DATE: FEBRUARY 26, 1997
This Schedule is an integral part of the Loan and Security Agreement between
GREYROCK BUSINESS CREDIT, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION
("GBC") and the above-borrower ("Borrower") of even date.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. CREDIT LIMIT
(Section 1.1): An amount not to exceed the lesser of (1) or (2) below:
(1) $12,000,000 at any one time outstanding; or
(2) an amount equal to
(i) RECEIVABLE LOANS. 80% of the amount of
Borrower's Eligible Receivables (as defined in
Section 8 above) (the "Receivable Loans")
(provided that the maximum amount of Receivable
Loans outstanding at any time with respect to
Receivables owing from Packard Bell NEC, Inc.
shall be $2,000,000, and said Receivables shall be
on terms of no more than 60 days after invoice
date); plus
(ii) ADDITIONAL REVOLVING LOANS. The unpaid
principal balance of additional revolving Loans
(the "Additional Revolving Loans"); provided that
the unpaid principal balance of the Additional
Revolving Loans shall not exceed the following
(the "Additional Revolving Loan Limit"): the sum
of $6,500,000, effective on the date hereof,
reducing by $217,000 on March 31, 1997 and by
$217,000 on the last day of each succeeding month,
until the earlier of (i) the date this Agreement
terminates or is terminated, or (ii) August 31,
1999. At the earlier of said dates the Additional
Revolving Loan Limit shall be reduced to zero, and
after said date no further Additional Revolving
Loans will be made.
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<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. INTEREST.
INTEREST RATE (Section 1.2): A rate equal to the "Prime Rate" plus 2% per
annum, calculated on the basis of a 360-day year
for the actual number of days elapsed. The
interest rate applicable to all Loans shall be
adjusted monthly as of the first day of each
month, and the interest to be charged for each
month shall be based on the highest "Prime Rate"
in effect during said month, but in no event shall
the rate of interest charged on any Loans in any
month be less than 7% per annum. "Prime Rate"
means the actual "Reference Rate" or the
substitute therefor of the Bank of America NT & SA
whether or not that rate is the lowest interest
rate charged by said bank. If the Prime Rate, as
defined, is unavailable, "Prime Rate" shall mean
the highest of the prime rates published in the
Wall Street Journal on the first business day of
the month, as the base rate on corporate loans at
large U.S. money center commercial banks.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3. FEES (Section 1.3/Section 6.2):
Loan Fee: $60,000, payable $5,000 per month, commencing
March 1, 1997 and continuing on the first day of
each succeeding month, until the earlier of (i)
the date this Agreement terminates or is
terminated, or (ii) said fee is paid in full.
Termination Fee: --0--
NSF Check Charge: $15.00 per item.
Wire Transfers: $15.00 per transfer.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. MATURITY DATE
(Section 6.1): FEBRUARY 28, 1998, subject to automatic renewal as
provided in Section 6.1 above, and early
termination as provided in Section 6.2 above.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5. REPORTING.
(Section 5.2):
Borrower shall provide GBC with the following:
1. Annual financial statements, as soon as available,
and in any event within 90 days following the end
of Borrower's fiscal year, certified by
independent certified public accountants
acceptable to GBC.
2. Quarterly unaudited financial statements, as soon
as available, and in any event within 30 days
after the end of each fiscal quarter of Borrower.
3. Monthly unaudited financial statements, as soon as
available, and in any event within 30 days after
the end of each month.
4. Monthly Receivable agings, aged by invoice date,
within 10 days after the end of each month.
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<PAGE>
5. Monthly accounts payable agings, aged by invoice
date, and outstanding or held check registers
within 10 days after the end of each month.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. BORROWER INFORMATION:
PRIOR NAMES OF
BORROWER
(Section 3.2): None
PRIOR TRADE
NAMES OF BORROWER
(Section 3.2): None
EXISTING TRADE
NAMES OF BORROWER
(Section 3.2): None
OTHER LOCATIONS AND
Addresses (Section 3.3): None
MATERIAL ADVERSE
LITIGATION (Section 3.10): None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. OTHER COVENANTS:
Borrower shall at all times comply with all
of the following additional covenants:
(1) GUARANTY. Borrower shall concurrently
cause Alex Sandel, Beny Alagem, and
Jason Barzilay to execute and deliver to
GBC a Continuing Guaranty, on GBC's
standard form, with respect to all of
the Obligations, and Borrower shall
cause such Guaranty to continue in full
force and effect throughout the term of
this Loan Agreement and so long as any
portion of the Obligations remains
outstanding.
Borrower: GBC:
FUTURE MEDIA PRODUCTIONS, INC. GREYROCK BUSINESS CREDIT,
a Division of NationsCredit Commercial
Corporation
By /s/ ALEX SANDEL By /s/ {Illegible}
------------------------------------ ---------------------------------
President or Vice President Title
-----------------------------
By
------------------------------------
Secretary or Ass't Secretary
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<PAGE>
[LOGO]
EXTENSION AGREEMENT
BORROWER: FUTURE MEDIA PRODUCTIONS, INC.
ADDRESS: 25136 ANZA DRIVE
VALENCIA, CALIFORNIA 91355
DATE: JANUARY 16, 1998
THIS EXTENSION AGREEMENT is entered into between GREYROCK BUSINESS CREDIT,
a Division of NationsCredit Commercial Corporation ("GBC"), whose address is
10880 Wilshire Blvd., Suite 950, Los Angeles, CA 90024 and the borrower named
above ("Borrower").
The Parties agree to amend the Loan and Security Agreement between them,
dated February 26, 1997 (the "Loan Agreement"), as follows. (This Amendment,
the Loan Agreement, any prior written amendments to said agreements signed by
GBC and the Borrower, and all other written documents and agreements between GBC
and the Borrower are referred to herein collectively as the "Loan Documents".
Capitalized terms used but not defined in this Amendment, shall have the
meanings set forth in the Loan Agreement.)
1. EXTENSION. The Maturity Date, "February 28, 1998", set forth in the
Schedule to the Loan Agreement, is hereby amended by replacing said date with
the date "April 30, 1998".
2. REPRESENTATIONS TRUE. Borrower represents and warrants to GBC that
all representations and warranties set forth in the Loan Agreement, as amended
hereby, are true and correct.
3. GENERAL PROVISIONS. This Amendment, the Loan Agreement, and the other
Loan Documents set forth in full all of the representations and agreements of
the parties with respect to the subject matter hereof and supersede all prior
discussions, representations, agreements and understandings between the parties
with respect to the subject hereof. Except as herein expressly amended, all of
the terms and provisions of
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<PAGE>
the Loan Agreement and the other Loan Documents shall continue in full force and
effect and the same are hereby ratified and confirmed.
BORROWER: GBC:
FUTURE MEDIA PRODUCTIONS, INC. GREYROCK BUSINESS CREDIT,
A DIVISION OF NATIONSCREDIT COMMERCIAL
CORPORATION
BY /s/ ALEX SANDEL
------------------------------- BY /s/ {Illegible}
PRESIDENT OR VICE PRESIDENT -------------------------------
TITLE
BY /s/ DAWN DODSON --------------------------
-------------------------------
SECRETARY OR ASS'T SECRETARY
CONSENT
The undersigned, guarantors, acknowledge that their consent to the
foregoing Agreement is not required, but the undersigned nevertheless do hereby
consent to the foregoing Agreement and to the documents and agreements referred
to therein and to all future modifications and amendments thereto, and any
termination thereof, and to any and all other present and future documents and
agreements between or among the foregoing parties. Nothing herein shall in any
way limit any of the terms or provisions of the Continuing Guarantees of the
undersigned, all of which are hereby ratified and affirmed. This Consent may be
executed in counterparts. The signatures of the undersigned shall be fully
effective even if other persons named below fail to sign this Consent.
/s/ ALEX SANDEL /s/ BENY ALAGEM
------------------------------- -------------------------------
Alex Sandel Beny Alagem
/s/ JASON BARZILAY
-------------------------------
Jason Barzilay
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<PAGE>
AMENDMENT TO LOAN AGREEMENT
BORROWER: FUTURE MEDIA PRODUCTIONS, INC.
ADDRESS: 25136 ANZA DRIVE
VALENCIA, CALIFORNIA 91355
DATE: APRIL 29, 1998
THIS AMENDMENT TO LOAN AGREEMENT is entered into between GREYROCK BUSINESS
CREDIT, a Division of NationsCredit Commercial Corporation ("GBC"), whose
address is 10880 Wilshire Blvd., Suite 950, Los Angeles, CA 90024 and the
borrower named above ("Borrower").
The Parties agree to amend the Loan and Security Agreement between them,
dated February 26, 1997 (as amended, the "Loan Agreement"), as follows,
effective on the date hereof. (This Amendment, the Loan Agreement, any prior
written amendments to said agreements signed by GBC and the Borrower, and all
other written documents and agreements between GBC and the Borrower are referred
to herein collectively as the "Loan Documents". Capitalized terms used but not
defined in this Amendment, shall have the meanings set forth in the Loan
Agreement.)
1. INCREASE CREDIT LIMIT. Section 1(1) of the Schedule, which presently
reads as follows:
"(1) $12,000,000 at any one time outstanding; or"
is amended to read as follows:
"(1) $20,000,000 at any one time outstanding; or"
2. INCREASE IN ADDITIONAL REVOLVING LOAN. Section 1(2)(ii) of the
Schedule, which presently reads as follows:
"(ii) ADDITIONAL REVOLVING LOANS. The unpaid principal balance
of additional revolving Loans (the 'Additional Revolving Loans');
provided that the unpaid principal balance of the Additional
Revolving Loans shall not exceed the following (the 'Additional
Revolving Loan Limit'): the sum of $6,500,000, effective on the
date hereof, reducing by $217,000 on March 31, 1997 and by
$217,000 on the last day of each succeeding month, until the
earlier of (i) the date this Agreement terminates or is
terminated, or (ii) August 31, 1999. At the earlier of said
dates the Additional Revolving Loan Limit shall be reduced to
zero, and after said date no further Additional Revolving Loans
will be made."
-1-
<PAGE>
is amended to read as follows:
"(ii) Additional REVOLVING LOANS. The unpaid principal balance
of additional revolving Loans (the 'Additional Revolving Loans');
provided that the unpaid principal balance of the Additional
Revolving Loans shall not exceed the following (the 'Additional
Revolving Loan Limit'): the sum of $15,000,000, effective on
April 29, 1998, reducing by $312,500 on June 30, 1998 and by
$312,500 on the last day of each succeeding month, until the
earlier of (i) the date this Agreement terminates or is
terminated, or (ii) the fourth anniversary of the date hereof.
At the earlier of said dates the Additional Revolving Loan Limit
shall be reduced to zero, and after said date no further
Additional Revolving Loans will be made."
3. EXTENSION. The Maturity Date, "April 30, 1998", set forth in the
Schedule to the Loan Agreement, is hereby amended by replacing said date with
the date "May 31, 1999".
4. CREDIT BALANCE. To the extent GBC at any time or from time to time is
holding collected funds of the Borrower, which are not to be applied to the
Obligations under the Loan Agreement or other Loan Documents, GBC agrees to pay
Borrower interest on such funds at a rate equal to the Prime Rate minus 2% per
annum, which interest shall be credited to Borrower's account monthly for each
month as of the first day of the following month. GBC shall have the right, in
its discretion to pay any such collected funds to Borrower at any time.
5. DIVIDENDS. Without limiting any of the covenants or provisions in the
Loan Agreement, without GBC's prior written consent, Borrower shall not pay or
declare, directly or indirectly, any dividends on Borrower's stock (except for
(i) dividends payable solely in stock of Borrower and (ii) dividends to
Borrower's shareholders, in an amount not greater than the amount of the federal
income tax payable by them as a result of their being taxed on all or a portion
of the Borrower's net income, by reason of the fact that the Borrower is a
Subchapter S corporation for federal income tax purposes, provided that no such
dividend shall be paid if, at the time it is to be paid and after giving effect
thereto, an Event of Default, or an event which, with notice or passage of time
or both, would constitute an Event of Default has occurred), and Borrower shall
not make any other payments, distributions, or transfers of assets, of any kind
or description, directly or indirectly, for any reason or in any transaction, to
any shareholders of Borrower, or any Affiliates of such shareholders, except for
payment of reasonable salaries in the ordinary course of business to
shareholders of Borrower who are full-time employees of Borrower.
6. REPRESENTATIONS TRUE. Borrower represents and warrants to GBC that
all representations and warranties set forth in the Loan Agreement, as amended
hereby, are true and correct.
7. GENERAL PROVISIONS. This Amendment, the Loan Agreement, and the other
Loan Documents set forth in full all of the representations and agreements of
the parties with respect to the subject matter hereof and supersede all prior
discussions, representations, agreements and understandings between the parties
with respect to the subject hereof. Except as herein expressly amended, all of
the terms and provisions of the Loan Agreement and the other Loan Documents
shall continue in full force and effect and the same are hereby ratified and
confirmed.
-2-
<PAGE>
BORROWER: GBC:
FUTURE MEDIA PRODUCTIONS, INC. GREYROCK BUSINESS CREDIT,
A DIVISION OF NATIONSCREDIT COMMERCIAL
CORPORATION
BY /s/ ALEX SANDEL
-----------------------------
PRESIDENT OR VICE PRESIDENT BY /s/ {Illegible}
-----------------------------
TITLE
--------------------------
BY /s/ DAWN DODSON
-------------------------------
SECRETARY OR ASS'T SECRETARY
CONSENT
The undersigned, guarantors, acknowledge that their consent to the
foregoing Agreement is not required, but the undersigned nevertheless do hereby
consent to the foregoing Agreement and to the documents and agreements referred
to therein and to all future modifications and amendments thereto, and any
termination thereof, and to any and all other present and future documents and
agreements between or among the foregoing parties. Nothing herein shall in any
way limit any of the terms or provisions of the Continuing Guarantees of the
undersigned, all of which are hereby ratified and affirmed. This Consent may be
executed in counterparts. The signatures of the undersigned shall be fully
effective even if other persons named below fail to sign this Consent.
/s/ ALEX SANDEL /s/ BENY ALAGEM
- -------------------------------- ---------------------------------
Alex Sandel Beny Alagem
/s/ JASON BARZILAY
- --------------------------------
Jason Barzilay
<PAGE>
EXHIBIT 10.14
EXTENSION AGREEMENT
BORROWER: FUTURE MEDIA PRODUCTIONS, INC.
ADDRESS: 25136 ANZA DRIVE
VALENCIA, CALIFORNIA 91355
DATE: SEPTEMBER 4, 1998
This Extension Agreement is entered into between Greyrock Capital, a
Division of NationsCredit Commercial Corporation (formerly Greyrock Business
Credit) ("GBC"), whose address is 10880 Wilshire Blvd., Suite 950, Los
Angeles, CA 90024 and the borrower named above ("Borrower").
The Parties agree to amend the Loan and Security Agreement between them,
dated February 26, 1997 (the "Loan Agreement"), as follows. (This Amendment,
the Loan Agreement, any prior written amendments to said agreements signed by
GBC and the Borrower, and all other written documents and agreements between
GBC and the Borrower are referred to herein collectively as the "Loan
Documents". Capitalized terms used but not defined in this Amendment, shall
have the meanings set forth in the Loan Agreement.)
1. EXTENSION. The Maturity Date, "May 31, 1999", set forth in the
Schedule to the Loan Agreement, is hereby amended by replacing said date with
the date "May 31, 2000".
2. REPRESENTATIONS TRUE. Borrower represents and warrants to GBC that
all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
3. GENERAL PROVISIONS. This Amendment, the Loan Agreement, and the
other Loan Documents set forth in full all of the representations and
agreements of the parties with respect to the subject matter hereof and
supersede all prior discussions, representations, agreements and
understandings between the parties with respect to the subject hereof.
Except as herein expressly amended, all of the terms and provisions of the
Loan Agreement and the other Loan Documents shall continue in full force and
effect and the same are hereby ratified and confirmed.
Borrower: GBC:
FUTURE MEDIA PRODUCTIONS, INC. GREYROCK CAPITAL,
a Division of NationsCredit Commercial
Corporation
By /s/ [ILLEGIBLE]
----------------------------
President or Vice President
By /s/ [ILLEGIBLE]
--------------------------------
By /s/ [ILLEGIBLE] Title [ILLEGIBLE]
------------------------------- ------------------------------
Secretary or Ass't Secretary
<PAGE>
CONSENT
The undersigned, guarantors, acknowledge that their consent to the
foregoing Agreement is not required, but the undersigned nevertheless do
hereby consent to the foregoing Agreement and to the documents and agreements
referred to therein and to all future modifications and amendments thereto,
and any termination thereof, and to any and all other present and future
documents and agreements between or among the foregoing parties. Nothing
herein shall in any way limit any of the terms or provisions of the
Continuing Guarantees of the undersigned, all of which are hereby ratified and
affirmed. This Consent may be executed in counterparts. The signatures of
the undersigned shall be fully effective even if other persons named below
fail to sign this Consent.
/s/ ALEX SANDEL
- -------------------------------- -------------------------------
Alex Sandel Beny Alagem
- --------------------------------
Jason Barzilay
<PAGE>
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement is made as of the 1st day of November, 1997
(the "Effective Date") by and between Packard Bell NEC, Inc., 6041 Variel
Avenue, Woodland Hills, California 91367 ("Purchaser" or "PB NEC"), and
Future Media Productions, Inc. ("Seller" or "Future").
In consideration of the mutual promises construed herein, the parties agree
to the following terms and conditions:
1. TERM. The term of this Agreement (the "Term") shall be effective for
one year from the effective date of this Agreement, except if
terminated pursuant to Section 20 hereunder. The Term shall be extended
for an additional one year period unless terminated by either party,
by giving no less than 30 days notice prior to the end of the initial
one year period.
During the Term and any subsequent extension, Seller agrees to (i)
manufacture, replicate and assemble the class of products listed in
Attachment A and B hereto, as amended from time to time (the
"Products") and (ii) sell to Purchaser the Products as ordered by
Purchaser on its Purchase Orders, as defined in Sections 3 and 4 of
this Agreement. This Agreement may be amended to include additional
products, part/assembly numbers, changes based upon a request for a
price quotation and additional items by written amendment signed by
duly authorized representatives of each party in accordance with the
terms, conditions and charges set forth in Attachment A hereto.
2. FORECASTS. Purchaser shall provide Seller with a rolling six (6) month
forecast of its estimated volume of Products, broken down by calendar
month (the "Product Forecast"). The first Product Forecast shall be
provided three (3) weeks prior to the Effective Date and each
subsequent Product Forecast shall be provided at least three (3) weeks
prior to the commencement of each Quarterly Period, as defined in
Section 4 below (and cover a period of six (6) months). Except as
provided in Section 4 below, the Product Forecast shall not be held to
imply any commitment by Purchaser to purchase a fixed quantity of any
Product under this Agreement.
3. PURCHASE ORDERS. Each delivery of Products hereunder will be initiated
by written or electronic purchase orders (collectively, "Purchase
Orders") submitted by Purchaser to Seller via mail, facsimile or
through electronic data interface ("EDI"), provided that any such EDI
submission shall be pursuant to and in accordance with the terms and
conditions of a separate EDI agreement that the parties shall enter
into for this purpose. Seller will acknowledge any Purchase Order in
writing as soon as reasonably possible, but in no event later than ten
(10) business days after the date of receipt of such Purchase Order.
Failure to respond within such period shall be deemed an acceptance of
such Purchase Order.
Each Purchase Order issued hereunder shall automatically be deemed to
include, without the necessity of reference or incorporation, all the terms
and provisions of this Agreement unless Purchaser and Seller otherwise agree
in writing executed by both parties. The preprinted terms and conditions on
the face and reverse of each Purchase Order form shall automatically be
deemed to be deleted and inapplicable without the necessity of a statement to
that effect on the face of the Purchase Order.
Each Purchase Order shall contain a complete list of the Products covered by
the order specifying quantity, part or assembly number, description for each
part or assembly number, the price of each Product, any additional charges
and costs, the total amount payable by Purchaser exclusive of taxes and
transportation charges, the location to which each Product is to be delivered
and its requested delivery date.
Based upon the forecasts received Seller agrees to maintain an ongoing supply
equal to one months forecast to minimize lead-time in the event Purchaser
requires advanced deliveries.
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4. PRICING. The pricing for Products ordered hereunder during any
calendar quarter (the "Quarterly Period") is, per unit F.O.B. Point, as
defined in Section 7, the price as agreed to in advance between the parties
three (3) weeks prior to such Quarterly Period, based on Purchaser's Product
Forecast for such Quarterly Period. Unless otherwise agreed to by the
parties, such price will be fixed for that Quarterly Period. The parties
agree that the pricing, terms, conditions and quality for the Products to be
sold hereunder will be Competitive Products (as defined below).
Purchaser agrees to order from Seller and Seller agrees to sell to Purchaser
substantially all of the United States requirements or Purchaser and
Purchaser's subsidiaries and affiliates, for Compact Discs to be purchased
from third party suppliers during the initial twelve (12) month period and
during each subsequent twelve (12) month period of this Agreement, provided
that the Products offered by Seller hereunder are Competitive Products.
Purchaser's subsidiaries and affiliates shall be entitled to issue Purchase
Orders under this Agreement but their requirements must be included in
Purchasers forecasts pursuant to paragraph 2 and 3 above.
A Product offered hereunder by Seller shall be a "Competitive Product" if:
the pricing, terms, conditions and quality for such Product are at least as
favorable to Purchaser as those available from any other third party
supplier. (See attachment A).
Upon agreement on price, as described above, Purchaser shall place a
quarterly Purchase Order (the "Quarterly Purchase Order"), under the
procedures set forth in Section 3 of this Agreement, for the three months of
each Quarterly Period, for which the prices were agreed to, and which shall
specify the same quantity of Products for which pricing has been agreed to
for each of the first three (3) months as are set forth in the Product
Forecast provided by Purchaser to Seller for the purpose of negotiating
prices, as specified above, subject to rescheduling and cancellation, as set
forth in Sections 15 and 16 of this Agreement.
The parties agree that the delivery of Products scheduled during the first
month of the Quarterly Purchase Order shall be firm (i.e., noncancelable and
not subject to rescheduling) and (subject to the terms and conditions
herein). Purchaser shall be obligated to purchase such Products. Seller
acknowledges that Purchaser requires flexibility for its purchases of
Products during the second and third months of any Quarterly Period.
Accordingly, Purchaser may reschedule or cancel quantities of Products ordered
under a Quarterly Purchase Order only in accordance with the following
provisions:
(a) Purchaser shall be allowed the flexibility to reschedule (but not
cancel) the delivery of up to twenty percent (20%) of the Products originally
ordered, in the Quarterly Purchase Order for delivery in the second month of
the applicable Quarterly Period, subject to the compliance with the other
terms and conditions applicable to rescheduling, as set forth in Section 15.
(b) Purchaser shall be allowed the flexibility to reschedule or cancel
the delivery of up to thirty percent (30%) of the Products originally ordered
in the Quarterly Purchase Order for delivery in the third month of the
applicable Quarterly Period subject to the compliance with the other terms
and conditions applicable to rescheduling and cancellation, as set forth in
Sections 15 and 16 and subject further to the provisions set forth in the
immediately following paragraph.
Purchaser shall not be entitled to cancel the delivery of any Products
covered by (b) above due to pricing reasons but instead, shall only be
permitted to cancel the delivery of such Products due to a change in
Purchaser's volume requirements. If Purchaser cancels the delivery of any
Products covered by (b) above, Purchaser shall reimburse Seller for Seller's
cost of materials procured in reliance upon the manufacture and sale of
such Products to Purchaser, subject to Seller's best efforts to mitigate its
damages, such as by reselling or reusing such materials or negotiating with
its vendors to accept the return of such materials at no charge.
Notwithstanding the foregoing, Purchaser is not prevented from issuing
additional Purchase Orders to the Quarterly Purchase Order for delivery of
Products during the same Quarterly Period, such Purchase Order(s) and
corresponding delivery(ies) being then subject to this Agreement, without
limitation or exception, including, without limitation, the provisions
applicable to Product Lead-Time, rescheduling and cancellation.
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Purchaser fully understands that the pricing offered by Seller for a given
Quarterly Period is also based upon the assumption of a homogenous production
level from month to month and therefore shall use reasonable efforts to issue
balanced Purchase Orders, including the Quarterly Purchase Order, during each
Quarterly Period, in order to avoid additional costs to Seller.
Purchaser shall pay, as a separate item, all duties, charges, sales, use or
value added taxes or any similar charges levied on the Products sold
hereunder, exclusive of any taxes assessed on Seller's income.
5. PAYMENT TERMS. Payment to Seller for the Products shall be made by
check or by bank wire transfer to Seller's designated depository account
as Seller may designate in writing to Purchaser within thirty (30) days
following delivery at the F.O.B. Point as defined below.
If payment is not made within such period, Seller may withhold future
deliveries until Purchaser makes payment in full and establishes acceptable
credit arrangements with Seller. In addition, for and on any payment due
hereunder not made as specified above, Seller shall be entitled to charge
Purchaser a payment fee equal to (a) one percent (1%)* above the one (1)
month London InterBank Overnight Rate ("LIBOR") from time to time in effect
for payments thirty (30) days or less overdue and (b) the Prime Rate in
effect from time to time for payments more than thirty (30) days overdue.
6. TITLE/RISK OF LOSS. Risk of loss and title to the Products shall pass
to Purchaser at the time that Seller delivers Products at the F.O.B.
Point, as defined below.
7. FREIGHT TERMS. All Products delivered under this Agreement will be
suitably packed for shipment in Seller's standard shipping containers,
marked for shipment to the address specified in Purchaser's Purchase
Order, and delivered F.O.B. to Purchaser's facility in Sacramento,
California or such other U.S. or foreign destination point selected by
Purchaser ("the F.O.B. Point") and title and risk of loss shall pass to
Purchaser at such F.O.B. Point.
8. PRODUCT WARRANTY.
8.1 Scope of Warranty and Warranty Period
Seller warrants that the Products shall conform to Purchaser's
Specifications as well as any similar follow-on documents for future
products that are agreed upon between Seller and Purchaser, and shall be
free from defects in workmanship and material under normal use and
service for a period of one (1) year from the date of the Product's
delivery at the F.O.B. point (the "Warranty Period"). Seller, shall
replace any such nonconforming or defective Product that is returned
freight charges collect, during the Warranty Period at no additional
charge to Purchaser, and in accordance with Purchaser's packaging and
labeling requirements applicable to the original defective and/or
nonconforming Product provided that the following requirements for a
valid warranty claim (the "Valid Warranty Claim Requirements") are met:
(I) The Product is within the Warranty Period at the time Purchaser
requests a Return Material Authorization ("RMA") Number;
(ii) Purchaser complies with Seller's RMA Procedures defined in
Section 8.2;
(iii) Seller confirms that the returned Product is defective and/or
nonconforming; and
(iv) None of the exclusions from Seller's warranty coverage, as
defined below, apply.
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Any Product that meets all of the above requirements shall be replaced with a
Product at the same revision level as the defective or nonconforming Product
returned by Purchaser, unless Purchaser specifically requests an update prior
to the return of such Product to Seller, Seller quotes an additional charge
to Purchaser and Purchaser agrees in writing to pay the additional charge for
the updated revision level of the Product. Such additional charge shall be
invoiced by Seller to Purchaser upon shipment of the updated Product and paid
by Purchaser in accordance with Section 5 of this Agreement.
If all of the above requirements have been met and provided that Purchaser
(a) returns defective and nonconforming Product on a weekly basis and not in
any intermittent batch mode and (b) sends Seller weekly reports reflecting
all quality problems associated with the Products, Seller shall ship the
replaced Product the F.O.B. Point within thirty (30) days following receipt
of the defective or nonconforming Product. If Seller fails to ship any
replaced Product within thirty (30) days from the date Seller receives the
corresponding defective or nonconforming Product, Purchaser's sole and
exclusive remedy and Seller's entire liability in contract, tort or otherwise
shall be limited to issuing a credit memo equal to the price invoiced for the
defective or nonconforming Product not timely replaced by Seller. If
Purchaser elects to purchase new Products as substitutes for the defective or
nonconforming Products not timely replaced by Seller, Purchaser shall issue a
new Purchase Order for the sale of such new Products, subject to the terms
and conditions set forth in this Agreement.
8.2 Seller's Return Material Authorization Procedures
Purchaser shall request in writing RMA numbers from Seller's scheduling group
on a weekly basis for those Products that Purchaser believes meet all of the
Valid Warranty Claim Requirements. Purchaser shall make such request only
after having tested the allegedly defective or nonconforming Product using
the same or substantially the same test procedures made available to and
possibly used by Seller as well as having determined that such requirements
have been met in order to minimize "No Trouble Found" or "NTF" situations.
Each written request for a RMA number from Seller shall specify the following:
(i) Description of the Product by part number;
(ii) Quantity of the affected Products so described;
(iii) Description of the defect and/or nonconformity
Seller shall review each written request and the above stated information to
determine whether, based upon the information supplied in the request, the
Valid Warranty Claim Requirements have been met. If, based upon such review,
Seller and Purchaser agree that the Valid Warranty Requirements have not been
met, then Seller shall have no obligation to issue a RMA number and Purchaser
agrees to be bound by such action. Seller shall have the right to physically
inspect the allegedly defective or nonconforming Product by visiting
Purchaser's facility prior to the issuance of a RMA but such inspection shall
be at Seller's expense. Otherwise, Seller shall, within two (2) business days
from receipt of the written request, issue to Purchaser a RMA number. The
issuance of a RMA number by Seller shall not be deemed to be an acceptance
that all of the Valid Warranty Claim Requirements have been met but shall be
a precondition to any authorized return of defective or nonconforming
Product by Purchaser.
Purchaser shall attach a defect and/or nonconformity tag to each Product
returned to Seller and for which Seller has issued a RMA number that details
the defect and/or nonconformity found by Purchaser (unless an update to the
Product's revision level has been requested and approved by Seller, in which
case a purchase order shall be issued specifying the applicable charge quoted
by Seller for the update) along with a document referencing the RMA number
issued by Seller. Purchaser shall ship the defective and/or nonconforming
Product, along with the above requested information to the Seller's address
set forth at the beginning of this Agreement or such other address as Seller
may provide as the designated address for such replacements from time to time
during the term of this Agreement.
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8.3 Seller's Confirmation of the Defect and/or Nonconformity of
Returned Product
Seller shall review both the returned Product and the accompanying
information and confirm whether all of the Valid Warranty Claim Requirements
have been met. Seller shall notify Purchaser in writing within thirty (30)
days of receipt of the returned Product if any of the Valid Warranty Claim
Requirements have not been met and shall specify those Requirements that have
not been met. Purchaser shall have ten (10) days to agree or disagree with
Seller's determination. If Purchaser and Seller agree, then the rights and
remedies set forth in the following paragraphs of this Section 8.3 shall
apply. If Purchaser and Seller do not agree, then both parties shall try to
resolve the dispute through the dispute resolution provisions set forth in
Section 28 of this Agreement.
If Seller and Purchaser agree that the Valid Warranty Claim Requirements in
Section 8.1 (i), (ii) or (iv) have not been met, Seller shall be entitled to
(a) return the Products to Purchaser by delivering the same to the F.O.B.
Point and invoicing Purchaser all of Seller's labor costs and direct overhead
incurred while inspecting the returned Products, or (b) treat the returned
Product as a request for out of warranty repair and charge Purchaser Seller's
labor costs and direct overhead incurred while inspecting the returned
Products and Seller's out of warranty replacement cost. Seller shall be
entitled to invoice Purchaser for the amount in subsection (b) only if
Purchaser has agreed in writing to pay such amount described in this
subsection (b) within five (5) days of written notice from Seller of such
amount. Purchaser's failure to agree in writing to pay such amount shall
authorize Seller to invoice Purchaser for the amount described in subsection
(a). Any out of warranty replacements shall be shipped to the F.O.B. Point
within ninety (90) days from the date of Purchaser's agreement to pay the out
of warranty costs. Purchaser shall be entitled to return a Product that is
not under warranty with a request that Seller replace it with a Product at a
later revision level, subject to the parties' prior written agreement on the
terms, conditions and pricing for such out of warranty upgrade.
If Seller and Purchaser agree that the Valid Warranty Claim Requirement in
Section 8.1 (iii) has not been met, then Seller shall be entitled to return
the Products to Purchaser by delivering the same to the F.O.B. Point and if
such Valid Warranty Claim Requirement has not been met in more than twenty
percent (20%) of any batch of the Products returned by Purchaser, Seller
shall also be entitled to invoice the Purchaser Seller's labor costs and
direct overhead incurred while inspecting the returned Products.
In the event Seller and Purchaser agree that any of the Valid Warranty Claim
Requirements have not been met, Purchaser shall also remain liable for
payment of the purchase price for the returned Products.
8.4 Exclusions from Seller's Warranty Coverage
Seller has no obligation to replace any defective and/or nonconforming
Products within or outside of their applicable Warranty Period if the defect
and/or nonconformity is caused by (i) any material or any related items
provided by Purchaser or Purchaser's designated vendors in connection
therewith, (ii) defects in or adherence to Purchaser's Specifications or
requirements, (iii) normal wear and tear or (iv) catastrophe, fault or
negligence of Purchaser or any third party, improper or unauthorized use, use
in a manner for which the Products were not designed by Purchaser or any
third party or due to causes external to the Products.
8.5 Epidemic Manufacturing Failures
If at least two and one half percent (2.5%) of the Products in a single
shipment are confirmed by Seller to have the same or substantially the same
defect and/or nonconformity as a result of Seller's manufacturing process,
such defect and/or nonconformity shall be deemed to be an "Epidemic
Manufacturing Failure" for purposes of this Agreement. In the case of any
Epidemic Manufacturing Failure, Seller shall have the right to visit
Purchaser's facility to confirm the existence of the Epidemic Manufacturing
Failure, provided that such inspection shall not disrupt Purchaser's division
operation and that advance written notice is given. In addition, the parties
shall agree on a case by case basis as to a fair and equitable remedy for the
applicable Epidemic Manufacturing Failure, provided that the limitations of
remedy set forth in Section 11 shall apply to any fair and equitable remedy
under this Section.
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8.6 Survival of Warranty Obligations
Seller's obligation under this Section 8 shall survive the expiration,
termination or cancellation of this Agreement for any reason whatsoever up to
the end of the last Warranty Period applicable to Products sold by Seller and
purchased by Purchaser hereunder.
9. ADDITIONAL WARRANTIES:
(a) BY PURCHASER: Purchaser warrants that (i) it has the authority to
enter into this Agreement, (ii) it is under no restriction or obligation with
anyone that conflicts with any provision of this Agreement, (iii) compliance
with the specifications for Products provided by Purchaser that are unique or
different from industry standard specifications for similar products, if any,
will not infringe any patent, copyright, trade secret right or other
intellectual property right of any third party, provided that Purchaser shall
not be in breach of this warranty to the extent that the infringement is due
to Seller's manufacture of the Products if the manufacturing procedure used
is not set forth in the specification and is otherwise within the sole
control of Seller, (iv) the use, resale and/or distribution of the Products
in combination with any other components not supplied by Seller (whether
under this Agreement or another agreement between Purchaser and Seller) do
not infringe any patent, copyright, trade secret right or other intellectual
property right of any third party when such claim would not have arisen but
for that combination and (v) except as specified in Attachment D hereto, it
does not know of any claims or suits threatened or pending against Purchaser
with regard to the warranty specified in (iv) above. Notwithstanding anything
to the contrary set forth above, Purchaser's warranty to Seller set forth in
Section 10(a)(iv) shall not apply to any Product that has no substantial
noninfringing use but Purchaser's warranty to Seller set forth in Section
10(a)(iii) shall apply to such a Product to the extent that the requirements
set forth in Section 10(a)(iii) are met. Purchaser agrees that it will
promptly provide written notice to Seller upon receipt of any notification
from its vendors and licensors, concerning or in any way referencing (a) any
claim of breach or default, or the cancellation, expiration or termination of
any agreements with such vendors and licensors pertinent to the Products or
(b) the threat or commencement of litigation by any such vendor or licensor
against Purchaser in connection with the Products, either separately or in
combination with other components or products, or with Purchaser's execution
and performance under this Agreement.
(b) BY SELLER: Seller warrants that (i) it has the authority to enter
into this Agreement, (ii) it is under no restriction or obligation with
anyone that conflicts with any provision of this Agreement, (iii) Seller's
manufacture, manufacturing processes and sale of the Products do not infringe
any patent, copyright, trade secret or other proprietary right of any other
person or entity in the Products, provided however that this warranty shall
not apply to any actual or threatened claim arising out of Seller's compliance
with Purchaser's unique specifications (including those different from
industry standard specifications for similar products and any manufacturing
procedures that are not industry standard and that are set forth in the
specifications) for the Products or the distribution, use and/or resale by
Purchaser or its customers of the Products in combination with any other
components or products not provided by Seller, where such claim would not
have arisen but for such combination, and (iv) it does not know of any claims
or suits threatened or pending against Seller with regard to the warranty
specified in (iii) above. Notwithstanding anything to the contrary set forth
above, Seller's warranty to Purchaser set forth in Section 10(b)(iii) shall
apply if the Product, as a result of its manufacture, manufacturing processes
and sale has no substantial noninfringing use. Seller agrees that it will
promptly provide written notice to Purchaser upon receipt of any notification
from its vendors and licensors, concerning or in any way referencing (a) any
claim of breach or default, or the cancellation, expiration or termination of
any agreements with such vendors and licensors pertinent to the Products or
(b) the threat or commencement of litigation by any such vendor or licensor
against Seller in connection with the Products or with Seller's execution and
performance of this Agreement.
The parties' obligations under this Section 9 shall survive the expiration,
termination or cancellation of this Agreement for any reason whatsoever.
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10. EXCUSED PERFORMANCE. Neither party shall be in default or be liable for
any delay in its performance under this Agreement resulting directly or
indirectly from acts of God, civil or military authority, civil disturbance,
war, strikes, work stoppages, shipping disruptions, fires, catastrophes, or
other causes beyond its reasonable control, provided however, that a party
shall not be excused from performance if the cause is within the reasonable
control of such party.
11. WARRANTY EXCLUSION. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES,
INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE NOT SPECIFIED HEREIN RESPECTING THIS AGREEMENT, THE
PRODUCTS OR SELLER'S MANUFACTURE AND SALE OF THE PRODUCTS HEREUNDER.
12. LIMITATIONS OF REMEDY. In no event shall either party be liable for any
special, indirect, incidental or consequential damages or lost profits to
anyone arising out of this Agreement, its manufacture and sale of the
Products, or the distribution or use of any Product purchased hereunder,
either separately or as combined with other products, provided however that
this limitation shall not apply to Section 23 of this Agreement.
Except for an action instituted or claim made for payment of taxes, no action
in any form arising out of this Agreement shall be instituted or claim made
more than two (2) years after the cause of action has arisen or in the case
of nonpayment, more than two (2) years from the date of last payment or
promise to pay.
13. DELIVERY. Seller shall make all deliveries of Products at the F.O.B.
Point. All Purchase Orders shall be subject to the applicable delivery
Lead-time set forth in Section 14 hereunder.
14. LEAD-TIME. The Lead-Times, as defined below, for Products supplied under
this Agreement shall be quoted in writing by Seller to Purchaser on a
quarterly basis within ten (10) business days after Seller's receipt of
Purchaser's most recent Forecast, provided that if no Lead-Time is provided
by Seller for one or more Products, the most recent Lead-Time communicated by
Seller to Purchaser shall continue to apply for Products ordered during the
calendar quarter to which the Lead-Time applies. Such quoted Lead-Times shall
be binding upon Purchaser and Seller for any Purchase Order issued by
Purchaser within the time quoted by Seller that sets forth the same quantity
and part or assembly number upon which Seller provided Purchaser with the
requested Lead-Time. If any Purchase Order exceeds the volume of Products set
forth in Purchaser's most recent Forecast, Seller shall use reasonable
efforts to deliver Products within the then current Lead-Times, provided that
Seller shall have no liability to Purchaser if such efforts are not
successful.
"Lead-time" shall be the total time required for Seller to (1) receive all
material specified under Purchase Orders, as applicable, (2) manufacture the
Products to Purchaser's specifications and (3) cause the Products to be
delivered to the designated delivery point.
15. RESCHEDULES. For Products that are subject to any Quarterly Purchase
Order to the extent set forth in Section 4 and for Products that are subject
to Purchase Orders other than the Quarterly Purchase Order, Purchaser may
reasonably request, from time to time, that Seller either delay or accelerate
the delivery date in order to meet Purchaser's revised requirements for
certain Products. In those cases, Seller shall use reasonable efforts to
reschedule Purchaser's orders provided that (i) Purchaser notifies Seller in
writing at least fourteen (14) days prior to the scheduled shipment date for
a given order and (ii) any individual Purchase Order may not be rescheduled
more than once.
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16. CANCELLATIONS. For Products that are subject to any Quarterly Purchase
Order to the extent set forth in Section 4 and for Products that are subject
to Purchase Orders other than the Quarterly Purchase Order, Purchaser may
cancel delivery of Products upon notice to Seller at least thirty (30) days
prior to the originally scheduled shipment date for such Products. Purchaser
will have right to cancel any shipments within thirty (30) days of the
scheduled shipment date for such shipments. If Purchaser does so cancel,
Purchaser shall be liable for the Products' full purchase price, except to
the extent that Seller, through the use of its best efforts has been
successful in (i) reselling or re-using such materials for purchase orders
that Seller has accepted from other purchasers at time of order cancellation,
if any, and for which Seller has not already procured material or (ii)
negotiating with its vendors to accept the return of such material at no
charge. In the event of any other cancellation by Purchaser, Purchaser will
reimburse Seller for all of Sellers cost of materials procured in reliance
upon the manufacturer's replication and sale of Products to Purchaser to
Sellers best efforts to mitigate its damages, such as by (i) reselling or
re-using such materials for purchase orders that Seller has accepted from
other purchasers at time of order cancellation, if any, and for which Seller
has not already procured or (ii) negotiating with its vendor to accept the
return of such material at no charge.
17. CONFIDENTIALITY AND PROPRIETARY RIGHTS. Each party shall keep
information obtained from the other in confidence and all such information
shall be controlled and utilized only in accordance with the Mutual
Non-Disclosure and Confidentiality Agreement executed by the parties, a copy
of which is attached hereto as Attachment C. The provisions of this paragraph
and the Mutual Non-Disclosure and Confidentiality Agreement shall survive
the termination, cancellation or expiration of this Agreement.
18. SPECIFICATIONS. Purchaser may provide all specifications, including but
not limited to, all designs and working drawings necessary for the manufacture
or replication of the Products. Purchaser's specifications are listed in
Attachment B hereto. Neither party shall make any changes to the
specifications for a Product to be supplied herein without first securing the
written consent of the other party. Specification changes may affect matters
such as but not limited to Product pricing, warranty, performance and
lead-time.
19. NO THIRD PARTIES. Unless expressly provided herein to the contrary, this
Agreement is for the exclusive benefit of the Seller and Purchaser and is not
for the benefit of any other third party.
20. DEFAULT, TERMINATION, EXPIRATION. This Agreement may be terminated by
either party upon written notice to the other party, if the other party (i)
breaches any material term or condition of this Agreement and fails to remedy
the breach within thirty (30) days after being given notice thereof, (ii)
becomes the subject of any voluntary or involuntary proceeding under the
U.S. Bankruptcy Code or state insolvency proceeding and such proceeding is
not terminated within sixty (60) days of its commencement or (iii) ceases to
be actively engaged in business. Notwithstanding the foregoing, either party
may terminate this Agreement immediately if the other party provides notice,
or is required to provide such notice, to the other in accordance with
Section 9 hereunder.
This Agreement may also be terminated by Purchaser with six (6) months' prior
notice if a Product is "Materially Substandard in Quality". For the purposes
of this Agreement and Purchaser's termination rights, a Product shall be
deemed Materially Substandard in Quality where the available monthly failure
rate (a failure is deemed existing when meeting the Valid Warranty Claim
Requirements) is above ten percent (10%) during any six (6) month period
composed within the warranty period.
Upon the expiration of this Agreement, Seller shall fulfill and Purchaser
shall make timely payment for any pending Purchase Order at the then-current
prices.
21. INDEPENDENT CONTRACTOR. Seller shall act only as an independent
contractor and not as an employee, agent, servant or representative of
Purchaser.
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22. COMPLIANCE WITH LAWS. Each party shall comply with all laws applicable
to their respective actions regarding the manufacture, resale or use of the
Products.
23. INDEMNIFICATION.
(a) BY PURCHASER: Purchaser agrees to defend, indemnify and hold Seller
harmless against any claim, loss, expense or liability (including reasonable
attorney's fees) at law or in equity arising out of any actual or threatened
claim brought against or incurred by Seller by a third party alleging any
breach by Purchaser of its representations and warranties under Section 9(a)
above.
(b) BY SELLER: Seller agrees to defend, indemnify and hold Purchaser
harmless against any claim, loss, expense or liability (including reasonable
attorney's fees) at law or in equity arising out of any actual or threatened
claim brought against or incurred by Purchaser by a third party alleging any
breach by Seller of its representations and warranties under Section 9(b)
above.
(c) PROCEDURES: Each party's (the "Indemnifying Party's") obligation to
indemnify the other party (the "Indemnified Party") under this Section 23 is
subject to the Indemnified Party providing the Indemnifying Party with (i)
prompt written notice of any indemnified claim, (ii) full control over the
defense or settlement of such claim and (iii) reasonable assistance in
connection with the defense or settlement of such claim.
(d) DISCLAIMER: THE FOREGOING PROVISIONS OF THIS SECTION 24 STATE THE
ENTIRE LIABILITY AND OBLIGATIONS OF PURCHASER AND SELLER WITH RESPECT TO ANY
ALLEGED OR ACTUAL INFRINGEMENT OF PATENTS, COPYRIGHTS, MASK WORK RIGHTS,
TRADE SECRETS, TRADEMARKS OR OTHER INTELLECTUAL PROPERTY RIGHTS.
The parties' obligations under this Section 23 shall survive the expiration,
termination or cancellation of this Agreement for any reason whatsoever.
24. CERTIFICATION. Upon agreement between the parties as to the pricing
that shall apply during each Quarterly Period, the Purchaser's Vice President
of Purchasing shall provide a written certification to Seller on behalf of
Purchaser that attached to the certification is true and accurate
information regarding the pricing, terms, conditions and quality that has
been offered to Purchaser by Purchaser's other suppliers each of which
influenced the pricing agreed to by Purchaser and Seller for the applicable
Quarterly Period. In addition, at the end of each twelve (12) month period
during the Term of this Agreement, the Purchaser's Vice President of
Purchasing shall provide a written certification, stating that Purchaser has
ordered from Seller, substantially all of the requirements of Purchaser and
Purchaser's subsidiaries Compact Discs during such twelve (12) month period.
Seller shall treat such certifications as Disclosed Confidential Information,
subject to the terms and conditions set forth in Attachment C.
The above mentioned certifications shall be subject to a right of audit to be
performed by an independent auditor designated by Seller upon five (5)
business days' prior written notice. The cost of the audit shall be borne by
the Seller unless it is finally agreed that the audit reveals that the
certifications do not represent accurate figures. In this case, the audit
shall be at the Purchaser's costs.
25. NOTICES. Except where otherwise specifically provided in this
Agreement, all notices to be given under this Agreement shall be in writing
and shall be sent by registered or certified mail, return receipt requested
and addressed as follows:
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IF TO SELLER:
ATTENTION:
Alex Sandel
President, Future Media Productions
25136 Anza Drive
Valencia, California 91355
with a copy to:
IF TO PURCHASER:
ATTENTION:
VP, Purchasing Packard Bell Electronics, Inc.
One Packard Bell Way Sacramento, CA 95828-0903.
with a copy to:
Sam Surloff General Counsel
6041 Variel Ave. Woodland Hills, Ca. 91367
26. GOVERNING LAW. This Agreement shall be construed under and governed by
the laws of the State of California.
27. AGREEMENT. This Agreement shall not be assignable by Seller or
Purchaser, except that Purchaser may assist this Agreement to any third party
solely in connection with a sale of Purchaser's business that is related to
this Agreement, effective upon thirty (30) days' prior written notice to
Seller.
28. DISPUTE RESOLUTION. All disputes or disagreements arising between the
parties out of or in relation to or in connection with this Agreement, or
for the breach thereof, shall be settled first amicably between the parties
in good faith. If no amicable settlement is reached between the parties within
thirty (30) days after the matter in dispute or disagreement is submitted to
the other party hereunder, then such dispute or disagreement shall be settled
in binding arbitration.
As to any dispute or disagreement where one of the parties institutes the
arbitration proceeding, the arbitration proceeding shall be applied to the
American Arbitration Association in Los Angeles, California and shall be
conducted in accordance with the arbitration rules of such American
Arbitration Association, except to the extent expressly set forth to the
contrary in this agreement. The decision and awards of the American
Arbitration Association shall be final and binding upon the parties hereto
and may be entered as a final decree and judgment in any court of competent
jurisdiction and shall be enforceable under law and equity. The fees of any
arbitration shall be borne equally by the parties hereto. The parties agree
that no suit or action arising under this Agreement shall be commenced or
sustained in any court except to enforce an arbitration award.
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29. MANUFACTURING LICENSES. Purchaser represents and warrants to Seller
that Purchaser either has or will obtain prior to the Effective Date and
shall maintain during the Term, the necessary license rights from any third
party who owns the replication process rights and the Intellectual Rights to
the Product to be covered under this Agreement sufficient to permit Seller to
manufacture, replicate, sell, deliver and provide a warranty for the Products
to Purchaser as set forth in this Agreement. If Purchaser fails to obtain
such license rights by the Effective Date, Purchaser shall inform Seller and
the parties shall determine an appropriate solution by setting forth such
solution, including its terms, conditions and pricing, in a written amendment
to this Agreement. If Purchaser fails to maintain such rights during the Term
of this Agreement, Purchaser shall provide Seller with an indemnity for a
breach of its representation and warranty of the same scope as set forth in
Section 23(a) and shall use its best efforts to obtain such rights, failing
which, Seller shall have the right to terminate this Agreement. Purchaser
shall make the same representation and warranty with respect to obtaining and
maintaining the necessary license rights from any third party who owns the
replication process rights and the intellectual rights for any additional
Product to be covered under this Agreement provided that Purchaser's
obligation to obtain such License rights shall not become effective until the
additional Product is made a part of this Agreement.
30. ENTIRE CONTRACT. This Agreement is the complete and exclusive statement
of the agreement between the parties and supercedes all prior communications,
agreements, and undertakings between the parties relating to the subject
matter hereof and may be amended or otherwise changed only by writing duly
signed by an authorized representative of each party. Headings used in this
Agreement are for convenience only and shall not be used in interpreting this
Agreement. The following Attachments are incorporated in and made a part of
this Agreement:
(A) Products, Additional Parts/Assembly Numbers, Changes and Additional
Costs
(B) Purchaser's Specifications
(C) Mutual Non-Disclosure and Confidentiality Agreement
(D) Known Claims or Suits Against Packard Bell
IN WITNESS WHEREOF, each of the parties herein has caused its duly authorized
representative to execute this Agreement as of the data set forth below.
FUTURE MEDIA PRODUCTIONS, INC.
(Signature) Accepted by: /s/ ALEX SANDEL
-------------------------------
(Print)
Accepted by: Alex Sandel
-------------------------------
Title: President
-------------------------------
Date:
-------------------------------
PACKARD BELL NEC, INC.
(Signature) Accepted by: /s/ SAMUEL SURLOFF
-------------------------------
(Print)
Accepted by: Samuel Surloff
-------------------------------
Title: Vice President, General Counsel
-------------------------------
Date:
-------------------------------
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ATTACHMENT A
PRODUCTS, ADDITIONAL PART/ASSEMBLY NUMBERS, CHANGES AND ADDITIONAL COSTS
1. PRODUCTS.
(A) Seller shall manufacture, replicate and assemble Compact Discs
and Compact Disc assemblies described in, and according to, the
Specifications set forth in Attachment B, as amended from time to time.
(B) Continue to support the many Zero (-0-) day turns on Master
CD's as Future Media has its own Mastering Facility.
(C) Procure and maintain the inventory on required printed
material in CD bills of material.
(D) Based upon the forecasts received Seller agrees to maintain an
ongoing supply of CD's equal to one months forecast.
2. ADDITIONAL PART/ASSEMBLY NUMBERS. During the Term and any subsequent
extension period, Purchaser may, at its option, add additional
parts/assemblies for purchase under this Agreement. Pricing for such
additional part/assembly numbers shall be negotiated on an item by item basis
exclusive of the pricing formula set forth in Section 4 of this Agreement. In
addition, Purchaser shall pay for any additional costs under paragraph 4 of
this Attachment A.
3. CHANGES. If Purchaser requires any changes to the Products or related
items that deviate from the Specifications in Attachment B, Purchaser shall
submit to Seller (i) all necessary documentation and (ii) a request for a
price quote ("RPQ") for each proposed change. Seller shall provide Purchaser
a price quote for each proposed change within 5 days of receipt. Purchaser
shall have 2 days either to accept or reject Seller's price quote and shall
provide Seller with written confirmation of same. Upon receipt of Purchaser's
purchase order accepting Seller's price quote, Seller shall proceed to
implement the requested change accordance with the RPQ.
4. ADDITIONAL COSTS. If Purchaser requires additional items or adders
under this Agreement which it does not provide to Seller as consigned
inventory, Purchaser shall be responsible for paying all costs incurred by
Seller relative to such additional products.
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ATTACHMENT B
PURCHASER'S SPECIFICATIONS
The specifications for the Products covered under this Agreement shall be
provided by Purchaser to Seller as soon as such specifications are available,
from time to time, following the execution of this Agreement and shall
include the manufacture and replication of Compact Discs and/or assembly
units of Compact Discs.
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C O M P R E H E N S I V E - C D D I S C
L I C E N S E A G R E E M E N T
AGREEMENT, having an effective date of October 1, 19XX by and between
U.S. Philips Corporation having its principal office at 580 White Plains
Road, Tarrytown, New York 10591 (hereinafter referred to as "USPC") and
Future Media Productions, Inc. having its principal office at 25136 Anza
Drive, Valencia, CA 91355 (hereinafter referred to as "Licensee").
WHEREAS, the Philips' Group of Companies (hereinafter referred to as
"Philips") has for many years been engaged in research and development of
systems, in which signals encoded in digital form and stored on a disc are
read and reproduced by means of devices using an optical read out beam, and
has obtained valuable know-how and experience thereby;
WHEREAS, one of the achievements of such research and development efforts
was a new and revolutionary high-fidelity sound storage and reproduction
system, which was further developed and defined in a cooperation with Sony
Corporation of Japan and has been jointly presented under the name "Compact
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Disc Digital Audio System" (CD-A);
WHEREAS, on the basis of this "Compact Disc Digital Audio System"
three further systems have been defined in a cooperation with Sony
Corporation of Japan and have been jointly presented under the names
"Compact Disc Data System" (CD-ROM); "CDV System" (CDV) and "Compact Disc
Interactive System" (CD-i);
WHEREAS, a multi-session CD system has been defined by Philips and
Sony and jointly presented under the name "Enhanced Music Compact Disc
System", which system is capable of storing sound and data respectively
in two sessions on an optical disc;
WHEREAS, Licensee desires the right to manufacture and sell discs
utilizing any or all of the above CD-A, CD-ROM, CDV, CD-i and Enhanced
Music CD Systems (jointly hereinafter referred to as "CD Systems"), and
wishes such discs to be interchangeable with the discs manufactured and
sold by the Philips' Group of Companies and others utilizing such
CD-Systems;
WHEREAS, USPC owns and/or controls the right to license patent
rights pertinent to the CD-Systems and owns additional patent rights
pertinent to optical disc manufacturing in
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general;
WHEREAS, USPC has been authorized by Sony to license patents owned
by Sony and indicated on the Exhibits hereto under the terms and
conditions specified herein, while Sony retains the right to also license
such patents;
WHEREAS, Licensee understands that USPC is willing to license any
one or more patents owned by it for optical disc manufacturing, whether
within or outside(1) of the Standard Specifications defining the CD
Systems on reasonable terms and conditions; and
WHEREAS, in furtherance of Licensee's efforts to manufacture and
sell discs which are interchangeable within their respective CD-Systems,
Licensee has requested USPC for a license under patent rights pertinent
to the CD-Systems, which USPC has the free right to license, and, in
addition, has requested USPC to disclose and make available certain basic
information on the CD-Systems;
NOW, THEREFORE, in mutual consideration of the premises
-----------------
(1) For further information please contact Michael E. Marion, U.S. Philips
Corporation, 580 White Plains Road, Tarrytown, NY 10591
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and the faithful performance of the mutual covenants hereinafter set forth,
the parties hereto have agreed as follows:
ARTICLE I - DEFINITIONS
As used in this Agreement the following terms shall have the following
meanings, unless the context clearly requires otherwise:
1.01 DISC - any non-recordable, reflective, disc-shaped information carrier
comprising any kind of information such as, but not limited to,
audio/video/text/data related information, which information is
irreversibly stored in layer during and as an integral part of the
manufacturing process of the disc, in a form which is optically readable
by playback devices.
1.02 CD-AUDIO DISC - any Disc comprising audio information encoded in
digital form, which is optically readable by a CD-Audio-Player (as
hereinafter defined) and conforms to the CD-Audio Standard
Specifications (as hereinafter defined).
1.03 CD-ROM DISC - any Disc comprising information encoded in digital form,
which is optically readable by a CD-ROM
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Player (as hereinafter defined) and conforms to either the CD-ROM
Standard Specifications (as hereinafter defined) the CD-ROM (XA)
Standard Specifications (as hereinafter defined).
1.04 CD-i DISC - any Disc comprising any kind of information such as, but
not limited to audio, video, text and data related information, encoded
in digital form, which is optically readable by a CD-i Player (as
hereinafter defined) and conforms to the CD-i Standard Specifications
(as hereinafter defined).
1.05 CDV-DISC - any Disc comprising television picture information
consisting of analog video information with digital audio information,
and with or without additional information to be used for control,
retrieval, educational and/or instructional purposes in relation to the
visual display of said television picture information, which is
optically readable by a CDV-Player (as hereinafter defined) and
conforms to the CDV-Standard Specifications (as hereinafter defined).
1.06 ENHANCED MUSIC CD DISC - any disc comprising any kind of information
such as, but not limited to, audio, video,
5
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text and data related information encoded in digital form and which
conforms to the Enhanced Music CD-Standard Specifications (as
hereinafter defined).
1.07 CD-AUDIO STANDARD SPECIFICATIONS - the specifications for the
CD-Audio-Disc/Player parameters as made available, modified or added to
from time to time in accordance with the provisions of Article III
hereof.
1.08 CD-ROM STANDARD SPECIFICATIONS - the specifications for the CD-ROM
Disc/Player parameters as made available, modified or added to from
time to time in accordance with the provisions of Article III hereof.
1.09 CD-ROM(XA) STANDARD SPECIFICATIONS - the specifications for the
CD-ROM(XA) Disc/Player parameters as made available, modified or added
to from time to time in accordance with the provisions of Article III
hereof.
1.10 CD-i STANDARD SPECIFICATIONS - the specifications for the CD-i
Disc/Player parameters (as hereinafter defined) as made available,
modified or added to from time to time in accordance with the provision
of Article III hereof.
1.11 CDV-STANDARD SPECIFICATIONS - the NTSC and/or PAL specifications for
the CDV-Disc/Player parameters as made
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available, modified or added to from time to time in accordance with
the provisions of Article III hereof.
1.12 ENHANCED MUSIC CD-STANDARD SPECIFICATIONS - the specifications for the
Enhanced Music CD-Disc/Player parameters as made available, modified or
added to from time to time in accordance with the provisions of
Article III hereof.
1.13 PLAYER - any playback device for optically reading information stored
on a Disc and converting such information into electrical signals for
reproduction purposes.
1.14 CD-AUDIO PLAYER - a Player which is designed and manufactured solely
for the reproduction of information stored on a CD-Audio Disc and
conversion of such information, which is bit-encoded according to the
CD-Audio Standard Specifications, into electrical signals by means
prescribed in the CD-Audio Standard Specifications, which electrical
signals are directly capable and intended to be used for sound
reproduction through amplifiers and loudspeakers.
1.15 CD-ROM PLAYER - a Player which is designed and
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manufactured solely for the reproduction of information stored on a
CD-ROM Disc and conversion of such information, which is bit-encoded
according to the CD-ROM-Standard Specifications, into electrical
signals by means prescribed in the CD-ROM Standard Specifications,
which electrical signals are directly capable and intended to be used
for reproduction of computer-related-data through data handling and/or
data processing apparatus.
1.16 CD-i PLAYER - a Player which is designed and manufactured solely for
the reproduction of any kind of information stored on a CD-i Disc and
as defined in the CD-i Standard Specifications, and conversion of such
information, which is bit-encoded according to said CD-i Standard
Specifications, into electrical signals by means as prescribed in the
CD-i Standard Specifications, which electrical signals are directly
capable and intended to be used for reproduction of such information.
1.17 CDV-PLAYER - a Player which is designed and manufactured solely for the
reproduction of information stored on a CDV-Disc and conversion of such
information, which is encoded according to the CDV-Standard
Specifications, into
8
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electrical signals by means as prescribed in the CDV-Standard
Specifications, which electrical signals are directly capable and
intended to be used for visual reproduction through standard television
receivers and/or standard television monitors.
1.18 ENHANCED MUSIC CD-PLAYER - a Player which is designed and manufactured
solely for the reproduction of information stored on an Enhanced Music
CD Disc and conversion of such information, which is bit-encoded
according to the Enhanced Music CD Standard Specifications, into
electrical signals by means as prescribed in the Enhanced Music CD
Standard Specifications, which electrical signals are directly capable
and intended to be used for the reproduction of audio, video, text and
data related information through data handling and/or data processing
apparatus.
1.19 COMBI-PLAYER - a Player which is any combination of a CD-Audio Player,
a CD-ROM Player, a CD-i Player, a CDV-Player and an Enhanced Music CD
Player.
1.20 LICENSED PRODUCT - any CD-Audio Disc, CD-ROM Disc, CD-i Disc, CDV-Disc
or Enhanced Music CD Disc.
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1.21 LICENSED PATENTS -- shall mean the patent rights listed in accordance
with one of the following license options to be selected by the Licensee:
(circle type of Licensed Product and Exhibit list of patents on each
option chosen, whether A or B, for each type of Disc)
I. Option A: Licensee, at its option, chooses from one or more of the
U.S. Patents listed on Exhibit I (CD-Audio Disc), Exhibit III (CD-ROM
Disc), Exhibit V (CD-i Disc), Exhibit VII (CDV Disc), and/or Exhibit IX
(Enhanced Music CD), and defined herein as Licensed Patents;
OR
II. Option B: Licensee chooses, at its option, all of the U.S. Patents
listed on Exhibit II (CD-Audio Disc), Exhibit IV (CD-ROM Disc), Exhibit
VI (CD-i Disc), Exhibit VIII (CDV Disc), and/or Exhibit X (Enhanced Music
CD Disc), and defined herein as Licensed Patents.
By /s/ Date 10-23-96
----------------------------- ----------------------------
1.22 ASSOCIATED COMPANY -- any corporation or other legal entity, in which a
party hereto, Philips Electronics North America Corporation, Philips
Electronics, N.V. (PENV) of
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the Netherlands or Sony Corporation of Japan, now or hereafter controls,
directly or indirectly, more than fifty percent (50%) of the shares
entitled to vote for the election of directors or persons performing
similar functions, but any such company or other legal entity shall be
deemed an Associated Company only for as long as such control exists.
1.23 TERRITORY -- United States of America, its territories and possessions.
ARTICLE II - LICENSES
Subject to the terms and conditions of this Agreement:
2.01 USPC hereby grants to Licensee and its Associated Companies a
non-exclusive, non-transferable license under Licensed Patents to make,
use and sell or otherwise dispose of Licensed Products in the Territory,
but not to have Licensed Products made for the Licensee by third parties
except as provided in Article IV.
2.02 USPC and Sony further agree for a period of ten (10) years from the
effective date of this Agreement, to grant Licensee and its Associated
Companies a non-exclusive, non-transferable license on reasonable,
non-discriminatory
11
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terms comparable to those set forth herein, to make, use, sell or
otherwise dispose of Licensed Products in the Territory, under any
patent rights not yet licensed hereunder which are essential to the
manufacturing, use or sale of Licensed Products, as to which, and to
the extent to which, USPC or Sony, have, or may hereafter acquire, the
free right to grant licenses to Licensee and its Associated Companies
and which patent rights were first filed in any country of the world
after December 31, 1982. It is expressly understood that in respect of
the patent rights to be licensed pursuant to this paragraph 2.02 of
Article II, paragraph 5.02 of Article V will not be applicable and that
royalties payable may have to be paid over and above the royalties due
on the basis of the use of Licensed Patents pursuant to paragraph 2.01
of this Article II.
2.03 Finally, USPC and Sony agree for a period of ten (10) years from the
date of this Agreement to grant Licensee and its Associated Companies
upon their request and on reasonable, non-discriminating royalty rates
and conditions to be agreed upon from case to case, a non-
12
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exclusive, non-transferable license to make, use, sell or otherwise
dispose of CD-Audio Players, CD-ROM Players, CD-i Players, CDV-Players
and Combi-Players in the Territory under any or all present and future
patent rights essential to the manufacture, use or sale of such Players
as to which, and to the extent to which, USPC or Sony may now have, or
may hereafter acquire, the free right to grant licenses to Licensee and
its Associated Companies for the manufacture, use and sale of such
Players. It is expressly understood that paragraphs 5.01 and 5.02 of
Article V shall not in any way be applicable to licenses pursuant to
this paragraph 2.03 of Article II.
2.04 In consideration of the undertakings set forth in paragraphs 2.01, 2.02
and 2.03 and similar undertakings by third party licensees of USPC or
PENV, for a period of ten (10) years from the effective date of this
Agreement, Licensee, agrees to grant to USPC, Philips Electronics North
America Corporation, PENV, Sony Corporation of Japan and their
respective Associated Companies, and to other third parties who have
similarly entered, or will enter, into a license agreement with USPC,
PENV or an Associated
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Company thereof concerning Licensed Products and who have elected to
accept or will accept a similar undertaking as contained in this
paragraph 2.04, on reasonable, non-discriminating conditions comparable
to those set forth herein, non-exclusive, non-transferable licenses to
manufacture, use, sell or otherwise dispose of Licensed Products under
any or all present and future patent rights which are essential to the
manufacturing, use or sale of Licensed Product, as to which, and to the
extent to which, Licensee or its Associated Companies may now have or
may hereafter acquire the right to grant licenses.
2.05 In consideration of the undertakings set forth in paragraphs 2.01, 2.02
and 2.03 and similar undertakings by third party licensees of USPC or
PENV, for a period of ten (10) years from the effective date of this
Agreement, Licensee agrees to grant to USPC, Philips Electronics North
America Corporation, PENV, Sony Corporation of Japan and their
respective Associated Companies, and to other third parties who have
entered or will enter into a license agreement with USPC, PENV or an
Associated Company thereof concerning Players and who have accepted or
will
14
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accept a similar undertaking as contained in this paragraph 2.05, on
reasonable, non-discriminating conditions to be agreed upon from case
to case, non-exclusive, non-transferable licenses to manufacture, use,
sell or otherwise dispose of CD-Audio, CD-ROM, CD-i, CDV, Enhanced
Music CD and/or Combi-Players under any or all present and future
patent rights which are essential to the manufacture, use or sale of
such Player, as to which, and to the extent to which, Licensee or its
Associated Companies may now have or may hereafter acquire the right to
grant licenses.
2.06 To the extent a dispute exists between USPC, Licensee and/or Sony
regarding whether any patent is "essential" or whether any license
offered by Licensee, USPC, or Sony pursuant to this Article II is under
"reasonable...conditions" as those words are used in this Article II
then USPC, Sony and/or licensee shall submit such dispute to binding
arbitration under the 1992 Patent Arbitration Rules of the American
Arbitration Association ("AAA"). Such arbitration shall be held before
a panel of three arbitrators and shall take place in New York, New York.
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<PAGE>
Licensee, USPC and/or Sony each shall choose one arbitrator who shall be
unaffiliated with the parties and who shall have been a member of the bar
of the United States Court of Appeals for the Federal Circuit for at least
the preceding five years. The two arbitrators chosen by USPC, Licensee
and/or Sony shall then choose a third arbitrator who shall also have been a
member of the bar of the Federal Circuit for at least the preceding five
years and who shall serve as chairperson of the panel. If the arbitrators
chosen by USPC, Licensee and/or Sony are unable to agree on a chairperson
of the panel within sixty days of their designation by USPC, Licensee
and/or Sony then such third arbitrator shall be chosen in accord with
the rules of the AAA. All other disputes regarding or relating to
this License Agreement other than those specified in this paragraph
shall not be subject to arbitration.
IT IS EXPRESSLY UNDERSTOOD THAT
(I) THE LICENSES AND LICENSE UNDERTAKINGS WITH REGARD TO THE MANUFACTURE OF
LICENSED PRODUCTS DO NOT REFER TO RECORDING MACHINES, OR APPARATUS OR
METHODS FOR THE MULTIPLICATION
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OF DISCS, OR APPARATUS OR METHODS FOR THE MANUFACTURE OF MATERIALS; NOR DO
THE LICENSE UNDERTAKINGS WITH REGARD TO THE MANUFACTURE OF PLAYERS EXTEND
TO THE MANUFACTURE OF COMPONENTS OF PLAYERS SUCH AS, BUT NOT LIMITED TO
SEMICONDUCTOR DEVICES, INTEGRATED CIRCUITS, LASERS, MOTOR AND LENSES,
EXCEPT FOR PATENT RIGHTS PERTAINING TO CIRCUITRY AND/OR SYSTEM ASPECTS
SPECIFIC TO THE CD-SYSTEM (AND SIMILAR TYPE OPTICAL READ-OUT SYSTEMS), AND
(II) THE RIGHTS AND LICENSES GRANTED PURSUANT TO THIS AGREEMENT DO NOT EXTEND TO
ANY COMBINATION OF ONE OR MORE LICENSED PRODUCTS WITH ANY OTHER ITEMS,
PRODUCTS, SYSTEMS, STRUCTURES, APPARATUS OR SOFTWARE.
ARTICLE III - STANDARD SPECIFICATIONS
TECHNICAL INFORMATION AND SUPPORT
3.01 Upon execution of this Agreement and receipt of the payment provided for in
paragraph 5.01 of Article V, USPC shall make available to Licensee for use
by Licensee and its Associated Companies a copy of the then current version
of the respective Standard Specifications, together with such information
as is in USPC's reasonable opinion is required for the interpretation of
such then
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current Standard Specifications.
3.02 If USPC in its reasonable opinion determines that an addition or
modification to any of the Standard Specifications should be made,
Licensee shall be so notified in writing and be furnished with
information to assist Licensee in the interpretation of such addition
and/or modification.
3.03 Insofar as USPC has a free and legal right to do so, USPC further
agrees to make available to Licensee upon Licensee's request and for
use by Licensee and its Associated Companies in accordance with the
terms of this Agreement, such other information, data and material as
are, in USPC's reasonable opinion, strictly required to manufacture
Licensed Products, which are interchangeable with Licensed Products
made and/or sold by Philips.
ARTICLE IV - HAVE MADE
The licenses and rights granted to Licensee and its Associated
Companies pursuant to Article II and the right to use the information
pursuant to Article III, include the right for Licensee and its Associated
Companies to have third parties manufacture for Licensee's or its Associated
Companies' use and
18
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account with due regard to what has been provided hereinbefore such Licensed
Products as Licensee and/or its Associated Companies require in and for their
sale of Licensed Products, provided that such third parties agree to use the
information obtained by Licensee pursuant to Article III only for the
manufacture of Licensed Products ordered by Licensee and its Associated
Companies and also agree to observe the secrecy obligations accepted by
Licensee hereunder. As and when the information supplied by USPC to Licensee
pursuant to Article III is supplied by Licensee or an Associated Company of
Licensee to a third party supplier to have such third party supplier
manufacture Licensed Products for Licensee and/or its Associated Companies,
Licensee will notify USPC of the name of such third party supplier and of the
fact that such third party supplier has agreed in writing to the restrictions
on the use of the USPC supplied information to be observed by it.
ARTICLE V - ROYALTIES REPORTS AND PAYMENTS
5.01 Upon execution of this Agreement, Licensee will make a non-refundable
payment of twenty five thousand ($25,000) US dollars to USPC. Said
payment of twenty five thousand dollars shall not be credited against
royalties payable
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hereunder pursuant to paragraph 5.02 of this Article V.
5.02 (A) IN THE CASE WHERE LICENSEE HAS CHOSEN OPTION A TO DEFINE LICENSED
PATENTS - In consideration of the patent licenses granted hereunder by USPC
to Licensee, Licensee agree to pay to USPC royalties as follows:
(a) seven point five U.S. cents ($0.075) for each CDV Disc with an
outer diameter greater than 130mm;
(b) two U.S. cents ($0.02) for each CD-Audio Disc with an outer
diameter smaller than 90mm; and
(c) four point five US cents ($0.045) for:
- each CD-ROM Disc;
- each CD-i Disc;
- each Enhanced Music CD Disc;
- each CDV Disc with an outer diameter equal to, or smaller than,
130mm; and
- each CD-Audio Disc with an outer diameter equal to, or greater
than, 90mm;
which is made, used, sold or otherwise disposed of by Licensee or an
Associated Company of Licensee, and in which a Licensed Patent is utilized.
5.02 (B) IN THE CASE WHERE LICENSEE HAS CHOSEN OPTION B TO
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DEFINE LICENSED PATENTS - In consideration of the patent licenses granted
hereunder by USPC to Licensee, Licensee agrees to pay to USPC royalties as
follows:
(a) eight U.S. cents ($0.08) for each CDV Disc with an outer diameter
greater than 130mm;
(b) two point two U.S. cents ($0.022) for each CD-Audio Disc with an
outer diameter smaller than 90mm; and
(c) four point eight US cents ($0.048) for:
- each CD-ROM Disc;
- each CD-i Disc;
- each Enhanced Music CD Disc;
- each CDV Disc with an outer diameter equal to, or smaller than,
130mm; and
- each CD-Audio Disc with an outer diameter equal to, or greater
than, 90mm;
which is made, used, sold or otherwise disposed of by Licensee or an
Associated Company of Licensee, and in which a Licensed Patent is utilized.
5.03 A Licensed Product shall be considered sold when invoiced, or if
not invoiced, when delivered to a party other than the manufacturer.
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5.04 Within thirty (30) days after the 31st March, the 30th June, the
30th September and the 31st December of each year during the
period this Agreement shall be in force and effect, Licensee
shall submit to USPC, even if there are no sales, a statement in
writing, duly certified by an officer of the Licensee, setting
forth with respect to the preceding quarterly period:
(i) The quantities of Licensed Products sold by Licensee and
its Associated Companies, specifying the quantities for
each of the following individual type of Licensed Products:
(a) CD-Audio Discs with an outer diameter smaller than 90
mm;
(b) CD-Audio Discs with an outer diameter equal to, or
greater than 90 mm;
(c) CDV Discs with an outer diameter equal to, or greater
than 130 mm;
(d) CDV Discs with an outer diameter smaller than 130 mm;
(e) CD-ROM Discs;
(f) CD-i Discs;
22
<PAGE>
(g) Enhanced Music DC Discs;
and
(ii) the royalty payable to USPC as calculated under the terms
of this Agreement.
Licensee shall pay to USPC the royalty due hereunder in U.S.
dollars concurrently with submission of the above mentioned
statement.
5.05 Royalties shall be due and payable on all Licensed Products
manufactured prior to, but remaining in stock with Licensee and
its Associated Companies at the date of expiration or
termination of this Agreement. Certified reports on the number
of Licensed Products in stock at the time of expiration or
termination of this Agreement shall be submitted to USPC within
thirty (30) days after such expiration or termination. For the
purpose of royalty computation it shall be assumed that all
Licensed Products in stock will be sold, leased or otherwise
disposed of in the same countries and in proportionally the same
quantities as in the last full six (6) months period reported on
during the term of this Agreement. Payment of royalties due
shall be effected concurrently with the
23
<PAGE>
submission of said certified report.
5.06 All payments which are not made on the dates specified herein,
shall accrue interest at the rate of two percent (2%) per month
or the maximum permitted by applicable law, whichever is less.
5.07 All costs, such as stamp duties, taxes and other similar levies
originating from or in connection with the conclusion of this
Agreement shall be borne by Licensee. However, in the event that
the government of a country imposes any income taxes on payments
hereunder by Licensee to USPC and requires Licensee to withhold
such tax from such payments, Licensee may deduct such tax from
such payments. In such event, Licensee shall promptly furnish
USPC with tax receipts issued by appropriate tax authorities so
as to enable USPC to support a claim for credit against income
taxes which may be payable by USPC and/or its Associated
Companies in the Netherlands.
5.08 In order that the royalties and reports provided for in this
Article V may be verified, Licensee agrees to ensure that full,
complete and accurate books and records shall be kept covering
all sales or other disposals of Licensed
24
<PAGE>
Products by Licensee and/or its Associated Companies, for a
period of three (3) years following such sales or other
dispositions. It is agreed that the books and records of
Licensee and/or its Associated Companies may be audited from
time to time, but not more than once in each calendar year, by
an independent certified public accountant appointed by USPC and
reasonably acceptable to Licensee, to the extent necessary to
verify the accuracy of the aforementioned statements and
payments. Such inspection shall be completed at USPC's own
expense provided that if any discrepancy or error exceeding
three percent (3%) of the money actually due is found in
connection with the computation, the cost of such inspection
shall be borne by Licensee.
5.09 Notwithstanding the provisions of Paragraph 5.08 of this Article
V, Licensee shall furnish whatever additional information as
USPC may reasonably request from time to time to enable USPC to
ascertain which products sold, leased or put into use by
Licensee and/or its Associated Companies are subject to the
payment of royalties to USPC hereunder, the patent rights which
have been utilized in
25
<PAGE>
connection with such products, and the amount of royalties payable.
ARTICLE VI - MOST FAVORABLE CONDITIONS
If under otherwise substantially the same conditions as contained in
this Agreement, licenses under the patent rights referred to and licensed
pursuant to Article II should be granted for Licensed Products to any third
party at a royalty rate more favorable than the rate payable by Licensee
under this Agreement, Licensee shall be entitled to have the royalty rate
applicable to it modified to such extent that the same shall be as favorable
as that available to such third party, provided always that such obligation
shall not apply in respect of cross-license agreements and other agreements,
in which the consideration for such licenses shall not be wholly expressed in
payment of royalties and shall also not apply to licenses or other
arrangements made pursuant to a court decision or a settlement of a dispute
between USPC and a Licensee or between USPC and a third party. Without
limiting the foregoing, this Article VI shall not apply to terms entered into
in settlement of a filed court action regardless of the nature of such action
or settlement terms.
26
<PAGE>
ARTICLE VII - DISCLAIMER
USPC warrants that it shall furnish the information to be supplied by it
to the best of its ability, but it makes no representation or warranty as to
the value of the information transmitted or the ability of Licensee to make
use thereof to secure interchangeability. USPC makes no warranty whatsoever
that the use of information supplied by USPC does not infringe or may not
cause infringement of patent rights owned or controlled by third parties, or
of patent rights owned or controlled by USPC or an Associated Company of USPC
not licensed pursuant to Article II.
In further certainty the parties of this Agreement recognize that third
parties own patent rights in the field of Licensed Products and Licensee
accepts that USPC makes no warranty whatsoever that any manufacture, use,
sale, lease or other disposition of Licensed Product will be free from
infringement of any patent other than Licensed Patents.
ARTICLE VIII - SECRECY
Licensee agrees that, subject to what has been provided for in Article
IV of this Agreement, Licensee and its Associated Companies shall not
disclose to any third party
27
<PAGE>
information relative to the manufacture and sale of Licensed Products
acquired from USPC or USPC's Associated Companies. This obligation, which
shall run for the period of this Agreement and for a period of three (3)
years thereafter, shall not apply to the extent information so acquired:
(a) was known to Licensee or its Associated Companies prior to the date
said information was acquired from USPC or its Companies, as shown by
records of Licensee or any Company of Licensee or otherwise demonstrated
to Philips' satisfaction;
(b) is or has become available to the public in general through no fault of
Licensee or its Companies;
(c) was or is received from a third party who was free and had a legal right
to disclose the same.
In protecting information acquired from USPC or their Companies
pertaining to Licensed Products, Licensee has agreed that Licensee and its
Companies will take all necessary measures and precautions, including, but
not limited to, measures requiring their present and future employees to give
suitable undertakings of secrecy both for the period of their employment and
thereafter, and that in general such information
28
<PAGE>
will be treated in the same manner and with the same degree of care as
Licensee applies and has applied to its own information of a sensitive or
confidential nature.
ARTICLE IX - PATENT MARKINGS AND LOGO
9.01 If requested by USPC, Licensee shall place appropriate patent
markings on an exposed surface of the Licensed Products made, used,
sold and/or otherwise disposed of hereunder. The content, form,
location and language used in such markings shall be in accordance
with the laws and practices of the country, where such markings are
used.
9.02 In addition, Licensed Products may be provided with respective logos
in accordance with the instructions laid down in the CD Logo Guide
which is available from USPC on request (hereinafter referred to as
"the Logo"). In advertisements and sales literature with respect to
Licensed Products sold by Licensee and/or its Companies the Logo may
similarly be used and applied.
9.03 USPC grants Licensee and its Companies a royalty free, non-exclusive,
non-transferable, indivisible right to use the Logo on and with
respect to Licensed Products manufactured by or for Licensee and/or
its
29
<PAGE>
Companies in accordance with the instructions laid down in Exhibit AA.
9.04 Licensee understands and agrees that USPC makes no warranty whatsoever
that any use of the Logo will be free from infringement of
intellectual property rights owned by third parties.
ARTICLE X - ASSIGNMENT
This Agreement shall inure to the benefit of and be binding upon each
of the parties hereto and their respective assigns. It may not be assigned in
whole or in part by Licensee without the prior consent in writing of USPC
except to the surviving corporation of a merger, consolidation or other
transfer of all or substantially all the assets of Licensee and except that
Licensee may assign this Agreement to one of its Companies provided that
Licensee remains liable hereunder and the transferee has the capability to
perform all obligations to be performed hereunder.
ARTICLE XI - TERM AND TERMINATION
11.01 This Agreement shall be effective from the date first written above,
if and unless otherwise terminated shall
30
<PAGE>
remain in force for a period of ten (10) years from the effective date
of this Agreement. Notwithstanding the foregoing, this Agreement shall
expire on the expiration date of the last to expire of the Licensed
Patents licensed and referred to in Article II.
11.02 Either party may terminate this Agreement at any time on thirty (30)
days notice to the other party in the event that the latter shall fail
to perform any obligation under this Agreement and such default is not
remedied within thirty (30) days after receipt of a notice specifying
the nature of the default. Such right of termination shall not be
exclusive of any other remedies or means of redress to which the
non-defaulting party may be lawfully entitled, it being intended that
all such remedies shall be cumulative. Any such termination shall not
affect any payments, the rights to which may have fallen due under
this Agreement prior to such termination. Notwithstanding anything to
the contrary herein, USPC shall have the right, at its sole option and
discretion, to terminate this Agreement without advance notice (but
with written notice) in the event that Licensee shall fail to abide by
31
<PAGE>
the obligations as set forth in Article V hereof for three (3)
consecutive quarters.
11.03 The obligations set forth in paragraphs 2.02, 2.03, 2.04, 2.05, 5.05,
12.05 and Article VIII shall survive termination of this Agreement.
Notwithstanding the foregoing, in the event termination is due to the
breach of the Agreement by Licensee, paragraphs 2.02 and 2.03 shall
not survive termination.
11.04 If Licensee should be dissolved or file a voluntary petition in
bankruptcy or seek any court of governmental protection from creditors
or make any assignment for creditors, or should an order be entered
pursuant to any law relating to bankruptcy or insolvency appointing a
receiver or trustee for Licensee, and if any such receivership is not
terminated within sixty (60) days, then, in any of the events
specified in this paragraph 11.04, USPC may give written notice to
Licensee terminating this Agreement and this Agreement shall be
terminated in accordance with the notice.
ARTICLE XII - MISCELLANEOUS
12.01 This Agreement sets forth the entire agreement and
32
<PAGE>
understanding between the parties as to the subject matter hereof and
merges all prior discussions between them and neither of the parties
shall be bound by any conditions, definitions, warranties, waivers,
releases or representations (either expressed or implied) with respect
to the subject matter of this Agreement, other than expressly
provided for herein, or as duly set forth on or subsequent to the date
hereof in writing signed by a duly authorized representative of the
party to be bound thereby.
12.02 Nothing contained in this Agreement shall be construed:
(a) as imposing on either party any obligation to institute any suit
or action for infringement of any of the patent rights licensed
hereunder or to defend any suit or action brought by a third
party which challenges or concerns the validity of any of such
patent rights, it being expressly understood that Licensee shall
have no right to institute any such suit or action for
infringement of any of the patent rights licensed by USPC
hereunder, nor the right to defend any such suit or action which
challenges or
33
<PAGE>
concerns the validity of any such USPC patent right;
(b) as imposing any obligation to file any patent application or to
secure any patent or to maintain any patent in force;
(c) as conferring any license or right to copy or to simulate the
appearance and/or design of any product of USPC or its Companies;
(d) as conferring any license under the patent rights licensed
pursuant to Article II hereof to manufacture, use, sell, lease or
otherwise dispose of any product or device other than a Licensed
Product.
12.03 If at any time a party shall elect not to assert its rights under any
provision of this Agreement, such action or lack of action in that
respect shall not be construed as a waiver of its rights under said
provision or of any other provision of this Agreement.
12.04 Any notice or request required or permitted to be given under or in
connection with this Agreement or the subject matter hereof shall be
in writing and shall be deemed to have been sufficiently given when,
if given to Licensee,
34
<PAGE>
it is addressed to:
Robert Steinberg, Esq.
Irell & Manella LLP
1800 Avenue of the Stars
Suite 900
Los Angeles, California 90067-4276
and in respect of USPC, to:
Intellectual Property Department
U.S. Philips Corporation
580 White Plains Road,
Tarrytown, New York 10591
and sent in each case by telecopy and Registered Mail, postage
prepaid. The date of mailing shall be deemed to be the date on which
such notice of request has been given. Either party may give written
notice of change of address and, after notice of such change has been
received, any notice or request required to be given shall thereafter
be given to such party at such changed address in the manner as
provided above.
12.05 This Agreement and all disputes, claims or controversies arising out
of, or in any way relating to, this Agreement ("Dispute") shall be
governed by and construed, and any
35
<PAGE>
claim or controversy arising with respect thereto shall be determined,
in accordance with the laws and in the competent courts of the State of
New York. The parties hereto consent to the personal jurisdiction of
the competent courts of the State of New York for the purpose of
prosecuting or resolving any such Dispute.
IN WITNESS WHEREOF, the parties hereof have caused this Agreement to
be signed on the date first above written.
U.S. PHILIPS CORPORATION FUTURE MEDIA PRODUCTIONS, INC.
By /s/ Algy Tamoshunas By /s/ Alex Sandel
------------------------ ------------------------
Algy Tamoshunas Alex Sandel
Title Vice President Title President
---------------------- ---------------------
Date 10/30/96 Date 10/23/96
---------------------- ----------------------
36
<PAGE>
Exhibit I
Option A - CD-Audio Disc December 5, 1995
Page 1
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title
Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U)
Priority date Expiration Date Patent (PS)
Publication (PUB)
Prov. Publ. (PPU)
or Appln. No./
Expiration date
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N 6493 NL 7214999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection
09.02.1972 26.11.2008 25.08.1992
- ----------------------------------------------------------------------------------------------------------------------------------
N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer
12.12.1977 20.07.1998
- ----------------------------------------------------------------------------------------------------------------------------------
N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc
09.11.1978 26.12.1998 08.09.1999
- ----------------------------------------------------------------------------------------------------------------------------------
P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal
18.11.1976 14.11.1997 18.11.1996 recording medium
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit I
Option A - CD-Audio Disc December 5, 1995
Page 2
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system
21.04.1978 Re 31,666/ 21.01.1998
19.10.1999
- ----------------------------------------------------------------------------------------------------------------------------------
P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium
04.10.1981 19.04.2011 04.10.2001
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system
P 16056 14.07.1980 19.02.2002 14.07.2001
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80009 JP 55-67608/ PS 4,413,340/ PS 1872451/ CIRC
P 14539 21.05.1980 20.05.2001 21.05.2000
- ----------------------------------------------------------------------------------------------------------------------------------
S-8P038 S 55-22605/ PS 4,398,292/ JPL 670009/ Method and apparatus for encoding digital with
25.02.1980 23.02.2001 25.02.2000 two error correcting codes
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit II
Option B - CD-Audio Disc December 5, 1995
Page 1
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title
Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U)
Priority date Expiration Date Patent (PS)
Publication (PUB)
Prov. Publ. (PPU)
or Appln. No./
Expiration date
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N 6493 NL 7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection
09.02.1972 25.08.1992
- ----------------------------------------------------------------------------------------------------------------------------------
N 7016 PS 4,118,734/ Optical videodisc with variable width tracks
29.10.1996
- ----------------------------------------------------------------------------------------------------------------------------------
N 7340 NL 7401858/ PS 4,084,185/ Record carrier on which information is stored in
12.02.1974 03.03.1996 an optically readable structure
- ----------------------------------------------------------------------------------------------------------------------------------
N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer
12.12.1977 20.07.1998
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit II
Option B - CD-Audio Disc December 5, 1995
Page 2
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
N 9076 NL 7803069/ PS 4,450,553/ PS 1363333/ Multi-layer optical disc
22.03.1978 22.05.2001 22.03.1999
- ----------------------------------------------------------------------------------------------------------------------------------
N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc
09.11.1978 26.12.1998 08.09.1999
- ----------------------------------------------------------------------------------------------------------------------------------
N 9258 NL 7810463/ PS 4,930,116/ PS 1550033/ Optical disc with deep pits in shallow v-shaped
19.10.1978 27.05.2007 19.10.1999 groove
- ----------------------------------------------------------------------------------------------------------------------------------
N 9398 NL 7902363/ PS 4,499,574/ PS 1694091/ Adaption of track distance to pit frequency
27.03.1979 12.02.2002 25.03.2000
- ----------------------------------------------------------------------------------------------------------------------------------
N 9567 PS 4,325,135/ Optical record carrier and apparatus for reading
13.04.1999 it
- ----------------------------------------------------------------------------------------------------------------------------------
N 9587 PS 4,310,916/ Optical record carrier and apparatus for reading
12.01.99 it
- ----------------------------------------------------------------------------------------------------------------------------------
N 9725 NL 8002039/ PS 4,389,719/ Optical disc with PVC substrate covered cured
08.04.1980 08.09.2000 lacquer
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit II
Option B - CD-Audio Disc December 5, 1995
Page 3
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
N 9732 NL 8002411/ PS 4,556,967/ Two phase information structure without cross-talk
25.04.1980 03.12.2002
- ----------------------------------------------------------------------------------------------------------------------------------
N 9933 NL 8100098/ PS 4,423,502/ PS 7882422/ Optical disc with tracks at different levels
12.01.1981 09.11.2001 12.01.2002
- ----------------------------------------------------------------------------------------------------------------------------------
P 10530 P 51-138821/ PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc shaped signal
18.11.1976 14.11.1997 18.11.1996 recording medium
- ----------------------------------------------------------------------------------------------------------------------------------
P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system
21.04.1978 19.10.1999 24.04.1998
Re 31,666/
19.10.1999
- ----------------------------------------------------------------------------------------------------------------------------------
P 14768 P 55-99252/ PS 4,358,780/ PPU 57-24038/ Information recording medium
18.07.1980 10.07.2001 18.07.2000
- ----------------------------------------------------------------------------------------------------------------------------------
P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium
04.10.1981 19.04.2011 04.10.1981
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80007 NL 800-1028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system
P 16056 14.07.1980 19.02.2002 14.07.2001
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit II
Option B - CD-Audio Disc December 5, 1995
Page 4
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80009 JP 55-67608/ PS 4,413,340/ PS 1872451/ CIRC
P 14539 21.05.1980 20.05.2001 21.05.2000
- ----------------------------------------------------------------------------------------------------------------------------------
S 8P038 S 55-22605/ PS 4,398,292/ JPI. 670009/ Method and apparatus for encoding digital with
25.02.1980 23.02.2001 25.02.2001 two error correcting codes
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit III
Option A - CD-ROM Disc December 5, 1995
Page 1
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title
Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U)
Priority date Expiration Date Patent (PS)
Publication (PUB)
Prov. Publ. (PPU)
or Appln. No./
Expiration date
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N 6493 NL 7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection
09.02.1972 26.11.2008 25.08.1992
- ----------------------------------------------------------------------------------------------------------------------------------
N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer
12.12.1977 20.07.1998
- ----------------------------------------------------------------------------------------------------------------------------------
N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc
09.11.1978 26.12.1998 08.09.1999
- ----------------------------------------------------------------------------------------------------------------------------------
P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal
18.11.1976 14.11.1997 18.11.1996 recording medium
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit III
Option A - CD-ROM Disc December 5, 1995
Page 2
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system
21.04.1978 Re 31,666/ 21.04.1998
19.10.1999
- ----------------------------------------------------------------------------------------------------------------------------------
P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium
04.10.1981 19.04.2011 04.10.2001
- ----------------------------------------------------------------------------------------------------------------------------------
P 18816 JP 58-35459/ PS 4,707,818/ PPU 59-162605/ Data transmitting system
04.03.1983 17.11.5004 04.03.2003
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system
P 16056 14.07.1980 19.02.2002 14.07.2001
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80009 JP 55-67608/ PS 4,413,340/ PS 1872451/ CIRC
P 14539 21.05.1980 20.05.2001 21.05.2000
- ----------------------------------------------------------------------------------------------------------------------------------
Q 83025 JP 83-161514/ PS 4,641,295/ PPU 60-52961/ Framing of data blocks on CD-ROM
P 19764 01.09.1983 27.08.2004 01.09.2003
- ----------------------------------------------------------------------------------------------------------------------------------
Q 84008 JP 84-57595/ PS 4,980,764/ PPU 60-201575/ CD-ROM error correction system A
P 21500 24.03.1984 22.03.2005 24.03.2004
Re 33.462/
22.03.2005
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit III
Option A - CD-ROM Disc December 5, 1995
Page 3
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Q 84009 JP 84-57596/ PS 4,680,764/ PPU 60-201576/ CD-ROM error correction system B
P 21501 24.03.1984 22.03.2005 24.03.2004
Re 33,462/
22.03.2005
- ----------------------------------------------------------------------------------------------------------------------------------
S-8P038 S 55-22605/ PS 4,398,292/ JPI. 670009/ Method and apparatus for encoding digital with
25.02.1980 23.02.2001 25.02.2000 two error correcting codes
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit IV
Option B - CD-ROM Disc December 5, 1995
Page 1
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title
Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U)
Priority date Expiration Date Patent (PS)
Publication (PUB)
Prov. Publ. (PPU)
or Appln. No./
Expiration date
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N 6493 NL 7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection
09.02.1972 26.11.2008 25.08.1992
- ----------------------------------------------------------------------------------------------------------------------------------
N 7016 PS 4,118,734/ Optical disc with variable width
09.10.1996
- ----------------------------------------------------------------------------------------------------------------------------------
N 7340 NL 7401858/ PS 4,084,185/ Record carrier on which information is stored in
12.02.1974 03.03.1996 an optically readable structure
- ----------------------------------------------------------------------------------------------------------------------------------
N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer
12.12.1977 20.07.1998
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit IV
Option B - CD-ROM Disc December 5, 1995
Page 2
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
N 9076 NL 7803069/ PS 4,450,553/ PS 1363333/ Multi-layer optical disc
22.03.1978 22.05.2001 22.03.1999
- ----------------------------------------------------------------------------------------------------------------------------------
N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc
09.11.1978 26.12.1998 08.09.1999
- ----------------------------------------------------------------------------------------------------------------------------------
N 9258 NL 781463/ PS 4,930,116/ PS 1550033/ Optical disc with deep pits in shallow v-shaped
19.10.1978 27.05.2007 19.10.1999 groove
- ----------------------------------------------------------------------------------------------------------------------------------
N 9398 NL 7902363/ PS 4,499,574/ PS 1694091/ Adaption of track distance to pit frequency
27.04.1979 12.02.2002 25.03.2000
- ----------------------------------------------------------------------------------------------------------------------------------
N 9567 NL 7906576 PS 4,325,135/ Optical record carrier and apparatus for reading
13.04.1999 it
- ----------------------------------------------------------------------------------------------------------------------------------
N 9587 PS 4,310,916/ Optical record carrier and apparatus for reading
12.01.1999 it
- ----------------------------------------------------------------------------------------------------------------------------------
N 9725 NL 8002039/ PS 4,389,719/ Optical disc with PVC substrate covered cured
08.04.1980 08.09.2000 lacquer
- ----------------------------------------------------------------------------------------------------------------------------------
N 9732 NL 8002411/ PS 4,556,967/ Two phase information structure without cross-talk
25.04.1980 03.12.2002
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit IV
Option B - CD-ROM Disc December 5, 1995
Page 3
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
N 9933 NL 8100098/ PS 4,423,502/ PS 7882422/ Optical disc with tracks at different levels
12.01.1981 09.11.2001 12.01.2002
- ----------------------------------------------------------------------------------------------------------------------------------
P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal
18.11.1976 14.11.1997 18.11.1996 recording medium
- ----------------------------------------------------------------------------------------------------------------------------------
P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system
21.04.1978 Re 31,666/ 21.04.1998
19.10.1999
- ----------------------------------------------------------------------------------------------------------------------------------
P 14768 P 55-99252 PS 4,358,780/ PPU 57-24038/ Information recording medium
18.07.1980 10.07.2001 18.07.2000
- ----------------------------------------------------------------------------------------------------------------------------------
P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium
04.10.1981 19.04.2011 04.10.2001
- ----------------------------------------------------------------------------------------------------------------------------------
P 18816 JP 58-35459/ PS 4,707,818/ PPU 59-162605/ Data transmitting system
04.03.1983 17.11.2004 04.03.2003
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system
P 16056 14.07.1980 19.02.2002 14.07.2001
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit IV
Option B - CD-ROM Disc December 5, 1995
Page 4
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80009 JP 55-67608/ PS 4,413,340/ PS 1872451/ CIRC
P 14539 21.05.1980 20.05.2001 21.05.2000
- ----------------------------------------------------------------------------------------------------------------------------------
Q 83025 JP 83-161514/ PS 4,641,295/ PPU 60-52961/ Framing of data blocks on CD-ROM
P 19764 01.09.1983 27.08.2004 01.09.2003
- ----------------------------------------------------------------------------------------------------------------------------------
Q 84008 JP 84-57595/ PS 4,680,764/ PPU 60-201575/ CD-ROM error correction system A
P 21500 24.03.1984 22.03.2005 24.03.2004
Re 33,462/
22.03.2005
- ----------------------------------------------------------------------------------------------------------------------------------
Q 84009 JP 84-57596/ PS 4,680,764/ PPU 60-201576/ CD-ROM error correction system B
P 21501 24.03.1984 22.03.2005 24.03.2004
Re 33,462/
22.03.2005
- ----------------------------------------------------------------------------------------------------------------------------------
S 8P038 S 55-22605/ PS 4,398,292/ JPL 670009/ Method and apparatus for encoding digital with
25.02.1980 23.02.2001 25.02.2001 two error correcting codes
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit V
Option A - CD-1 Disc December 5, 1995
Page 1
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title
Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U)
Priority date Expiration Date Patent (PS)
Publication (PUB)
Prov. Publ. (PPU)
or Appln. No./
Expiration date
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
B 33255 GB 8609078/ 4,868,764/ Enhanced resolution of CD-ROM stored TV-pictures
14.04.1986 06.04.2007
- ----------------------------------------------------------------------------------------------------------------------------------
B 33335 GB 8726961/ 4,858,026/ PPU 63-168781/ Pyramid encoder with decoder in prediction channel
24.12.1986 21.12.2007 24.12.2007
- ----------------------------------------------------------------------------------------------------------------------------------
N 6493 NL 7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection
09.02.1972 26.11.2008 25.08.1992
- ----------------------------------------------------------------------------------------------------------------------------------
N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer
12.12.1977 20.07.1998
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit V
Option A - CD-1 Disc December 5, 1995
Page 2
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in Optical disc
09.11.1978 26.12.1998 08.09.1999
- ----------------------------------------------------------------------------------------------------------------------------------
N 11734 NL 8600980/ 4,914,515/ PPU 62-256269/ Partial updating of stationary pictures on CD-1
18.04.1986 15.04.2007 17.04.2007
- ----------------------------------------------------------------------------------------------------------------------------------
N 11753 NL 8601182/ 4,794,465/ PPU 62-269584/ Data driven action tagging in CD-1
12.05.1986 10.10.2006 11.05.2007
- ----------------------------------------------------------------------------------------------------------------------------------
P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal
18.11.1976 14.11.1997 18.11.1996 recording medium
- ----------------------------------------------------------------------------------------------------------------------------------
P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system
21.04.1978 Re 31,666/ 21.04.1998
19.10.1999
- ----------------------------------------------------------------------------------------------------------------------------------
P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium
04.10.1981 19.04.2011 04.10.2001
- ----------------------------------------------------------------------------------------------------------------------------------
P 19262 JP 58-97687/ A 700817/ PS 1,864,908/ Digital signal transmitting method
01.06.1983 01.06.2003
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit V
Option A - CD-1 Disc December 5, 1995
Page 3
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
P 19263 JP 58-97688/ A 700817/ PS 1,864,909/ Digital signal transmitting method
01.06.1983 01.06.2003
- ----------------------------------------------------------------------------------------------------------------------------------
P 19264 JP 58-97689/ A 700817/ PS 1,782,167/ Digital signal transmitting method
01.06.1983 01.06.2003
- ----------------------------------------------------------------------------------------------------------------------------------
P 23912 JP 60-51994/ PPU 61-211728 Data processing apparatus
15.03.1985 - 15.03.2005
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system
P 16056 14.07.1980 19.02.2002 14.07.2001
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80009 JP 55-67608/ PS 4,413,340/ PPU 57-4629/ CIRC
P 14539 21.05.1980 20.05.2001 21.05.2000
- ----------------------------------------------------------------------------------------------------------------------------------
Q 86003 NL 8600450/ 4,802,169/ PPU 62,217468/ Real time format switching in CD-1
P 30624 26.02.1986 24.02.2007 23.07.2007
- ----------------------------------------------------------------------------------------------------------------------------------
S-8P038 S 55-22605/ PS 4,398,292/ JPI. 670009/ Method and apparatus for encoding digital with
25.02.1980 23.02.2001 25.02.2000 two error correcting codes
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit VI
Option B - CD-1 Disc December 5, 1995
Page 1
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title
Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U)
Priority date Expiration Date Patent (PS)
Publication (PUB)
Prov. Publ. (PPU)
or Appln. No./
Expiration date
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
B 33255 GB 8609078/ 4,868,764/ Enhanced resolution of CD-ROM stored TV-pictures
14.04.1986 06.04.2007
- ----------------------------------------------------------------------------------------------------------------------------------
B 33335 GB 8726961/ 4,858,026/ PPU 63-168781/ Pyramid encoder with decoder in prediction channel
24.12.1986 21.12.2007 24.12.2007
- ----------------------------------------------------------------------------------------------------------------------------------
N 6493 NL 72511999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection
09.02.1972 26.11.2008 25.08.1992
- ----------------------------------------------------------------------------------------------------------------------------------
N 7016 PS 4,118,734/ Optical disc with variable width tracks
24.10.1996
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit VI
Option B - CD-1 Disc December 5, 1995
Page 2
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
N 7340 NL 7401858 PS 4,084,185/ Record carrier on which information is stored in
03.03.1996 an optically readable structure
- ----------------------------------------------------------------------------------------------------------------------------------
N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer
12.12.1977 20.07.1998
- ----------------------------------------------------------------------------------------------------------------------------------
N 9225 NL 7809227/ PS 4,230,915/ PS 1630678 Depth of smooth pits in optical disc
09.11.1978 26.12.1998 08.09.1999
- ----------------------------------------------------------------------------------------------------------------------------------
N 9258 NL 7810463/ PS 4,930,116/ PS 1550033/ Optical disc with deep pits in shallow v-shaped
19.10.1978 27.05.2007 19.10.1999 groove
- ----------------------------------------------------------------------------------------------------------------------------------
N 9398 NL 7902363/ PS 4,499,574/ PS 1694091/ Adaption of track distance to pit frequency
27.03.1979 12.02.2002 25.03.2000
- ----------------------------------------------------------------------------------------------------------------------------------
N 9567 PS 4,325,135/ Optical record carrier and apparatus for reading
13.04.1999 it
- ----------------------------------------------------------------------------------------------------------------------------------
N 9587 PS 4,310,916/ Optical record carrier and apparatus for reading
it
- ----------------------------------------------------------------------------------------------------------------------------------
N 9725 NL 8002039/ PS 4,389,719/ Optical disc with PVC substrate covered cured
08.04.1980 08.09.2000 lacquer
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit VI
Option B - CD-1 Disc December 5, 1995
Page 3
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
N 9732 NL 8002411/ PS 4,556,967/ Two phase information structure without cross-talk
25.04.1980 03.12.2002
- ----------------------------------------------------------------------------------------------------------------------------------
N 9933 NL 8100098/ PS 4,423,502/ PS 7882422/ Optical disc with tracks at different levels
12.01.1981 09.11.2001 12.01.2002
- ----------------------------------------------------------------------------------------------------------------------------------
N 11734 NL 8600980/ 4,914,515/ PPU 62-256269/ Partial updating of stationary pictures on CD-1
18.04.1986 15.04.2007 17.04.2007
- ----------------------------------------------------------------------------------------------------------------------------------
N 11753 NL 8601182/ 4,794,465/ PPU 62-269584/ Data driven action tagging in CD-1
12.05.1986 10.10.2006 11.05.2007
- ----------------------------------------------------------------------------------------------------------------------------------
P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal
18.11.1976 14.11.1997 18.11.1996 recording medium
- ----------------------------------------------------------------------------------------------------------------------------------
P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system
21.04.1978 Re 31,666/ 21.04.1998
19.10.1999
- ----------------------------------------------------------------------------------------------------------------------------------
P 14768 P 55-99252/ PS 4,358,780/ PPU 57-24038/ Information recording medium
18.07.1980 10.07.2001 18.07.2000
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit VI
Option B - CD-1 Disc December 5, 1995
Page 4
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium
04.10.1981 19.04.2011 04.10.2001
- ----------------------------------------------------------------------------------------------------------------------------------
P 19262 JP 58-97687/ A 700817/ PS 1,864,908/ Digital signal transmitting method
01.06.1983 01.06.2003
- ----------------------------------------------------------------------------------------------------------------------------------
P 19263 JP 58-97688/ A 700817/ PS 1,864,909/ Digital signal transmitting method
01.06.1983 01.06.2003
- ----------------------------------------------------------------------------------------------------------------------------------
P 19264 JP 58-97689/ A 700817/ PS 1,782,167/ Digital signal transmitting method
01.06.1983 01.06.2003
- ----------------------------------------------------------------------------------------------------------------------------------
P 23912 JP 60-51994/ - PPU 61-211728 Data processing apparatus
15.03.1985 15.03.2005
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system
P 16056 14.07.1980 19.02.2002 14.07.2001
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80009 JP 55-67608/ PS 4,413,340/ PPU 57-4629 CIRC
P 14539 21.05.1980 20.05.2001 21.05.2000
- ----------------------------------------------------------------------------------------------------------------------------------
Q 86003 NL 8600450/ 4,802,169/ PPU 62-217468/ Real time format switching in CD-1
P 30624 26.02.1986 24.02.2007 23.07.2007
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit VI
Option B - CD-1 Disc December 5, 1995
Page 5
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
S-8P038 S 55-22605/ PS 4,398,292/ JPI. 670009/ Method and apparatus for encoding digital with
25.02.1980 23.02.2001 25.02.2000 two error correcting codes
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit VII
Option A - CDV - Disc December 5, 1995
Page 1
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title
Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U)
Priority date Expiration date Patent (PS)
Publication (PUB)
Prov. Publ. (PPU)
or Appln. No./
Expiration date
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N 6493 NL 7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection
02.09.1972 26.11.2008 25.08.1992
- ----------------------------------------------------------------------------------------------------------------------------------
N 8717 NL 7702874/ PS 4417285/ PS 1153514/ Automatic field correction during VLP stop-motion
17.03.1977 22.11.2000 25.09.1997
PS 1313142/
16.03.1998
PS 1351132/
16.03.1998
- ----------------------------------------------------------------------------------------------------------------------------------
N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer
12.12.1977 20.07.1998
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit VII
Option A - CDV - Disc December 5, 1995
Page 2
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
N 9225 NL. 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc
09.11.1978 26.12.1998 08.09.1999
- ----------------------------------------------------------------------------------------------------------------------------------
N 10591 NL 8300541/ PS 4660097/ VIP with "Compact-Disc" audio
14.02.1983 21.04.2004
- ----------------------------------------------------------------------------------------------------------------------------------
N 10730 NL 8302542/ PS 4642702/ PS 1944768/ VIP with CD audio in underband
15.07.1983 13.07.2004 14.02.2004
- ----------------------------------------------------------------------------------------------------------------------------------
P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal
18.11.1976 14.11.1997 18.11.1996 recording medium
- ----------------------------------------------------------------------------------------------------------------------------------
P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system
21.04.1978 Re 31,666/ 21.04.1998
19.10.1999
- ----------------------------------------------------------------------------------------------------------------------------------
P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium
04.10.1981 19.04.2011 04.10.2001
- ----------------------------------------------------------------------------------------------------------------------------------
P 20779 JP 58-226598/ PS 4893193/ PPU 60-119670/ Disc type recording media
30.11.1983 09.01.2007 30.11.2003
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit VII
Option A - CDV - Disc December 5, 1995
Page 3
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system
P 16056 14.07.1980 19.02.2002 14.07.2001
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80009 JP 55-67608/ PS 4,413,340/ PPU 57-4629/ CIRC
P 14539 21.05.1980 20.05.2001 21.05.2000
- ----------------------------------------------------------------------------------------------------------------------------------
S 8P038 S 55-22605/ PS 4,398,292/ JPL 670009/ Method and apparatus for encoding digital with two
25.02.1980 23.02.2001 25.02.2000 error correcting codes
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit VIII
Option B - CDV - Disc December 5, 1995
Page 1
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title
Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U)
Priority date Expiration date Patent (PS)
Publication (PUB)
Prov. Publ. (PPU)
or Appln. No./
Expiration date
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N 6493 NL 7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection
09.02.1972 26.11.2008 25.08.1992
- ----------------------------------------------------------------------------------------------------------------------------------
N 7016 PS 4,118,734/ Optical disc with variable width tracks
24.10.1996
- ----------------------------------------------------------------------------------------------------------------------------------
N 7340 NL 7401858 PS 4,084,185/ Record carrier on which information is stored in an
03.03.1996 optically readable structure
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit VIII
Option B - CDV - Disc December 5, 1995
Page 2
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
N 8717 NL 7702874/ PS 4417285/ PS 1153514/ Automatic field correction during VLP stop-motion
17.03.1977 22.11.2000 25.09.1997
PS 1313142/
16.03.1998
PS 1351132/
16.03.1998
- ----------------------------------------------------------------------------------------------------------------------------------
N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer
12.12.1977 20.07.1998
- ----------------------------------------------------------------------------------------------------------------------------------
N 9076 NL 7803069/ PS 4,450,553/ PS 1363333/ Multi-layer optical disc
22.03.1978 22.05.2001 22.03.1999
- ----------------------------------------------------------------------------------------------------------------------------------
N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc
09.11.1978 26.12.1998 08.09.1999
- ----------------------------------------------------------------------------------------------------------------------------------
N 9258 NL 7810463/ PS 4,930,116/ PS 1550033/ Optical disc with deep pits in shallow v-shaped
19.10.1978 27.05.2007 19.10.1999 groove
- ----------------------------------------------------------------------------------------------------------------------------------
N 9398 NL 7902363/ PS 4,499,574/ PS 1694091/ Adaption of track distance to pit frequency
27.03.1979 12.02.2002 25.03.2000
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit VIII
Option B - CDV - Disc December 5, 1995
Page 3
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
N 9567 PS 4,325,135/ Optical record carrier and apparatus for reading it
13.04.1997
- ----------------------------------------------------------------------------------------------------------------------------------
N 9587 NL 7907180 PS 4,310,916/ PS 1637642 Optical record carrier and apparatus for reading it
12.01.1999
- ----------------------------------------------------------------------------------------------------------------------------------
N 9725 NL 8002039/ PS 4,389,719/ Optical disc with PVC substrate covered cured
08.04.1980 08.09.2000 lacquer
- ----------------------------------------------------------------------------------------------------------------------------------
N 9732 NL 8002411/ PS 4,556,968/ Two phase information structure without cross-talk
25.04.1980 03.12.2002
- ----------------------------------------------------------------------------------------------------------------------------------
N 9933 NL 8100098/ PS 4,423,502/ PS 7882422/ Optical disc with tracks at different levels
12.01.1981 09.11.2001 12.01.2002
- ----------------------------------------------------------------------------------------------------------------------------------
N 10591 NL 8300541/ PS 4660097/ VLP with "Compact-Disc" audio
14.02.1983 21.04.2004
- ----------------------------------------------------------------------------------------------------------------------------------
N 10730 NL 8302542/ PS 4642702/ PS 1944768/ VLP with CD audio in underband
15.07.1983 13.07.2004 14.02.2004
- ----------------------------------------------------------------------------------------------------------------------------------
P 10530 PS 51-138821 PS 4,142,210/ PPU 5.3-63002/ Method of signal recording and disc-shaped signal
18.11.1976 14.11.1997 18.11.1996 recording medium
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit VIII December 5, 1995
Option B - CDV - Disc
Page 4
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system
21.04.1978 Re 31,666/ 21.04.1998
19.10.1999
- ----------------------------------------------------------------------------------------------------------------------------------
P 14768 P 55-99252/ PS 4,358,780/ PPU 57-24038/ Information recording medium
18.07.1980 10.07.2001 18.07.2000
- ----------------------------------------------------------------------------------------------------------------------------------
P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium
01.10.1981 19.04.2011 04.10.2001
- ----------------------------------------------------------------------------------------------------------------------------------
P 20779 JP 58-226598/ PS 4893193/ PPU 60-119670/ Disc type recording media
30.11.1983 09.01.2007 30.11.2003
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system
P 16056 14.07.1980 19.02.2002 14.07.2001
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80009 JP 55-67608/ PS 4,413,340/ PPU 57-4629/ CIRC
P 14539 21.05.1980 20.05.2001 21.05.2000
- ----------------------------------------------------------------------------------------------------------------------------------
S-8P038 S 55-22605/ PS 4,398,292/ JPL 670009/ Method and apparatus for encoding digital with two
25.02.1980 23.02.2001 25.02.2000 error correcting codes
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit IX December 5, 1995
Option A - Enhanced Music CD - Disc
Page 1
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Licensor's Priority US Patent (PS) Jp Ul Model (UM) Title
Ref No PII Application/ or Appln. No/ Prov. Publ (U)
Priority date Expiration date Patent (PS)
Publication (PUB)
Prov. Publ (PPU)
or Appln No/
Expiration date
- ------------------------------------------------------------------------------------------------------------------------------
D 86308 DE 36 13 343/ PS 4,825,285/ A 63-001 183/ DPCM encoder with 2-dimensional low pass filter
D 86313 19.04.1986 15 01 2007 20 04 2007
D 86337 DE 36 20 424/
10.06.1986
DE 36 38 128/
08.11.1986
- ------------------------------------------------------------------------------------------------------------------------------
D 86327 DE 36.31 252/ PS 4,901,075/ A 63-132.530/ Coefficient encoder in transform coding
D 86336 13.09.1986 11.09.2007 14.09.2007
DE 37.38.127/
08.11.1986
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit IX December 5, 1995
Option A - Enhanced Music CD - Disc
Page 2
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
D 87091 DE 37 15 067/ PS 5,021,879/ A 63-287 186/ Motion estimation on superblocks of N transform
D 87291 06.05.1987 04.06.2008 06.05.2008 blocks
DE 37.15.147/
07.05.1987
DE 37 44 280/
28.12.1987
DE 37 26 520
- ---------------------------------------------------------------------------------------------------------------------------------
F 89522 FR 8908186/ A 631,830/ A 92-500 443/ NORMALISATION/special subsample pictures
20.06.1989 19.06.2010
- ---------------------------------------------------------------------------------------------------------------------------------
F 89526 FR 8903929/ PS 5,079,631/ A 02 028 596/ Selectable temporal/controlled by
24.08.1989 classification parameter
- ---------------------------------------------------------------------------------------------------------------------------------
N 6494 NI.7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection
09.02.1972 26.11.2008 25.08.1992
- ---------------------------------------------------------------------------------------------------------------------------------
N 8979 NI.7713710 PS 4,188,433/ Optical disc with coating comprising U-V lacquer
12.12.1977 20.07.1998
- ---------------------------------------------------------------------------------------------------------------------------------
N 9225 NI.7809227 PS 4,230,915/ Depth of smooth pits in optical disc
09.11.1978 26.12.1998
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit IX December 5, 1995
Option A - Enhanced Music CD - Disc
Page 3
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N 13088 NI.89-023581/ PS 5,428,598/ PPU 03-108,162/ Copyright protection using alternating copy-bit
12.09.1989 27.06.2012 14.09.2010
PS 5,453,968/
26.09.2013
- ----------------------------------------------------------------------------------------------------------------------------------
N 13257 NI.900424/ A 369,864 A 04-216.288/ Image data blocks with hierarchal encoding level
22.02.1990 20.02.2011
- ----------------------------------------------------------------------------------------------------------------------------------
N 13409 NI.91.200.764/ A 07-707,527/ A 01-233.380/ Sector and word offset in video block header
06.08.1990 A 08-269,941 04.06.2011
- ----------------------------------------------------------------------------------------------------------------------------------
N 13661 EP.91.200.764/ PS 5,341,356/ PPU 9.1-089.596/ Recording of contact info in lead out
02.04.1991 17.01.2012 02.04.2012
EP.91.201.005/
26.04.1991
- ----------------------------------------------------------------------------------------------------------------------------------
N 13685 EP.91.200.764/ PS 5,390,159/ PPU 93.094,657/ CD ROM-XA-WO
02.04.1991 12.02.2012 01.04.2012
EP.91.201.005/ A 08-328,307
26.04.1991 A 08-371,644
</TABLE>
<PAGE>
Exhibit IX December 5, 1995
Option A - Enhanced Music CD - Disc
Page 4
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N 13709 GB 9012538/ A 08-086,402/ A 04-229,464/ Decoder delay in coded videoframes on CD-I
15.06.1990 A 08-299,027/ 04.06.2011
- ----------------------------------------------------------------------------------------------------------------------------------
P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal
18.11.1976 14.11.1997 18.11.1996 recording medium
- ----------------------------------------------------------------------------------------------------------------------------------
P 12222 PS 53-47247/ PS 4,355,392 PPUB 63-29451/ Burst error correcting system
21.04.1978 Re 31,666/ 21.06.1998
19.10.1999
- ----------------------------------------------------------------------------------------------------------------------------------
P 15668 I 56-546.301/ PS 5,305,301/ PPU 57-169938/ Optical recording medium
04.10.1980 19.04.2001 01.10.2001
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80007 NL 800-1028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system
P16056 14.07.1980 19.02.2002 14.07.2001
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80009 JP 55-67608/ PS 4,413,340/ PPU 57-4629/ CIRC
P 14539 21.05.1980 20.05.2001 21.05.2000
- ----------------------------------------------------------------------------------------------------------------------------------
S-8P038 S 55-22605/ PS 4,398,292/ JPL 670009/ Method and apparatus for encoding digital with two
21.02.1980 23.02.2001 25.02.2000 error correcting codes
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit IX December 5, 1995
Option A - Enhanced Music CD - Disc
Page 5
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S 32P040 S 56-17,734 USP 4,456,905/ IP 1,547,082/ Method and apparatus for encoding binary data
09.02.1981 08.02.2002 09.02.2001
- ----------------------------------------------------------------------------------------------------------------------------------
S 91P276 S 91P276 PS 5,191.436/ PUB4-014.974/ Apparatus for recording compressed digital video
09051990 3004.2011 09.05.2010 data on a compact disc media
- ----------------------------------------------------------------------------------------------------------------------------------
S 90P308 JP 1-253,398 PS 5,155,593/ PUB 3-114.384/ Video signal coding method
27 09 1989 27 09 2010/ 27 09 2009
- ----------------------------------------------------------------------------------------------------------------------------------
S 90P340 JP 1-267,046/ PS 5,132,792/ PUB 3-129,986/ Video signal transmitting system
14 10 1989 12 10 2010 14 10 2009
IP 1-267,044/ PUB 3-129,985
14 10 1989
- ----------------------------------------------------------------------------------------------------------------------------------
8 1000899 JP [ILLEGIBLE] PS 4,803,193/ PPU 60-119670/ Disc recording medium and apparatus for playback
P 14539 30 11 1983 30 11 2003 thereof
- ----------------------------------------------------------------------------------------------------------------------------------
8-1002186 JP P58-226,599 PS 4-62151/ Disc reproducing apparatus
30 11 1983 30 11 2003
- ----------------------------------------------------------------------------------------------------------------------------------
94902625 JP P06-32017 cbd cbd Recording medium and its reproducing apparatus
22 12 1994 and method
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit X December 5, 1995
Option B - Enhanced Music CD - Disc
Page 1
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Licensor's Priority US Patent (PS) Jp ULModel (UM) Title
Ref No P11 Application/ or Appln. No/ Prov. Publ (U)
Priority date Expiration date Patent (PS)
Publication (PUB)
Prov. Publ (PPU)
or Appln. No/
Expiration date
- ------------------------------------------------------------------------------------------------------------------------------
D 86308 DE 36 13 343/ PS 4,825,285/ A 63-001. 183/ DPCM encoder with 2-dimensional low pass filter
D 86313 19.04.1986 15.04.2007 20.04.2007
D 86337 DE 36 20 424/
10.06.1986
DE 36 38 128/
08.11.1986
- ------------------------------------------------------------------------------------------------------------------------------
D 86327 DE 36.31 252/ PS 4,901,075/ A 63-132.530/ Coefficient encoder in transform coding
D 86336 13.09.1986 11.09.2007 14.09.2007
DE 37.38.127/
08.11.1986
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit X December 5, 1995
Option B - Enhanced Music CD - Disc
Page 2
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
D 87091 DE.37.15 067/ PS 5,021,879/ A 63-287 186/ Motion estimation on superblocks of N transform
D 87291 06.05.1987 04.06.2008 06.05.2008 blocks
DE 37.15.147/
07.05.1987
DE 37 44 280/
28.12.1987
DE 37 26 520
- ---------------------------------------------------------------------------------------------------------------------------------
F 89522 FR 8908186/ A 631,830/ A 92-500 443/ Selectable temporal/special subsampled pictures
20.06.1989 19.06.2010
- ---------------------------------------------------------------------------------------------------------------------------------
F 89526 FR 8903929/ PS 5,079,631/ A 02 028 596/ Normalisation controlled by classification parameter
24.03.1989 06.03.2010 23.03.2010
- ---------------------------------------------------------------------------------------------------------------------------------
N 6493 NL 7214999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection
02.09.1972 26.11.2008 25.08.1992
- ---------------------------------------------------------------------------------------------------------------------------------
N 7016 PS 4,118,734/ Optical videodisc with variable width tracks
24.10.1996
- ---------------------------------------------------------------------------------------------------------------------------------
N 7340 NL 7401858 PS 4,084,185/ Record carrier on which information is stored in an
03.03.1996 optically readable structure
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit X December 5, 1995
Option B - Enhanced Music CD - Disc
Page 3
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer
12.12.1977 20.07.1998
- ----------------------------------------------------------------------------------------------------------------------------------
N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc
09.11.1978 26.12.1998 08.09.1999
- ----------------------------------------------------------------------------------------------------------------------------------
N 9258 NL 78104163/ PS 4,930,116/ PS 1550033/ Optical disc with deep pits in shallow v-shaped
- 19.10.1978 27.05.2007 19.10.1999 groove
- ----------------------------------------------------------------------------------------------------------------------------------
N 9398 NL 7902363/ PS 4,499,574/ PS 169-1091/ Adaption of track distance to pit frequency
27.03.1979 12.02.2002 25.03.2000
- ----------------------------------------------------------------------------------------------------------------------------------
N 9567 PS 4,325,135/ Optical record carrier and apparatus for reading it
13.04.1999-
- ----------------------------------------------------------------------------------------------------------------------------------
N 9587 PS 4,310,916/ Optical record carrier and apparatus for reading it
12.01.1999
- -----------------------------------------------------------------------------------------------------------------------------------
N 9725 NL 8002039/ PS 4,389,719/ Optical disc with PVC substrate covered cured
08.04.1980 08.09.2000 lacquer
- -----------------------------------------------------------------------------------------------------------------------------------
N 9732 NL 8002414/ PS 4,556,967/ Two phase information structure without cross-talk
25.04.1980 03.12.2002
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit X December 5, 1995
Option B - Enhanced Music CD - Disc
Page 4
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N 9933 NL 8100098/ PS 4,423,502/ PS 7882422/ Optical disc with tracks at different levels
12.01.1981 09.11.2001 12.01.2002
- ----------------------------------------------------------------------------------------------------------------------------------
N 13088 NL 89-02358/ PS 5,428,598/ PPU 03-108,162/ Copyright protection using alternating copy-bit
21.09.1989 27.06.2012 14.09.2010
PS 5,453,968/
26.09.2012
- ----------------------------------------------------------------------------------------------------------------------------------
N 13257 NL 900424/ A 369,864 A 04-216.288/ Image data blocks with hierarchial encoding level
22.02.1990 20.02.2011
- ----------------------------------------------------------------------------------------------------------------------------------
N 13409 NL 9001771/ A 07-707.527 A 04-233.380/ Sector and word offset in video block header
06.08.1990 A 08-269.941 04.06.2011
- ----------------------------------------------------------------------------------------------------------------------------------
N 13661 EP 91.200.764/ PS 5,341,356/ PPU 93-089.596/ Recording of contract info in lead out
02.04.1991 07.01.2012 02.04.2012
EP 91.201.005/
26.04.1991
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit X December 5, 1995
Option B - Enhanced Music CD - Disc
Page 5
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N 13685 EP 91.200.764/ PS 5,390,159/ PPU 93-094,675/ CD ROM-XA-WO
02.04.1991 12.02.2012 01.04.2012
EP 91 201 005/ A 08-328,307
26.04.1991 A 08-371,644
- ----------------------------------------------------------------------------------------------------------------------------------
N 13709 GB 9012538/ A 08-086,402 A 04-229.464/ Decoder delay in coded videoframes on CD-1
05.06.1990 A 08-299,027 04.06.2011
- ----------------------------------------------------------------------------------------------------------------------------------
P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal
18.11.1976 14.11.1997 18.11.1996 recording medium
- ----------------------------------------------------------------------------------------------------------------------------------
P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system
21.04.1978 Re 31,666/ 21.04.1998
19.10.1999
- ----------------------------------------------------------------------------------------------------------------------------------
P 14768 P 55-99252/ PS 4,358,780/ PPU 57-24038/ Information recording medium
18.07.1980 10.07.2001 18.07.2000
- ----------------------------------------------------------------------------------------------------------------------------------
P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium
04.10.1981 19.04.2011 04.10.2001
- ----------------------------------------------------------------------------------------------------------------------------------
Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system
P 16056 14.07.1980 19.02.2002 14.07.2001
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit X December 5, 1995
Option B - Enhanced Music CD - Disc
Page 6
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Q 80009 JP 55-67608/ PS 4,413,340/ PPU 57-4629/ CIRC
P 14539 21.05.1980 20.05.2001 21.05.2000
- ----------------------------------------------------------------------------------------------------------------------------------
S-8P038 S 55-22605/ PS 4,398,292/ JPL 670009/ Method and apparatus for encoding digital with two
25.02.1980 23.02.2001 25.02.2000 error correcting codes
- ----------------------------------------------------------------------------------------------------------------------------------
S-82P040 S 56-17,734 USP 4,456,905/ JP 1,547,082/ Method and apparatus for encoding binary data
09.02.1981 08.02.2002 09.02.2001
- ----------------------------------------------------------------------------------------------------------------------------------
S 91P276 JP 2-119,604 PS 5,191,436/ PUB 4-014,974/ Apparatus for recording compressed digital video
09.05.1990 30.04.2011 09.05.2010 data on a compact disc media
- ----------------------------------------------------------------------------------------------------------------------------------
S 90P308 JP 1-253,398 PS 5,155,593/ PUB 3-114,384/ Video signal coding method
27.09.1989 27.09.2010 27.09.1989
- ----------------------------------------------------------------------------------------------------------------------------------
S 90P340 JP 1-267,046/ PS 5,132,792/ PUB 3-129,986/ Video signal transmitting system
14.10.1989 12.10.2010 14.10.2009
- ----------------------------------------------------------------------------------------------------------------------------------
8-4000899 JP P58-226598 PS 4,893,193/ PPU 60-119670/ Disc recording medium and apparatus for playback
30.11.1983 09.01.2007 30.11.2003 thereof
- ----------------------------------------------------------------------------------------------------------------------------------
8-4002186 JP P58-226599 PS 4-62151/ Disc reproducing apparatus
10.11.1983 10.11.2003
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit X December 5, 1995
Option B - Enhanced Music CD - Disc
Page 7
SURVEY OF LICENSOR'S PATENT RIGHTS
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
94902625 JP P06-320107 t.b.d. t.b.d. Recording medium and its reproducing apparatus and
22.12.1994 method
- ----------------------------------------------------------------------------------------------------------------------------------
94097815 JP P07-13211 t.b.d. t.b.d. Recording medium and recording and/or reproducing
30.01.1995 apparatus thereof
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NON-EXCLUSIVE PATENT LICENSE AGREEMENT
FOR
DISC PRODUCT MANUFACTURERS
This AGREEMENT is made effective this 1st day of June, 1996, by and
between DISCOVISION ASSOCIATES, a joint venture subject to the State of
California partnership law, having a place of business at 2355 Main Street,
Suite 200, Irvine, California 92714, United States of America (hereinafter
referred to as DVA) and FUTURE MEDIA PRODUCTIONS, a California corporation,
having a place of business at 25136 Anza Drive, Valencia, California 91355
(hereinafter referred to as LICENSEE), who agree as follows:
SECTION 1.0 RECITALS
1.1 DVA has the right to grant licenses under certain DVA-owned United
States and Canadian patents relating to the design, manufacture,
and sale of optical disc products such as compact discs and
CD-ROM discs.
1.2 DVA is prepared to grant non-exclusive licenses under such patents on
reasonable terms and conditions to financially sound and commercially
responsible applicants.
1.3 LICENSEE has produced and/or sold and intends to continue producing
and/or selling products which may embody patented inventions covered
by such DVA patents or which may be made using apparatus or methods
which may embody such patented inventions. These products are
manufactured by: (1) LICENSEE; (2) manufacturers licensed by DVA who
do not pay United States and Canadian royalty rates; (3)
manufacturers licensed by DVA who pay United States and Canadian
royalty rates; or (4) manufacturers not licensed by DVA. As
specified later in this Agreement, the amount of any royalty to be
paid by LICENSEE to DVA depends partly on the source of the product.
1.4 DVA is offering LICENSEE, as an option herein, a license under
individual ones of its patents, the availability of such license
under any one or more of DVA's patents being in no way conditioned on
the need for LICENSEE to take a license under any other DVA's
patents.
<PAGE>
1.5 LICENSEE has determined that its business interests will be best served
by taking a license under the terms and conditions of this Agreement.
In so doing, LICENSEE understands that if less than all DVA patents
are licensed, then licenses under additional DVA patents may be
required before LICENSEE can make or sell optical disc products free
and clear of all claims of patent infringement by DVA. Information
regarding infringement of additional DVA patents may be obtained by
using the factory inspection provisions of Section 10.0 herein.
SECTION 2.0 DEFINITIONS
2.1 "Information Storage Medium" (Media) shall mean any record carrier
primarily designed to store and/or record any type of information.
2.2 "Disc(s)" shall mean any pre-recorded, non-recordable and non-erasable
Information Storage Medium in the shape of a disc and having
information recorded thereon in one or more information bearing
layers, which information is recoverable using optical detection
means.
2.3 "Digital Disc(s)" shall mean a Disc having pre-recorded thereon
digitally encoded information. Digital Discs shall be limited to
Discs commonly known as Compact Disc Digital Audio Discs or CD
Digital Audio Discs, Compact Disc Single Discs or CD Single Discs,
Compact Disc Read Only Memory Discs or CD-ROM Discs, Compact
Disc-Graphics Discs or CD-G Discs, Compact Disc-Interactive Discs or
CD-I Discs, and Pre-Recorded Mini Discs.
2.4 "Compact Disc Digital Audio Disc(s)" or "CD Digital Audio Disc(s)"
shall mean a Digital Disc having pre-recorded thereon audio
entertainment information. A CD Digital Audio Disc is defined herein
according to the definition in a specification entitled "Compact
Disc Digital Audio System Description" published by N.V. Philips
Consumer Electronics B.V. and Sony Corporation and commonly referred
to as the "Red Book." CD Digital Audio Discs shall mean Digital
Discs commonly known as compact discs (CD's).
2.5 "Compact Disc Single Disc(s)" or "CD Single Disc(s)" shall mean a CD
Digital Audio Disc, either three inches (3") or five inches (5") in
diameter, having pre-recorded thereon twenty (20) minutes or less of
audio entertainment information.
2.6 "Compact Disc Read Only Memory Disc(s)" or "CD-ROM Disc(s)" shall mean
a Digital Disc having pre-recorded thereon text files, data files,
image files, computer program files, and the like, primarily
intended for computer-related,
Page 2 of 23
<PAGE>
database-related and/or multimedia-related usage. A CD-ROM Disc is
defined herein according to the definition in a specification
entitled "Compact Disc Read Only Memory (CD-ROM) System Description"
published by N.V. Philips Consumer Electronics B.V. and Sony
Corporation and commonly referred to as the "Yellow Book." CD-ROM
Discs include CD-ROM/XA discs.
2.7 "Compact Disc-Interactive Disc(s)" or "CD-I Disc(s)" shall mean a
Digital Disc having pre-recorded thereon audio, video and program
control data for interactive use with a human user by means of
computer apparatus. A CD-I Disc is defined herein according to the
definition in a specification entitled "Compact Disc Interactive
Media Full Functional Specification" published by N.V. Philips
Consumer Electronics B.V. and Sony Corporation and commonly referred
to as the "Green Book."
2.8 "Compact Disc-Graphics Disc(s)" or "CD-G Disc(s)" shall mean a Digital
Disc having pre-recorded thereon graphics information comprised of
discrete still pictures or graphic images having no user perceivable
motion.
2.9 "Pre-Recorded Mini Disc(s)" shall mean a Digital Disc having a diameter
of 65 millimeters or less, that is played back at constant linear
velocity, capable of storing not more the 150 megabytes of
information and defined in a specification published by Sony
Corporation and commonly referred to as the "Rainbow Book."
2.10 "Video Disc(s)" shall mean a Disc having pre-recorded thereon
information intended to produce visual images having user
perceivable motion. Video Discs shall include, but are not limited
to, Discs commonly known as laser discs (LD's), compact disc-video
(CD-V) discs, and digital video/versatile discs (DVD's) and
successors to DVD's.
2.11 "Licensed Product(s)" shall mean only Digital Discs as defined in this
Agreement.
2.12 "Master Disc(s)" shall mean any recordable Information Storage Medium
primarily designed for use in any process to eventually produce a
Disc by any transfer process whereby the information from all tracks
of a Master Disc is transferred substantially simultaneously to an
Information Storage Medium to form a Disc.
Page 3 of 23
<PAGE>
2.13 "Mastering Apparatus" shall mean any instrumentality, or aggregate of
instrumentalities, primarily designed to produce a Master Disc.
2.14 "Matrix" shall mean any element which transfers information from a
Master Disc to an Information Storage Medium to form a Disc. Matrix
shall include, but is not limited to, elements commonly known as
fathers, mothers, and stampers.
2.15 "Matrixing Apparatus" shall mean any instrumentality, or aggregate of
instrumentalities, primarily designed to produce a Matrix having any
type of information recorded thereon corresponding to information on a
Master Disc.
2.16 "Replication Apparatus" shall mean any instrumentality, or aggregate of
instrumentalities, primarily designed to transfer any type of
information from a Matrix or a Master Disc to a multiplicity of
Information Storage Media and thereby to fabricate a multiplicity of
Discs having identical information recorded thereon.
2.17 "Manufacturing Apparatus" shall mean apparatus for use in the
fabrication of Discs, including apparatus used in performing quality
assurance procedures and/or testing of Discs. Manufacturing Apparatus
shall include, but is not limited to, any one or more of the following:
Mastering Apparatus; Master Disc; Matrixing Apparatus; Matrix; and
Replication Apparatus.
2.18 "Manufacturing Process(es)" shall mean any method or process, including
related apparatus, used in the fabrication of Discs, including process
steps directed to quality assurance procedures and/or testing of Discs.
2.19 "DVA Patent(s)" shall mean all United States and Canadian patents owned
by DVA as of the effective date of this Agreement, including utility
models and design patents, and any United States and Canadian patents,
including utility models and design patents, issuing from pending United
States and Canadian patent applications owned by DVA as of the effective
date of this Agreement, directed to Licensed Products and/or any
Manufacturing Apparatus and/or any Manufacturing Process, under which
patents and patent applications (as well as divisionals, continuations,
continuation-in-part applications, reissues, reexaminations and
extensions thereof) DVA has, as of the effective date of this Agreement,
the right to grant licenses to LICENSEE of the scope granted herein,
PROVIDED HOWEVER that such grant, or the exercise of rights under such
grant, will not result in the payment of royalties or other
consideration by DVA to third
Page 4 of 23
<PAGE>
parties (except for payments to Affiliates of DVA and payments to third
parties for inventions made by said third parties while employed by DVA
or any of its Affiliates). United States and Canadian patents relating
to Licensed Products and/or their manufacture which have issued and are
licensable by DVA are set forth in Appendix A. DVA shall provide
LICENSEE on at least an annual basis an updated version of Appendix A
which includes any new patent to be added to Appendix A and which
indicates the expiration of a previously listed patent by the addition
of the letter "E" following the patent number.
2.20 "Licensed Patent(s)" shall mean those DVA-owned United States and
Canadian patents listed in Appendix B of this Agreement, these being
the DVA Patent(s) under which LICENSEE has agreed to take a license.
Any DVA Patent(s) listed in Appendix A may be added to Appendix B and
thereby become a Licensed Patent by written agreement of the parties.
2.21 "Transfer(s)" (Transferred) as used herein shall mean (i) sell and/or
sold, (ii) deliver(ed) to others (including for export) other than by
sale, regardless of the basis of compensation, if any, (for example, by
consignment, by gift or by transshipment through an intermediate country
or territory such as Switzerland, Hong Kong, et cetera) and/or (iii)
sell (sold) in combination with other products.
2.22 "Type Number" shall mean any combination of numbers, letters, and/or
words used to identify a particular type or model of Licensed Product.
2.23 "Affiliate(s)" shall mean any corporation, company, or other business
entity controlled by a party to this Agreement. For this purpose,
control means direct or indirect beneficial ownership of greater than
fifty percent (50%) of the voting securities or greater than fifty
percent (50%) interest in the income of such corporation, company, or
other business entity.
2.24 "Arm's Length Trade" shall mean a sale, lease or other commercial
transaction between unaffiliated parties having an adverse economic
interest. After completion of an Arm's Length Trade, a party thereto
will derive no further economic benefit from subsequent transactions by
another party thereto with respect to the goods involved in such Arm's
Length Trade.
2.25 "Manufacturer's Net Selling Price" shall mean the invoice price after
discounts actually allowed for a Licensed Product sold in Arm's Length
Trade by LICENSEE or its Affiliate, such price not to include: (1)
packaging costs incurred by LICENSEE for such Licensed Product; (2)
insurance fees and
Page 5 of 23
<PAGE>
packing and transportation charges incurred by LICENSEE and invoiced
separately to a third party; (3) duties and sales taxes actually
incurred and paid by LICENSEE in connection with delivery of such
Licensed Product; (4) the cost of any copyright license fee paid by
LICENSEE in respect of information stored on the Licensed Product; and
(5) pre-mastering charges incurred by LICENSEE and necessary for the
manufacture of the Licensed Product, which pre-mastering charges are
invoiced separately to a third party. Manufacturer's Net Selling Price
shall include all mastering charges, including but not limited to
charges incurred for Manufacturing Apparatus used in the mastering
process, whether such mastering charges are incurred as the result of
LICENSEE's own Manufacturing Apparatus, or from mastering charges
invoiced separately to a third party, such as LICENSEE's purchase of a
stamper from a third party. In respect of a Licensed Product used or
leased by LICENSEE or its Affiliate or sold or Transferred in other
than Arm's Length Trade by LICENSEE or its Affiliate, the
Manufacturer's Net Selling Price shall be deemed to be equal to the
average Manufacturer's Net Selling Price as defined above for the
same or equivalent Licensed Product sold in Arm's Length Trade during
the then current accounting period. In the event there are no sales in
Arm's Length Trade during an accounting period, DVA and LICENSEE shall
attempt to agree upon an amount to be regarded as the Manufacturer's
Net Selling Price for such accounting period. If DVA and LICENSEE do
not so agree, then Manufacturer's Net Selling Price shall mean the
actual selling price to an ultimate consumer. If a Licensed Product is
not separately sold and is included with other apparatus, then the
Manufacturer's Net Selling Price of such Licensed Product shall be the
Manufacturer's Net Selling Price of the equivalent Licensed Product
which is separately sold, or, if no such equivalent Licensed Product
exists, shall be, at LICENSEE's option, either: (1) the price as
aforesaid of such other apparatus multiplied by the ratio of the
Manufacturing Cost of such Licensed Product to the Manufacturing Cost
of such other apparatus; or (2) one hundred and fifty percent (150%) of
the Manufacturer's Net Selling Price of that part of the apparatus that
constitutes the Licensed Product.
2.26 "Manufacturing Cost" shall mean total cost of direct materials, direct
and indirect factory labor and factory overhead determined in
accordance with sound accounting principles.
Page 6 of 23
<PAGE>
SECTION 3.0 NON-EXCLUSIVE LICENSE GRANT
3.1 DVA grants to LICENSEE a non-exclusive, royalty bearing license under
the Licensed Patent(s):
3.1.1 to make, have made, use, rent, lease, sell and/or Transfer
Licensed Products in the United States of America and Canada and
their territories and possessions; and
3.1.2 to make, have made, use or have used Manufacturing Apparatus and
to use or have used Manufacturing Processes in the United States
of America and Canada and their territories and possessions to
manufacture Licensed Products for LICENSEE.
It is understood by LICENSEE that licenses under additional DVA
Patent(s) not listed in Appendix B may be required before LICENSEE can
make, use, rent, lease, sell and/or Transfer Licensed Products free and
clear of all claims of patent infringement by DVA. LICENSEE may obtain
from DVA a determination as to the applicability of any DVA Patent(s)
to LICENSEE's products by use of the factory inspection provisions of
Section 10.0 of this Agreement. In any event, DVA reserves the right to
bring a patent infringement action against LICENSEE with respect to any
DVA Patent(s) not listed in Appendix B.
3.2 No license is granted by DVA to LICENSEE in this Section 3.0, either
expressly or by implication, estoppel, or otherwise:
3.2.1 other than under the Licensed Patent(s) listed in Appendix B;
3.2.2 with respect to any products other than Licensed Products;
3.2.3 to rent, lease, sell and/or Transfer any Manufacturing Apparatus;
or
3.2.4 to rent, lease, sell and/or Transfer any Manufacturing Process or
process step thereof.
3.3 The license granted herein shall include a sublicense to LICENSEE's
Affiliates, identified in Appendix C, which are LICENSEE's Affiliates as
of the effective date of this Agreement. LICENSEE shall pay and account
to DVA for royalties hereunder with respect to the exercise by any
Affiliate of LICENSEE of the sublicense granted to it hereunder, and if
LICENSEE fails to make such payment or accounting, DVA reserves the right
to seek directly from such Affiliate any
PAGE 7 OF 23
<PAGE>
royalties due and owing to DVA. Sublicenses will be granted to
additional Affiliates of LICENSEE during the term of this Agreement upon
receipt by DVA of written notices from LICENSEE setting forth the names
and addresses of such additional Affiliates to be covered by this
Agreement, provided each such notice is given before any sales of
Licensed Products by the Affiliate named therein. Each Affiliate
sublicensed under this Agreement shall be bound by the terms and
conditions of this Agreement as if it were named herein in the place of
LICENSEE. LICENSEE represents to DVA that it has the power to bind each
such Affiliate to the terms and conditions of this Agreement and agrees
to take whatever action is necessary to legally bind such Affiliates.
The sublicense granted to an Affiliate shall terminate on the date such
Affiliate ceases to be an Affiliate.
3.4 Except as set forth in Section 3.3, LICENSEE is expressly not granted
the right to sublicense third parties under this Agreement.
SECTION 4.0 RELEASE
4.1 Upon payment of the consideration set forth in Section 5.8, DVA
irrevocably releases LICENSEE and its Affiliates, identified in Appendix
C, which are LICENSEE's Affiliates as of the effective date of this
Agreement, from any and all claims of infringement of the Licensed
Patent(s), which claims have been made or which might be made at any
time, with respect to any Licensed Products used, rented, leased, sold,
or otherwise Transferred by or for LICENSEE or its sublicensed
Affiliates before the effective date of this Agreement, to the extent
such Licensed Products would have been licensed hereunder had they been
manufactured, used, rented, leased, sold, or otherwise Transferred after
the effective date of this Agreement. This release shall not apply to
any Licensed Product on which a royalty accrues after the effective date
of this Agreement. This release applies only to the Licensed Patent(s)
and does not apply to any other DVA Patent(s). LICENSEE may remain
liable for infringement of other DVA Patent(s).
4.2 LICENSEE expressly represents that its Affiliates identified in Appendix
C include all of LICENSEE's Affiliates as of the effective date of this
Agreement.
SECTION 5.0 ROYALTIES AND OTHER PAYMENTS
5.1 LICENSEE shall pay, as hereinafter provided, earned royalties to DVA
with respect to both of the following for:
Page 8 of 23
<PAGE>
5.1.1 each Licensed Product for which LICENSEE is licensed hereunder in
the country of manufacture; and
5.1.2 each Licensed Product for which LICENSEE is licensed hereunder in
the country of use, rental, lease, sale or Transfer.
5.2 For each Licensed Product manufactured in the United States of America
or Canada or their territories or possessions, no more than one royalty
shall be due for such Licensed Product, regardless of the number of
countries in which the use, distribution and sale of such Licensed
Product occurs.
5.3 LICENSEE shall pay to DVA a royalty as set forth below in Section 5.4 or
as set forth below in Section 5.5. LICENSEE's election between the
royalty of Section 5.4 and the royalty of Section 5.5 shall be made in
writing to DVA for each type of Licensed Product on or before submission
of the royalty report for the first accounting period for which royalty
is to be paid for such type of Licensed Product. This election, once
made, cannot be changed except as provided herein. For any given
accounting period, LICENSEE shall pay the same royalty for each Licensed
Product of the same type.
If Section 5.4 is selected, and LICENSEE subsequently wishes to change
its royalty election, LICENSEE may change the royalty election by
notifying DVA in writing, on or before submission of the royalty report
for the next accounting period for which such royalties are to be paid,
of LICENSEE'S election to pay royalties pursuant to Section 5.5 herein,
and of the Licensed Patent(s) to be included in Appendix B. Appendix B
shall thereupon be amended to list the Licensed Patent(s) in accordance
with LICENSEE's written notification, LICENSEE shall be liable for
royalty payments pursuant to Section 5.4 up to the date of DVA's receipt
of written notice of LICENSEE's change of royalty election.
If LICENSEE is considering an election to pay royalties pursuant to
Section 5.5, LICENSEE may request a factory inspection in accordance
with Section 10.0. If Section 5.5 is selected, DVA reserves the right to
bring a patent infringement action against LICENSEE with respect to any
DVA Patent(s) not listed in Appendix B.
The royalty election may be changed from Section 5.5 to Section 5.4 by
written agreement of the parties.
page 9 of 23
<PAGE>
5.4 As a first option, LICENSEE shall pay to DVA each of the following
royalties:
5.4.1 For each Licensed Product which is manufactured, used, rented,
leased, sold and/or Transferred by or for LICENSEE and/or its
Affiliates, LICENSEE shall pay to DVA a royalty for:
5.4.1.1 Digital Discs (except CD Single Discs): three cents
(U.S. $0.03) per information bearing layer; and
5.4.1.2 CD Single Discs: two cents (U.S. $0.02) per
information bearing layer.
5.4.1.3 With respect to each of the preceding Sections 5.4.1.1
and 5.4.1.2, LICENSEE shall have the option of paying a
royalty of three percent (3.0%) of the Manufacturer's
Net Selling Price.
5.5 As a second option, LICENSEE shall pay to DVA for each Licensed
Product which is manufactured, used, rented, leased, sold and/or
Transferred by or for LICENSEE and/or its Affiliates, a royalty equal
to the sum total of the individual patent royalty rates of Licensed
Patent(s) as a percentage of the Manufacturer's Net Selling Price of
such Licensed Product, such individual rates being set forth in
Appendix B.
5.6 No royalties shall be paid by LICENSEE for:
5.6.1 Licensed Products manufactured for LICENSEE by any other DVA
licensee, so long as the other DVA licensee has fully paid and
reported royalties to DVA on such Licensed Products and has
identified LICENSEE as the purchaser of such Licensed Products
in its royalty reports to DVA. If the other DVA licensee has
paid a partial royalty to DVA, then LICENSEE shall receive a
credit for that partial royalty.
5.6.2 Licensed Products manufactured by LICENSEE for any other DVA
licensee, so long as the other licensee has fully paid and
reported royalties to DVA on such Licensed Products, and
LICENSEE has identified such other DVA licensee as the
purchaser, and both LICENSEE and such other DVA licensee have
both identified the other in their respective royalty reports
due DVA reporting such transaction.
Page 10 of 23
<PAGE>
If the other DVA licensee has paid a partial royalty to DVA,
then LICENSEE shall a receive credit for that partial royalty.
5.7 Lists of manufacturers that have a valid patent license agreement for
Licensed Products with DVA are listed in Appendix D-1 and D-2. These
lists will be updated annually. If LICENSEE purchases Licensed
Products from any manufacturer listed in Appendix D-2 (licensed
manufacturers not paying U.S. and Canadian royalty rates), and uses,
rents, leases, sells and/or Transfers such Licensed Products in the
United States of America or Canada or their territories or
possessions, then LICENSEE shall:
5.7.1 pay to DVA a royalty of two United States cents (U.S. $0.02)
per information bearing layer; or
5.7.2 submit the royalty report described in Section 6.6 to both DVA
and each such licensed manufacturer. If LICENSEE chooses this
option, DVA will demand, where appropriate, payment of the
owed royalties as specified in Section 5.7.1 from the licensed
manufacturer. If the licensed manufacturer does not pay these
royalties within sixty (60) days of DVA's demand, LICENSEE
must pay these royalties. The fact that DVA seeks payment from
the licensed manufacturer in no way absolves LICENSEE of
liability for these royalties.
5.8 LICENSEE agrees to pay DVA within sixty (60) days of the execution of
this Agreement, the sum of Twenty Thousand United States Dollars
($20,000) as additional consideration for the release granted LICENSEE
in Section 4.0. This sum is not refundable and is not creditable
toward royalties set forth in this Section 5.0. LICENSEE and its
Affiliates are jointly and severally liable for this payment, and if
LICENSEE fails to make this payment, then DVA reserves the right to
seek such payment from any or all of LICENSEE's Affiliates.
Section 6.0 ACCRUALS, RECORDS AND REPORTS
6.1 Royalties shall accrue when any Licensed Product with respect to which
royalty payments are required by Section 5.0 of this Agreement is sold
(as evidenced by bill or invoice), first rented, first leased, first
put into use or Transferred, whether or not payment is received by
LICENSEE. On sales or Transfers between LICENSEE and its Affiliate for
resale or for further Transfer, the royalty shall accrue at the time
of sale or Transfer to the Affiliate.
Page 11 of 23
<PAGE>
6.2 LICENSEE shall pay royalties and other sums of money due hereunder in
United States dollars. All royalties for an accounting period computed
on invoiced amounts in currencies other than United States dollars
shall be converted directly into United States dollars, without
intermediate conversions to another currency, at the currency exchange
rate quoted by either the United States edition of the Wall Street
Journal or the head office of Citibank N.A. of New York, New York at
the close of banking on the last business day of such accounting
period.
6.3 An accounting period shall end on the last day of each March, June,
September and December during the term of this Agreement. The first
accounting period under this Agreement shall be for a period
commencing as of the effective date of this Agreement. Within sixty
(60) days after the end of each such period, LICENSEE shall furnish to
DVA the written reports containing the information specified in
Sections 6.4, 6.5 and 6.6 hereof and shall pay to DVA all owed
royalties accrued hereunder in favor of DVA to the end of each such
period. If LICENSEE chooses the option specified in Section 5.7.2,
LICENSEE shall also send the applicable licensed manufacturer a copy
of the royalty report specified in Section 6.6 within the same
sixty-day period.
6.4 With respect to Licensed Products LICENSEE manufactures or purchases
from a manufacturer not listed in either Appendix D-1 or D-2, LICENSEE
shall submit a royalty report including the following information:
6.4.1 identification by Type Number, brand name and/or label name,
Licensed Product type (for example, CD Digital Audio, CD-ROM,
etc.), Manufacturer's Net Selling Price, and quantity of each
Licensed Product type upon which royalty has accrued pursuant
to Section 6.1;
6.4.2 the name of the manufacturer, city and either state or country
of the manufacture and the countries in which LICENSEE sold
(as evidenced by bill or invoice), first rented, first leased,
first put into use or Transferred those Licensed Products; and
6.4.3 identification of the royalty basis used for each Licensed
Product type pursuant to the provisions of Section 5.0, the
amount of royalties due for each Licensed Product type, all
information required to show how such amount has been
calculated and the aggregate amount of all royalties due.
Page 12 of 23
<PAGE>
In the event that Section 6.4.1. does not apply, LICENSEE shall so
state. In the event no royalties are due, LICENSEE's report shall so
state.
6.5 With respect to Licensed Products LICENSEE purchases from a licensed
manufacturer listed in Appendix D-1, LICENSEE shall submit a royalty
report including the following information:
6.5.1 identification by Type Number, brand name and/or label name,
Licensed Product type (for example, CD Digital Audio, CD-ROM,
etc.) Manufacturer's Net Selling Price, and quantity of each
Licensed Product type upon which royalty has accrued pursuant
to Section 6.1;
6.5.2 the name of the licensed manufacture, city and either state
or country of the manufacturer and the countries in which
LICENSEE sold (as evidenced by bill or invoice), first rented,
first leased, first put into use or Transferred those Licensed
Products;
6.5.3 identification of the royalty basis used for each Licensed
Product type pursuant to the provisions of Section 5.0, the
amount of royalties due for each Licensed Product type, all
information required to show how such amount has been
calculated and the aggregate amount of all royalties due; and
6.5.4 identification by Type Number, brand name and/or label name,
Licensed Product type (for example, CD Digital Audio, CD-ROM,
etc.), and quantity of each Licensed Product type which is
available for sale by LICENSEE during the applicable account
period which is exempt from royalty in accordance with Section
5.6.
In the event that either of Sections 6.5.1 and 6.5.4 do not apply,
LICENSEE shall so state as to each such Section. In the event no
royalties are due, LICENSEE's report shall so state.
6.6 With respect to Licensed Products LICENSEE purchases from a licensed,
manufacturer listed in Appendix D-2, LICENSEE shall submit a royalty
report for each such licensed manufacturer including the following
information:
6.6.1 identification by Type Number, brand name and/or label name,
Licensed Product type (for example, CD Digital Audio, CD-ROM,
Page 13 of 23
<PAGE>
etc.), Manufacturer's Net Selling Price, and quantity of each
Licensed Product type purchased from the licensed manufacturer;
6.6.2 the name of the licensed manufacturer, city and country of the
manufacture, and the countries in which LICENSEE sold (as
evidenced by bill or invoice), first rented, first leased,
first put into use or Transferred those Licensed Products;
6.6.3 the total number of Licensed Products purchased from the
licensed manufacturer and the total number of information
bearing layers; and
6.6.4 the royalty rate specified in Section 5.7.1 (if applicable),
the amount, if any, of the royalty paid by LICENSEE, and the
total outstanding royalty owed DVA for Licensed Products
purchased from the licensed manufacturer.
6.7 LICENSEE's royalty reports shall be certified by an officer of LICENSEE
or by a designee of such officer to be correct to the best of LICENSEE's
knowledge and information.
6.8 LICENSEE shall keep separate records in sufficient detail to permit
the determination of royalties payable hereunder. At the request of
DVA, LICENSEE will permit an independent auditor and/or technical
consultant selected by DVA, or any other person or persons acceptable
to both DVA and LICENSEE, to examine during ordinary business hours
once in each calendar year such reports and other documents as may be
necessary to verify or determine royalties paid or payable under this
Agreement. Such auditor, technical consultant or other person(s) shall
be instructed to report to DVA only the amount of royalties due and
payable. If no request for examination of such records for any
particular accounting period has been made by DVA within five (5)
years after the end of said period, the right to examine such records
for said period, and the obligation to keep such records for said
period, shall terminate.
6.9 The fees and expenses of DVA's representatives performing any
examination of record under Section 6.8 shall be borne by DVA.
However, if an error in royalties of more than three percent (3.0%) if
the total royalties due is discovered for any year examined, then the
total fees and expenses of these representatives shall be borne by
LICENSEE.
Page 14 of 23
<PAGE>
SECTION 7.0 INTEREST ON OVERDUE ROYALTIES AND OTHER PAYMENTS
7.1 LICENSEE shall be liable for interest at a rate of one and one-half
percent (1.5%) per month compounded monthly on any overdue royalty or
other payment set forth in Section 5.0 herein, commencing on the date
such royalty or other payment becomes due. If such interest rate
exceeds the maximum legal rate in the jurisdiction where a claim
therefor is being asserted, the interest rate shall be reduced to such
maximum legal rate.
SECTION 8.0 ASSIGNMENTS
8.1 LICENSEE shall not assign any of its rights or privileges hereunder
without the prior written consent of DVA, except to a successor in
ownership of all or substantially all the assets of LICENSEE, which
successor expressly assumes in writing the performance of all the
terms and conditions of this Agreement to be performed by LICENSEE as
if it were named herein in the place of LICENSEE. After any such
assignment, LICENSEE shall no longer be licensed hereunder.
SECTION 9.0 LICENSE TO DVA
9.1 LICENSEE grants to DVA and its Affiliates an irrevocable, worldwide,
non-exclusive, royalty-free license under LICENSEE's patents and
patent applications to make, have made, use, lease, sell or otherwise
Transfer products corresponding to the Licensed Products defined
herein, and to make, have made, use or have used Manufacturing
Apparatus in the manufacture of such products and to practice or have
practiced Manufacturing Processes in the manufacture of such products.
Said license to DVA and its Affiliates shall be effective as of the
date LICENSEE first pays royalties in accordance with Section 5.0
hereof. Said license shall be with respect to all of LICENSEE's
patents and patent applications, including utility models, design
patents, divisionals, reissues, extensions, continuations, and
reexaminations, under which patents and patent applications LICENSEE
now has or hereafter, during the term of this Agreement, obtains the
right to grant licenses to DVA of the scope granted herein.
9.2 The license as set forth in Section 9.1 shall not apply with respect
to any patent of LICENSEE, if such grant would result in the payment
of royalties by LICENSEE to third parties, except for payments to
Affiliates of LICENSEE and payments to third parties for inventions
made by said third parties while employed by LICENSEE or any of its
Affiliates.
SECTION 10.0 FACTORY INSPECTION
10.1 At LICENSEE's request, DVA will perform a factory inspection at
LICENSEE's Licensed Product manufacturing facility, or the Licensed
Product manufacturing
Page 15 of 23
<PAGE>
facility of the manufacturer who supplies Licensed Products to
LICENSEE, and thereafter provide LICENSEE with claim charts indicating
which DVA Patent(s) listed in Appendix A apply to LICENSEE's products.
If LICENSEE is not the manufacturer, it is LICENSEE's responsibility to
obtain the authorization of the manufacturer for DVA to perform the
desired factory inspection. LICENSEE shall pay to DVA an inspection fee
of Fifty Thousand United States dollars (U.S. $50,000) for each Licensed
Product manufacturing facility to be inspected, said fee to be paid
prior to each inspection.
10.2 If LICENSEE notifies DVA that LICENSEE wishes to have the factory
inspection set forth in Section 10.1, then LICENSEE agrees to allow, or
to obtain authorization to allow, the representatives of DVA to inspect
the manufacturing facility as follows:
10.2.1 DVA's representatives shall be allowed to inspect those parts of
the manufacturing facility which are directly related to the
possible infringement of DVA Patent(s). The inspection shall be
made during reasonable business hours as soon as practically
possible after payment of the inspection fee by LICENSEE. DVA
and LICENSEE shall determine by mutual agreement the time,
duration and other detailed manner and schedule of such
inspection.
10.2.2 The employees at the manufacturing facility will be directed, to
the best of LICENSEE's ability, to answer all questions asked by
the DVA representatives and will allow the full and complete
inspection, copying, videotaping and photographing of all
documentation, machines, methods, and materials used in, at, or
with a part of the manufacturing facility which LICENSEE has the
right to disclose to others, as long as such questions and/or
such part of the facility is directly related to the possible
infringement. Any notes made by the DVA representatives and any
documents, photographs, and videotapes shall be stamped
"CONFIDENTIAL."
10.2.3 Any inspection of a Licensed Product manufacturing facility
shall be on a confidential basis, and information learned as a
result thereof shall be used for no purpose other than the
technical discussions set forth herein. DVA shall safeguard the
confidential information learned with standards at least as high
as those that it uses to safeguard its own confidential
information.
Page 16 of 23
<PAGE>
10.2.4 DVA shall not divulge any information obtained or learned as a
result of such inspection to any other person or entity other
than LICENSEE, including but not limited to other DVA licensees.
This obligation shall not apply to information which is or
becomes publicly available through no fault of DVA or is
rightfully obtained without a bind of secrecy.
10.2.5 DVA shall use its best efforts to provide, within sixty (60)
days from the inspection of the Licensed Product manufacturing
facility, a report in writing to LICENSEE. The report shall
include those DVA Patent(s) which DVA believes are infringed by
such facility and shall be in the form of claim charts providing
the basis and reasons for the possible infringement of the DVA
Patent(s) in question.
DVA shall use its best efforts to include in the report all DVA
Patent(s) which DVA believes are infringed by such facility. It
is understood and agreed by LICENSEE that the exclusion of one
or more DVA Patents neither stops DVA from asserting a claim of
infringement against LICENSEE under such DVA Patent(s), nor
affects the rights of DVA in any way with respect to such DVA
Patent(s).
It is understood and agreed by LICENSEE that this report and
these claim charts are for settlement purposes only and cannot
and will not be used for any other purpose. LICENSEE agrees to
keep this report and these claim charts confidential and not to
disclose them to any other party.
10.3 LICENSEE can elect this inspection option once per calendar year. Any
inspection of a Licensed Product manufacturing facility after the first
inspection of such manufacturing facility shall be performed for a fee
to be determined and agreed upon between DVA and LICENSEE.
Section 11.0 TERM OF AGREEMENT; TERMINATION
11.1 Subject to Section 11.5 below, the term of this Agreement shall be from
the effective date hereof until the expiration of the last to expire of
the Licensed Patent(s), unless previously terminated as hereinafter
provided.
11.2 LICENSEE may terminate the license granted herein, but only in its
entirety, at any time by giving notice in writing to DVA. Such
termination shall be effective on the date such notice is received by
DVA.
Page 17 of 23
<PAGE>
11.3 DVA shall have the right to terminate this Agreement in the event:
11.3.1 LICENSEE fails to make any payment when due under this Agreement
and such payment is not made within sixty (60) days of written
notice from DVA; or
11.3.2 LICENSEE defaults under any term of this Agreement, other than
a default involving the payment of money, which default is not
cured within thirty (30) days of written notice from DVA; or
11.3.3 LICENSEE becomes insolvent or admits in writing its inability
to pay its debts as they mature or makes an assignment for the
benefit of creditors; or
11.3.4 LICENSEE files a petition under any foreign or U.S. bankruptcy
law.
The rights and remedies set forth in this section are not exclusive and
are in addition to any other rights and remedies available to DVA under
this Agreement or at law or equity.
11.4 In the event this Agreement or the license granted hereunder
shall be terminated pursuant to this Section 11.0 or assigned
pursuant to Section 8.0, the corresponding sublicenses granted
to Affiliates of LICENSEE pursuant to Section 3.3 shall
likewise terminate, but no notices need be given by DVA to such
Affiliates.
11.5 Any expiration or termination of this Agreement pursuant to
this Section 11.0, or any termination of a sublicense pursuant
to Section 3.3, shall not relieve LICENSEE of any obligation or
liability accrued hereunder prior to such termination
(including, without limitation, the obligations set forth in
Sections 5.0, 6.0 and 7.0), or rescind or give rise to any
right to rescind anything done by LICENSEE or any payments made
or other consideration given to DVA hereunder prior to the time
such termination becomes effective, and such termination shall
not affect in any manner any rights of DVA arising under this
Agreement prior to such termination.
Page 18 of 23
<PAGE>
SECTION 12.0 PAYMENTS, NOTICES AND OTHER COMMUNICATIONS
12.1 Any notice or other communication pursuant to this Agreement shall be
made by registered airmail (except that registered or certified mail
may be used where delivery is in the same country as mailing) and
shall be effective upon receipt by the addressee. Such notice or
communication shall be mailed to:
12.1.1 In the case of DVA:
Dennis Fischel
President
DISCOVISION ASSOCIATES
Post Office Box 19616
Irvine, California 92713
12.1.2 In the case of LICENSEE:
Alex Sandel
FUTURE MEDIA PRODUCTIONS
25136 Anza Drive
Valencia, California 91355
12.2 LICENSEE's royalty reports, as described in Section 6.0 of this
Agreement, shall be mailed via air mail to:
DISCOVISION ASSOCIATES
ATTN: Controller
Post Office Box 19616
Irvine, California 92713
Fax No.: (714) 660-1801
A summary of the report, which states the total royalty to be paid,
shall be sent by facsimile to DVA on, or before, the mailing of the
complete report.
12.3 All payments set forth in Section 5.0 of this Agreement shall be paid
via bank wire transfer to:
Federal Reserve Bank of San Francisco
For Credit to Sumitomo Bank of California
San Francisco - Head Office
ABA: 121002042
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<PAGE>
For Further Credit to:
The Sumitomo Bank, Ltd., Los Angeles Branch
for Account of Discovision Associates
ABA: 122041594
ACCOUNT NUMBER: 046-133013-70
or by check payable to DVA and mailed via air mail directly to:
DISCOVISION ASSOCIATES
ATTN: Controller
Post Office Box 19616
Irvine, California 92713
SECTION 13.0 APPLICABLE LAW; VENUE; JURISDICTION
13.1 This Agreement shall be construed, and the legal relations between the
parties hereto shall be determined, in accordance with the laws of the
State of New York and, as applicable, the laws of the United States of
America.
13.2 Any dispute that arises under or relates to this Agreement shall, at
DVA's election, be prosecuted exclusively in the appropriate court
situated in the State of Delaware, United States of America. LICENSEE
consents to the venue and jurisdiction of such court for purposes of
any such dispute, and agrees that a judgment of such court shall be
enforceable in the jurisdiction in which LICENSEE is located.
SECTION 14.0 MISCELLANEOUS
14.1 Nothing contained in this Agreement shall be construed as:
14.1.1 requiring the filing of any patent application, the securing
of any patents or the maintenance of any patents; or
14.1.2 a warranty or representation by DVA as to the validity or
scope of any Licensed Patent; or
14.1.3 a warranty or representation that the manufacture, use,
rental, lease, sale or other Transfer of any Licensed Product
is free from infringement of any patents or other rights of
third parties; or
14.1.4 an obligation on the part of DVA to furnish any manufacturing
or technical information, or any information concerning other
licensees; or
Page 20 of 23
<PAGE>
14.1.5 an obligation upon DVA to make any determination as to the
applicability of its patents to any of LICENSEE's products,
except as otherwise provided in Section 10.0; or
14.1.6 a license with respect to any act which would otherwise
constitute inducement of infringement or contributory
infringement under United States patent law or its equivalent
under any law foreign to the United States; or
14.1.7 conferring any right to use, in advertising, publicity, or
otherwise, any name, trade name, trademark, service mark,
symbol or any other identification or any contraction,
abbreviation or simulation thereof; or
14.1.8 conferring any rights by implication, estoppel or otherwise,
to or under copyrights with respect to any computer software
under any present system of statutory protection or one
hereinafter enacted in any country or countries, wherein the
copying of such computer software is a requisite of
infringement under such system; or
14.1.9 an obligation to bring or prosecute actions or suits against
third parties for infringement of any patent.
14.2 LICENSEE shall have the complete responsibility and shall use its
best efforts to obtain all necessary approvals and validations of
this Agreement, including all necessary approvals and validations for
any products made, used or sold hereunder.
14.3 LICENSEE will sell and deliver to DVA, F.O.B. LICENSEE's shipping
point, any Licensed Product ordered from LICENSEE by DVA and which is
available for sale by LICENSEE. LICENSEE will also sell and deliver to
DVA a copy of each manual (including, but not limited to, service, use
and other technical manuals) relevant to a Licensed Product which is
available for sale by LICENSEE, provided that, upon request by
LICENSEE, DVA first delivers to LICENSEE a letter agreeing to hold
such manual in confidence and to use it only for reverse engineering
purposes. Any such sales will be at the same prices charged to
LICENSEE's most favored customer.
14.4 The waiver by either party of a breach or default of any provision of
this Agreement by the other party shall not be construed as a waiver
of any succeeding breach of the same or any other provision, nor shall
any delay or omission on the part of either party to exercise or avail
itself of any right, power
Page 21 of 23
<PAGE>
or privilege that it has or may have hereunder operate as a waiver of any
right, power or privilege of such party.
14.5 It is the intention of both parties to make this Agreement
binding only to the extent that it may be lawfully done under existing
applicable law as identified in Section 13.0. If any sentence, paragraph,
clause or combination of the same is in violation of any applicable law,
that portion which is in violation shall be severed from this Agreement
and the remainder of this Agreement shall remain binding upon the
parties hereto, except that no license is granted, expressly or by
implication, unless royalties are paid pursuant to Section 5.0.
14.6 Each party represents and warrants that it has the full right and
power to enter into this Agreement and that there are no outstanding
agreements, assignments, or encumbrances to which the representing party
is bound which may restrict, or prohibit entry into, or performance
under, this Agreement. DVA further represents and warrants that it has
the full power to grant the license and release set forth in Sections
3.0 and 4.0. Neither party makes any other representations or
warranties, express or implied, other than the representations set forth
in Sections 3.3 and 4.2 regarding Affiliates.
14.7 The headings of the several sections are inserted for convenience
of reference only and are not intended to affect the meaning or
interpretation of this Agreement.
14.8 The specifications referred to in various definitions in Section
2.0 of this Agreement (i.e., the Red Book, Green Book, Yellow Book and
Rainbow Book) are for clarity and the convenience of the parties in
determining the product(s) that the parties intend to be licensed under
this Agreement.
14.9 This Agreement may be executed in any number of copies, but all
of such counterparts together shall constitute one and the same
Agreement.
14.10 The parties hereto acknowledge that this instrument sets forth
the entire agreement and understanding of the parties hereto and shall
supersede all previous communications, representations and
understandings, either oral or written, between the parties relating to
the subject matter hereof, except prior written agreements signed by
both parties, and shall not be subject to any changes or modifications
except by the signing of a written instrument by or on behalf of both
parties hereto.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
signed as of the dates written below, to be effective as of the date first
above written.
DISCOVISION ASSOCIATES
/s/ Dennis Fischel
--------------------------------
By: Dennis Fischel
Witness: Title: President
[ILLEGIBLE] Date: Sept. 16, 1996
- -------------------------------- --------------------------------
FUTURE MEDIA PRODUCTIONS
EL:DHT:dh
Witness: /s/ Alex Sandel
--------------------------------
By: Alex Sandel
Title:
Date: 8-26-96
- -------------------------------- --------------------------------
Page 23 of 23
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL
PATENT
PATENT ROYALTY
COUNTRY NUMBER RATE TITLE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED STATES US 4,152,586 1.65% OPTICAL TRANSDUCER AND FOCUSING SYSTEM
(Cont.) US 4,161,752 2.00% HIGH DENSITY VIDEO DISC HAVING TWO PIT DEPTHS
US 4,161,753 2.00% VIDEO RECORDING DISK WITH INTERLACING OF DATA FOR FRAMES ON THE SAME TRACK
US 4,185,065 1.65% APPARATUS FOR REPLICATING CENTRALLY APERTURED VIDEO DISC RECORDS
US 4,100,880 1.65% DIGITAL METHOD AND APPARATUS FOR ROTATING AN INFORMATION STORAGE DISC
US 4,204,199 2.00% METHOD AND MEANS FOR ENCODING AND DECODING DIGITAL DATA
US 4,210,031 2.00% VIDEO PLAYER AND/OR RECORDER WITH HADAMARD TRANSFORM
US 4,211,617 2.00% PROCESS FOR PRODUCING A STAMPER FOR VIDEODISC PURPOSES
US 4,222,072 2.00% VIDEO PLAYER/RECORDER WITH NON-LINEAR MARK LENGTH MODULATION
US 4,225,873 2.00% RECORDING AND PLAYBACK SYSTEM
US 4,228,326 2.00% SYSTEM FOR RECORDING INFORMATION ON A ROTATABLE STORAGE DISC IN A SUBSTANTIALLY UNIFORM
RECORDING DENSITY
US 4,232,388 1.00% METHOD AND MEANS FOR ENCODING AND DECODING DIGITAL DATA
US 4,241,698 1.65% VACUUM EVAPORATION SYSTEM FOR THE DEPOSITION OF A THIN EVAPORATED LAYER HAVING A HIGH
DEGREE OF UNIFORMITY
US 4,252,327 2.00% VIDEO DISC PLAYER
US 4,256,374 0.75% WRITE AND READ OBJECTIVE LENS FOR HIGH DENSITY STORAGE
US 4,260,360 1.65% METHOD AND MEANS FOR REPLICATING CENTRALLY APERTURED VIDEO DISC RECORDS
US 4,264,911 2.00% OPTICAL RECORDING DISC AND RELATED METHOD OF MANUFACTURE
US 4,274,110 2.00% RECORDING DISC COVER AND PLAYER APPARATUS FOR REMOVING COVER
US 4,286,848 0.75% REPRODUCING OBJECTIVE LENS FOR VIDEODISCS
US 4,307,381 2.00% METHOD AND MEANS FOR ENCODING AND DECODING DIGITAL DATA
US 4,310,919 2.00% OPTICAL VIDEO DISC STRUCTURE
US 4,313,100 1.20% METHOD FOR MAKING A COMPOSITE VIDEO DISC
US 4,313,101 2.00% RECORDING MEDIUM HAVING A PILOT SIGNAL WITH AN ALIGNED PHASE ANGLE IN ADJACENT TRACKS
US 4,337,538 2.00% DRIVE ASSEMBLY FOR A VIDEO RECORDER-PLAYBACK MACHINE
US 4,330,614 2.00% SPINDLE ASSEMBLY FOR A VIDEO RECORDER-PLAYBACK MACHINE
US 4,340,353 1.65% NOT SPRUE VALUE ASSEMBLY FOR AN INJECTION MOLDING MACHINE
US 4,340,055 2.00% VIDEO DISC PLAYER
US 4,341,469 0.80% LASER SHADOWGRAPH
US 4,345,261 2.00% DIELECTRIC RECORDING MEDIUM
US 4,347,500 0.80% SPINDLE CLAMP ASSEMBLY FOR A VIDEO RECORDER-PLAYBACK MACHINE
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 4 of 7
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL
PATENT
PATENT ROYALTY
COUNTRY NUMBER RATE TITLE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED STATES US 4,347,619 2.00% DIGITAL FORMATTING SYSTEM
(cont.) US 4,353,767 2.00% METHOD OF MANUFACTURING AN OPTICAL READING DISC
US 4,357,633 2.00% FOCUS DETECTOR FOR AN OPTICAL DISC PLAYBACK SYSTEM
US 4,358,774 2.00% APPARATUS AND METHOD FOR CONTROLLING FOCUS IN A RECORDING MEDIUM
US 4,358,802 1.65% FLUID CUSHION TURNTABLE FOR VIDEO DISC PLAYER
US 4,367,545 2.00% VIDEO DISC PLAYER
US 4,388,957 0.75% WIDE APERTURE OBJECTIVE LENS
US 4,372,741 1.65% HOT SPRUE VALVE ASSEMBLY FOR AN INJECTION MOLDING MACHINE
US 4,374,638 1.65% APPARATUS FOR PRODUCING CENTRALLY APERTURED RECORD DISCS
US 4,391,578 2.00% HOT SPRUE VALVE ASSEMBLY FOR AN INJECTION MOLDING MACHINE
US 4,394,117 2.00% HOT SPRUE SLEEVE VALVE ASSEMBLY FOR AN INJECTION MOLDING MACHINE
US 4,397,805 2.00% METHOD FOR MAKING A VIDEO DISC
US 4,405,540 1.65% HOT SPRUE VALVE ASSEMBLY FOR AN INJECTION MOLDING MACHINE
US 4,412,743 1.00% OFF-AXIS LIGHT BEAM DEFECT DETECTOR
US 4,412,805 1.65% HOT SPRUE ASSEMBLY FOR AN INJECTION MOLDING MACHINE
US 4,415,138 2.00% ELASTOMERIC VIDEODISC MOLD OR INTERMEDIATE MEMBER
US 4,422,189 1.65% LENS ASSEMBLY FOR A VIDEO RECORDER-PLAYBACK MACHINE
US 4,422,904 2.00% METHOD FOR FORMING VIDEO DISCS
US 4,430,401 2.00% METHOD FOR PRODUCING A RECORDING DISC STAMPER
US 4,433,423 2.00% HIGH QUALITY DELTA MODULATOR
US 4,439,132 1.65% HOT SPRUE ASSEMBLY FOR AN INJECTION MOLDING MACHINE
US 4,441,179 2.00% OPTICAL VIDEO DISC STRUCTURE
US 4,445,144 0.60% METHOD FOR DETECTING ECCENTRICITY IN A VIDEO DISC AND IN A VIDEO DISC PLAYER
US 4,445,209 2.00% DITHERED FOCUSING SYSTEMS
US 4,450,486 2.00% SYSTEM FOR RECORDING CONTINUOUS-PLAY AND STOP-MOTION SIGNAL
US 4,451,013 2.00% VIDEO DISC READ BACK SCANNER
US 4,455,634 2.00% AUDIO/VIDEO QUALITY MONITORING SYSTEM
US 4,456,375 1.20% OPTICAL DISC MEASUREMENT BY REFRACTION
US 4,456,014 2.00% METHOD AND APPARATUS FOR STORING INFORMATION ON A STORAGE MEDIUM
US 4,465,977 1.65% ERRONEOUS PULSE SEQUENCE DETECTOR
- -----------------------------------------------------------------------------------------------------------------------------------
Page 5 of 7
<PAGE>
<CAPTION>
APPENDIX A
- -----------------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL
PATENT
PATENT ROYALTY
COUNTRY NUMBER RATE TITLE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED STATES US 4,466,934 1.65% HOT SPRUE VALVE ASSEMBLY FOR AN INJECTION MOLDING MACHINE
(cont.) US 4,467,467 2.00% VIDEO RECORDER-PLAYBACK MACHINE
US 4,477,890 1.20% MAPPING DISC DEFECT DETECTOR
US 4,479,146 2.00% VERTICAL CODE VERIFIER
US 4,488,279 2.00% VIDEO RECORDER-PLAYBACK MACHINE
US 4,998,011 1.65% FLAT PLAT FOCUS SENSING APPARATUS
US 4,499,502 2.00% COMPRESSED BANDWIDTH FREQUENCY MODULATION SIGNAL FORMAT APPARATUS AND METHOD
US 4,499,560 2.00% WRITING BEAM FOCUS MONITOR
US 4,500,464 2.00% PROCESS FOR MAKING A VIDEO RECORD DISC
US 4,504,939 2.00% STORAGE MEDIUM TRACK PITCH DETECTOR
US 4,510,536 2.00% SIGNAL CONDITIONING METHOD AND APPARATUS FOR FM CODE SIGNAL
US 4,519,004 2.00% EXTENDED PLAY VIDEODISC
US 4,524,444 2.00% ANALYZING THE SIGNAL TRANSFER CHARACTERISTICS OF A SIGNAL PROCESSING UNIT
US 4,635,648 1.65% METHOD AND MEANS FOR DRYING COATINGS ON HEAT SENSITIVE MATERIALS
US 4,668,000 2.00% STORAGE MEDIUM TRACK PITCH DETECTOR
US 4,583,210 2.00% METHOD AND APPARATUS FOR STORING AND RETRIEVING INFORMATION
US 4,598,324 2.00% AUDIO EVALUATION UNDER CONTROL OF VIDEO PICTURE FRAME NUMBER
US 4,611,318 2.00% METHOD AND APPARATUS FOR MONITORING THE STORAGE OF INFORMATION ON A STORAGE MEDIUM
US 4,616,753 2.00% VIDEO RECORD DISC AND PROCESS FOR MAKING SAME
US 4,023,837 2.00% AUDIO/VIDEO QUALITY MONITORING SYSTEM
US 4,646,084 2.00% STORAGE MEDIUM TRACK PITCH DETECTOR
US 4,706,133 2.00% METHOD AND APPARATUS FOR RECOVERING INFORMATION FROM A VIDEO DISC
US 4,759,007 2.00% STORAGE MEDIUM TRACK PITCH DETECTOR
US 4,764,915 2.00% METHOD AND APPARATUS FOR RECORDING A MULTIPLEXED SIGNAL ON A RECORD MEDIUM
US 4,796,098 2.00% BANDED AND INTERLEAVED VIDEO DISC FORMAT
US 4,797,752 2.00% BANDED AND INTERLEAVED VIDEO DISC FORMAT
US 4,810,223 2.00% VIDEO RECORD DISC
US 4,893,297 2.00% VIDEO RECORD DISC AND PROCESS FOR MAKING SAME
US 4,986,878 2.00% METHOD AND APPARATUS FOR SCANNING A RECORDING MEDIUM FOR DEFECTS
Page 6 of 7
<PAGE>
<CAPTION>
APPENDIX A
- -----------------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL
PATENT
PATENT ROYALTY
COUNTRY NUMBER RATE TITLE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED STATES US 5,001,568 2.00% SIGNAL EVALUATION BY ACCUMULATION AT ONE RATE AND RELEASING AND TESTING AT A SLOWER RATE
(cont.) US 5,003,526 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT
US 5,018,020 2.00% RECORD DISC FOR STORING SEPARATE VIDEO AND AUDIO INFORMATION
US 5,084,852 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT
US 5,126,990 2.00% A METHOD OF EVALUATING A STORAGE MEDIUM BY RECIRCULATING A TEST SAMPLE OF A SIGNAL
US 5,136,558 2.00% TWO AXIS ELECTROMAGNETIC ACTUATOR
US 5,155,633 1.65% ANAMORPHIC ACHROMATIC PRISM FOR OPTICAL DISC HEADS
US 5,177,640 1.65% TWO-AXIS MOVING COIL ACTUATOR
US 5,220,434 2.00% VIDEO RECORDING MEDIUM FOR STOP-MOTION PLAYBACK
US 5,245,174 2.00% FOCUS SENSING APPARATUS UTILIZING A REFLECTING SURFACE HAVING VARIABLE REFLECTIVITY
US 5,253,244 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT
US 5,265,079 2.00% SEEK ACTUATOR FOR OPTICAL RECORDING
US 5,313,332 0.60% FLEXURE SUSPENSION FOR TWO AXIS ACTUATOR
US 5,321,000 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT
US 5,331,622 2.00% COMPACT OPTICAL HEAD
US 5,349,175 2.00% FOCUS SENSING APPARATUS USING ELECTRICAL AGC TO ENHANCE DIFFERENTIAL FOCUS ERROR SIGNAL
US 5,373,490 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT
US 5,375,116 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT
US 5,448,545 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT
US 5,459,709 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT
US 5,470,390 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT
US RE 32,431 2.00% METHOD AND APPARATUS FOR RECOVERING INFORMATION FROM A ROTATABLE STORAGE DISC
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: An "E" directly following the Patent Number indicates
that patent has expired.
<PAGE>
APPENDIX B
UNITED STATES AND CANADIAN PATENTS LICENSED TO LICENSEE UNDER THIS AGREEMENT:
<TABLE>
<CAPTION>
INDIVIDUAL
PATENT
PATENT NUMBER ROYALTY RATE
------------- ------------
<S> <C>
</TABLE>
APPENDIX B PATENTS SHALL BE ALL OF THE PATENTS LISTED IN APPENDIX A
APPENDIX B
Page 1 of 1
<PAGE>
APPENDIX C
LICENSEE'S Affiliates as of the effective date of this Agreement are:
Company:
------------------------------
Address:
------------------------------
------------------------------
------------------------------
Company:
------------------------------
Address:
------------------------------
------------------------------
------------------------------
Company:
------------------------------
Address:
------------------------------
------------------------------
------------------------------
Company:
------------------------------
Address:
------------------------------
------------------------------
------------------------------
Company:
------------------------------
Address:
------------------------------
------------------------------
------------------------------
APPENDIX C
Page 1 of 2
<PAGE>
Company:
------------------------------
Address:
------------------------------
------------------------------
------------------------------
Company:
------------------------------
Address:
------------------------------
------------------------------
------------------------------
Company:
------------------------------
Address:
------------------------------
------------------------------
------------------------------
Company:
------------------------------
Address:
------------------------------
------------------------------
------------------------------
Company:
------------------------------
Address:
------------------------------
------------------------------
------------------------------
APPENDIX C
Page 2 of 2
<PAGE>
APPENDIX D-1
LICENSED DISC MANUFACTURERS WHO ARE PAYING UNITED STATES AND CANADIAN RATES:
<TABLE>
<S> <C>
National Tape & Disc Inc.
Allied Digital Technologies
(Hauppauge Record Mfg., Ltd.) Nimbus Manufacturing Inc.
Americ Disc Inc. Nippon Columbia Co., Ltd. (U.S.)
American MultiMedia, Inc. Optical Disc Corporation
ASR Recording Services Philips (N.V.) Gloeilampenfabrieken
Astraltech Americas, Inc. Pilz (U.S.)
Atlantic Recording Corporation Pioneer
Bertelsmann de Mexico P & O Compact Disc
Better Quality Cassettes, Inc. Producers Color/Technidisc
Cinram Ltd. Sanyo Laser Products
Denon Corporation (U.S.A) Sanyo Verbarim CD Company, L.L.C.
Digital Audio Disc Corporation (U.S.) Sonopress Inc. (U.S.)
Discovery Systems/Metatec Sonopress (Germany)
Distribution North America Sony Corporation (U.S.)
Eastern Standard Productions, Inc. Sony Music Entertainment
Eva-Tone, Inc. Time Warner Inc. (U.S.)
EMI Manufacturing (USA) U.S. Optical Disc
JVC America Warner Bros. Records Inc.
KAO Corporation Warner Communications Inc.
Kuraray Co., Ltd. WEA Manufacturing Inc.
Mitsubishi Plastics Industries Ltd. Zomax Optical Media
</TABLE>
APPENDIX D-1
Page 1 of 1
<PAGE>
APPENDIX D-2
LICENSED DISC MANUFACTURERS NOT PAYING UNITED STATES AND CANADIAN RATES:
<TABLE>
<S> <C>
Bertelsmann AG Pilz GmbH & Company
Compact Disc KG
Damont Audio Limited
Ritek Incorporation
EMI Compact Disc (Holland)
Sanyo Electric Co., Ltd.
EMI Manufacturing Australia
Seiko Epson
Fuji Photo Film Co., Ltd.
Show-Ads Omega Pty. Ltd.
Fujitsu Limited (Disctronics Technologies)
Hitachi Ltd. Sonopress (Germany)
Japan Optical Disc Corporation Sonopress (Mexico)
KAO Corporation Sonopress Pan Asia Ltd.
Matsushita Electric Industrial Co., Ltd. Sony Corporation (Japan)
Mayking Records Ltd. Sony DADC Austria AG
Memory-Tech Corporation TDK Corporation
Mitsubishi Electric Corporation Thorn EMI plc
Moulage Plastique de L'ouest (MPO) Toshiba Corporation
Nimbus Manufacturing (UK) Ltd. Toshiba-EMI Limited
Nippon Columbia Co., Ltd. (Japan) Toyo Recording Co., Ltd.
Optrom, Inc. Victor Company of Japan
</TABLE>
APPENDIX D-2
Page 1 of 1
<PAGE>
June 15, 1998
Averil Associates, Inc.
833 17th Street, Suite Six
Santa Monica, CA 90403
Attn: Diana L. Maranon
Ladies and Gentlemen:
In connection with your engagement as our financial advisor pursuant to a
letter agreement, dated June 15, 1998 (as such agreement may be amended from
time to time, the "Agreement"), between you and us, we hereby agree to
indemnify and hold harmless you and your affiliates, and your respective
directors, officers, agents, employees and controlling persons, and each of
their respective successors and assigns (collectively, the "indemnified
persons"), to the full extent lawful, from and against all losses, claims,
damages, liabilities and expenses (or actions in respect thereof) that are
related to or arise out of (i) actions or alleged actions taken or omitted to
be taken (including any untrue statements made or any statements omitted to
be made) by us or any of our affiliates, directors, officers, employees or
agents, (ii) actions or alleged actions taken or omitted to be taken by an
indemnified person (including acts or omissions constituting ordinary
negligence) pursuant to the terms of, or in connection with services rendered
pursuant to or in accordance with the terms of, the Agreement or any
transaction or proposed transaction contemplated thereby or any indemnified
person's role in connection therewith, or (iii) any untrue statement or
alleged untrue statement of a material fact contained in any offering
materials or in any amendment or supplement thereto, or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading. We will not be responsible,
however, for any losses, claims, damages, liabilities or expenses pursuant to
clause (ii) of the preceding sentence that are finally judicially determined
to have resulted primarily from the gross negligence or willful misconduct of
the person seeking indemnification hereunder. We also agree that (i) no
indemnified person shall have any liability to us or any of our affiliates,
directors, officers, employees or agents except for losses, claims, damages,
liabilities or expenses incurred by us in connection with the transaction
that are finally judicially determined to have resulted primarily from the
gross negligence or willful misconduct of such indemnified person; and (ii)
in no event shall the indemnified persons' aggregate liability in connection
with such losses, claims, damages, liabilities and expenses exceed the fees
you actually receive from us pursuant to the Agreement.
Promptly after receipt by an indemnified person of notice of any complaint or
the commencement of any action or proceeding with respect to which
indemnification is being sought hereunder, such person will notify us in
writing of such complaint or of the commencement of such action or
proceeding. We will not, without the prior written consent of you, settle or
compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not you
or any other indemnified person is an actual or potential party to such
claim, action, suit or proceeding).
We agree that if any indemnification sought by an indemnified person pursuant
to this letter agreement is held by a court to be unavailable for any reason
other than as specified in the second sentience of the first paragraph of
this letter agreement, then we will contribute to the losses, claims,
damages, liabilities and expenses for which such indemnification is held
unavailable (i) in such proportion as is appropriate to reflect the relative
benefits to us, on the one hand, and you, on the other hand, in connection
with your engagement referred to above, or (ii) if the allocation provided by
clause (i) above in this paragraph is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) in this paragraph, but also the relative fault of
us, on the one hand, and you, on the other hand, as well as any other
relevant equitable considerations; PROVIDED HOWEVER, that in any event the
aggregate contribution by all indemnified persons to all losses, claims,
damages, liabilities and expenses with respect to which contribution is
available hereunder will not exceed the amount of fees actually received by
you from us pursuant to your engagement referred to above. It is hereby
agreed that for purposes of this paragraph, the relative benefits to us, on
the one hand, and you, on the other hand, with respect to your engagement
shall be deemed to be in the same proportion as (i) the total value paid or
proposed to be paid or received by us or our stockholders, as the case may
be, pursuant to the transaction, whether or not
<PAGE>
consummated, for which you are engaged to render financial advisory services,
bears to (ii) the fee paid or proposed to be paid to you in connection with
such engagement. It is agreed that it would not be just and equitable if
contribution pursuant to this paragraph were determined by pro rata
allocation or by any other method which does not take into account the
considerations referred to in this paragraph.
We further agree that we will promptly reimburse you and any other
indemnified person hereunder for all expenses (including fees and
disbursements of counsel) as they are incurred in connection with
investigating, preparing or defending any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder, whether or not in connection with
pending or threatened litigation in which any indemnified person is a party;
PROVIDED, HOWEVER; that we will have the right to mutually determine legal
counsel to represent you and any other indemnified person hereunder and will
have the right to manage any such legal process, so long as such management
does not adversely impair, hinder or otherwise jeopardize the rights or
defense of you or any other indemnified person hereunder.
Our indemnity, contribution and other obligations under this letter agreement
shall be in addition to any rights that you or any other indemnified person
may have at common law or otherwise, and shall be binding on our successors
and assigns.
We hereby consent to personal jurisdiction, service and venue in any court in
which any claim which is subject to, or which may give rise to a claim for
indemnification or contribution under, this letter agreement is brought
against you or any other indemnified person.
This letter agreement shall be deemed made in California. This letter
agreement and all controversies arising from or relating to performance under
this letter agreement shall be governed by and construed in accordance with
the laws of the State of California, without giving effect to such state's
rules concerning conflicts of laws. ANY RIGHT TO TRIAL BY JURY WITH RESPECT
TO ANY CLAIM OR ACTION ARISING OUT OF THIS LETTER AGREEMENT OR ANY ENGAGEMENT
OF YOU IS HEREBY WAIVED.
It is understood that, in connection with your above-mentioned engagement,
you may also be engaged in writing to act in one or more additional
capacities, and that the terms of the original engagement or any such
additional engagement may be embodied in one or more separate written
agreements. The provisions of this letter agreement shall apply to the
original engagement, related activities prior to the date of the original
engagement, any such additional written engagement and any modification of
the original engagement or such additional written engagement and shall
remain in full force and effect following the completion or termination of
your engagement(s).
Sincerely,
FUTURE MEDIA PRODUCTIONS
By:
----------------------
Alex Sandel
Dated:
--------------------
Accepted:
AVERIL ASSOCIATES, INC.
By:
----------------------------
Diana L. Maranon
Dated:
----------------------------
<PAGE>
June 15, 1998
Mr. Alex Sandel
President
Future Media Productions
25136 Anza Drive
Valencia, California 91355
Dear Mr. Sandel:
1. This letter confirms our understanding that Future Media Productions,
Inc. (the "Company") has engaged Averil Associates, Inc. ("Averil") as
financial advisor to the Company regarding its strategic and financing
alternatives with respect to an initial public offering (the
"Engagement"). It is anticipated that the scope of this retention will
take the following form:
(A) Averil will act as financial advisor to the Company with respect
to the consideration and implementation of its strategic
alternatives. As part of this assignment, Averil will (i) study
and evaluate the short-term and long-term projected financial
performance and capital needs of the Company, (ii) develop
valuation perspectives regarding the Company, reflecting
appropriate strategic, industry and macroeconomic
considerations, (iii) as a result of Averil's diligence, and in
conjunction with management analysis, work with management in
developing a strategic financing plan for the Company; (iv) work
with management in contacting and negotiating with potential
underwriters in line with the financing plan, (v) review various
structural and tax considerations applicable to a transaction
impacting the Company, (vi) coordinate all financial and legal
advisors involved in the transactional process, and (vii) assist
in the preparation, execution and the closing of all aspects of
an initial public offering.
(B) A transaction may include the Company or any of its affiliates,
including (without limitation) a new entity formed for such
purpose (collectively, the "Entities").
2. The Company shall pay to Averil, as compensation for services under this
Engagement, as follows:
(A) RETAINER. A non-refundable retainer fee of $35,000, payable
upon execution of this letter agreement.
(B) TRANSACTION FEES. In the case of a transaction, a transaction
fee of .75% of the consideration raised, payable in cash, at the
closing (or, if more than one, at each closing) of a transaction
in line with the Company's business plan, by wire transfer or
certified bank check; PROVIDED HOWEVER, the retainer fee payable
pursuant to the first paragraph of Section 2(A) above, shall be
credited against any transaction fees payable pursuant to this
paragraph.
<PAGE>
In addition to the cash fees payable pursuant to the above
paragraph, the Company shall issue to Averil, at no cost,
additional equity securities, warrants or other participating
interests in the Company (or, if applicable, another Entity)
representing .25% of the consideration raised in value, priced
in accordance with the Black Scholes option model, to be issued
upon consummation of the transaction and receipt of the
consideration in cash; provided, however, the minimum amount of
warrants issuable pursuant to this transaction shall be $50,000
in value. The Company will grant to Averil registration rights,
at Averil's expense, on Form S-3, exercisable after twelve
months following any initial public offering.
(C) EXPENSES. In addition to any fees payable hereunder, the
Company shall, whether or not a transaction shall be consummated,
reimburse Averil as billed for its business class travel and
other reasonable out-of-pocket expenses (including all fees and
disbursements of counsel and of other consultants and advisors
retained by it, messenger and duplicating services, telephone
and facsimile expenses, document and database charges and other
customary expenditures), incurred in connection with, or arising
out of, Averil's activities under or contemplated by this
engagement. Averil shall charge all of its out-of-pocket
expenses at its actual cost. Aggregate total expenses shall not
exceed $7,500; provided, however, in the event that Averil is
asked to travel with the Company either in connection with the
selection of underwriters or completion of the roadshow, such
expenses shall be covered by the Company.
(D) DEFINITIONS. As used herein, "transaction" shall mean any
transaction or series or combination of transactions whereby,
directly or indirectly, a private or public party(ies)
(excluding Greyrock Business Credit, Alexander Sandel, Beny
Alagem and Jason Barzilay or any entity that any of them owns or
controls) lends or otherwise invests in any of the Entities or
their respective affiliates or assets. Such transaction may
include, but shall not be limited to, placement of a term loan,
revolver or other debt facility, subordinated debentures,
convertible equity or other similar securities, a private or
public financing transaction, an acquisition or exchange of
capital stock or assets, a lease of assets with or without a
purchase option, a merger or consolidation, the formation of a
joint venture or partnership or any similar transaction through
which the Company's financing objectives are met.
As used herein, "consideration" shall mean all (i) cash,
whether paid, funded or contributed immediately or to be paid,
funded or contributed in the future (contingent, deferred or
otherwise), (ii) the fair market value of all debt, equity and
other securities, other participating interests and any other
property paid, funded or contributed, and (iii) the fair market
value of all debt or other liabilities paid, funded or secured
(or otherwise assumed) directly or indirectly on behalf of the
Company or any of its affiliates.
3. In connection with Averil's activities hereunder, the Company will
furnish Averil with all material information regarding the business and
financial condition of the Company (all such information so furnished
being the "Information"). The Company recognizes and confirms that
Averil (i) will use and rely primarily on the Information and on
information available from generally recognized public sources in
performing the services contemplated by this letter without having
independently verified the same; (ii) does not assume responsibility
for the accuracy or completeness of the Information and such other
information, (iii) will not make an appraisal of any assets of the
<PAGE>
Company, and (iv) retains the right to continue to perform due
diligence during the course of the engagement.
4. Since Averil will be acting on behalf of the Company in connection with
its engagement hereunder, the Company and Averil have entered into a
separate indemnification agreement, dated the date hereof and attached
hereto, providing for the indemnification of Averil and certain related
persons. Such indemnification agreement is an integral part of this
letter and the terms thereof are incorporated by reference herein. It
is understood that if any other person or entity is established by the
Company for the purpose of carrying out any transaction contemplated by
this engagement letter, such person or entity will enter into
engagement and indemnification agreements substantially similar to this
engagement letter and the associated indemnification agreement dated the
date hereof. THE COMPANY ACKNOWLEDGES AND AGREES THAT THE
SERVICES RENDERED BY AVERIL UNDER THIS ENGAGEMENT ARE FINANCIAL ADVISORY
SERVICES ONLY AND DO NOT INCLUDE THE RENDERING OF ANY LEGAL
REPRESENTATION BY AVERIL OR ANY OF ITS AGENTS OR EMPLOYEES. THE
COMPANY REPRESENTS THAT IT EITHER HAS LEGAL COUNSEL, OR WILL RETAIN
LEGAL COUNSEL, TO RENDER APPLICABLE LEGAL SERVICES IN RELATION TO THE
ASSIGNMENTS CONTEMPLATED BY THIS ENGAGEMENT AND WILL IN NO WAY RELY
UPON AVERIL TO RENDER SUCH LEGAL COUNSEL._________(initials)
5. Averil's engagement hereunder shall be terminable at will at any time
prior to the closing of the Transaction by either the Company or Averil
upon thirty days' prior written notice thereof to the other party. It
is understood, however, that notwithstanding any termination of
Averil's engagement hereunder by the Company, Averil shall be entitled
to receive any retainer fees and all out-of-pocket expenses to be paid
to it pursuant to clauses (A) and (C) of the second paragraph of this
letter agreement and, for a period of twelve months subsequent to the
termination of this engagement, any transaction fees referred to in
clause (B) of the second paragraph of this letter agreement relating to
assignments within the scope of this engagement. Otherwise, the
parties shall not have any continuing liability or obligation to the
other except for those related to the indemnification agreement referred
to in paragraph 4 hereof and the representations and warranties
contained in paragraph 7, the terms of which shall survive any
termination of Averil's engagement hereunder.
6. The advice (written or oral) rendered by Averil pursuant to this
agreement is intended solely for the benefit and use of the Company in
considering the matters to which this agreement relates, and the
Company agrees that neither such advice nor Averil's retention may be
disclosed publicly or made available to third parties without the prior
written consent of Averil.
7. The Company represents and warrants to Averil that (i) this Agreement
has been duly authorized, executed and delivered by the Company, and,
constitutes a legal, valid and binding agreement of the Company,
enforceable in accordance with its terms and (ii) any offering materials
will not, when delivered for distribution in connection with a
transaction and at the closing of a transaction, contain any untrue
statements of a material fact or omit to state any material fact
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading. The Company
shall advise Averil promptly of the occurrence of any event or any
other change that results in the Information or offering materials
containing any untrue statement of a material fact or omitting to state
any material fact necessary to make the statements contained therein, in
light of the circumstances under which they were made, not misleading.
<PAGE>
8. The execution of this letter shall not be deemed or construed as
obligating Averil to make any investment in the Company or any other
Entity, directly or indirectly.
9. This Agreement may not be modified or amended except in a writing duly
executed by the parties hereto.
10. Any determination that any one or more of the provisions of this
Agreement may be, or is, invalid, illegal or unenforceable shall not
affect the validity, legality or enforceability of the remainder of
this Agreement.
11. THIS AGREEMENT AND ALL CONTROVERSIES ARISING FROM OR RELATING TO
PERFORMANCE UNDER THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING
EFFECT TO SUCH STATE'S RULES CONCERNING CONFLICTS OF LAWS. THE PARTIES
HERETO HEREBY IRREVOCABLY CONSENT TO PERSONAL JURISDICTION AND VENUE
IN ANY COURT OF THE STATE OF CALIFORNIA OR ANY FEDERAL COURT SITTING IN
THE CITY OF LOS ANGELES FOR THE PURPOSES OF ANY SUIT, ACTION OR OTHER
PROCEEDING ARISING OUT OF THIS AGREEMENT OR ANY OF THE AGREEMENTS OR
TRANSACTIONS CONTEMPLATED HEREBY, WHICH IS BROUGHT BY OR AGAINST ANY
PARTY HERETO, AND HEREBY AGREE THAT ALL CLAIMS IN RESPECT OF ANY SUCH
SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH
COURT. THE PARTIES HERETO HEREBY IRREVOCABLY CONSENT TO THE SERVICE OF
PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH SUIT, ACTION OR
PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED
MAIL, POSTAGE PREPAID, TO SUCH PARTIES AT THEIR RESPECTIVE ADDRESSES SET
FORTH ABOVE, SUCH SERVICE TO BECOME EFFECTIVE TEN (10) DAYS AFTER SUCH
MAILING. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR ACTION
ARISING OUT OF THIS AGREEMENT OR CONDUCT IN CONNECTION WITH THIS
ENGAGEMENT IS HEREBY WAIVED.______(initials)
12. This agreement may be executed in counterparts, each of which together
shall be considered a single document.
Please confirm that the foregoing is in accordance with your understanding by
signing and returning to Averil the enclosed duplicate of this letter, which
shall thereupon constitute a binding agreement.
AVERIL ASSOCIATES, INC.
By:
-----------------------------------
Diana L. Maranon
ACCEPTED AND AGREED TO:
FUTURE MEDIA PRODUCTIONS
By:
------------------------------------
Alex Sandel
<PAGE>
EXHIBIT 16.1
[LETTERHEAD]
September 8, 1998
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Gentlemen:
We have read Item 11(i) of Form S-1 dated September 8, 1998 of Future Media
Productions, Inc. and are in agreement with the statements contained in the
third paragraph on page 52 therein. We have no basis to agree or disagree
with other statements of the registrant contained therein.
/s/ Brown, Leifer, Slatkin + Berns LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated September 4, 1998 in the Registration Statement
(Form S-1) and related Prospectus of Future Media Productions, Inc. for the
registration of shares of its common stock.
/s/ Ernst & Young LLP
Woodland Hills, California
September 8, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 10, 1997 in the Registration Statement (Form
S-1) and related Prospectus of Future Media Productions, Inc. for the
registration of shares of its common stock.
/s/ Brown, Leifer, Slatkin + Berns LLP
Studio City, California
September 8, 1998
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,891
<SECURITIES> 0
<RECEIVABLES> 4,914
<ALLOWANCES> 287
<INVENTORY> 584
<CURRENT-ASSETS> 7,552
<PP&E> 25,879
<DEPRECIATION> 5,751
<TOTAL-ASSETS> 28,076
<CURRENT-LIABILITIES> 17,539
<BONDS> 0
0
0
<COMMON> 3,070
<OTHER-SE> (3,596)
<TOTAL-LIABILITY-AND-EQUITY> 28,076
<SALES> 16,709
<TOTAL-REVENUES> 16,709
<CGS> 11,023
<TOTAL-COSTS> 16,118
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 448
<INCOME-PRETAX> 190
<INCOME-TAX> 3
<INCOME-CONTINUING> 187
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 187
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
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