<PAGE>
As filed with the Securities and Exchange Commission on March 14, 2000
Registration No. 333-
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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>
<CAPTION>
California 3652 95-4486758
<S> <C> <C>
(State or
Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
ncorporationIor Organization) Classification Code Number) Identification No.)
</TABLE>
---------------
25136 Anza Drive
Valencia, California 91355
(661) 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
(661) 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. Anton W. Leung, Esq.
Phillip Gharabegian, Esq. Gibson, Dunn & Crutcher LLP
Troop Steuber Pasich Reddick & 2029 Century Park East
Tobey, LLP Los Angeles, California 90067
2029 Century Park East (310) 552-8500
Los Angeles, California 90067
(310) 728-3000
---------------
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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered Offering Price(1) Registration Fee
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<S> <C> <C>
Common Stock, no par value................... $70,000,000 $18,480
</TABLE>
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(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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. Future +
+Media may not sell these securities until the registration statement filed +
+with the Securities and Exchange Commission is effective. This prospectus is +
+not an offer to sell these securities and it is not soliciting an offer to +
+buy these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION-MARCH 14, 2000
PROSPECTUS
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Shares
[LOGO OF FUTURE MEDIA PRODUCTIONS]
Common Stock
- --------------------------------------------------------------------------------
Future Media is offering shares and the selling shareholders are
offering shares of common stock in an initial public offering. Prior to
this offering, there has been no public market for Future Media's common stock.
Future Media will not receive any proceeds from the sale of shares by the
selling shareholders.
Future Media is an independent manufacturer/replicator of Digital Versatile
Discs (DVDs) and Compact Discs (CDs). Future Media targets its sales to
companies in industries including Internet/online, film and entertainment,
edutainment software, publishing and computer hardware.
It is anticipated that the public offering price will be between $ and $
per share. Application has been made to include the common stock for quotation
in the Nasdaq National Market under the symbol "FMPI".
<TABLE>
<CAPTION>
Per
Share Total
<S> <C> <C>
Public offering price......................................... $ $
Underwriting discounts and commissions........................ $ $
Proceeds, before expenses, to Future Media.................... $ $
Proceeds to selling shareholders.............................. $ $
</TABLE>
See "Risk Factors" on pages 8 to 13 for factors that should be considered
beforeinvesting in the shares of Future Media.
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Neither the Securities and Exchange Commission nor any state securities
commission hasapproved or disapproved of these securities or passed upon the
accuracy or adequacy of thisprospectus. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
The underwriters may purchase up to additional shares from Future Media
and additional shares from the selling shareholders at the public
offering price, less underwriting discounts and commissions. Delivery and
payment for the shares will be on , 2000.
Prudential Volpe Technology
a unit of Prudential
Securities
CIBC World Markets
, 2000
<PAGE>
Description of Photographs:
. Photographs of Future Media's headquarters, mastering facility,
replication machines and printing machines.
. Collage of manufactured DVDs and CDs.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 8
Forward-Looking Statements.......... 13
Termination Of S Corporation
Status............................. 14
Use Of Proceeds..................... 15
Dividend Policy..................... 15
Dilution............................ 16
Capitalization...................... 17
Selected Financial Data............. 18
Management's Discussion and Analysis
Of Financial Condition and Results
Of Operations...................... 20
Industry Overview................... 26
Business............................ 28
Management.......................... 37
Certain Relationships and Related
Transactions....................... 42
Principal and Selling Shareholders.. 44
Description Of Capital Stock........ 45
Shares Eligible For Future Sale..... 46
Underwriting........................ 47
Legal Matters....................... 49
Experts............................. 49
Where You Can Find More
Information........................ 49
Index To Financial Statements....... F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information you
should consider before investing in the common stock of Future Media. You
should read the entire prospectus carefully.
Future Media
We are an independent manufacturer/replicator of Digital Versatile Discs
(DVDs) and Compact Discs (CDs). We target our sales to companies in industries
including Internet/online, film and entertainment, edutainment software,
publishing and computer hardware. Our customers include America Online, Inc.,
Modus Media International Holdings, Inc., Havas Interactive, Inc., GT
Interactive Software, Lions Gate Entertainment, infoUSA Inc., Interplay
Entertainment Corp., Juno Online Services, Inc. and a major motion picture
distributor.
We have successfully implemented our business model, which consists of the
following elements:
. High volume customers: Our customer base is comprised of some of the
highest volume customers of DVDs and CDs.
. High replication capacity: Since inception we have continued to add new
equipment and have become one of the largest independent
manufacturers/replicators of DVDs and CDs in the United States.
. Low cost structure: We achieve substantial economies of scale through our
optimally designed facility at a single locale, our dedication to
maximizing machine uptime and our flat organizational structure.
. Superior turnaround service: We are dedicated to providing superior
turnaround service by maintaining high throughput mastering technologies
and high DVD/CD graphic printing capacity and by efficiently managing
operational workflow.
To implement our business model, we have developed a focused operating
approach founded on the following key principles:
. High capacity manufacturing capabilities at a single locale;
. Optimally designed manufacturing facilities;
. Self sufficient repair, maintenance and engineering capabilities;
. Technologically advanced manufacturing equipment; and
. Marketing our services directly to senior management.
We believe that our focused operating approach distinguishes us from our
competitors. We also believe that the effectiveness of our operating approach
has been proven through the growth in our targeted customer base, the retention
of our customers and our demonstrated long-term financial performance.
To foster our continued growth in line with our business model, we plan to
pursue the following opportunities:
. Capitalize on the continuing growth of the DVD market;
. Expand our position as a low cost CD manufacturer within the
Internet/online, film and entertainment, edutainment software, publishing
and computer hardware industries; and
. Actively stimulate new CD replicating business through targeted Internet
related marketing programs.
We are a California corporation. Our executive offices are located at 25136
Anza Drive, Valencia, California 91355, and our telephone number is (661) 294-
5575.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Shares offered by Future Media................ shares
Shares offered by the selling shareholders.... shares
Total shares outstanding after this offering.. shares
Use of proceeds by Future Media............... To repay all existing debt, to
purchase capital equipment, to
distribute retained earnings
including an amount for the
purpose of paying income taxes
on our 2000 S Corporation
earnings to our existing
shareholders, and for general
corporate purposes, including
potential strategic
investments.
Proposed Nasdaq National Market symbol........ FMPI
</TABLE>
Except as otherwise noted, all information in this prospectus regarding the
number of outstanding shares of common stock does not include:
. shares that the underwriters may purchase if they exercise their over-
allotment option;
. 1,200,000 shares of common stock available for issuance pursuant to our
1998 stock incentive 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; and
. 366,600 shares of common stock issuable upon exercise of warrants issued
to David Moss, our Vice President-Operations, at an exercise price of
$0.0017 per share.
Also, except as otherwise noted, all information in this prospectus has been
adjusted to give effect to the change of the status of Future Media from an S
Corporation to a C Corporation for income tax purposes.
Risk Factors
You should consider the risk factors and the impact of events that could
adversely affect our business before investing in our common stock.
5
<PAGE>
Summary Selected Financial and Other Data
(in thousands, except for per share and employee data)
The following table summarizes certain selected financial and operating data
contained in the financial statements and elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales........................ $26,972 $25,814 $36,042 $43,311 $53,002
Cost of goods sold............... 14,821 11,972 23,132 27,304 31,938
------- ------- ------- ------- -------
Gross profit..................... 12,151 13,842 12,910 16,007 21,064
Selling, general and
administrative expenses......... 6,093 2,537 4,214 4,232 4,201
Stock related compensation
expense(1)...................... -- -- -- 3,055 720
Abandoned offering costs......... -- -- -- 676 --
------- ------- ------- ------- -------
Income from operations........... 6,058 11,305 8,696 8,044 16,143
Interest income.................. 12 252 42 35 1
Interest expense................. (957) (1,108) (818) (1,264) (1,404)
Change in accounting estimate for
royalties(2).................... -- 3,770 -- -- --
------- ------- ------- ------- -------
Income before state income
taxes........................... 5,113 14,219 7,920 6,815 14,740
Provision for state income
taxes........................... 72 223 120 102 2
------- ------- ------- ------- -------
Net income....................... $ 5,041 $13,996 $ 7,800 $ 6,713 $14,738
======= ======= ======= ======= =======
Pro Forma Statement of Income
Data (unaudited)(3):
Income before provision for
income taxes.................... $14,740
Pro forma income tax provision... 5,896
-------
Pro forma net income............. $ 8,844
=======
Pro forma basic earnings per
share........................... $ 0.98
=======
Pro forma diluted earnings per
share........................... $ 0.86
=======
Weighted average shares
outstanding--basic.............. 9,000
=======
Weighted average shares
outstanding--diluted............ 10,336
=======
Other Data:
Capital expenditures............. $ 6,277 $ 1,585 $ 3,642 $ 6,752 $15,226
Depreciation and amortization.... 1,053 1,389 1,950 2,861 4,368
Number of full-time employees at
period end...................... 44 57 75 92 127
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
---------------------------
Pro
Pro Forma As
Actual Forma(4) Adjusted(5)
------ -------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Current assets...................................... $8,253 $8,553 $
Property and equipment, net......................... 29,837 29,837
Total assets........................................ 41,089 41,389
Current liabilities................................. 16,165 33,272
Long-term debt, less current portion................ 5,327 5,327
Total shareholders' equity.......................... 19,469 2,362
</TABLE>
6
<PAGE>
- --------
(1) On January 1, 1998, we granted warrants to purchase 366,600 shares of
common stock at an exercise price of $0.0017 per share to David Moss, our
Vice President--Operations. These warrants expire on December 31, 2007. In
connection with the grant of these warrants, we recognized compensation
expense of $3,055,000 in 1998 representing the excess of the estimated fair
value of the shares over the exercise price. In 1999 our existing
shareholders committed to give 30,000 shares of their stock to a director
for services to us. For the year ended December 31, 1999 we recorded stock
related compensation expense of $720,000 for this commitment, based upon
the estimated fair value of the shares to be given.
(2) We 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. We reached settlements totaling $70,000 for CD
sales occurring before the effective dates of the agreements. Because of
the settlement amounts, our prior estimates of royalty liabilities were
overstated by approximately $3,770,000 and the adjustment to the accruals
was made in 1996.
(3) We have been exempt from paying federal income taxes and have paid certain
state income taxes at a reduced rate because of our S Corporation status.
Upon the completion of this offering, our S Corporation status will
terminate. Pro forma statement of income data reflect the income tax
expense recordable had we not been exempt from paying taxes under the S
Corporation election. Because of the termination of our S Corporation
status, we 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 our S Corporation status (1.5%) to C
Corporation status (approximately 40%). This charge will occur in the
quarter during which our S Corporation status is terminated. If this charge
was recorded at December 31, 1999, the amount would have been approximately
$2.7 million.
(4) The pro forma balance sheet reflects (i) an accrual for the distribution of
retained earnings of approximately $14.4 million to our current
shareholders, including an amount for the purpose of paying income taxes on
S Corporation earnings and (ii) the recording of additional deferred taxes
of approximately $2.7 million based on the increase in the effective tax
rate upon our anticipated change from an S Corporation to a C Corporation.
(5) Adjusted for pro forma adjustments discussed above and to give effect to
the receipt and application of the estimated net proceeds of this offering,
including a deduction of $ to be paid to Averil Capital Markets Group,
Inc., a company controlled by one of our directors upon the closing of this
offering and the repayment of existing bank debt.
7
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors, in addition to the
other information in this prospectus, before purchasing shares of our common
stock. Each of these risk factors could adversely affect our business,
operating results and financial condition as well as adversely affect the value
of an investment in our common stock.
Risks Related to Our Business
We do not have long-term purchase contracts with our customers and
therefore our customers could stop doing business with us at any time.
Generally, we do not have agreements with our customers that contain purchase
commitments or guarantees for an ongoing business relationship. Accordingly,
our customers could stop doing business with us at any time and we cannot
guarantee an ongoing business relationship with our customers. Since we operate
with virtually no backlog, if a customer stops doing business with us, we may
not be able to replace the lost business with business from another existing
client or a new client. To the extent we are unable to replace the business,
some of our capacity would go unused, our revenues could decline and our
results of operations may be adversely affected.
Our focus on high volume customers results in customer concentration and
increases the likelihood that losing a single customer would have an
adverse impact on our revenues and results of operations.
As part of our business model, we seek to replicate DVDs and CDs for high
volume customers to reduce our marginal production costs. This strategy results
in customer concentration and has inherent risks. For example, our top three
customers, America Online, Inc., Modus Media International Holdings, Inc., and
Havas Interactive, Inc. accounted for approximately 56% of our net sales for
the year ended December 31, 1999. If we lose any of our large customers, our
revenues may be reduced and our operating results may be adversely impacted.
Additionally, the merger between America Online, Inc. and Time Warner may
result in the diversion of some replication business from us to Time Warner's
internal DVD and CD manufacturing operations.
If DVD and/or CD prices decline, our revenues and margins may be reduced
and our operating results may be adversely impacted.
Since the introduction of CD media in 1982, there has been a significant
growth in the CD replicating business, which 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. If CD
prices decline further we may not be able to reduce our costs or increase our
volume to offset the decline in price. Additionally, if the acceptance of the
DVD medium continues to grow, the DVD replicating business may attract new
entrants, which may result in an increased worldwide DVD production capacity.
As a result, wholesale DVD prices may decline and we may not be able to reduce
our costs or increase our volume to offset the decline in price. These pricing
pressures in the DVD and CD replication business could reduce our revenues and
margins, which would adversely impact our operating results.
We may not succeed in developing a substantial DVD customer base, which
would adversely impact our growth strategy.
We commenced our DVD production in the fourth quarter of 1999. Our growth
strategy depends in part on our ability to attract additional DVD customers. We
believe motion picture producers and distributors, computer hardware
manufacturers and producers of computer software and games will primarily drive
DVD sales. Although we plan to expand our customer relationships, we will be
competing for DVD business with captive DVD manufacturers of major motion
picture companies and we may not be successful in attracting additional DVD
customers.
8
<PAGE>
We may experience operational downtime if we are forced to move production
to another facility.
Since our business model is based on operating replicating facilities at a
single geographic locale to achieve efficiencies associated with high volume,
we will not be able to move production quickly to another facility if we
experience operational downtime or capacity reduction. Earthquakes, power
outages, or other events outside of our control could cause such operational
downtime or capacity reduction. Any operational downtime or capacity reduction
could result in the loss of major orders or customers and have a
disproportionate adverse impact on our business, financial condition and
results of operation.
We substantially depend upon our key personnel and they would be difficult
to replace.
We depend on our executive officers for our success and the loss of any of
these officers or key employees could disrupt our business. We depend on our
key executives, including Alex Sandel, who is our Chief Executive Officer and
David Moss, who is our Vice President--Operations. In addition to his
management duties, Mr. Sandel also plays a key role in our sales and marketing
efforts. We have entered into an employment agreement with Mr. Moss. In
addition, we have purchased $3 million of "key person" life insurance on each
of Messrs. Sandel and Moss, of which we are the sole beneficiary. However, in
the event of the death of either of these executive officers, the proceeds of
such insurance may not be sufficient to offset our loss.
Because our operating results may fluctuate and are unpredictable from
quarter to quarter, our share price may be adversely affected.
Our net sales, net income and results of operations have fluctuated from
quarter to quarter, and we expect these fluctuations to continue in the future
because of many factors, including:
. seasonal pattern of certain of the businesses we serve;
. timing of new product releases by our customers;
. commercial success of products offered by our customers;
. timing of expenses incurred to obtain and support new business; and
. general changes in economic and industry conditions.
The demand for DVDs and CDs 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.
Additionally, we anticipate that demand for DVDs will be somewhat dependent on
the timing of motion picture releases, with DVDs typically being released six
months following the theatrical release of a motion picture. We may not be able
to adequately reduce our costs on a timely basis if our revenues do not meet
expectations in any given quarter. In addition, historically our product mix
has been more heavily weighted to lower margin customers in the first six
months of each year. If our results of operations for any period fall below the
expectations of securities analysts or investors, the price of our common stock
could decline.
We heavily rely on our customers in the Internet and computer software
industries and our operations could be impaired if demand from such
industries drops.
Currently, a substantial portion of our sales is to Internet service
providers and computer software companies. We are dependent upon the continued
growth and financial stability of the Internet and computer software
industries, which may be affected by changes in any of the following:
. economic conditions;
. consumer trends and preferences;
. sales of personal computers;
. the installed base of CD-ROM and DVD drives in computers; and
. sales of interactive game consoles.
9
<PAGE>
Our sales are also dependent upon the ability of software publishers to
create commercially successful content and Internet service providers
continuing to market their services through the mass distribution of CDs.
If we do not respond to technological change, we could lose customers and
our services could become obsolete.
The industries in which we compete are characterized by rapidly changing
technologies. We may not be able to successfully adapt our manufacturing
processes to new technologies. Additionally, we may not have the financial
resources to make the capital expenditures necessary for such adaptations or be
able to generate sufficient sales to recover these capital expenditures. If we
fail to keep pace with rapidly changing industry technology, we will be at a
competitive disadvantage and could lose customers. In addition, competing
technologies, such as broadband data delivery systems, may render our existing
and/or planned products and services obsolete.
Our future performance and profitability could be impaired if we are unable
to manage growth.
Our future performance and profitability will depend on a number of factors,
including our ability to obtain production machinery, and recruit, motivate and
retain qualified personnel. In addition, our performance will depend on whether
we are able to implement enhancements to our operational and financial systems,
including our reporting obligations for being a public company. Moreover, our
management and our administrative and financial resources may face significant
demands resulting from any future expansion, whether internally or through
acquisitions.
If we are unable to compete successfully against current and future
competitors our revenues and operating results could be impaired.
The DVD and CD replication industries are highly competitive. Our primary
competitors include the following DVD and/or CD replication companies:
AmericDisc; Carlton Communications PLC; Cinram International, Inc.; Denon
Electronics, Inc.; Disctronics, Inc.; DOCdata N.V.; JVC Corporation; and Zomax
Optical Media, Inc.
A number of these companies can handle large volume requirements and offer
services not currently offered by us. In addition to the above listed
companies, we compete with foreign manufacturers that can operate at lower
costs. To a limited extent, we compete with large captive manufacturing
divisions of major music and entertainment companies. Many of our existing
competitors and future potential competitors may be larger and more established
and have greater financial and other resources. As a result, such competitors
may respond more quickly than us to market demands or devote greater resources
to the manufacture, promotion and sale of their products.
We heavily depend on licenses for DVD and CD technology and we may not be
successful in obtaining and maintaining such licenses. We could incur
significant loss of revenues if we are unable to obtain and maintain such
licenses.
We cannot guarantee that we will successfully obtain and maintain licenses
for the patented technology we use. We manufacture CDs using patented
technology primarily under nonexclusive licenses from U.S. Philips Corporation
and Discovision Associates. These CD licenses generally provide for the payment
of royalties based upon the number, type and size of CDs sold. Our license from
Discovision Associates continues until the last patent covered by such license
expires and our license from U.S. Philips Corporation continues until the
earlier of October 1, 2006 or the expiration of the last patent covered by such
license.
In order to manufacture/replicate DVDs we must obtain licenses from U.S.
Philips Corporation and Sony Corporation for certain patented DVD technology.
We have entered into nonexclusive DVD licenses with U.S. Philips Corporation,
which continue until October 1, 2009. Additionally, we believe we have
finalized a nonexclusive DVD licensing agreement with Sony Corporation to use
Sony Corporation's patented DVD
10
<PAGE>
technology. We are currently awaiting the receipt of the executed copy of this
DVD licensing agreement with Sony Corporation. These DVD licenses generally
provide for the payment of royalties based upon the number and type of DVDs
sold. We cannot assure you neither we nor our licensors will not be sued for
patent infringement and have to stop using the licensed technologies.
Our operating results could be impaired by burdensome environmental
regulation and other legal uncertainties.
Since the DVD and CD manufacturing processes involve the use of hazardous
materials, we are subject to federal, state and local regulations governing the
storage, use and disposal of hazardous materials. Our liability in the event of
an accident or the costs of remediation could exceed our resources or insurance
coverage. Also, we may have to incur substantial expenditures as a result of
having to engage in preventive or remedial action, having to reduce chemical
exposure or dealing with waste treatment or disposal.
Risks Related to this Offering and Our Common Stock
The rights of our shareholders could be adversely affected because our
founders control us.
Upon completion of this offering, two of our founders can elect or remove all
members of the board of directors and thereby control our affairs and
management. Moreover, upon completion of this offering, these two founders,
Alex Sandel and Jason Barzilay, will beneficially own approximately % ( % if
the underwriters' over-allotment option is exercised in full) of our
outstanding shares. As a result of such ownership, these founding shareholders,
acting together, can determine the outcome of elections and other matters
presented to our shareholders for approval. Such concentration of ownership may
cause any of the following:
. delay, defer or prevent a change in our control;
. adversely affect the voting and other rights of our other shareholders;
and
. depress the price of our common stock.
Our existing shareholders will receive substantial benefits from this
offering.
Our existing shareholders will receive substantial benefits from the sale of
our common stock in this offering. Specifically, we expect to use approximately
$27.9 million of the net proceeds from this offering to repay our borrowings
(including approximately $8.3 million which will be distributed to existing
shareholders for 1998 and 1999 S Corporation taxes) that our existing
shareholders personally guaranteed. Our existing shareholders will be released
from such guarantees when we repay our borrowings. Moreover, we expect to
distribute approximately $8.9 million of the net proceeds from this offering to
our existing shareholders as a distribution of retained earnings including an
amount for the purpose of paying income taxes on 2000 S Corporation earnings.
In addition, the selling shareholders will receive net proceeds of $ million
in the aggregate, and may benefit from increased liquidity of their remaining
investment in us resulting from this offering.
Purchasers in this offering will experience immediate and substantial
dilution.
If you purchase our common stock upon completion of this offering, you 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. You will
sustain an immediate and substantial dilution of $ per share, (assuming an
initial public offering price of $ per share), based on the pro forma net
tangible book value at December 31, 1999 of $2.4 million. If outstanding stock
options and warrants are exercised then you will experience additional
dilution.
11
<PAGE>
No prior public market exists for our common stock and no active trading
market may develop.
Prior to this offering our common stock has not had a public market.
Additionally, we cannot be certain that as a result of this offering an active
trading market for our common stock will develop, or if it develops whether it
will continue.
Our stock price could fluctuate and we cannot assure you that the shares
offered pursuant to this offering will trade at market prices in the range
of the initial public offering price.
The initial public offering price does not necessarily bear any relationship
to our book value, assets, past operating results, financial condition or any
other established criteria of value. The initial public offering price of the
shares of our common stock is negotiated with the selling shareholders and the
underwriters. The trading price of our common stock could be subject to wide
fluctuations in response to any of the following:
. variations in our operating results;
. announcements relating to our business (including new product
introductions by us or by our competitors);
. technological trends;
. securities analysts changing financial estimates;
. changes in the stock price or operating performance of other companies
investors may deem comparable to us;
. changes in general economic conditions or the financial markets; and
. changes in the manufacturing or retail industries.
Sales of additional shares of our common stock into the public market may
cause our stock price to fall.
Upon completion of this offering, we will have shares of common stock
outstanding ( if the underwriters' over-allotment option is exercised in
full). Of those shares, a total of shares (plus additional shares if
the underwriters exercise their over-allotment option in full) will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended, unless purchased or held by our affiliates as that term is
defined in Rule 144 under the Securities Act. Pursuant to Rule 144, sales of
common stock by our affiliates are subject to the volume limitations, manner of
sale, and notice requirements. All of our executive officers, directors and
shareholders, including the selling shareholders, will execute lock-up
agreements under which they will agree to not sell or otherwise transfer,
directly or indirectly, any shares of common stock or any securities
convertible into, or exercisable or exchangeable for, 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. After the expiration of the 180-day period, shares that can 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 shares of our common stock subject to these
lock-up agreements. Sales of substantial amounts of our common stock in the
public market, or the perception sales could occur, could adversely affect the
prevailing market price for the common stock and could impair our ability to
raise capital through a public offering of equity securities.
<TABLE>
<CAPTION>
Number of shares Date of availability for resale into public market
---------------- --------------------------------------------------
<C> <S>
9,000,000 180 days after the date of this prospectus due to a lock-up
agreement our two existing shareholders have with
Prudential Securities. However, Prudential Securities can
waive this restriction at any time and without notice.
Since these shares are held by our affiliates, sales of
these shares will also be subject to the volume limitations
of Rule 144.
</TABLE>
12
<PAGE>
Provisions in our charter documents could deter takeover efforts or depress
our stock price.
Provisions of our Articles of Incorporation, Bylaws and California law could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our shareholders. 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 issued in the future. Our 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 our shareholders.
Following this offering, we will not have any shares of preferred stock
outstanding and we have no present intention to issue any shares of preferred
stock. However, preferred stock could be issued with voting, liquidation,
dividend and other rights superior to those of the common stock. An issuance of
preferred stock could make it more difficult for a third party to acquire a
majority of our outstanding voting stock, which may depress the market value of
our common stock.
Provisions of our Articles of Incorporation make it difficult for minority
shareholders to obtain representation on the board of directors. Our Articles
of Incorporation provide cumulative voting rights of shareholders, which cease
at such time we have 800 or more holders of our common stock as of the record
date of our most recent annual meeting of shareholders. This provision has the
effect of making it more difficult for minority shareholders to obtain
representation on the board of directors once we have 800 or more shareholders.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of
risks, uncertainties and assumptions about us, including, among other things:
. general economic and business conditions, both nationally and in our
markets;
. our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
. anticipated trends in our business;
. existing and future regulations affecting our business;
. successful implementation of our business strategy;
. our relationship with large customers;
. fluctuations in our operating results;
. increasing adoption of alternative data delivery systems;
. technological trends in the DVD and CD industries; and
. other risk factors described under "Risk Factors" in this prospectus.
In addition, in this prospectus, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect" and similar
expressions, as they relate to us, our business or our management, are intended
to identify forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
after the date of this prospectus. Because of these risks and uncertainties,
the forward-looking events and circumstances discussed in this prospectus may
not occur and actual results could differ materially from those anticipated or
implied in the forward-looking statements.
13
<PAGE>
TERMINATION OF S CORPORATION STATUS
We have been treated as an S Corporation since our inception. As a result,
our shareholders have been directly taxed on our earnings for federal income
tax purposes instead of us. Other than a tax imposed on S Corporations by the
State of California (currently 1.5% of income), our shareholders have also been
responsible for state income taxes on earnings. Such taxation of our
shareholders will continue through the date immediately preceding the date of
termination of our S Corporation status. The termination date will occur
immediately prior to the closing of this offering. On the termination date, we
will become a C Corporation for tax purposes and be subject to federal and
state corporate income taxes.
From January 1, 2000 through the date of this prospectus we paid an aggregate
of approximately $2.3 million in dividends to our shareholders. From the date
of this prospectus through April 2000 we expect to pay approximately $6.0
million in additional dividends to our shareholders. Out of the proceeds of
this offering, we expect to pay approximately $8.9 million in dividends to our
shareholders, including approximately $1.8 million for the purpose of paying S
Corporation taxes. Pursuant to our current loan agreement with Greyrock, we may
not declare or pay any dividends or make any distribution without the prior
written consent of Greyrock, except for distributions to existing shareholders
for the purpose of paying income taxes on our S Corporation earnings.
We have entered into a tax indemnification agreement with our existing
shareholders relating to their respective income tax liabilities. The tax
indemnification agreement is intended to assure we assume the taxes on the one
hand and our existing shareholders assume certain taxes on the other only to
the extent such parties received the related income giving rise to such taxes.
The tax indemnification agreement generally provides, if an adjustment is made
to our taxable income for a year in which we were treated as an S Corporation,
we will indemnify our existing shareholders and our existing shareholders will
indemnify us against any increase in 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. We 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
indemnification agreement. Any payment made by us to the existing shareholders
pursuant to the tax indemnification agreement may be considered by the Internal
Revenue Service or state taxing authorities to be non-deductible by us for
income tax purposes.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to us from this offering, at an assumed initial public
offering price of $ per share, are estimated to be approximately $
million, $ million if the underwriters' over-allotment options from us are
exercised in full, after deducting the underwriting discounts and commissions
and estimated offering expenses.
We expect to use a portion of the net proceeds to repay all existing bank
debt to Greyrock Capital, a division of Banc of America Commercial Finance
Corporation, in an amount estimated to be approximately $27.9 million at
closing. The bank debt was used to purchase capital equipment, to pay a
distribution to the existing shareholders 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 guarantees will
terminate.
We also expect to use approximately $14.1 million to purchase capital
equipment.
We also plan to distribute $ 8.9 million to our existing shareholders as a
distribution of the retained earnings through the closing of this offering,
including an amount for the purpose of paying income taxes on our S Corporation
earnings.
In addition, upon the closing of this offering we plan to pay $ to
Averil Capital Markets Group, Inc., for services rendered in connection with
this offering. Averil Capital Markets Group, Inc., is a financial advisory firm
founded and controlled by Diana Maranon, who is one of our directors.
The balance of the net proceeds will be used for working capital and general
corporate purposes, including potential strategic investments. Pending such
uses, we intend to invest the net proceeds in short-term, interest bearing
securities or guaranteed obligations of the United States government.
We will not receive any proceeds from the sale of shares by the selling
shareholders.
DIVIDEND POLICY
Historically we have paid cash dividends when operating as an S Corporation.
However, other than paying approximately $8.9 million out of the net proceeds
of this offering to our existing shareholders as a distribution of retained
earnings, including an amount for the purpose of paying income taxes on S
Corporation earnings, we have no current intention to declare or pay dividends
on our common stock following our conversion to C Corporation status. Instead,
we intend to follow a policy of retaining earnings to finance the growth of our
business. Our board of directors will have the discretion to determine any
future dividend payments and such discretion may depend on the following: our
results of operations; our financial condition; contractual and legal
restrictions; and other factors our board of directors deems relevant.
Pursuant to our current loan agreement with Greyrock, we may not declare or
pay any dividends or make any distribution without the prior written consent of
Greyrock, except for distributions to existing shareholders for the purpose of
paying income taxes on our S Corporation earnings.
15
<PAGE>
DILUTION
Purchasers of our common stock in this offering will experience immediate and
substantial dilution in the pro forma net tangible book value of our common
stock from the initial public offering price. The pro forma net tangible book
value of our common stock as of December 31, 1999 was $2.4 million. Pro forma
net tangible book value per share is equal to our total tangible assets, less
total liabilities, divided by the number of shares of common stock outstanding,
after giving effect to (i) the distribution by us of approximately
$14.4 million to our existing shareholders as a retained earnings distribution,
including an amount for the purpose of paying income taxes on S Corporation
earnings, and (ii) the recording by us of additional deferred taxes as if we
were treated as a C Corporation at December 31, 1999. After giving effect to
the sale of shares of common stock by us and the receipt and application
of the estimated net proceeds, assuming an initial public offering price of
$ per share, after deducting the underwriting discounts and commissions
and estimated offering expenses, including an amount of $ to be paid to
Averil Capital Markets Group, Inc., a company controlled by one of our
directors upon the closing of this offering, our pro forma net tangible book
value as of December 31, 1999 would have been approximately $ or
$ per share. This represents an immediate increase in net tangible book
value of $ per share to our current shareholders and an immediate and
substantial dilution of $ per share to new shareholders purchasing
shares in this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price.......................... $
Pro forma net tangible book value as of December 31, 1999.... $0.26
Increase attributable to new shareholders....................
-----
Pro forma net tangible book value as of December 31, 1999 after
the offering..................................................
-----
Dilution to new shareholders................................... $
=====
</TABLE>
The following table summarizes a comparison of the number of shares of common
stock acquired from us, 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 this offering, before the deduction of underwriting
discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration Average
----------------- --------------- Price Per
Number Percent Amount Percent Share
--------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Current shareholders............. 9,000,000 % $15,000 % $--
New investors.................... $
--------- ----- ------- ----- ----
100.0% $ 100.0%
========= ===== ======= ===== ====
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options under our 1998 stock incentive plan and no exercise of the warrants
granted to David Moss. At the date of this prospectus, 828,000 shares of common
stock were subject to outstanding options under our 1998 stock incentive 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 warrants held by David Moss 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.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999 on
(i) an actual basis; (ii) on a pro forma basis to give effect to the accrual
for the payment of $14.4 million to our current shareholders as a distribution
of retained earnings, including an amount for the purposes of paying income
taxes on S Corporation earnings and the recording of additional deferred taxes
of approximately $2.7 million based on the increase in the effective tax rate
upon our anticipated change from an S Corporation to C Corporation; and
(iii) pro forma as adjusted to reflect the pro forma adjustments and to give
effect to our receipt of approximately $ million in estimated net proceeds
from this offering, including a deduction of $ to be paid to Averil Capital
Markets Group, Inc., a company controlled by one of our directors upon the
closing of this offering and the application of these net proceeds, including
the repayment of existing bank debt of $9.8 million at December 31, 1999, of
which $5.3 million was classified as long-term debt.
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term debt, less current portion............. $ 5,327 $ 5,327 $
------- ------- ----
Shareholders' equity(1):
Preferred Stock, no par value;
5,000,000 shares authorized; no shares issued
or outstanding actual, pro forma or pro
forma as adjusted........................... -- --
Common Stock, no par value;
45,000,000 shares authorized; 9,000,000
shares issued and outstanding actual and pro
forma; shares outstanding pro
forma as adjusted........................... 3,790 3,790
Note receivable from officer................... (1,428) (1,428)
Retained earnings.............................. 17,107 --
------- ------- ----
Total shareholders' equity................. 19,469 2,362
------- ------- ----
Total capitalization....................... $24,796 $ 7,689 $
======= ======= ====
</TABLE>
- --------
(1) Does not include: (a) 1,200,000 shares of common stock available for
issuance pursuant to our 1998 stock incentive 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; and (b) 366,600 shares
of common stock issuable upon exercise of warrants issued to David Moss,
our Vice President--Operations, at an exercise price of $0.0017 per share.
17
<PAGE>
SELECTED FINANCIAL DATA
We derived the statement of income data for the years ended December 31,
1997, 1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999
presented below from our financial statements included in another part of this
prospectus. The statement of income data for the years ended December 31, 1995
and 1996 and the balance sheet data as of December 31, 1995, 1996 and 1997 are
derived from our audited financial statements not included in this prospectus.
The financial statements as of and for the years ended December 31, 1997, 1998
and 1999 have been audited by Ernst & Young, LLP, independent auditors. You
should read the selected financial data together with the historical financial
statements and related notes to our audited reports, as well as the section
included in this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales........................ $26,972 $25,814 $36,042 $43,311 $53,002
Cost of goods sold............... 14,821 11,972 23,132 27,304 31,938
------- ------- ------- ------- -------
Gross profit..................... 12,151 13,842 12,910 16,007 21,064
Selling, general and
administrative expenses......... 6,093 2,537 4,214 4,232 4,201
Stock related compensation
expense(1)...................... -- -- -- 3,055 720
Abandoned offering costs......... -- -- -- 676 --
------- ------- ------- ------- -------
Income from operations........... 6,058 11,305 8,696 8,044 16,143
Interest income.................. 12 252 42 35 1
Interest expense................. (957) (1,108) (818) (1,264) (1,404)
Change in accounting estimate for
royalties(2).................... -- 3,770 -- -- --
------- ------- ------- ------- -------
Income before state income
taxes........................... 5,113 14,219 7,920 6,815 14,740
Provision for state income
taxes........................... 72 223 120 102 2
------- ------- ------- ------- -------
Net income....................... $ 5,041 $13,996 $ 7,800 $ 6,713 $14,738
======= ======= ======= ======= =======
Earnings per share:
Basic........................... $ 0.56 $ 1.56 $ 0.87 $ 0.75 $ 1.64
======= ======= ======= ======= =======
Diluted......................... $ 0.56 $ 1.56 $ 0.87 $ 0.71 $ 1.43
======= ======= ======= ======= =======
Shares used in computing earnings
per share:
Basic........................... 9,000 9,000 9,000 9,000 9,000
======= ======= ======= ======= =======
Diluted......................... 9,000 9,000 9,000 9,498 10,336
======= ======= ======= ======= =======
Pro Forma Statement of Income
Data(3)(unaudited):
Pro forma net income data:
Income before provision for
income taxes.................... $14,740
Pro forma income tax provision... 5,896
-------
Pro forma net income............. $ 8,844
=======
Pro forma basic earnings per
share........................... $ 0.98
=======
Pro forma diluted earnings per
share........................... $ 0.86
=======
Weighted average shares
outstanding--basic.............. 9,000
=======
Weighted average shares
outstanding--diluted............ 10,336
=======
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, 1999
------------------------------- -------------------------------------
Pro Forma
1995 1996 1997 1998 Actual Pro Forma (4) As Adjusted (5)
------- ------- ------- ------- ------- ------------- ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets.......... $10,846 $11,252 $ 8,036 $ 9,204 $ 8,253 $ 8,553
Property and equipment,
net.................... 11,896 12,097 17,636 21,898 29,837 29,837
Total assets............ 22,909 24,155 25,920 31,438 41,089 41,389
Current liabilities..... 12,839 8,865 14,132 16,246 16,165 33,272
Long term debt, less
current portion........ 4,750 2,129 1,755 9,085 5,327 5,327
Total shareholders'
equity................. 5,305 13,144 9,936 5,999 19,469 2,362
Dividends per share..... -- .68 1.22 1.52 .06 --
</TABLE>
18
<PAGE>
- --------
(1) On January 1, 1998, we granted warrants to purchase 366,600 shares of
common stock at an exercise price of $0.0017 per share to David Moss, our
Vice President--Operations. These warrants expire on December 31, 2007. In
connection with the grant of these warrants, we recognized compensation
expense of $3,055,000 in 1998 representing the excess of the estimated fair
value of the shares over the exercise price. In 1999 our existing
shareholders committed to give 30,000 shares of their stock to a director
for services to us. For the year ended December 31, 1999 we recorded stock
related compensation expense of $720,000 for this commitment, based upon
the estimated fair value of the shares to be given.
(2) We 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. We reached settlements totaling $70,000 for CD
sales occurring before the effective dates of the agreements. Because of
the settlement amounts, our prior estimates of royalty liabilities were
overstated by approximately $3,770,000 and the adjustment to the accruals
was made in 1996.
(3) We have been exempt from paying federal income taxes and have paid certain
state income taxes at a reduced rate because of our S Corporation status.
Upon the completion of this offering, our S Corporation status will
terminate. Pro forma statement of income data reflect the income tax
expense recordable had we not been exempt from paying taxes under the S
Corporation election. Because of the termination of our S Corporation
status, we 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 our S Corporation status (1.5%) to C
Corporation status (approximately 40%). This charge will occur in the
quarter during which our S Corporation status is terminated. If this charge
was recorded at December 31, 1999, the amount would have been approximately
$2.7 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes 1 and 7 to the December 31,
1999 financial statements.
(4) The pro forma balance sheet reflects (i) an accrual for the distribution of
retained earnings of approximately $14.4 million to our current
shareholders, including an amount for the purpose of paying income taxes on
S Corporation earnings and (ii) the recording of additional deferred taxes
of approximately $2.7 million based on the increase in the effective tax
rate upon our anticipated change from an S Corporation to a C Corporation.
(5) Adjusted for pro forma adjustments discussed above and to give effect to
the receipt and application of the net proceeds of this offering, including
a deduction of $ to be paid to Averil Capital Markets Group, Inc., a
company controlled by one of our directors upon the closing of this
offering and the repayment of existing bank debt.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the financial statements and related notes, which
are included in this prospectus.
Results of Operations
Sales are generally recorded at the time of shipment. However, in certain
instances, sales are recognized upon completion of an order, prior to shipment,
if the risks of ownership have passed to the customer. In these circumstances,
which have been insignificant at the end of reporting periods, we obtain
written instructions from the customer to hold the product for future shipment.
Cost of goods sold consists primarily of the following:
. raw materials;
. direct labor;
. depreciation of plant equipment;
. repairs and maintenance of plant equipment;
. royalties payable on the sale of DVDs and CDs; and
. rent and utilities related to the plant facility.
In addition to changes in these costs, our cost of goods sold as a percentage
of net sales are affected by various factors, including the following:
. DVD and CD units manufactured and associated number of units sold as a
percentage of our total DVD and CD production capacity in any period,
which directly affects gross margin due to the high component of fixed
costs inherent in our operations;
. average unit prices we are able to charge for our products, which are
subject to market conditions; and
. raw material packaging costs and associated direct labor costs required
to fulfill customer orders during any particular period.
Quarterly Results
The following table sets forth certain unaudited statement of income data for
the last eight 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>
Three Months Ended
--------------------------------------------------------------------------------------
1998 1999
------------------------------------------- ------------------------------------------
March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31
-------- ------- ------------ ----------- -------- ------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ 6,915 $9,794 $12,025 $14,577 $8,675 $11,313 $14,960 $18,054
Cost of goods sold...... 4,634 6,389 7,727 8,554 5,864 6,744 9,283 10,047
------- ------ ------- ------- ------ ------- ------- -------
Gross profit............ 2,281 3,405 4,298 6,023 2,811 4,569 5,677 8,007
Selling, general and
administrative
expenses............... 861 1,146 812 1,413 1,072 1,030 888 1,211
Stock related
compensation expense... 3,055 -- -- -- -- -- -- 720
Abandoned offering
costs.................. -- -- -- 676 -- -- -- --
------- ------ ------- ------- ------ ------- ------- -------
Income (loss) from
operations............. (1,635) 2,259 3,486 3,934 1,739 3,539 4,789 6,076
Interest income......... -- 15 20 -- -- 24 28 (51)
Interest expense........ (131) (317) (416) (400) (351) (330) (372) (351)
------- ------ ------- ------- ------ ------- ------- -------
Income (loss) before
state income taxes..... (1,766) 1,957 3,090 3,534 1,388 3,233 4,445 5,674
Provision (benefit) for
state income taxes..... (16) 19 46 53 -- -- 1 1
------- ------ ------- ------- ------ ------- ------- -------
Net income (loss)....... $(1,750) $1,938 $ 3,044 $ 3,481 $1,388 $ 3,233 $ 4,444 $ 5,673
======= ====== ======= ======= ====== ======= ======= =======
</TABLE>
20
<PAGE>
We have experienced, and expect to experience in the future, quarterly
variations in revenues and earnings as a result of various factors, many of
which are outside our control, including:
.seasonal patterns of certain of the businesses we serve;
.timing of new product releases by our customers;
.commercial success of products offered by our customers;
.timing of expenses incurred to obtain and support new business; and
.general changes in economic and industry conditions.
Typically, we experience increased demand for our products in our third and
fourth quarters. Such increase is primarily due to the release of new products
by our customers for the new school year and the holiday season.
Yearly Results
The following table provides certain statement of income data expressed as a
percentage of net sales for the specified periods.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0%
Cost of goods sold................................... 64.2 63.0 60.3
------- ------- -------
Gross profit......................................... 35.8 37.0 39.7
Selling, general and administrative expenses......... 11.7 9.8 7.9
Stock related compensation expense................... -- 7.1 1.4
Abandoned offering costs............................. -- 1.6 --
------- ------- -------
Income from operations............................... 24.1 18.5 30.4
Interest income...................................... 0.1 0.1 --
Interest expense..................................... (2.2) (2.9) (2.6)
------- ------- -------
Income before state income taxes..................... 22.0 15.7 27.8
Provision for state income taxes..................... 0.3 0.2 --
------- ------- -------
Net income........................................... 21.7% 15.5% 27.8%
======= ======= =======
</TABLE>
As shown by the above table, over the last three years, as a percentage of
sales our gross profit margins have increased from 35.8% in 1997 to 39.7% in
1999. In addition our selling, general and administrative expenses have
decreased as a percentage of sales from 11.7% in 1997 to 7.9% in 1999. These
favorable trends are a result of the fact that our business has a high
percentage of fixed costs, both in costs of goods sold, which directly effects
our gross profit, and in selling, general and administrative expenses.
Therefore, by increasing revenues, our costs as a percentage of revenues tend
to decrease resulting in higher income from operations as a percentage of
sales.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Sales. Net sales totaled $53,001,871 for the year ended December 31, 1999
as compared to $43,311,180 for the year ended December 31, 1998. This
represents an increase of $9,690,691 or 22.4% for the year ended December 31,
1999, as compared to the year ended December 31, 1998. This increase is a
result of increased CD unit sales of approximately 26.3%, partially offset by
lower packaging revenues. Our pricing is comprised of a price for the unit (CD
or DVD) and a price for packaging, when our customers request this service.
While our unit prices for CDs remained constant during 1999 as compared to
1998, our packaging revenues decreased by approximately $3,048,011. The
additional CD unit sales during 1999 are a result of increased demand for our
products with fulfillment of these orders made possible by production capacity
added subsequent to 1998. In addition, we commenced production and shipment of
DVDs during the fourth quarter of 1999, which added $2,718,333 to revenues for
the year.
21
<PAGE>
Cost of Goods Sold. Cost of goods sold was $31,937,704 for the year ended
December 31, 1999 and $27,304,178 for the year ended December 31, 1998. Cost of
goods sold as a percentage of sales was approximately 60.3% for the year ended
December 31, 1999 as compared to 63.0% for the year ended December 31, 1998. As
a percentage of sales in 1999, our raw materials costs decreased 4.8% and
shipping costs decreased 0.7%, partially offset by increases in depreciation
expense of 1.3%, factory overhead of 1.9% and royalties of 0.5%.
Gross Profit. Gross profit for the year ended December 31, 1999 was
$21,064,167 or 39.7% of net sales as compared to $16,007,002 or 37.0% of net
sales for the year ended December 31, 1998. Our gross profit increased because
our volume of CD and DVD units sold increased, in line with our business model,
as a result of the increased production capacity we added during 1999.
Selling, General and Administrative Expenses. As a percentage of net sales,
selling, general and administrative expenses decreased from 9.8% for the year
ended December 31, 1998 to 7.9% for the year ended December 31, 1999. Selling,
general and administrative expenses were $4,200,969 for the year ended December
31, 1999 as compared to $4,232,741 for the year ended December 31, 1998, a
decrease of $31,772 or approximately 0.8%. This decrease is the net result of
reduced amounts paid for consulting fees (approximately $396,000), taxes and
licenses (approximately $107,000) and miscellaneous items (approximately
$147,000), offset by higher amounts paid for salaries and related benefits
(approximately $486,000) and office related expenses (approximately $132,000)
in 1999.
Stock Related Compensation Expense. In 1999 our existing shareholders
committed to give 30,000 shares of their stock to a director for services to
us. For the year ended December 31, 1999 we recorded compensation expense of
$720,000 for this commitment, based upon the estimated fair value of the shares
to be given. On January 1, 1998, we granted warrants to purchase 366,600 shares
of stock at $0.0017 per share to one of our officers, with the warrants
expiring on December 31, 2007. In connection with these warrants, we recognized
compensation expense for $3,055,000 in 1998 representing the excess of the
estimated fair value of the shares over the exercise price.
Income from Operations. Income from operations totaled $16,143,198 for the
year ended December 31, 1999 and $8,043,528 for the year ended December 31,
1998. This represents an increase of $8,099,670 or 100.7% for the year ended
December 31, 1999, as compared to the year ended December 31, 1998. Income from
operations was 30.4% of net sales for the year ended December 31, 1999 and
18.5% of net sales for the year ended December 31, 1998. Excluding the stock
related compensation expense in 1999 and 1998 and abandoned offering costs
recognized in 1998, income from operations would have been 16,863,198 or 31.8%
of net sales in 1999 and $11,774,261 or 27.2% of net sales in 1998. As a
result, income from operations in 1999 as compared to 1998 would have increased
$5,088,937 or 43.2%.
Interest Expense. Interest expense was $1,403,694 for the year ended December
31, 1999 and $1,263,861 for the year ended December 31, 1998. The increase of
11.1% in 1999 as compared to 1998 is the net result of higher average
borrowings during 1999, partially offset by lower average interest rates. Our
weighted average interest rate on our debt was 10.1% for the year ended
December 31, 1999 and 10.4% for the year ended December 31, 1998.
Income Tax Expense. We have operated as an S Corporation for federal and
state income tax purposes, and accordingly we are not subject to federal taxes
and subject to only a minimal percentage of state income taxes. The only
provision for income taxes was the amount required for state income tax
purposes. Our total income tax expense was $2,000 for the year ended December
31, 1999 due to our S Corporation status and credits we receive for state taxes
for purchases of manufacturing equipment.
Net Income. Based on our S Corporation status and the factors discussed
above, net income was $14,738,174 for the year ended December 31, 1999 and
$6,712,633 for the year ended December 31, 1998. This represents an increase of
$8,025,541 or 119.6% for the year ended December 31, 1999 as compared to the
year ended December 31, 1998.
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Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales. Net sales for the year ended December 31, 1998 totaled $43,311,180
compared to net sales for the year ended December 31, 1997, which totaled
$36,042,427. This increase of $7,268,753, or 20.2%, is attributable to an
increase in the number of CDs sold of approximately 55.9%, offset by lower
average CD sales prices for the year ended December 31, 1998 compared to 1997.
Our pricing is comprised of a price for the unit (CD) and a price for
packaging, when our customers request this service. Our average unit price
declined in 1998 as compared to 1997 by approximately 14.8%. In addition, our
packaging revenues decreased by $1,384,468 in 1998 from the amounts in 1997.
The additional unit sales during 1998 are a result of increased demand for our
products with fulfillment of these orders made possible by production capacity
added subsequent to 1997.
Cost of Goods Sold. Cost of goods sold for the year ended December 31, 1998
totaled $27,304,178 or 63.0% of net sales, compared to $23,132,442 or 64.2% of
net sales for the year ended December 31, 1997. As a percentage of net sales,
increases in cost of sales in the year ended December 31, 1998 were related to
increases in royalties of 2.2% and depreciation of production equipment of
1.3%, offset by decreases in factory overhead of 2.3%, raw material costs of
1.0% and obsolescence reserves of 1.4%.
Gross Profit. Because of the foregoing, gross profit for the year ended
December 31, 1998 was $16,007,002, as compared to $12,909,985 for the year
ended December 31, 1997, an increase of $3,097,017 or 24.0%. As a percentage of
net sales, gross profit was 37.0% in 1998 as compared to 35.8% in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $4,232,741 for the year ended December 31, 1998
and $4,214,033 for the year ended December 31, 1997. This represents an
increase of $18,708 or less than 1.0% in 1998 over 1997. As a percentage of net
sales, selling, general and administrative expenses decreased from 11.7% for
the year ended December 31, 1997 to 9.8% for the year ended December 31, 1998.
Income from Operations. Because of the above items, income from operations
was $8,043,528 for the year ended December 31, 1998 and $8,695,952 for the year
ended December 31, 1997, a decrease of $652,424 or 7.5%. As a percentage of net
sales, income from operations was 18.6% in 1998 and 24.1% in 1997. Excluding
the stock warrant compensation expense and abandoned offering costs recognized
in the year ended December 31, 1998, income from operations would have been
$11,774,261 or 27.2% of net sales. This represents an increase of $3,078,309 or
35.4% of the amount in 1997.
Interest Expense. Interest expense totaled $1,263,861 for the year ended
December 31, 1998 and $817,998 for the year ended December 31, 1997. This
increase in 1998 of $445,863, or 54.5%, is a result of higher average
borrowings in 1998 as compared to 1997. The weighted average interest rate on
our debt was 10.4% for the year ended December 31, 1998 and 10.5% for the year
ended December 31, 1997.
Income Tax Expense. We have operated as an S Corporation for federal and
state income tax purposes, and accordingly we were not subject to federal taxes
and we were only subject to 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. Because of the items discussed above, net income was
approximately $6,712,633 for the year ended December 31, 1998 and was
approximately $7,800,159 for the year ended December 31, 1997, a decrease of
$1,087,526 or 13.9%.
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Liquidity and Capital Resources
Historically we have funded our operations and capital expenditures through
cash flow from operations, borrowings under our lines of credit and favorable
terms from our equipment vendors for the purchase of equipment used in our
manufacturing operations. In February 1997, we entered into a credit agreement
with Greyrock Capital, a division of Banc of America Commercial Finance
Corporation ("Greyrock"), which was amended in January 1998 and further amended
in April 1998, July 1998, June 1999 and January 2000. The credit agreement
currently provides (i) receivable loans based on 80% of our eligible
receivables, (ii) equipment loans based on 90% of the net purchase price of new
equipment purchased and delivered subsequent to June 1999 and (iii) additional
revolving loans. Under the credit agreement we are allowed to borrow the lower
of $30,000,000, or an amount equal to 80% of our eligible receivables and up to
$15,000,000 of equipment loans plus the unpaid balance of the revolving loans.
The credit agreement had an original maturity date of February 28, 1998 and
provided for automatic renewals. In January 2000, the maturity date was
extended to June 30, 2001, and continues to provide for automatic renewals. The
credit agreement is secured by accounts receivable, equipment, inventory and
other assets and is personally guaranteed by our existing shareholders. Unlike
a typical revolving loan or line of credit, loans under the Greyrock credit
agreement are advanced at Greyrock's sole discretion. Accordingly, there can be
no guarantee that funds will be available under this credit agreement in the
future. We do not pay any commitment fees for the unused portion of the credit
facility.
Borrowings under receivable loans bear interest at the prime rate (8.5% at
December 31, 1999) plus 2.0% per annum; however, the interest rate will not be
less than 7.0% per annum. At December 31, 1999 there was a total of $1,852,303
borrowed under the receivable loans.
Under the amendment of April 1998, the revolving loans were for up to
$15,000,000, 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. In addition, this amendment disallowed any distributions to
shareholders except for the purpose of paying income taxes on S corporation
earnings. We obtained permission from Greyrock for the loans and advances to
related parties that are described in Certain Relationships and Related
Transactions. The revolving loans bear interest at the prime rate (8.5% at
December 31, 1999) plus 2.0% per annum; however the interest rate will not be
less than 7.0% per annum. The outstanding balance of the revolving loans was
$9,062,500 at December 31, 1999.
Under the amendment of June 1999, amounts borrowed under the equipment loans
are to be repaid in 48 equal monthly payments of principal through the earlier
of (i) the earlier of the date the credit agreement terminates, or is
terminated or (ii) the date such equipment loans have been repaid in full. The
equipment loans bear interest at the prime rate (8.5% at December 31, 1999)
plus 2.0% per annum; however, the interest rate will not be less than 7.0% per
annum. At December 31, 1999 no amounts had been borrowed under the equipment
loans.
As of December 31, 1999 we had available a total of $8,978,932 under the
credit facility, of which $5,457,420 was available on the equipment loans and
$3,521,512 was available under the receivable loans. We expect to use a portion
of our net proceeds from this offering to repay all amounts outstanding under
the credit agreement. We expect to maintain a $30 million credit facility with
Greyrock or another lender.
Net cash provided by operating activities was $23,046,306 for the year ended
December 31, 1999. We spent a net amount of $5,667,671 in financing activities
for the year ended December 31, 1999. This amount results mainly from repayment
of long-term debt of $3,756,986, loans to an officer of $1,428,000 and
distributions to the existing shareholders of $560,000 for the payment of
taxes.
We spent a total of $17,378,635 in investing activities in 1999. Of this
amount, $15,226,235 was spent for property and equipment utilized in our
operations. In addition, we made cash investments totaling $2,152,400 in two
companies with whom we entered into strategic alliances. On December 21, 1999,
we purchased 648 units of Lions Gate Entertainment totaling $1,652,400 through
a public offering. Each unit consists of one share of 5.25% convertible
redeemable preferred stock and 425 warrants. Through this investment, we were
able to align ourselves with a motion picture company, which distributes DVDs.
As an additional element to
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our investment in Lions Gate Entertainment we received the right to replicate
all of its DVDs at market prices for a period of three years. On December 23,
1999 we invested cash of $500,000 in Synthonics Technologies, Inc. in return
for a note receivable convertible into 11,518,096 shares of Synthonics
Technologies, Inc. common stock. As part of our investment, we agreed to
replicate up to 2 million CDs without charge to Synthonics Technologies, Inc.
and establish a catalog entity to develop and produce 3D interactive catalogs
on behalf of Synthonics Technologies, Inc. and its customers.
Out of the net proceeds of this offering, we anticipate investing
approximately $14,100,000 in capital equipment. This new equipment will expand
our capacity for replication of DVDs and CDs. It should be noted, however, the
purchase of equipment is subject to many factors, including but not limited to
future demand for our product. Therefore, no assurance can be given we will
purchase equipment as described above, and actual equipment purchased may vary
significantly from our projections.
We believe cash flows from operations, net proceeds from this offering,
together with available funds under the credit agreement, will be sufficient to
support our operating and capital expenditures for the next twelve months.
However, long-term capital requirements depend on many factors, including, but
not limited to, the rate at which we expand our business, whether internally or
through acquisitions and strategic alliances. To the extent the funds generated
from the sources described above are insufficient to fund our activities in the
short or long term, we will be required to raise additional funds through
public or private financings. No assurance can be given additional funds will
be available on terms acceptable to us.
Seasonality
The demand for DVDs and CDs 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.
Inflation
Prices for raw materials used in the production of DVDs and CDs have not
changed substantially as a percentage of sales since 1996, and in certain
instances decreased during the year 1999. However, some of our other
manufacturing and selling, general and administrative costs have continued to
increase (primarily in the aggregate and sometimes as a percentage of net
sales) since the beginning of 1996. As our general CD selling price has been
relatively unchanged over the last two years, we have been unable to pass these
costs on to our customers. Despite this trend we have remained profitable by
increasing net sales.
Impact of Year 2000
In 1999, we completed our remediation and testing of systems. Because of
those planning and implementation efforts, we experienced no significant
disruptions in mission critical information technology and non-information
technology systems and those systems have successfully responded to the Year
2000 date change. We did not incur any significant expenses during 1999 in
connection with remediating our systems. We are not aware of any material
problems resulting from Year 2000 issues, either with our products, internal
systems, or the products and services of third parties. We will continue to
monitor our mission critical computer applications and those of our suppliers
and vendors throughout the year 2000 to ensure any latent Year 2000 matters
arising are addressed promptly.
Qualitative and Quantitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates. There are
currently no risks related to foreign currency exchange rates and we do not use
derivative financial instruments, swaps, commodity investments or hedging. Our
interest expense is sensitive to changes in the prime rate. Due to the nature
of our debt, we have concluded that there is no material market risk exposure.
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INDUSTRY OVERVIEW
The Digital Versatile Disc (DVD) and Compact Disc (CD) are among the most
popular optical media for content delivery and are widely used in the
distribution of movies, music, application and edutainment software, publishing
content and Internet/online promotional materials. The wide acceptance of DVD
and CD as a content delivery media has fueled the growth of the replication
industry.
The first commercial application of CD technology was storage and playback of
pre-recorded music, or CD-Audio, which was adopted as an international standard
in 1982, and introduced to the consumer market in 1983. The CD-ROM entered the
market in 1991, providing cost-effective storage and retrieval of any
combination of data, text, graphics, audio and video. The DVD entered
commercial distribution in December 1996. DVDs are currently capable of storing
up to 13 times as much data as CDs and are suitable for high quality playback
of film and video, multi-channel surround sound audio and interactive media.
An important advantage of DVD players and DVD-ROM drives, which should speed
their market penetration, is their compatibility with CD-Audio and CD-ROMs.
This 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 their CDs
obsolete.
During the past decade, CDs have become the dominant format in audio and
portable data storage and retrieval markets. Since its introduction, the
popularity of DVDs has grown rapidly and the DVD is increasingly becoming a
standard format for video. DVDs and CDs can be replicated faster than
traditional tape storage mediums at a comparable cost. In addition, consumer
acceptance of the DVD and CD formats is due in part to the following
combination of advantages over other mass storage formats:
. Higher storage capacity / longer play time;
. Greater portability and ease of storage;
. Higher quality presentation including crisper sounds and sharper video;
. Longer life as a result of lack of degradation; and
. Random accessibility of data.
CD-ROM. According to Infotech, CD-ROM disc units sold in the United States by
CD-ROM replicators have grown at a compound annual growth rate of 34.0% from
approximately 443 million units in 1996 to approximately 1.066 billion units in
1999. The consumer market has emerged within the past several years and its
substantial growth is expected to help sustain CD-ROM unit sales in the next
few years. Infotech estimates that total worldwide CD-ROM disc units sold will
continue to increase through the year 2001.
CD-ROM is well suited to applications involving the storage of large amounts
of information in a form that 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 catalogs. 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.
Infotech estimates that in the United States, the installed base of CD-ROM
drives will grow from approximately 60.4 million in 1996 to approximately 338.8
million by 2004 representing a compounded annual growth rate of 24.1%. In
addition, CD-ROM discs can be played on DVD-ROM drives. This rapidly growing
installed base of CD-ROM drives, as well as the growth in the installed base of
DVD-ROM drives, expands the potential consumer market for publishers of CD-ROM
software, data and entertainment products.
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DVD. DVD is becoming the accepted new medium for home video distribution.
Unlike videocassettes, DVD-Video experiences no image or sound degradation with
normal use and offers greater storage capacity, indexing, random access and
lower manufacturing costs. DVD is capable of holding a full length motion
picture with up to three spoken languages, three foreign language subtitles and
multi-channel, digital surround sound. Added features such as multilingual
voice tracks, soundtrack albums, director's notes, out takes, story-based games
and other CD applications may be available with the higher storage capacity
afforded with DVDs.
The home video market, both rental and purchased videos, has been served
primarily by pre-recorded videotape (VHS). We believe the DVD-Video format will
surpass the VHS format in the pre-recorded video market over time. Infotech
estimates the following:
. The installed base of DVD-Video players in the United States will
increase from approximately 300,000 in 1997 to 39.6 million in 2004,
representing a compounded annual growth rate of approximately 100.9%.
Infotech estimates the worldwide installed base of DVD-Video players
will reach 96.7 million players by 2004.
. DVD-Video disc units sold in the United States by replicators will
increase from 3.4 million units in 1997 to approximately 991.0 million
units in 2004, representing a compounded annual growth rate of 124.9%.
. In the United States, more than 5,000 DVD-Video titles are currently
available and the number of titles will approach 42,500 by the end of
2004.
In addition to the growth in home video, Infotech projects that DVD-ROM drive
shipments in the United States will increase from approximately 125,000 in 1997
to 134.2 million in 2004, representing a compounded growth rate of 171.0%.
Also, the next generation of game consoles being manufactured by Sega,
Nintendo, Sony and Microsoft will be DVD-based. Consequently, there will be
pressure on some software game manufacturers to produce higher-capacity
software games in the DVD format. We believe that certain of our software game
customers will supplement their CD business in this area. Infotech estimates
that DVD-ROM disc units sold by replicators in the United States will increase
from approximately 520,000 in 1997 to 589.0 million in 2004, representing a
compounded growth rate of 173.1%.
Growth of Internet Usage and E-Commerce
As the number of Internet users has increased the functionality of the
Internet has expanded to a medium that enables complex business-to-business
communications and commerce. The Internet and related online technologies are
revolutionizing the way businesses and consumers communicate, share information
and conduct business.
We believe CDs and DVDs will play an important role in the expansion of the
Internet and online commerce. Specifically, we believe CDs, and potentially
DVDs, will function as an important marketing medium for integrating Internet
or online strategies with traditional commerce, distribution and communication
channels, such as "bricks and mortar" stores, mail order catalogs, television
sales and retail-based kiosks. DVDs and CDs have special features, in addition
to those discussed above, which particularly enhance their use in connection
with the Internet and e-commerce programs. These include the following:
. The ability of a DVD or CD to direct or link consumers to a website; and
. The increased ability to include special promotional or customer brand
information in the form of graphics, audio, video and other data.
In fact, certain of our Internet and e-commerce customers, most notably
America Online, have already adopted a technique of mass-mailing CDs for
marketing purposes as a cost effective alternative to other methods of
advertising.
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BUSINESS
We are an independent manufacturer/replicator of Digital Versatile Discs
(DVD) and Compact Discs (CD). We target our sales to companies in industries
including Internet/online, film and entertainment, edutainment software,
publishing and computer hardware. We have successfully implemented our business
model, which consists of the following elements:
. High volume customers: Our customer base is comprised of some of the
highest volume customers of DVDs and CDs.
. High replication capacity: Since inception we have continued to add new
equipment and have become one of the largest independent
manufacturers/replicators of DVDs and CDs in the United States.
. Low cost structure: We achieve substantial economies of scale through
our optimally designed facility at a single locale, our dedication to
maximizing machine uptime and our flat organizational structure.
. Superior turnaround service: We are dedicated to providing superior
turnaround service by maintaining high throughput mastering technologies
and high DVD/CD graphic printing capacity and by efficiently managing
operational workflow.
Our customers include America Online, Inc., Modus Media International
Holdings, Inc., Havas Interactive, Inc., GT Interactive Software, Lions Gate
Entertainment, infoUSA Inc., Interplay Entertainment Corp., Juno Online
Services, Inc. and a major motion picture distributor. In order to achieve
significant cost efficiencies we focus on customers requiring high volume
production runs and have designed our business processes to support them. We
are thereby able to achieve lower overall unit costs and therefore we believe
we are less vulnerable to competitive pricing pressures and have greater
flexibility in the pricing of our products and services.
Due to our technologically advanced equipment, plant design, in-house
engineering capabilities and workflow techniques, we believe we are one of the
most efficient high volume, low cost DVD and CD manufacturers in the industry.
As a result of these factors, as well as our self-sufficient engineering,
repair and maintenance capabilities, we believe we are able to provide superior
turnaround service. This is not only a fundamental selling advantage but also
helps foster long-term relationships with our high volume customers.
Based upon our strong business model, we believe we are well positioned to
capitalize on the anticipated growth in the DVD market, the continuing growth
in the CD-ROM market, as well as the growing use of CDs in connection with
marketing of Internet, e-commerce and other distribution channels.
Operating Approach
We believe that our operating approach distinguishes us from our competitors
and that the effectiveness of our operating approach has been proven through
the growth in our targeted customer base, the retention of our customers and
our demonstrated long-term financial performance. Our focused operating
approach is based on the following principles.
High Capacity Manufacturing Capabilities at a Single Locale. We maintain all
of our production and mastering facilities within two buildings, aggregating
approximately 73,000 square feet, in Valencia, California. In April 2000 we
plan to move our production facilities into an 83,000 square foot building in
the same area, at which time we will have approximately 112,000 square feet for
our operations. With our current equipment configuration, we have current
production capacity of approximately 220 million CDs per year or, as a result
of having replicating machines convertible between DVD and CD, we have
production capacity of 30 million DVDs and 140 million CDs per year. Following
our move to the larger production facility, we will have sufficient square
footage to more than double our current production capacity. By aggregating our
production capacity in a single locale, we can maintain high product yield
rates, manage costs and facilitate overall profitability. In addition, we
believe we can more closely administer our daily production schedule and
quickly respond to unanticipated time sensitive customer requests. Because of
our fast turnaround times, we are able to fulfill the replication needs of a
national customer base from our Valencia, California facility. We believe we
have one of the most efficient facilities in the industry. As compared to
others in the industry, our manufacturing facilities are relatively new and
were designed to facilitate high volume production. We believe our sales per
employee, operating income per employee, operating margins and yield rates
historically have been among the highest in the industry.
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Optimally Designed Manufacturing Facilities. Our manufacturing facilities
have been engineered to provide optimal efficiency. The layout of our
facilities, coupled with redundant operating systems, has allowed us to
efficiently manage operational workflow and to maximize factory throughput. We
are able to complete and control all mastering, replication, printing and
packaging functions internally without dependence on outside subcontractors. As
a result, we believe we have established faster turnaround times for customer
orders than most others in the industry.
Self-Sufficient Repair, Maintenance and Engineering Capabilities. We operate
24 hours a day, seven days a week, and have staff engineers on the production
floor at all times to monitor and maintain a smooth production flow. In order
to maximize our machine uptime, we maintain a full machine shop with
substantial spare parts inventory for our manufacturing equipment. Our
engineering talent, coupled with our investment in spare parts inventory, has
allowed us to develop a high degree of self-sufficiency, resulting in higher
productivity. We also maintain a close technical working relationship with each
of our equipment vendors.
Technologically Advanced Manufacturing Equipment. To implement our business
model, we have always invested in the most advanced, high volume equipment
available. As of December 31, 1999, we have invested approximately $39.1
million in our mastering, replication, printing and packaging equipment. We
expect to invest approximately $18.0 million toward the purchase of new
equipment during 2000, including $14.1 million of the net proceeds of this
offering.
Marketing Our Services Directly to Senior Management. Since our business
model requires us to attract customers with large annual replication
requirements, the selection of the replication vendor by our customers usually
has higher visibility and importance at the executive levels. Consequently, we
are able to more precisely target our prospective customers and minimize the
use of field sales personnel. Alex Sandel, who has extensive relationships in
the computer hardware and software industries, spearheads our sales and
marketing effort. As a result, we are able to actively target and market our
services at the executive level. A strong sales team with substantial
experience in the CD replicating business and extensive industry knowledge and
contacts supports Mr. Sandel. In addition to our sales team, we plan to utilize
the relationships of the members of our board of directors to increase our
visibility and penetration with both DVD and CD customers.
Growth Strategy
In order to foster our continued growth in line with our business model, we
plan to pursue the following opportunities.
Capitalize on the Continuing Growth of DVD. We commenced our DVD production
in the fourth quarter of 1999. In order to continue our participation in this
growing market, we have purchased and plan to purchase additional machines that
will significantly increase our DVD manufacturing capacity. Through a direct
sales effort targeting motion picture production companies, post production and
authoring houses and existing edutainment customers, we intend to pursue a
marketing strategy targeted at senior executives similar to the one we have
successfully implemented in the CD-ROM market. We believe that our location in
Southern California, as well as our independence from large entertainment
companies, will provide an advantage in obtaining business from independent
motion picture production companies as well as overflow work from the major
motion picture production companies having captive replicating facilities. We
have made and intend to continue to make strategic investments, where
appropriate, in selected companies that either currently or in the future may
have high volume DVD replication requirements. By making this type of strategic
investment, we have the ability to negotiate a long-term exclusive DVD
replication agreement.
Expand our Position as a Low Cost CD-ROM Manufacturer. Our penetration of the
marketplace for CDs is focused on the CD-ROM market with a significant presence
among computer software developers and Internet/online providers. Because of
our success as a low cost, high volume replicator, we believe we are well
positioned to address the growth in the market for CD-ROM. We believe we can
offer our customers cost effective CD manufacturing services with turnaround
times among the shortest in the industry. In addition to maintaining our
existing customer base, we intend to use the contacts of our board of directors
and our senior executives' direct selling efforts to expand our customer base
to other companies with high volume replicating needs.
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Stimulate CD Demand through Targeted Internet-Related Marketing Programs. The
rise of the Internet and related services has caused various industries to re-
examine traditional distribution methods, such as "bricks and mortar" retail
stores, direct mail catalogs, television sales and retail-based kiosks, and
their connection to online users. This has caused both business-to-business and
business-to-consumer companies to alter their marketing and distribution
programs in order to address changing market trends caused by growing Internet
commerce. In Europe, the CD has been a significant marketing tool, often
distributed as inserts to magazines or other publications. In our market, some
of our largest customers, such as America Online and Juno, are using CDs as
marketing tools. We believe CDs, and potentially DVDs, will play an
increasingly important role in the marketing strategy of many e-commerce and
catalog companies.
CDs are relatively inexpensive to both manufacture and mail. As compared to
paper based catalogs, creating an updated or subsequent version of catalogs on
CDs and DVDs is generally easier and less expensive. CDs and DVDs also provide
interactive functionality and an entertaining means of advertising. Certain of
our Internet and e-commerce customers, most notably America Online, have
already adopted a technique of mass-mailing CDs for marketing purposes as a
cost effective alternative to other methods of advertising.
In order to capitalize on this market need, our objective is to assist
companies in establishing and producing marketing programs enhancing, promoting
and integrating their e-commerce businesses utilizing CDs and DVDs. We will
focus on promoting our business through three principal avenues:
. the digital production and distribution of product catalogs through CDs
and, in the future, DVDs;
. e-commerce programs capitalizing on the convergence of traditional
retail, catalog, kiosk and online formats through various CD-based
applications; and
. marketing programs utilizing the CD as an advertising medium used to
drive customers to a targeted online destination by either new or
existing retailers and e-tailers.
30
<PAGE>
Customers
We service a broad range of high volume DVD and CD customers. The following
table summarizes the principal market segments within DVD and CD-ROM and our
market orientation, our current customer base and our estimate of the growth
potential of the DVD and CD markets.
<TABLE>
<CAPTION>
Estimated Estimated
Selected CD-ROM DVD
Market Segment Customers Potential Potential
-------------- ------------------------- ---------- ---------
(All CD customers except
where DVD is indicated)
<S> <C> <C> <C>
Online Providers
These customers are large users America Online High Low
due to the continued and Juno
growing prevalence of Internet
and online services. These
customers are attractive to us
due to their less seasonal and
higher volume requirements.
Internet Marketing
These customers include "bricks Synthonics Technologies High High
and mortar," direct mail
catalog, kiosk and online
companies. They are looking to
promote their e-commerce
presence and integrate it with
other distribution channels.
The DVD and CD formats can
stimulate new customer growth
and also connect to the current
customer base.
Film/Entertainment
One of the largest users of DVD A major motion picture Not High
products. We are positioned to distributor/DVD applicable
penetrate this market segment Lions Gate Entertainment/
based upon our capacity and DVD
rapid turnaround capabilities.
Edutainment Software
This segment is one of the Havas Interactive High High
mass-market segments most GT Interactive
appropriately suited to our Interplay
speed and quality capabilities. Encore
These companies are expected to
be large volume users driven by
edutainment, games and
application software.
Microsoft Authorized
Replicators and Turnkey
Manufacturers
These replicators are Modus Media High High
authorized by Microsoft to Zomax
assemble and distribute Banta
operating systems, applications
and manuals to OEM computer
manufacturers. These companies
outsource a significant portion
of their CD requirements.
Publishing
Publishing companies are a infoUSA/CD and DVD High Medium
large and increasing user of Ziff/Davis
the DVD and CD formats given
the continued transition from
print to electronic media. This
segment is expected to continue
to grow because of the low cost
of storing a high volume of
printed product on DVD or CD.
OEM Computer Hardware &
Peripherals
This is a substantial market 3dfx High Medium
sector in which we have a Toshiba
demonstrated track record; we Fountain Technology
intend to continue to
aggressively pursue PC and
peripheral manufacturers.
</TABLE>
31
<PAGE>
Currently, approximately 40 customers account for substantially all of our
net sales. Our top three customers, America Online, Modus Media and Havas
Interactive, accounted for approximately 32%, 14% and 10%, respectively, of our
net sales for the year ended December 31, 1999. We have expanded our customer
base aggressively since our founding in July 1994 primarily due to the focused
efforts of our senior management and sales team. We plan to continue expanding
and diversifying our customer base in order to reduce our dependence on any one
customer and to optimize our production capacity. Specifically, we plan to
further expand and diversify our customer base beyond our current presence by
further penetrating the Internet, film/entertainment, and publishing
industries.
Our current customer base is characterized primarily by: (i) customers
requiring production runs that are annual and ongoing, less cyclical in nature
and less time-sensitive, such as America Online and (ii) customers with
substantial annual production requirements tied to seasonal consumer purchasing
trends and product announcement cycles such as Havas Interactive and GT
Interactive. To the extent we are successful in our efforts to promote DVD and
CD business within the film/entertainment industry or through Internet related
marketing programs, we will attract and acquire customers with substantial
production requirements revolving around film releases, retail cycles and other
planned marketing events. Our large capacity allows us to manage the competing
demands of our customers on a daily basis. We work closely with customers to
monitor the actual production schedule and the product quality and service
delivered.
Our business is based primarily on purchase orders. Due to our fast
turnaround time, high capacity and strong customer service support, we believe
that we have been able to develop excellent relationships with our customers.
However, we do not have any significant backlog and we do not typically enter
into supply contracts with our customers.
As part of our effort to secure certain DVD business, we recently invested
$1.7 million in Lions Gate Entertainment, a Canadian production and
distribution film and entertainment studio, in order to become affiliated with
and establish relationships within the entertainment industry. In addition,
assuming price and quality are in line with industry standards, we have
obtained the exclusive right to all of the DVD replication needs of Lions Gate
for the next three years. We also have a five year agreement with Synthonics
Technologies, Inc., which grants us exclusive rights to all DVD and CD
replication needs of Synthonics, assuming price and quality are in line with
industry standards.
Sales and Marketing
Our sales and marketing effort is tailored to a customer base consistent with
our business model. We have targeted customers who require and depend upon high
volume DVD and CD manufacturing capacity. We maintain a focused sales and
marketing effort led by Alex Sandel and supported by a strong sales staff who
have significant experience in the replication industry. Our sales and
marketing efforts are focused on expanding our reach across the United States,
across a broader industrial base, to customers in the Internet/online area and
to the future users of DVDs and CDs. These efforts are supported by
relationships and contacts of our board of directors and sales and marketing
team.
Develop DVD Customer Base. We believe DVD technology is positioned to become
the new medium for home video and the high-capacity medium for software
distribution and high-capacity computer games.
Home Video: We anticipate DVD demand will continue to grow in the motion
picture industry, the primary area utilizing the DVD format today. We
intend to broaden our sales and marketing efforts in this industry through
relationships certain of our directors have with leading motion picture
producers and distributors. In order to further stimulate our growth and
broaden our relationships within the entertainment industry, and where
appropriate, we intend to continue making strategic investments in selected
companies that can direct their DVD replication requirements exclusively to
us. As an example, we recently invested $1.7 million in Lions Gate
Entertainment, a Canadian production and distribution film and
entertainment studio. As part of the investment, we received exclusive
rights to all DVD replication needs of Lions Gate for the next three years,
assuming price and quality are in line with
32
<PAGE>
acceptable industry standards. Additionally, we are marketing to
independent post-production companies that provide DVD authoring services
to the motion picture industry because of the long-term relationships they
have with the movie studios and, in certain cases, the autonomy to
independently select the services of DVD replicators.
Software Distribution and Computer Games: DVD-ROM drives are becoming
increasingly popular. Furthermore, home video game companies, such as Sony,
Nintendo and Sega, are introducing home video game consoles that are
compatible with the DVD format. Microsoft has also announced its plans to
introduce a DVD compatible game console. With this large installed base,
which is projected to continue to grow, we believe there will be a growing
demand for high-capacity computer games playable on the DVD format. In
addition, some of our current customers in the software publishing industry
are moving selected product titles to the DVD format. We will be well-
positioned to attract future DVD business from our current computer
hardware and software customers as a result of our strong relationships and
demonstrated performance with these customers.
Stimulate CD Demand through Targeted Internet-Related Marketing Programs. As
a result of the increasing popularity of the Internet, many companies now have
to integrate an Internet strategy with their traditional retail and direct mail
marketing strategies. We believe CDs, and potentially DVDs, will play an
increasingly important role as part of the marketing strategy of many e-
commerce and catalog companies. When a CD or DVD is used as a catalog or
promotional tool in the Internet e-commerce space, we believe it will generate
high-volume demand. In order to capitalize on this market, our objective is to
assist companies to establish and produce marketing programs enhancing,
promoting and integrating their e-commerce businesses utilizing CDs and DVDs.
We will focus on three principal areas:
Targeted Internet Marketing Programs: We believe the CD format is well
suited for driving customer traffic to designated online sites because it
is less expensive than other advertising media, it can be targeted to an
intended audience, it can deliver a dynamic, interactive advertising
message and it can deliver to the customer software that currently cannot
be delivered via the Internet due to file size concerns. The most notable
example of this use, which involves our leading customer, is that of
America Online. We are identifying and marketing to our current customers
as well as potential customers this technique in stimulating growth in CDs.
E-Commerce Programs: The introduction of online and digital capabilities
has also introduced new and more engaging ways in which retailers and e-
tailers can interact with their customers. There will be application
programs that interactively promote commerce. These types of interactive
programs may require CDs and DVDs as a program medium. We recently invested
in Synthonics Technologies, Inc., a 3D technology firm, which utilizes its
technology in the digital catalog, kiosk and e-commerce areas. As a result,
we believe there will be opportunities for future CD replication.
Digital Catalog Business: In order to respond to an increasingly
"digital" consumer as well as the increasing popularity of online e-
commerce, many direct mail catalog companies are considering various
changes to their traditional distribution programs. One possible
alternative is the partial or total substitution of the traditional paper-
based catalog with a CD or DVD catalog. By following this approach, a
company can appeal to the new and growing base of online consumers, "link"
and drive traffic to its website, interact with customers in a more
entertaining way, and more effectively integrate a customer with its online
capabilities.
Many customers and potential customers interested in CD or DVD marketing
programs lack the knowledge and resources to internally develop and execute
these programs. We will oversee the coordination of the overall production
process of these programs. We intend to outsource the creative, graphic and
production services necessary to implement the above programs. Where the
customer handles creative programming, we will carry out our replicating and
packaging functions upon delivery of a master from the customer. By following
this model, we can stimulate growth in our main business, the replication of
DVDs and CDs, while maintaining our core high volume business model.
Broader Industry Coverage for CDs. Our marketing efforts have been
historically targeted toward companies in the computer hardware and software
industries, and we intend to further penetrate these areas. As
33
<PAGE>
a result of the rise of the Internet, we will also continue to focus on online
service providers and other related companies. Because of our efficiency, high
capacity, fast turnaround time and independence within the replicating
industry, we have obtained overflow work from other CD replicators that do not
have sufficient internal capacity. We only accept orders from replicators who
provide such work on a year-round basis. Our main marketing thrust is to
attract new customers whose usage patterns are driven by fundamentals that
counterbalance the seasonal usage patterns of the computer hardware and
software market segments. We believe this strategy helps to balance capacity
demands and thereby moderate seasonal fluctuations.
Suppliers
We seek to reduce costs and enhance quality by purchasing from a limited
number of suppliers. However, all raw materials needed to manufacture our
products are readily available from multiple suppliers at competitive prices.
The principal raw materials used to manufacture DVDs are optical grade
polycarbonate, aluminum, nickel, ultraviolet-curable lacquers and ink. Also,
certain types of DVDs require a minimal amount of gold. The principal raw
materials used to manufacture CDs are the same as those used for manufacturing
DVDs, except for gold.
Warehousing and Distribution
We primarily use common carriers to ship products to customers throughout the
United States. We also deliver products by truck directly to a small number of
customers who demand direct shipping. To meet the needs of customers distant
from our facility, we ship unpackaged or "spindled" DVDs and CDs directly to
the customer or its distribution facility. If required, we have relationships
with packaging companies in other parts of the United States that would be able
to handle individual customer fulfillment needs. We currently believe that this
strategy is superior to building multiple manufacturing facilities. The cost to
ship unpackaged DVDs or CDs to a packaging company is lower than the investment
required to construct, operate and maintain multiple manufacturing facilities.
Also, by aggregating our production capacity in a single locale, we believe we
can optimize our production capacity, maintain high product yield rates, manage
costs and facilitate overall profitability. In addition, we believe we can more
closely administer our daily production schedule and quickly respond to large
volume, unanticipated time sensitive customer requests. Because of our low-cost
structure and fast turnaround times, we are able to fulfill the replication
needs of a national customer base from our Valencia, California facility.
Seasonality and Backlog
Our 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. Typically, DVDs and
CDs are produced and shipped as orders are received and we operate with
virtually no backlog during most of the year. As a result, net sales in any
quarter generally are dependent on orders shipped in that quarter. However, we
believe focusing our marketing efforts on a more diversified customer base will
help reduce the effects of seasonal cycles of our business. For example, to the
extent we are successful in our efforts to promote DVD and CD business within
the film/entertainment industry or through Internet related marketing programs,
we will attract and acquire customers with substantial production requirements
revolving around film releases, retail cycles and other planned marketing
events, which are not as seasonal as our computer hardware and software
customers.
Competition
The DVD and CD replication industries are highly competitive. We believe that
the principal competitive factors in the DVD replicating industry are price,
quality, turnaround time, capacity and service and relationships with studios,
with price and quality being the most important. We believe the factors listed
above are also critical in the CD replicating industry, with price and
turnaround time typically being the most important. We believe that we compete
favorably with respect to each of these factors in both DVD and CD replicating
and that the quality of our products and services, our low cost manufacturing
operations, our ability to accommodate tight delivery schedules, and our
flexibility in production create significant competitive advantages.
34
<PAGE>
The replication industry can be divided into two categories: (i) companies
that are affiliated with and are captives of large entertainment companies
(music and motion pictures), and (ii) independent companies, such as us, that
have no affiliation. We compete more directly with the independent replicators,
which include: AmericDisc, Carlton Communications PLC, Cinram International,
Inc., Denon Electronics, Inc., Disctronics, Inc., DOCdata N.V., JVC
Corporation, and Zomax Optical Media, Inc. In addition to the above listed
companies, we also compete with foreign manufacturers that can operate at lower
costs than us. We do not typically compete directly with captive manufacturers.
In some instances, we provide replication services to them to cover their
overflow work caused by their own capacity constraints. These captive
replicators include the following: Sony Music Entertainment, Inc., Polygram
Holdings, Inc., Warner Advanced Media Operations and Warner Music Group (both
divisions of Time Warner, Inc.), Bertelsmann Music Group and Capitol-EMI Music.
Many of the independent replicators are manufacturers of DVDs and CDs but
also other pre-recorded multimedia products including video cassettes, audio
cassettes and audio CDs. In addition, certain of these independent replicators
consider themselves full outsource service providers offering such services as
call center operations, customer support, warehousing inventory management,
distribution and fulfillment.
We concentrate on providing high volume, low cost DVD and CD replication
along with mastering, packaging and fulfillment services which are essential to
our customers needs. We believe we distinguish ourselves from our competitors
through our strict focus on those replication and affiliated services necessary
to meet our customers' requirements for high capacity manufacturing and quick
turnaround of DVDs and CDs.
We may also face indirect competition from broadband online service
providers, such as telephone, cable and wireless service providers. However, we
believe online 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 DVD or CD.
DVD and CD Manufacturing Process
The DVD and CD manufacturing process consists of three stages.
Pre-production. Pre-production of DVDs and 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
proper injection molding equipment to produce either DVDs or CDs. Pre-
production begins with receipt of the customer's data, which is supplied in any
number of approved input media.
The mastering process forms the master image of the DVD or CD from which the
polycarbonate replicas are molded. 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 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 proper injection molding machine to replicate DVDs or CDs.
Replication and Printing. CD replication uses a fully integrated in-line
process, which incorporates injection molding machines, metallizing equipment,
protective coating 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
35
<PAGE>
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. A DVD-5 contains 4.7 gigabytes of data molded onto one layer of the
polycarbonate substrate. A DVD-10 contains 9.4 gigabytes of data molded into
both polycarbonate substrates. A DVD-9 contains approximately 8.5 gigabytes of
data molded onto both polycarbonate substrates, one of which is semi-
transparent. The semi-transparent layer contains a thin layer of reflective
material, usually gold.
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. We maintain equipment to provide for most customer-requested
packaging configurations and use 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 of the box. The
jewel box is typically shrink-wrapped for protection.
Employees
At December 31, 1999, we had 127 full-time employees, including 3 engaged in
sales and marketing, 13 engaged in general administration and finance and 111
engaged in DVD and CD replicating/manufacturing. In addition, we use temporary
employees in varying numbers throughout the year, who are primarily engaged in
packaging. We rely on our ability to vary the number of part-time and temporary
employees in order to respond to fluctuating market demand for our packaging
services. None of our employees are covered by a collective bargaining
agreement. We believe we have a good relationship with our employees.
Properties
Our executive offices and manufacturing, sales and marketing operations are
located at 25136 Anza Drive, Valencia, California, where we lease approximately
44,500 square feet of space. This lease expires on February 28, 2002. Our
mastering facilities are located near our executive offices at 24833 Anza
Drive, Valencia, California, in leased facilities occupying an aggregate of
approximately 28,500 square feet of space. This lease expires on May 31, 2007.
We expect to enter into a multi-year lease for approximately 83,000 square feet
of space located at 24811 Avenue Rockefeller, Valencia, California at
commercially standard terms. We currently plan to move our executive offices,
manufacturing, sales and marketing operations to this location during April
2000. We are currently negotiating the release from our lease for the property
located 25136 Anza Drive in Valencia, and we do not believe that this will
result in any material out-of-pocket costs to us. We believe that our new
facilities will be adequate to meet our projected needs for the foreseeable
future. We do not believe that the relocation of certain of our operations to
these new facilities will cause any material disruption in our business. See
"Certain Relationships and Related Transactions."
Legal Proceedings
We are not involved in any pending, nor are we aware of any threatened, legal
proceedings which we believe could reasonably be expected to have a material
adverse effect on our business, operating results or financial condition.
36
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to our
directors and executive officers as of February 15, 2000:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Alex Sandel.................. 57 Chairman of the Board, Chief Executive
Officer and President
David Moss................... 39 Vice President--Operations
Louis L. Weiss............... 49 Chief Financial Officer, Principal Accounting
Officer and Secretary
Sanford R. Climan(1)(2)...... 44 Director
Mark Dyne(1)(2).............. 39 Director
Diana Maranon................ 41 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. Our Bylaws presently provide 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 our board of directors. The current number of
directors is fixed at five. The remaining directors may fill any vacancy on the
board of directors, including a vacancy resulting from an increase in the size
of the board of directors. The board of directors cannot decrease the number of
directors or shorten the term of any incumbent director.
The board of directors appoints the executive officers and subject to
employment contracts, such officers serve at the discretion of the board of
directors.
Alex Sandel is one of our co-founders and he has served as our Chairman of
the Board, Chief Executive Officer and President since we were founded in June
1994. Mr. Sandel was one of the original founders of Packard Bell Electronics
(1986), an innovative PC manufacturer that was first to market PCs via
traditional consumer electronics retail outlets. Mr. Sandel served as a
director of Packard Bell Electronics since its inception until 1999. Mr. Sandel
is a principal shareholder in Argoguest, Inc., an incubator focused on
investing in early stage Israeli-based Internet and Internet enabling
technology companies. Mr. Sandel has founded, managed and held engineering
positions with several companies over the past thirty years. He was educated at
the Israeli Institute of Technology, Haifa, Israel. While continuing his
education in the United States, he received his BSEE from California State
College, Pomona, California (1969) and MSOR from the University of Southern
California (1974).
David Moss has served as our Vice President--Operations since our founding 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 L. Weiss joined us in May 1998 as Chief Financial Officer and Principal
Accounting Officer. 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 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 (inactive status) and he
has a B.B.A. and M.B.A. from the University of Wisconsin.
37
<PAGE>
Sanford R. Climan has served as a Director since August 1998. Mr. Climan is
Managing Director of Entertainment Media Ventures (EMV), a Los Angeles-based
venture capital fund focused on investment in the areas of technology, media,
and the Internet. From October 1995 through May 1997, Mr. Climan was Executive
Vice President and President of Worldwide Business Development for Universal
Studios, Inc., where he oversaw corporate international strategy and the
following Universal Studios operating units: Consumer Products; Home Video; Pay
Television; New Media; Spencer Gifts and Strategic Marketing. From June 1997
through February 1999 and from June 1986 to September 1995, Mr. Climan was a
member of the senior management team at Creative Artists Agency, a leading
talent and literary representation firm, working with both talent and corporate
clients. Prior to joining CAA, Mr. Climan held executive positions at various
entertainment companies, working in general management capacities, as well as
overseeing areas of motion picture and television production and distribution.
Mr. Climan serves as a director of a number of public and private companies.
Mr. Climan received his B.A. from Harvard College, a M.S. in Health Policy and
Management from the Harvard School of Public Health and his M.B.A. from Harvard
Business School.
Mark Dyne has served as a Director 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. Currently, Mr. Dyne is a Director of
Ozisoft Pty. Limited, a company he founded in 1982. From November 1998 through
January 2000, Mr. Dyne was Chief Executive Officer of Virgin Interactive
Entertainment. From June 1995 through May 1997, Mr. Dyne served as an executive
officer of Sega Enterprises (Australia) Pty., Ltd., a theme park developer,
which operated the $70 million interactive indoor theme park in Darling Harbor
in Sydney, Australia. Moreover, currently, Mr. Dyne is Chairman of the Board of
Directors of Tag-It Pacific, Inc., a manufacturer of buttons, tags and other
apparel trim products, and a director of Talent Connection.com, an
entertainment portal.
Diana Maranon has served as a Director since August 1998. Ms. Maranon is the
President and Managing Director of Averil Capital Markets Group, Inc., 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. Before founding Averil Capital Markets Group, Inc., 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, LLP. 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
The board of directors will maintain an audit committee and a compensation
committee. The audit committee will review the scope of our audits, the
engagement of our independent auditors and their audit reports. The members of
the audit committee are Sanford Climan and Mark Dyne. The compensation
committee will evaluate our compensation policies and administer our stock
option plan. The members of the compensation committee are Sanford Climan and
Mark Dyne.
Director Compensation
We intend to pay non-employee directors fees of $1,500 for each meeting
personally attended. We intend to pay non-employee directors fees of $500 for
each telephonic meeting attended. Our directors are also reimbursed for their
reasonable travel expenses incurred in attending board or committee meetings.
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<PAGE>
Compensation Committee Interlocks and Insider Participation
We did not have a compensation committee for the fiscal year ended December
31, 1999. Our board of directors made all decisions regarding executive
compensation for the fiscal year ended December 31, 1999. No interlocking
relationship exists between any member of our compensation committee and any
member of any other company's board of directors or compensation committee.
Executive Compensation
The following table presents both cash and noncash compensation paid or to be
paid by us to each of our executive officers who received compensation for the
year ended December 31, 1999 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....................................... 1999 $540,000 --
David Moss, Vice President--Operations........... 1999 $461,561 $52,000
Louis Weiss, Chief Financial Officer............. 1999 $228,894 --
</TABLE>
Employment Agreements with Executive Officers
David Moss has an employment agreement with us. According to his agreement,
he is entitled to a salary of $395,000 per year subject to automatic annual
increases of six percent. The compensation committee can make further salary
increase adjustments to Mr. Moss' agreement if they choose to do so. In
addition, the compensation committee can grant bonus compensation to Mr. Moss.
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 his
employment agreement plus a lump sum payment of $1,000,000. Mr. Moss'
employment agreement is effective August 26, 1998 through August 26, 2003,
subject to extension through August 26, 2006 upon our written consent and Mr.
Moss' written consent.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options at
Options at Fiscal Year-End Fiscal Year-End
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- -------------------------- -------------------------
<S> <C> <C>
Alex Sandel, Chief
Executive Officer and
President............... 72,500/217,500
David Moss, Vice
President--Operations... 36,250/108,750
Louis Weiss, Chief
Financial Officer....... 21,250/63,750
</TABLE>
Stock Plan
We adopted a stock incentive plan in May 1998. Each of our executive
officers, other employees, non-employee directors or consultants is eligible to
be considered for the grant of awards under our stock incentive plan. A maximum
of 1,200,000 shares of common stock may be issued under our stock incentive
plan. If any award expires or terminates for any reason, then the common stock
subject to that award will again be available for issuance under our stock
incentive plan.
Our board of directors or a committee of two or more non-employee directors
appointed by the board of directors will administer our stock incentive plan.
The administrator will have full and final authority to select the executives
and other employees to whom awards will be granted. Additionally, the
administrator will have the full and final authority to grant the awards and to
determine the terms and conditions of the awards and the number of shares to be
issued.
39
<PAGE>
Awards. Our stock incentive plan authorizes the administrator to enter into
both incentive and non-statutory options. An award under the stock incentive
plan may permit the recipient to pay the entire purchase price of the shares by
delivering previously-owned shares of our capital stock.
Plan Duration. Our board of directors adopted our stock incentive plan on May
7, 1998 and on the same day our shareholders approved the plan. Our stock
incentive plan was subsequently amended on August 25, 1998. Our shareholders
approved the amendment on the same day. As a result of the amendment the number
of shares of our common stock subject to our stock incentive plan was increased
to 1,200,000. As of the date of this prospectus, our board of directors has
granted options covering an aggregate of 828,000 shares of our common stock to
our directors, officers and employees, 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. Any
award duly granted on or prior to May 7, 2008 may be exercised or settled in
accordance with its terms. No award may be granted on or after May 7, 2008.
Amendments. The administrator may amend or terminate our stock incentive plan
at any time and in any manner. However, no recipient of any option may be
deprived of any of his or her rights under the option as a result of any
amendment or termination without his or her consent. Shareholder approval is
required to increase the number of shares available for issuance under our
stock incentive plan.
Form S-8 Registration. We intend to file a registration statement under the
Securities Act to register the 1,200,000 shares of our common stock reserved
for issuance under our stock incentive plan and the 366,600 shares issuable
upon David Moss' exercise of his warrants. The registration statement is
expected to be filed shortly following the date of this prospectus and will
become effective immediately upon filing with the Securities and Exchange
Commission. Shares issued under our stock incentive plan after the effective
date of this 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 our affiliates, 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
Our Articles of Incorporation include a provision eliminating the personal
liability of our directors to us and to our shareholders for monetary damages
for breach of the director's fiduciary duties in certain circumstances. This
limitation has no effect on a director's liability for any of the following:
. for acts or omissions involving intentional misconduct or a knowing and
culpable violation of law;
. for acts or omissions a director believes to be contrary to our best
interest or to the best interest of our shareholders;
. for acts or omissions involving the absence of good faith on the part of
the director;
. for any transaction from which a director derived an improper personal
benefit;
. for acts or omissions showing a reckless disregard for the director's
duty to us or to our 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 serious injury to us or to
our shareholders;
. for acts or omissions constituting an unexcused pattern of inattention
amounting to abdication of the director's duty to us or to our
shareholders;
. under Section 310 of the California Corporations Code (concerning
contracts or transactions between a director and us); or
. under Section 316 of the California Corporations Code (concerning
director's liability for improper dividends, loan and guarantees).
This limitation of liability does not apply to a director acting in his
capacity as an officer. Further, this limitation of liability provision does
not affect the availability of injunctions and other equitable remedies
available including injunctive relief or recession.
40
<PAGE>
Our Articles of Incorporation and Bylaws provide indemnification of our
directors and executive officers and discretionary indemnification of our other
officers and employees and other agents to the fullest extent permitted by law.
Pursuant to this provision, our Bylaws provide for indemnification of our
directors, officers and employees. In addition, we may provide indemnification
to persons whom we are not obligated to indemnify. The Bylaws also allow us to
enter into indemnity agreements with individual directors, officers, employees
and other agents. We have entered into indemnification agreements designed to
provide the maximum indemnification permitted by law with all our directors and
executive officers. These agreements, together with our Bylaws and Articles of
Incorporation, may require us, among other things, to indemnify these directors
against certain liabilities that 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
they undertake to repay the amount advanced if it is ultimately determined by a
court that are not entitled to indemnification, and to obtain directors' and
officers' insurance if available on reasonable terms. We maintain director and
officer liability insurance.
Section 317 of the California Code, our Bylaws and our indemnification
agreements with our 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 our directors, officers, and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been
advised 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.
41
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have been treated as an S Corporation since our inception. We paid an
aggregate of approximately $23.3 million in cash dividends to our shareholders
from January 1, 1997 through March 1, 2000. These dividends were paid to our
shareholders to pay their income taxes, and as a return of their investment. We
intend to pay dividends aggregating approximately $8.9 million to our
shareholders prior to the closing of this offering as a distribution of
retained earnings and for the purpose of funding income taxes on 2000
S Corporation earnings.
Our current 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, the shareholder guarantees will
terminate. See "Use of Proceeds."
Our current shareholders have entered into a tax indemnification agreement
with us relating to their respective income tax liabilities. See "Termination
of S Corporation Status."
In January 2000, we loaned $2,630,000 to Alex Sandel with interest at our
borrowing rate from Greyrock. We expect such amount to be repaid prior to or
concurrently with the closing of this offering.
In 1999, we made rental payments on a new facility totaling $86,000 to a
company owned by Alex Sandel, our president and majority shareholder. We intend
to enter into a multiyear lease agreement with this company. This lease,
including the amount of the lease payments, is expected to be on terms similar
with those currently prevailing in the market.
During 1999, we made non-interest bearing loans to Alex Sandel totaling
$1,472,000 and interest bearing loans totaling $1,075,000 (interest accrued at
our borrowing rate from our major lender). These loans were repaid in their
entirety during 1999 except for interest accrued, totaling approximately
$72,000, which was subsequently forgiven by our board of directors.
In December 1999, we invested $500,000 in Synthonics Technologies, Inc. in
return for a note convertible into 11,518,096 shares of Synthonics common
stock, which at the time represented approximately 38% of Synthonics
outstanding shares. In addition, we agreed to replicate and package up to 2
million CDs without charge to Synthonics and establish a catalog entity to
develop and produce 3D interactive digital catalogs on behalf of Synthonics for
its customers. At the time of the investment, Diana Maranon, one of our
directors, was a member of the board of directors of Synthonics.
In December 1999, we made advances totaling $2,500,000 to Jason Barzilay, one
of our shareholders. This amount was repaid before the end of 1999. During
1999, we also made a loan of $1,000,000 to a company owned by Alex Sandel and
Jason Barzilay, which was repaid before the end of the year. Interest on these
amounts accrued at our borrowing rate from Greyrock.
In connection with the warrants issued to David Moss, our Vice President--
Operations, we loaned him a total of $1,428,000 in 1999 under promissory notes
bearing compound interest at the rate of 4.6% per annum, in order to allow him
to pay the federal and state taxes due as a result of the receipt of the
warrants. The unpaid principal balance and any accrued but unpaid interest
shall be due and payable on the earlier of: (1) January 1, 2006; or (2) the
fifteenth day following the date of delivery of written demand for payment made
at any time after the later of (a) the closing of a liquidity event (which
includes this offering), or (b) if applicable, the expiration of any lock-up
period imposed in connection with such liquidity event on our common stock held
by David Moss.
Since September 1997, Averil Capital Markets Group, Inc., a financial
advisory firm founded and controlled by Diana Maranon, has performed various
services for us including investigation of strategic and financing
alternatives. As consideration for these services rendered, we have paid Averil
Capital Markets Group, Inc. approximately $186,184, including expenses. As
consideration for services rendered in connection
42
<PAGE>
with this offering, we have agreed to pay Averil Capital Markets Group, Inc. a
cash payment of 0.75% of the gross proceeds raised upon consummation of this
offering and warrants to purchase shares of our 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 warrants given to Averil Capital Markets
Group, Inc. will become exercisable on the first anniversary of this offering.
We have entered into an indemnification agreement with Averil Capital Markets
Group, Inc. pursuant to which we will indemnify Averil Capital Markets Group,
Inc. and Ms. Maranon against any amounts these parties may become obligated to
pay in connection with Ms. Maranon's service as one of our directors and her
consulting services to us.
We lease one of our two facilities in Valencia, California, from Bascal
Properties II, a partnership owned by our 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. We believe this
lease is at prevailing market rates for similar properties. Rental payments to
Bascal Properties II were $240,000 for the year ended December 31, 1999,
$240,000 for the year ended December 31, 1998 and $140,000 for the year ended
December 31, 1997. In June 1997, we 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.
On November 1, 1997, we entered into a Purchase and Sale Agreement with
Packard Bell NEC. The Packard Bell NEC Agreement governed our 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 agreed to purchase from us substantially
all of its United States requirements for CDs, so long as the pricing, terms,
conditions and quality of the CDs being sold by us were at least as favorable
as those available from any other third party supplier. The Packard Bell NEC
Agreement expired in November 1999. At the time this agreement was entered
into, our current shareholders owned a significant minority interest in Packard
Bell NEC and Alex Sandel was a director of Packard Bell NEC.
Historically, significant portions of our net sales have been to Packard Bell
NEC. Our net sales to Packard Bell NEC were approximately $554,000 for the year
ended December 31, 1999, $5.3 million for the year ended December 31, 1998,
$12.1 million for the year ended December 31, 1997, $14.2 million for the year
ended December 31, 1996 and $20.9 million for the year ended December 31, 1995.
Such sales represented approximately 1.0% of our net sales for the year ended
December 31, 1999, 12.4% of our net sales for the year ended December 31, 1998,
33.5% of our net sales for the year ended December 31, 1997, 55.3% of our net
sales for the year ended December 31, 1996 and 65.8% of our net sales for the
year ended December 31, 1995. At December 31, 1999, accounts receivable from
Packard Bell NEC were approximately $23,000, or 0.3% of total trade receivables
as of such date.
We had net sales to Reveal Computer Products (formerly named Cal Circuit
Abco, Inc. prior to December 1994), a re-packager of computer peripherals
managed by Jason Barzilay and controlled by our current and former
shareholders, amounting to $35,000 for the year ended December 31, 1996 and
$4,212,000 for the year ended December 31, 1995. During the second quarter of
1996, we wrote off accounts receivable balances of $1,559,000 due from Reveal
Computer Products. Moreover, from June 1995 to November 1995, we loaned an
aggregate of approximately $3.3 million to Reveal Computer Products bearing
interest at prime plus three percent. We determined this amount was
uncollectible and reserved for it at December 31, 1995. We ultimately wrote off
such amount in 1996, the same year Reveal Computer Products entered bankruptcy
and ceased operations.
43
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table presents information regarding the beneficial ownership
of our common stock as of March 1, 2000, and as adjusted to reflect our sale of
shares of our common stock and the selling shareholders sale of our common
stock offered by this prospectus, for:
. each person who is known to us to be the beneficial owner of more than
5% of our outstanding common stock;
. each of our directors; and
. the named executive officers as a group.
The address of each person listed is in care of us, at 25136 Anza Drive,
Valencia, California 91355, unless otherwise provided 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(2)............ 6,145,000 67.2%
Jason Barzilay............ 3,000,000 33.3%
David Moss(3)............. 439,100 4.7%
Louis Weiss(4)............ 42,500 * 42,500
Sanford R. Climan(4)(5)... 30,000 * 30,000
Mark Dyne(4)(6)........... 7,500 * 37,500(9)
Diana Maranon(4)(7)....... 7,500 * 7,500
All of the directors and
executive officers as a
group (six persons)(8)... 6,671,600 69.0%
</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. Shares of common stock under warrants or options
currently exercisable or exercisable within 60 days of the date of this
offering are deemed outstanding for purposes of computing the percentage
ownership of the person holding such warrants or options but are not
deemed outstanding for computing the percentage ownership of any other
person. 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) Includes 145,000 shares of common stock, which may be purchased upon
exercise of options that are currently exercisable.
(3) Includes 366,600 shares of common stock, which may be purchased upon
exercise of warrants that are currently exercisable and 72,500 shares of
common stock, which may be purchased upon exercise of options that are
currently exercisable.
(4) Represents shares of common stock, which may be purchased upon exercise of
options that are currently exercisable.
(5) Mr. Climan's address is c/o Entertainment Media Ventures, LLC, 828 Moraga
Drive Second Floor, Los Angeles, California 90049.
(6) Mr. Dyne's address is c/o Brilliant Digital Entertainment, Inc., 6355
Topanga Canyon Boulevard, Suite 513, Woodland Hills, California 91367.
(7) Ms. Maranon's address is c/o Averil Capital Markets Group, Inc., 2029
Century Park East, Suite 1900, Century City, California 90067.
(8) Includes 671,600 shares of common stock, which may be purchased upon
exercise of warrants and options that are currently exercisable.
(9) Includes 30,000 shares to be given by the existing shareholders to Mr.
Dyne.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 45,000,000 shares of our common stock, no par
value and 5,000,000 shares of preferred stock, no par value. As of March 1,
2000, there were 9,000,000 shares of our common stock outstanding and there
were two holders of record of the common stock. Currently, there are no shares
of preferred stock outstanding. The following statements are brief summaries of
our 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 our annual meeting of shareholders where we have at least 800 holders
of our equity securities. The holders of our common stock are entitled to
receive dividends in proportion to their ownership when, as and if declared by
our board of directors out of legally available funds. In the event of our
liquidation, dissolution or winding up, the holders of common stock are
entitled subject to the rights of holders of preferred stock issued by us, if
any, to share proportionally 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 us. Our common stock does
not have any redemption or sinking fund provisions. The outstanding shares of
our common stock are, and the common stock issuable pursuant to this offering
will be, when issued, fully paid and nonassessable.
Preferred Stock
Our board of directors has the authority to issue the authorized and unissued
preferred stock in one or more series and our board of directors may determine
the designations, rights and preferences of the preferred stock. Accordingly,
and without the need for shareholder approval, our board of directors has the
power 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 our common stock. In the event of issuance, and under certain
circumstances, we could use our preferred stock as a way of discouraging,
delaying or preventing an acquisition or a change in our control. We do not
currently intend to issue any shares of our preferred stock.
Warrants
We have granted to David Moss warrants to purchase 366,600 shares of our
common stock. The warrants granted to David Moss expire on December 31, 2007
and are exercisable for $0.0017 per share. None of the warrants granted to
David Moss will have any voting rights, dividend rights or preferences until
such time as they are exercised for shares of our common stock.
Effective upon the closing of this offering, we will grant to Averil Capital
Markets Group, Inc. warrants to purchase shares of our common stock equivalent
to 0.25% of the gross proceeds raised in this offering with an exercise price
equal to 110% of the initial public offering price. The warrants granted to
Averil Capital Markets Group, Inc. expire five years after they are granted.
See "Certain Relationships and Related Transactions."
Transfer Agent
Our transfer agent and registrar for our common stock is U.S. Stock Transfer
Corporation.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock.
We cannot predict the effect, if any, that future sale of shares, or the
availability of shares for future sale, will have on the prevailing market
price for our common stock. Sales of substantial amounts of our common stock in
the public market following this offering, or the perception that these sales
may occur, could adversely affect the prevailing market prices for our common
stock. See "Risk Factors--Sales of additional shares of our common stock into
the public market may cause our stock price to fall."
Upon completion of this offering, we will have shares of our common
stock outstanding, if the underwriters' over-allotment options are exercised in
full. Of those shares, a total of shares, shares 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 our "affiliates" as that term is defined in Rule
144.
All of our executive officers, directors and shareholders, including the
selling shareholders have signed lock-up agreements under which they agreed not
to sell or otherwise transfer, directly or indirectly, any shares of common
stock or any securities convertible into, or exercisable or exchangeable for,
any shares of common stock for a period of 180 days from the date of this
prospectus without the prior written consent of Prudential Securities
Incorporated. These lock-up agreements do not prevent us from granting
additional options under our stock incentive plan. After the expiration of the
180-day period, shares that can 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 these lock-up agreements.
<TABLE>
<CAPTION>
Number of shares Date of availability for resale into public market
---------------- --------------------------------------------------
<C> <S>
9,000,000 180 days after the date of this prospectus due to a lock-up
agreement our two existing shareholders have with
Prudential Securities. However, Prudential Securities can
waive this restriction at any time and without notice.
Since these shares are held by our affiliates, sales of
these shares will also be subject to the volume limitations
of Rule 144.
</TABLE>
In general, under Rule 144 as currently in effect, any person who has
beneficially owned restricted securities for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
.1% of the then outstanding shares of common stock; or
. the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which the notice of the
sale on Form 144 is filed with the Securities and Exchange Commission.
Within 90 days after the date of this prospectus, we intend 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 warrants granted to David Moss. Additionally, we have
agreed to file a Registration Statement on Form S-3 covering the shares of
common stock underlying the warrants to be granted to Averil Capital Markets
Group, Inc., after these warrants become exercisable. After the effective date
of the Form S-8, shares of common stock issued upon exercise of options granted
pursuant to our stock incentive plan and upon exercise of the warrants granted
to David Moss will be available for sale in the public market. However, these
shares will remain subject to Rule 144 volume limitations applicable to our
affiliates and to the lock-up agreements. Shares of common stock issuable upon
exercise of the warrants to be granted to Averil Capital Markets Group, Inc.
will become exercisable subject to Rule 144 volume limitations, one year after
the date these warrants were granted or the filing of the related Form S-3,
whichever occurs first.
46
<PAGE>
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below, for whom Prudential Securities Incorporated and CIBC World Markets Corp.
are acting as representatives. We and the selling shareholders are obligated to
sell, and the underwriters are obligated to purchase, all of the shares offered
on the cover page of this prospectus, if any are purchased. Subject to
conditions of the underwriting agreement, each underwriter has severally agreed
to purchase the shares indicated opposite its name:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ ---------
<S> <C>
Prudential Securities Incorporated....................................
CIBC World Markets Corp. .............................................
----
Total...............................................................
====
</TABLE>
The underwriters may sell more shares than the total number of shares offered
on the cover page of this prospectus and they have, for a period of 30 days
from the date of this prospectus, over-allotment options to purchase up to
additional shares from us and up to additional shares from the selling
shareholders. If any additional shares are purchased, the underwriters will
severally purchase the shares in the same proportion as per the table above.
The representatives of the underwriters have advised us and the selling
shareholders that the shares will be offered to the public at the offering
price indicated on the cover page of this prospectus. The underwriters may
allow a concession not in excess of $ per share to selected dealers and such
dealers may reallow a concession not in excess of $ per share to certain
other dealers. After the shares are released for sale to the public, the
representatives may change the offering price and the concessions. The
representatives have informed us and the selling shareholders that the
underwriters do not intend to sell shares to any investor who has granted them
discretionary authority.
We and the selling shareholders have agreed to pay to the underwriters the
following fees, assuming both no exercise and full exercise of the
underwriters' over-allotment options to purchase additional shares:
<TABLE>
<CAPTION>
Total Fees
---------------------------------------------
Fee Without Exercise of Full Exercise of
Per Share Over-Allotment Options Over-Allotment Options
--------- ---------------------- ----------------------
<S> <C> <C> <C>
Fees paid by us......... $ $ $
Fees paid by the selling
shareholders........... $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $ in expenses
for this offering. We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments that the underwriters may be required to make in respect of these
liabilities.
We, our officers and directors, and all shareholders including our selling
shareholders have entered into lock-up agreements pursuant to which we and they
have agreed not to offer or sell any shares of common stock or securities
convertible into or exchangeable or exercisable for shares of common stock 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.
Prudential Securities Incorporated may, at any time and without notice, waive
the terms of the lock-up agreements specified in the underwriting agreement.
Prior to this offering, there has been no public market for our common stock.
The public offering price, negotiated among Future Media, the selling
shareholders, and the representatives is based upon various factors such as our
financial and operating history and condition, our prospects, the prospects for
the industry we are in and prevailing market conditions.
47
<PAGE>
Prudential Securities Incorporated, on behalf of the underwriters, may engage
in the following activities in accordance with applicable securities rules:
. Over-allotments involving sales in excess of the offering size, creating
a short position. Prudential Securities Incorporated may elect to reduce
this short position by exercising some or all of the over-allotment
options.
. Stabilizing and short covering; stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in
the open market may also reduce the short position. These activities may
cause the price of the shares to be higher than would otherwise exist in
the open market.
. Penalty bids permitting the representatives to reclaim concessions from a
syndicate member for the shares purchased in the stabilizing or short
covering transactions.
Such activities, which may be commenced and discontinued at any time, may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
. the Public Offers of Securities Regulations 1995;
. the Financial Services Act 1986; and
. the Financial Services Act 1986, (Investment Advertisements) (Exemptions)
Order 1996 (as amended).
We have asked the underwriters to reserve shares for sale at the same
offering price directly to our officers, directors, employees and other
business affiliates or related third parties. The number of shares available
for sale to the general public in the offering will be reduced to the extent
such persons purchase the reserved shares.
Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
AdvisorSM, a full service brokerage firm program, may view offering terms and a
prospectus online and place orders through their financial advisors.
48
<PAGE>
LEGAL MATTERS
Our counsel, Troop Steuber Pasich Reddick & Tobey, LLP, Los Angeles,
California, has rendered an opinion that the common stock offered by us, upon
its sale will be duly and validly issued, fully paid and non-assessable.
Gibson, Dunn & Crutcher LLP, Los Angeles, California, has acted as counsel to
the underwriters in connection with certain legal matters relating to this
offering.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1999, and for each of the three years in
the period ended December 31, 1999, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission in Washington,
D.C., a registration statement under the Securities Act with respect to this
offering. 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 about us and the shares offered, please review the registration
statement and the exhibits. A copy of the registration statement, including the
exhibits, 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.
When this offering is consummated, we will become subject to the
informational requirements of the Securities Exchange Act and will file reports
and other information with the Securities and Exchange Commission in accordance
with its rules. These reports and other information concerning us may be
inspected and copied at the public reference facilities referred to above as
well as some of the 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 at
http://www.sec.gov.
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Balance Sheets at December 31, 1998 and December 31, 1999................ F-3
Statements of Income for years ended December 31, 1997, 1998 and 1999.... F-4
Statements of Shareholders' Equity for years ended December 31, 1997,
1998 and 1999........................................................... F-5
Statements of Cash Flows for years ended December 31, 1997, 1998 and
1999.................................................................... F-6
Notes to Financial Statements for December 31, 1997, 1998 and 1999....... F-7
</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, 1998 and 1999 and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1998 and 1999 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Los Angeles, California
February 25, 2000
F-2
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 Pro Forma
----------------------- December 31,
1998 1999 1999
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Accounts receivable (net of allowance
for doubtful accounts of $163,000 in
1998 and $265,778 in 1999)............ $ 8,035,270 $ 7,202,126
Inventories............................ 726,774 766,868
Prepaid expenses....................... 433,497 284,101
Deferred income taxes.................. 8,000 -- 300,000
----------- ----------- ----------
Total current assets..................... 9,203,541 8,253,095
Property and equipment, net.............. 21,898,093 29,837,448
Investments.............................. -- 2,852,400
Other assets............................. 336,268 145,845
----------- -----------
Total assets............................. $31,437,902 $41,088,788
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Bank overdraft......................... $ 517,258 $ 370,489
Line of credit......................... 1,616,537 1,852,303
Accounts payable--trade................ 2,648,974 2,762,457
Accounts payable--capital equipment.... 4,449,059 1,530,356
Accrued expenses--royalties............ 2,213,294 4,101,760
Accrued expenses....................... 1,032,631 1,043,268
Deferred revenue....................... -- 700,000
Deferred income taxes.................. -- 40,500 --
Current portion of long-term debt...... 3,756,987 3,757,698 --
Current portion of capital lease
obligations........................... 11,666 5,938
Distributions payable.................. -- -- 14,407,386
----------- ----------- ----------
Total current liabilities................ 16,246,406 16,164,769
Long-term debt, less current portion..... 9,084,805 5,327,108
Capital lease obligations, less current
portion................................. 17,479 11,525
Deferred income taxes.................... 90,000 116,000 3,200,000
Commitments
Shareholders' equity:
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........................... 3,070,000 3,790,000 3,790,000
Retained earnings...................... 2,929,212 17,107,386 --
Note receivable from officer........... -- (1,428,000) (1,428,000)
----------- ----------- ----------
Total shareholders' equity............... 5,999,212 19,469,386 2,362,000
----------- -----------
Total liabilities and shareholders'
equity.................................. $31,437,902 $41,088,788
=========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-3
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net sales to unaffiliated companies.... $23,974,131 $37,962,123 $52,448,072
Net sales to related parties........... 12,068,296 5,349,057 553,799
----------- ----------- -----------
Total net sales........................ 36,042,427 43,311,180 53,001,871
Cost of goods sold..................... 23,132,442 27,304,178 31,937,704
----------- ----------- -----------
Gross profit........................... 12,909,985 16,007,002 21,064,167
Selling, general and administrative
expenses.............................. 4,214,033 4,232,741 4,200,969
Stock related compensation expense..... -- 3,055,000 720,000
Abandoned offering costs............... -- 675,733 --
----------- ----------- -----------
Income from operations................. 8,695,952 8,043,528 16,143,198
Other income (expense):
Interest income...................... 42,105 35,189 670
Interest expense..................... (817,998) (1,263,861) (1,403,694)
----------- ----------- -----------
Other income (expense), net.......... (775,893) (1,228,672) (1,403,024)
----------- ----------- -----------
Income before provision for state
income taxes.......................... 7,920,059 6,814,856 14,740,174
Provision for state income taxes....... 119,900 102,223 2,000
----------- ----------- -----------
Net income............................. $ 7,800,159 $ 6,712,633 $14,738,174
Earnings per share:
Basic................................ $ 0.87 $ 0.75 $ 1.64
=========== =========== ===========
Diluted.............................. $ 0.87 $ 0.71 $ 1.43
=========== =========== ===========
Shares used in computing earnings per
share:
Basic................................ 9,000,000 9,000,000 9,000,000
=========== =========== ===========
Diluted.............................. 9,000,000 9,498,287 10,336,178
=========== =========== ===========
Pro forma net income data (Notes 1 and
7, unaudited):
Income before provision for income
taxes............................... $ 7,920,059 $ 6,814,856 $14,740,174
Pro forma income tax provision....... 3,161,100 2,725,942 5,896,070
----------- ----------- -----------
Pro forma net income................. $ 4,758,959 $ 4,088,914 $ 8,844,104
Pro forma basic earnings per share... $ 0.98
===========
Pro forma diluted earnings per
share............................... $ 0.86
===========
Weighted average shares outstanding--
basic............................... 9,000,000
===========
Weighted average shares outstanding--
diluted............................. 10,336,178
===========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-4
<PAGE>
FUTURE MEDIA PRODUCTIONS
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Note
Common Stock Receivable
-------------------- from Retained
Shares Amount Officer Earnings Total
--------- ---------- ----------- ------------ ------------
<S> <C> <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.............. -- -- -- 6,712,633 6,712,633
--------- ---------- ----------- ------------ ------------
Balance at December 31,
1998................... 9,000,000 3,070,000 -- 2,929,212 5,999,212
Dividends, $.06 per
share.................. -- -- -- (560,000) (560,000)
Loan to officer......... -- -- (1,428,000) -- (1,428,000)
Contribution of
capital................ -- 720,000 -- -- 720,000
Net income.............. -- -- -- 14,738,174 14,738,174
--------- ---------- ----------- ------------ ------------
Balance at December 31,
1999................... 9,000,000 $3,790,000 $(1,428,000) $ 17,107,386 $ 19,469,386
========= ========== =========== ============ ============
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-5
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Operating activities
Net income............................ $ 7,800,159 $ 6,712,633 $ 14,738,174
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 1,949,838 2,860,789 4,368,177
Stock related compensation expense.. -- 3,055,000 720,000
Provision for bad debts............. 955,243 120,000 120,000
Loss on disposals of property and
equipment.......................... 20,959 57,058 --
Deferred income taxes............... 17,000 22,000 74,500
Changes in operating assets and
liabilities:
Accounts receivable................ (3,195,350) (1,347,486) 713,144
Inventories........................ 1,523,072 (92,276) (40,094)
Prepaid expenses................... (121,019) (123,088) 149,396
Other assets....................... 279,437 (92,411) 190,423
Other receivables.................. -- 275,000 --
Accounts payable................... (850,930) 941,330 113,483
Accrued expenses................... 39,622 408,583 10,637
Accrued expenses--royalties........ 3,090,416 (1,953,206) 1,888,466
----------- ------------ ------------
Net cash provided by operating
activities........................... 11,508,447 10,843,926 23,046,306
Investing activities
Capital expenditures.................. (3,641,686) (6,751,862) (15,226,235)
Purchases of investments.............. -- -- (2,152,400)
Proceeds from disposals of property
and equipment........................ -- 20,000 --
----------- ------------ ------------
Net cash used in investing
activities........................... (3,641,686) (6,731,862) (17,378,635)
Financing activities
Net borrowings (repayments) on line of
credit............................... (103,316) 1,352,893 235,766
Net payments on bank overdraft........ (914,366) (226,150) (146,769)
Proceeds from long-term debt.......... 6,537,612 11,321,000 --
Repayments on long-term debt.......... (6,700,928) (2,844,843) (3,756,986)
Note receivable from officer.......... -- -- (1,428,000)
Payments on capital lease
obligations.......................... (14,221) (10,964) (11,682)
Dividends paid to shareholders........ (6,671,542) (13,704,000) (560,000)
----------- ------------ ------------
Net cash used in financing
activities........................... (7,866,761) (4,112,064) (5,667,671)
Net change in cash and cash
equivalents.......................... -- -- --
Cash and cash equivalents at beginning
of period............................ -- -- --
----------- ------------ ------------
Cash and cash equivalents at end of
period............................... $ -- $ -- $ --
=========== ============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest........................... $ 817,998 $ 1,121,507 $ 1,403,749
State income taxes................. $ 107,000 $ 61,500 $ 1,800
Supplemental disclosure of non-cash
transactions
</TABLE>
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.
In 1999, the Company agreed to provide replications of two million CD's to
Synthonics partially as part of the Company's investment in Synthonics (valued
at $700,000).
The accompanying notes to the financial statements are an integral part of
these statements.
F-6
<PAGE>
FUTURE MEDIA PRODUCTION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. Business and Summary of Significant Accounting Policies
Description of Business
Future Media Productions, Inc. (the Company) is an independent
manufacturer/replicator of digital versatile discs (DVDs) and compact disks
(CDs) to companies in industries including Internet/online, film and
entertainment, edutainment software, publishing and computer hardware. The
majority of the Company's business is targeted at high volume customers in
these markets.
Pro Forma Balance Sheet Information
The Company is an S Corporation for income tax purposes. The pro forma
unaudited December 31, 1999 information in the accompanying balance sheet
reflects the distribution, in the amount of approximately $14,407,386
(unaudited), to shareholders upon conversion from an S Corporation to a C
Corporation and the establishment of a net deferred tax liability of
approximately $2,900,000 (unaudited), resulting in an approximately $2,700,000
(unaudited) reduction of retained earnings, upon conversion 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
affecting the reported amounts in the financial statements and accompanying
notes. Actual results could differ from those estimates, although management
does not believe differences would materially affect the Company's financial
position or results of operations.
Concentration of Credit Risk
The Company manufactures and distributes DVDs and CDs principally to
companies in the Internet/online, film and entertainment, edutainment software,
publishing and computer hardware industries 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 sales and
credit exist and are described in Note 5.
Cash Equivalents
The Company considers all highly liquid investments with maturities 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 increasing useful lives 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.
Income Taxes
The Company has elected to be taxed under the S Corporation provisions of the
Internal Revenue Code which provides, in lieu of corporate income taxes, the
shareholders separately account for their pro rata share of
F-7
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
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 offset by certain manufacturing
credits.
In connection with the closing of the proposed public offering, 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 December 31, 1999, the amount
would have been approximately $2,700,000 (unaudited), consisting primarily of
timing differences related to depreciation.
Immediately prior to the closing of the proposed public offering, the Company
will enter into a tax indemnification agreement with the existing shareholders
relating to respective income tax liabilities. The tax indemnification
agreement is intended to assure the Company assumes taxes for the related
income giving rise to such taxes and the existing shareholders assume taxes for
which they have received the related income giving rise to such taxes.
Revenue Recognition
Revenues are recorded when products are shipped or orders are completed under
purchase orders or contracts and are due to be shipped but awaiting
instructions from the customer of the shipping destination. Revenues related to
the latter have been insignificant at the end of reporting periods.
Stock-Based Compensation
The Company accounts for employee and director stock options using the
intrinsic value method. Generally, the exercise price of the Company's employee
stock options equals or exceeds the market price of the underlying stock on the
date of grant and no compensation expense is recognized. If the option price is
less than fair value, the Company records compensation expense over the vesting
period of the stock option. Options granted to non-employees are accounted for
using a fair value method. The Company has disclosed the pro forma material
effects of using the fair value method of all options in its financial
statements.
Earnings Per Share
Basic earnings per share has been computed by dividing net income by the
weighted average number of common shares outstanding for the periods presented.
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)
December 31, 1999
The following table sets forth the calculation for basic and diluted earnings
per share for the periods presented:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Earnings:
Net income............................. $7,800,159 $6,712,633 $14,738,174
========== ========== ===========
Shares:
Weighted average shares for basic
earnings per share.................... 9,000,000 9,000,000 9,000,000
Share equivalents for dividends to
stockholders.......................... -- -- 623,641
Stock options and warrants............. -- 498,287 712,537
---------- ---------- -----------
Weighted average shares for diluted
earnings per share.................... 9,000,000 9,498,287 10,336,178
========== ========== ===========
</TABLE>
Pro Forma Earnings Per Share (unaudited)
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 most recent period presented.
Long-Lived Assets
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
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 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. The Company has identified no
such impairment losses.
Comprehensive Income
There were no significant items of comprehensive income and no impact of
these items on the Company's results of operations for the years ended December
31, 1997, 1998 and 1999, and therefore no further disclosures related to this
matter have been made.
Reclassifications
Certain reclassifications have been made to the December 31, 1997 and 1998
financial statements to conform to the presentation in 1999.
2. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------
1998 1999
--------- ---------
<S> <C> <C>
Raw materials........................................... $ 604,972 $ 668,515
Work-in process and finished goods...................... 121,802 98,353
--------- ---------
$ 726,774 $ 766,868
========= =========
</TABLE>
F-9
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
3. Property and Equipment
Property and equipment, net, consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Plant equipment......... $ 27,799,629 $ 39,057,036
Computer equipment and
software............... 95,736 237,871
Office furniture and
equipment.............. 83,564 83,558
Automotive equipment.... 71,080 96,865
Leasehold improvements.. 815,912 1,698,122
Leased property under
capital leases......... 57,540 57,540
------------ ------------
28,923,461 41,230,992
Less accumulated
depreciation and
amortization........... (7,025,368) (11,393,544)
------------ ------------
$ 21,898,093 $ 29,837,448
============ ============
</TABLE>
4. Investments
On December 21, 1999, the Company purchased, through an underwriting, 648
units of Lions Gate Entertainment, a Canadian motion picture production and
distribution company. Each unit was purchased for $2,550 or a total of
$1,652,400. Each unit consists of one 5.25% Convertible Redeemable Preferred
Stock and 425 warrants. Each share of preferred stock is convertible into 1,000
shares of common stock and each warrant entitles the holder to purchase one
share of Lions Gate common stock at $5.00 per share. The closing quoted market
value per share of Lions Gate on February 28, 2000 was $2.625. The warrants
expire January 2004.
On December 23, 1999, the Company paid in cash $500,000 to Synthonics
Technologies, Inc. (Synthonics) in return for a note receivable convertible
into 11,518,096 shares of Synthonics common stock, which at the time
represented 38% of Synthonics outstanding shares. The Company agreed to
replicate and package up to two million CDs without charge to Synthonics and
establish a catalog company to develop and produce 3D interactive digital
catalogs on behalf of Synthonics for its customers. A member of Synthonics
Board of Directors is also a member of the Company's Board of Directors. The
investment in Synthonics totaling $1,200,000 (including an amount of $700,000
as the fair market value of the replication services to be performed), will be
accounted for under the equity method.
5. Related Party Transactions and Major Customers
During the years ended December 31, 1997 and 1998, a significant portion of
the Company's revenue activity consisted of sales to one affiliated company,
which at the time was partially owned by the shareholders of the Company. Net
sales to this affiliate, an original manufacturer of personal computers, were
$12,068,296, $5,349,057 and $553,799 for the years ended December 31, 1997,
1998 and 1999, respectively, and represented 33.5%, 12.4% and 1.0% of the
Company's net sales, respectively. At December 31, 1998 and 1999, accounts
receivable from this affiliate were $614,538 and $23,103, or 7.5% and 0.3% of
total trade receivables, respectively.
Net sales to the Company's top two unaffiliated customers in 1997 and 1998
and top three unaffiliated customers in 1999 were 35.4%, 47.6% and 55.6% of
total net sales, respectively, including one customer in 1999 which represented
32.1% of total net sales. Accounts receivable in the aggregate from these
significant customers at December 31, 1998 and 1999 were $1,457,142, or 17.9%
and $2,434,045, or 32.5% of total trade receivables, respectively.
F-10
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
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. As consideration for
such services, the Company paid to the director $25,000, $101,184 and $0,
including out of pocket expenses during the years ended December 31, 1997, 1998
and 1999. The Company has committed, upon consummation of an offering, to a
cash payment to the director of 0.75% of the gross proceeds of an offering and
additional equity securities, warrants, or other participating interests in the
Company representing 0.25% of the consideration raised in value, priced in
accordance with a Black-Scholes option model, with a minimum amount of warrants
issuable pursuant to this transaction not to be less than $50,000 in value.
After the end of the year, the Company paid a non-refundable retainer of
$60,000 to this director, which will be credited against any transaction fees
payable pursuant to the offering.
During the year ended December 31, 1999, the Company made non-interest
bearing loans totaling $1,427,000 and interest bearing loans totaling
$1,075,000 (interest accrued at the Company's borrowing rate with its major
lender) to its president. These loans were repaid in their entirety during 1999
except for interest accrued, totaling approximately $72,000, which was
subsequently forgiven by the Company's Board of Directors. After the end of
1999, the Company loaned $2,630,000 to this officer with interest at the
Company's borrowing rate with its major lender.
During 1999, advances totaling $2,500,000 were made to one of the Company's
shareholders. This amount was repaid before the end of 1999. In addition, a
loan totaling $1,000,000 was made during 1999 to a company partially owned by
the Company's president and this shareholder. This amount was repaid prior to
the end of 1999.
In connection with stock warrants issued to an officer of the Company (see
Note 9), the Company loaned an officer a total of $1,428,000 under promissory
notes bearing compound interest at the rate of 4.6% per annum. The unpaid
principal balance and any accrued but unpaid interest shall be due and payable
on the earlier of: (1) January 1, 2006; or (2) the fifteenth day following the
date of delivery by the Company to Maker of written demand therefore made at
any time after the later of (a) the closing of a Liquidity Event (as defined),
or (b) if applicable, the expiration of any lock-up period imposed in
connection with such Liquidity Event on the common stock of the Company, or any
successor to the Company, held by Maker.
In 1999, the Company made payments in lieu of lease payments on a new
production facility to a company owned by the Company's president. Such
payments during the year totaled $86,000. Subsequent to December 31, 1999, the
Company expects to enter into a multi-year lease agreement with this company.
Lease payments are expected to be negotiated at rates commensurate with
commercial terms charged for similar properties in the area with increases
based on the Consumer Price Index.
6. 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, July 1998, June 1999 and January 2000. The Credit Agreement
currently provides loans based on 80% of the Company's eligible receivables (as
defined) (Receivable Loans), loans based on 90% of the net purchase price of
new equipment purchased and delivered subsequent to June 1999 (Equipment Loans)
and additional revolving loans (Revolving Loans). Under the Credit Agreement
the Company is allowed to borrow the lesser of $30,000,000 or an amount equal
to 80% of the Company's eligible receivables (as defined), $15,000,000 of
Equipment Loans plus the unpaid balance of
F-11
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
the Revolving Loans. 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
January 2000 the maturity date was extended to June 30, 2001, and continues to
provide for automatic renewals. Borrowings under Receivable Loans bear interest
at the prime rate (8.5% at December 31, 1999) plus 2.0% per annum; however, the
interest rate will not be less than 7.0% per annum. Outstanding borrowings
under the Receivable Loans amounted to $1,616,537 at December 31, 1998 and
$1,852,303 at December 31, 1999. 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 years ended December 31, 1997, 1998 and 1999 was $234,778,
$116,959 and $274,833, respectively.
Under the amendment of April 1998, the Revolving Loans were 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 Loans bear interest at the prime
rate (8.5% at December 31, 1999) plus 2.0% per annum; however, the interest
rate will not be less than 7.0% per annum. The outstanding balance of the
Revolving Loans was $12,812,500 and $9,062,500 at December 31, 1998 and 1999,
respectively. As part of the Credit Agreement, the Revolving Loans are
collateralized by accounts receivable, equipment, inventory and other assets
and is personally guaranteed by the shareholders of the Company.
Under the amendment of June 1999, amounts borrowed under the Equipment Loans
are to be repaid in 48 equal monthly payments of principal through the earlier
of (i) the earlier of the date the Credit Agreement terminates, or is
terminated or (ii) the date such Equipment Loans have been repaid in full. The
Equipment Loans bear interest at the prime rate (8.5% at December 31, 1999)
plus 2.0% per annum; however, the interest rate will not be less than 7.0% per
annum. At December 31, 1999 no amounts had been borrowed under the Equipment
Loans.
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.
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year ended December 31:
2000........................................................... $ 3,757,697
2001........................................................... 3,758,480
2002........................................................... 1,568,627
-----------
$ 9,084,804
===========
</TABLE>
Interest expense incurred for long-term debt was $579,123, $1,142,893 and
$1,125,167 for the years ended December 31, 1997, 1998 and 1999, respectively.
The Company's weighted average interest rate on its debt was 10.5%, 10.4% and
10.1% for the years ended December 31, 1997, 1998 and 1999, respectively.
F-12
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
7. Income Taxes
The provision (benefit) for state income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1997 1998 1999
--------- -------- ---------
<S> <C> <C> <C>
Current........................................ $ 102,900 $ 80,223 $ (72,500)
Deferred....................................... 17,000 22,000 74,500
--------- -------- ---------
$ 119,900 $102,223 $ 2,000
========= ======== =========
</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. This will result in
the establishment of a provision for income taxes and deferred tax liability of
approximately $2,700,000 (unaudited) upon the closing date. The following
unaudited pro forma income tax information has been determined as if the
Company operated as a C Corporation for the periods presented:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Federal tax provision..................... $2,460,000 $2,115,600 $4,598,935
State income taxes net of federal
benefit.................................. 701,100 602,800 1,297,135
---------- ---------- ----------
Total pro forma income tax provision...... $3,161,100 $2,718,400 $5,896,070
========== ========== ==========
</TABLE>
The difference between actual income tax expense and the U. S. Federal
statutory income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Statutory rate................................. 34.0 % 34.0 % 34.0 %
State tax provision............................ 1.5 1.5 1.5
Manufacturers credit........................... -- -- (1.5)
S Corporation status........................... (34.0) (34.0) (34.0)
------- ------- -------
Effective tax rate............................. 1.5 % 1.5 % 0.0 %
======= ======= =======
</TABLE>
The difference between the unaudited pro forma income tax expense and the
U.S. Federal statutory income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Statutory rate................................. 34.0 % 34.0 % 34.0 %
State tax provision............................ 6.0 6.0 6.0
Manufacturers credit........................... -- -- (1.3)
Other.......................................... (0.1) -- 1.3
------- ------- -------
Effective tax rate............................. 39.9 % 40.0 % 40.0 %
======= ======= =======
</TABLE>
F-13
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Deferred income tax assets and liabilities are computed for those differences
having future tax consequences using the currently enacted tax laws and rates.
Income tax expenses equal 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 our deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Bad debt allowance..................................... $ 2,400 $ 4,000
Other.................................................. 5,600 9,000
Credit carryovers...................................... -- 43,000
--------- ---------
Total deferred assets.................................. 8,000 56,000
Depreciation........................................... (90,000) (116,000)
Other.................................................. -- (96,500)
--------- ---------
Total deferred liabilities............................. (90,000) (212,500)
--------- ---------
Net deferred tax liabilities........................... $ (82,000) (156,500)
========= =========
Balance sheet classification:
Current deferred tax assets.......................... $ 8,000 $ --
Current deferred tax liabilities..................... -- 40,500
Long-term deferred tax liabilities................... 90,000 116,000
</TABLE>
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 December 31 1999, future minimum lease payments required under the lease
arrangement are as follows:
<TABLE>
<CAPTION>
Related Party Other Total
------------- -------- ----------
<S> <C> <C> <C>
Year ended December 31:
2000..................................... $ 240,000 $276,638 $ 516,638
2001..................................... 240,000 273,358 513,358
2002..................................... 240,000 49,345 289,345
2003..................................... 240,000 570 240,570
2004..................................... 240,000 -- 240,000
Thereafter............................... 580,000 -- 580,000
---------- -------- ----------
$1,780,000 $599,911 $2,379,911
========== ======== ==========
</TABLE>
F-14
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Total rent expense pursuant to these leases was $395,672, $507,886 and
$504,312 for the years ended December 31, 1997, 1998 and 1999, respectively.
Rental payments to related parties were $140,000 for the year ended December
31, 1997 and $240,000 for both the years ended December 31, 1998 and 1999.
Subsequent to December 31, 1999, the Company expects to enter into a multi-
year lease agreement for a new production facility and negotiated a termination
of its lease agreement for one of its existing facilities. The new lease is
expected to be a multi-year operating lease with a company owned by the
shareholders of the Company to be negotiated at rates commensurate with
commercial terms charged for similar properties with periodic adjustments to
the monthly base rent based on the Consumer Price Index. The Company does not
expect to incur significant expenses in terminating its existing lease under
the terms of the agreement with the current landlord.
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 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 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 December 31, 1999.
A summary of the Company's stock option activity, and related information is
as follows:
<TABLE>
<CAPTION>
Outstanding Stock Options
-----------------------------
Weighted
Average
Exercise Range of
Number Price Exercise
of Per Prices Per
Options Share Share
------- -------- ------------
<S> <C> <C> <C>
Outstanding at January 1, 1998................... -- $ -- $ --
Granted........................................ 828,000 11.35 11.20-11.90
------- ------ ------------
Outstanding at December 31, 1998................. 828,000 11.35 11.20-11.90
------- ------ ------------
Outstanding at December 31, 1999................. 828,000 $11.35 $11.20-11.90
======= ====== ============
Exercisable at:
December 31, 1998.............................. -- $ -- $ --
======= ====== ============
December 31, 1999.............................. 214,500 $11.37 $11.20-11.90
======= ====== ============
</TABLE>
At December 31, 1999, 372,000 shares were available for future grant. The
weighted average remaining contractual life for the outstanding options is 8.46
years at December 31, 1999.
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, the Company's net income would have been
F-15
<PAGE>
FUTURE MEDIA PRODUCTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
reduced by approximately $350,000 and $600,000 for the years ended December 31,
1998 and 1999, respectively, and basic and diluted earnings per share would
have been $0.71 and $0.67, respectively, for the year ended December 31, 1998,
and $1.57 and $1.37, respectively, for the year ended December 31, 1999. The
fair value of the options is estimated using a minimum value option pricing
model with the following weighted average assumptions for grants in 1998:
dividend yield of 0.0%; risk free interest rate of 6.0%; and expected life of
5.0 years.
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 year ended December 31, 1998, with
the warrants expiring on December 31, 2007. These warrants have no voting
rights, dividend rights or preferences until such time as they are exercised
for shares of common stock. As of December 31, 1999 no warrants have been
exercised.
Stock Related Compensation Expense
In 1999, the shareholders of the Company committed to give 30,000 shares of
their stock to a director for services to the Company. For the year ended
December 31, 1999, the Company has recorded stock related compensation expense
of $720,000 for this commitment based on the estimated fair value of the shares
given, and a contribution to capital for the same amount from the shareholders.
10. Fair Value of Financial Instruments
In estimating its fair value disclosures for financial statements, the
Company used the following methods and assumptions:
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. The fair
value of the note receivable from officer discounted at the Company's
borrowing rate is approximately $1,096,000.
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 amounts of long-term debts approximate their
fair values.
11. Proposed Initial Public Offering
On January 27, 2000, 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.
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 of the retained earnings balance prior to closing to
its shareholders.
F-16
<PAGE>
- -------------------------------------------------------------------------------
Until , all dealers effecting transactions in these securities, whether
or not participating in this offering, 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.
- -------------------------------------------------------------------------------
[LOGO OF FUTURE MEDIA APPEARS HERE]
Prudential Volpe Securities
a unit of Prudential Securities
CIBC World Markets
- -------------------------------------------------------------------------------
<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................ $18,480
NASD filing fee.....................................................
Nasdaq National Market fee..........................................
Accounting fees and expenses........................................
Legal fees and expenses (other than blue sky).......................
Blue sky fees and expenses, including legal fees....................
Printing; stock certificates........................................
Transfer agent and registrar fees...................................
Consulting fees.....................................................
Miscellaneous.......................................................
-------
Total............................................................. $
=======
</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
II-1
<PAGE>
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
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>
Exhibit
Document 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....................... 10.4
Tax Agreement........................................................ 10.5
</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
II-2
<PAGE>
Securities Act pursuant to Section 4(2) of the Securities Act as a transaction
not involving any public offering, and also pursuant to Rule 701 because the
offer and sale of the securities was pursuant to a compensatory benefit plan
relating to compensation.
In May 1998, pursuant to its 1998 Stock Plan the Company issued stock options
to purchase an aggregate of 648,000 shares of common stock at $11.20 per share
to 15 employees 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.
The Company has agreed to issue to Averil Capital Markets Group, Inc.
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 to 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 to 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
------- -------------------
<C> <S>
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 Certificate (Non-Statutory Stock
Option).
10.3 Form of Registrant's Stock Option Certificate (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 David Moss.
10.7 Warrant Agreement, dated January 1, 1998, between the Registrant and
David Moss.
10.8 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.
10.9 Lease Agreement, dated May 1, 1997, between the Registrant and
Bascal Properties.
10.10 Loan and Security Agreement dated February 26, 1997, between the
Registrant and Greyrock Business Credit.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
10.11 Extension Agreement, dated January 16, 1998, between the Registrant
and Greyrock Business Credit.
10.12 Amendment to Loan Agreement, dated April 29, 1998, between the
Registrant and Greyrock Business Credit.
10.13 Extension Agreement, dated September 4, 1998, between the Registrant
and Greyrock Business Credit.
10.14 Amendment to Loan Document, dated June 17, 1999 between the
Registrant and Greyrock Business Capital.
10.15 Amendment to Loan Document, dated January 25, 2000, between the
Registrant and Greyrock Business Capital.
10.16 Comprehensive CD Disc License Agreement, dated October 1, 1996,
between the Registrant and U.S. Phillips Corporation.
10.17 Non-Exclusive Patent License Agreement for Disc Product
Manufacturers, dated June 1, 1996, between the Registrant and
Discovision Associates.
10.18 Letter Agreement, dated June 15, 1998, between the Registrant and
Averil Capital Markets Group, Inc.
10.19 Engagement Agreement, dated June 15, 1998, between the Registrant
and Averil Capital Markets Group, Inc.
10.20 DVD Format and Logo License, dated January 11, 2000, between the
Registrant and Toshiba Corporation.
10.21 DVD Video Disc and DVD Rom Disc Patent License Agreement, dated
October 1, 1999, between the Registrant and U.S. Philips
Corporation.
10.22 Patent License Agreement for the Use of AC-3 Technology in the
Manufacture of DVD Discs, dated October 1, 1999, between Registrant
and U.S. Phillips Corporation.
10.23 Subscription Agreement, dated December 22, 1999, between the
Registrant and Synthonics Technologies, Inc.*
10.24 Letter Agreement, between the Registrant and Lions Gate
Entertainment Corp.*
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.
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
II-4
<PAGE>
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-5
<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 March 14, 2000.
Future Media Productions, Inc.
/s/ Alex Sandel
By: _________________________________
Alex Sandel
Chairman of the Board,
Chief Executive Officer and
President
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
--------- ----- ----
<S> <C> <C>
/s/ Alex Sandel Chairman of the Board, March 14, 2000
______________________________________ Chief Executive Officer
Alex Sandel and President
/s/ Louis Weiss Chief Financial Officer, March 14, 2000
______________________________________ Principal Accounting
Louis Weiss Officer and Secretary
/s/ Sanford R. Cilman Director March 14, 2000
______________________________________
Sanford R. Climan
/s/ Mark Dyne Director March 14, 2000
______________________________________
Mark Dyne
/s/ Diana Maranon Director March 14, 2000
______________________________________
Diana Maranon
</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 December 31, 1998 and 1999 and for each of the three years in the period
ended December 31, 1999 and have issued our report thereon dated February 25,
2000 (included elsewhere in this Registration Statement). 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
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999, 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
Los Angeles, California
February 25, 2000
II-7
<PAGE>
SCHEDULE II
FUTURE MEDIA PRODUCTIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
For the Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Charged Balance
Balance at to Costs Charged at End
Beginning and to Other of
Description of Period Expenses Accounts Deductions(1) Period
- ----------- ---------- -------- -------- ------------- --------
Column A Column B Column C Column D Column E
- -------- ---------- ----------------- ------------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1997..................... $298,439 $955,243 $ -- $1,003,682 $250,000
Year Ended December 31,
1998..................... 250,000 120,000 -- 207,000 163,000
Year Ended December 31,
1999..................... 163,000 120,000 -- 17,222 265,778
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
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 Certificate (Non-Statutory Stock
Option).
10.3 Form of Registrant's Stock Option Certificate (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 David Moss.
10.7 Warrant Agreement, dated January 1, 1998, between the Registrant and
David Moss.
10.8 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.
10.9 Lease Agreement, dated May 1, 1997, between the Registrant and
Bascal Properties.
10.10 Loan and Security Agreement dated February 26, 1997, between the
Registrant and Greyrock Business Credit.
10.11 Extension Agreement, dated January 16, 1998, between the Registrant
and Greyrock Business Credit.
10.12 Amendment to Loan Agreement, dated April 29, 1998, between the
Registrant and Greyrock Business Credit.
10.13 Extension Agreement, dated September 4, 1998, between the Registrant
and Greyrock Business Credit.
10.14 Amendment to Loan Document, dated June 17, 1999 between the
Registrant and Greyrock Business Capital.
10.15 Amendment to Loan Document, dated January 25, 2000, between the
Registrant and Greyrock Business Capital.
10.16 Comprehensive CD Disc License Agreement, dated October 1, 1996,
between the Registrant and U.S. Phillips Corporation.
10.17 Non-Exclusive Patent License Agreement for Disc Product
Manufacturers, dated June 1, 1996, between the Registrant and
Discovision Associates.
10.18 Letter Agreement, dated June 15, 1998, between the Registrant and
Averil Capital Markets Group, Inc.
10.19 Engagement Agreement, dated June 15, 1998, between the Registrant
and Averil Capital Markets Group, Inc.
10.20 DVD Format and Logo License, dated January 11, 2000, between the
Registrant and Toshiba Corporation.
10.21 DVD Video Disc and DVD Rom Disc Patent License Agreement, dated
October 1, 1999, between the Registrant and U.S. Philips
Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
10.22 Patent License Agreement for the Use of AC-3 Technology in the
Manufacture of DVD Discs, dated October 1, 1999, between Registrant
and U.S. Phillips Corporation.
10.23 Subscription Agreement, dated December 22, 1999, between the
Registrant and Synthonics Technologies, Inc.*
10.24 Letter Agreement, between the Registrant and Lions Gate
Entertainment Corp.*
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.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
*To be filed by Amendment.
<PAGE>
EXHIBIT 3.1
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>
EXHIBIT 3.2
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.
6
<PAGE>
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
7
<PAGE>
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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EXHIBIT 10.1
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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(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.
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<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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(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,
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<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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(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>
EXHIBIT 10.2
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]
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
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.
<PAGE>
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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<PAGE>
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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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.
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EXHIBIT 10.3
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.
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<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)
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<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.
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<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.
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<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
6
<PAGE>
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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<PAGE>
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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<PAGE>
(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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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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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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EXHIBIT 10.6
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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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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EXHIBIT 10.7
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
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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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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).
10
<PAGE>
(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.
12
<PAGE>
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
13
<PAGE>
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
-------------------------------
14
<PAGE>
EXHIBIT 10.8
[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.,
Initials [ILLEGIBLE]
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<PAGE>
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
------------------------------- ------------------------
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.
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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]
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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.
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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]
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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
-2-
<PAGE>
STATE OF CALIFORNIA )
) ss
COUNTY OF LOS ANGELES )
On this 11th Day of July, 1985, before the undersigned a notary 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
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NOTARY PUBLIC IN AND FOR SAID STATE
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ARTICLE I
DEFINITIONS
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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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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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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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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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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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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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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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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
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SECTION 3.1 APPROVAL OF PLANS
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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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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
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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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intent of this DECLARATION. 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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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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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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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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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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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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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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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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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 shall 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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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
------- -------
------- -------
<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>
EXHIBIT 10.9
[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:
PAGE 1
<PAGE>
(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
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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
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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
PAGE 6 Initials ________ _______
<PAGE>
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.
PAGE 9
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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
PAGE 10
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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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 PROPERTIES 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.
_______________________ _______________________
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>
EXHIBIT 10.10
[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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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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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.
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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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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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SCHEDULE TO LOAN AND SECURITY AGREEMENT -.S.
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[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.
-1-
<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.
-2-
<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
-3-
<PAGE>
EXHIBIT 10.11
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
-1-
<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
-2-
<PAGE>
EXHIBIT 10.12
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 10.13
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>
EXHIBIT 10.14
[LOGO]
Amendment to Loan Documents
Borrower: Future Media Productions, Inc.
Address: 25136 Anza Drive
Valencia, California 91355
Date: June 17, 1999
THIS AMENDMENT TO LOAN DOCUMENTS is entered into between Greyrock Capital,
a Division of NationsCredit Commercial Corporation (formerly Greyrock Business
Credit) ("Greyrock"), whose address is 10880 Wilshire Blvd., Suite 1850, 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 Greyrock and Borrower, and all
other written documents and agreements between Greyrock and 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) $20,000,000 at any one time outstanding; or"
is amended to read as follows:
"(1) $30,000,000 at any one time outstanding; or"
2. Equipment Loans. The following Section 1(2)(iii) is hereby added
---------------
to the Schedule, immediately following Section 1(2)(ii):
-1-
<PAGE>
Greyrock Capital Amendment To Loan Documents
---------------------------------------------------------------
"(iii) Equipment Loans.
---------------
(1) Greyrock will make Loans (the "Equipment Loans") to
Borrower in an amount equal to 90% of the net purchase price of
new equipment purchased and delivered to Borrower after the
date hereof and acceptable to Greyrock in its discretion
(provided that not more than $15,000,000 in Equipment Loans
shall be made hereunder).
(2) The "net purchase price" of Equipment means the purchase
price thereof, as shown on the applicable invoice, net of all
charges for taxes, freight, delivery, insurance, set-up,
training, manuals, fees, service charges and other similar
items.
(3) Equipment Loans shall be made in disbursements of not less
than $1,500,000 each.
(4) Each Equipment Loan shall be repaid by Borrower to Greyrock
in 48 equal monthly payments of principal, commencing on the
last day of the first month after such Equipment Loan was
disbursed and continuing until the earlier of the date such
Equipment Loan has been paid in full or the date this Agreement
terminates by its terms or is terminated, as provided in
Sections 6.1 - 6.2 above, at which date the entire unpaid
principal balance of the Equipment Loans, plus all accrued and
unpaid interest thereon, shall be due and payable.
(5) Accrued interest on the Equipment Loans shall be paid
monthly on the last day of each month as provided in Section
1.2 above.
(6) Equipment Loans may not be repaid and reborrowed."
3. Extension. The Maturity Date, "May 31, 2000", set forth in the
---------
Schedule to the Loan Agreement, is hereby amended by replacing said date with
the date "June 30, 2000".
4. Representations True. Borrower represents and warrants to Greyrock
--------------------
that all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
5. 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
-2-
<PAGE>
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: Greyrock:
FUTURE MEDIA PRODUCTIONS GREYROCK CAPITAL,
INC. a Division of NationsCredit
Commercial Corporation
By /s/ [ILLEGIBLE]^^
-----------------------------
President or Vice President By /s/ [ILLEGIBLE]^^
--------------------------
Title SVP
-----------------------
By /s/ [ILLEGIBLE]^^
-----------------------------
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. This Consent, and the foregoing Agreement, shall be
fully effective notwithstanding the fact that Beny Alagem, another guarantor, is
not signing this Consent, regardless of any effect his failure to sign may have
on his guaranty with respect to Borrower.
/s/ Alex Sandel /s/ Jason Brazilay
- ---------------------------- ---------------------------
Alex Sandel Jason Brazilay
-3-
<PAGE>
EXHIBIT 10.15
- --------------------------------------------------------------------------------
[LOGO]
Amendment to Loan Documents
Borrower: Future Media Productions, Inc.
Address: 25136 Anza Drive
Valencia, California 91355
Date: January 25, 2000
THIS AMENDMENT TO LOAN DOCUMENTS is entered into between Greyrock Capital,
a Division of Banc of America Commercial Finance Corporation (formerly Greyrock
Business Credit) ("Greyrock"), whose address is 10880 Wilshire Blvd., Suite
1850, 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 Greyrock and Borrower, and all
other written documents and agreements between Greyrock and 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, "June 30, 2000", set forth in the
---------
Schedule to the Loan Agreement, is hereby amended by replacing said date with
the date "June 30, 2001".
2. Representations True. Borrower represents and warrants to
--------------------
Greyrock 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,
-1-
<PAGE>
Greyrock Capital Amendment To Loan Documents
- --------------------------------------------------------------------------------
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: Greyrock:
FUTURE MEDIA PRODUCTIONS, GREYROCK CAPITAL,
INC. a Division of NationsCredit
Commercial Corporation
By /s/ Alex Sander
----------------------------- By /s/ Lisa Nagano
President or Vice President -----------------------------
Title LISA NAGANO
By /s/ [ILLEGIBLE] --------------------------
----------------------------- SR. VICE PRESIDENT
Secretary or Ass't Secretary
CONSENT
The undersigned, guarantors, acknowledge that their consent to the
foregoing Amendment is not required, but the undersigned nevertheless do hereby
consent to the foregoing Amendment 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. This Consent, and the foregoing Amendment, shall be
fully effective notwithstanding the fact that Beny Alagem, another guarantor, is
not signing this Consent, regardless of any effect his failure to sign may have
on his guaranty with respect to Borrower.
/s/ Alex Sandel /s/ Jason Barzilay
- ----------------------------- -----------------------------
Alex Sandel Jason Barzilay
-2-
<PAGE>
EXHIBIT 10.16
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, 1996 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
1
<PAGE>
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
2
<PAGE>
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
3
<PAGE>
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
4
<PAGE>
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,
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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
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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-
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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
13
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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
<PAGE>
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.
15
<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
16
<PAGE>
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
17
<PAGE>
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
<PAGE>
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
19
<PAGE>
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
20
<PAGE>
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.
21
<PAGE>
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
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<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
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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
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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
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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
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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
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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>
- ------------------------------------------------------------------------------------------------------------------------------
<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>
- ----------------------------------------------------------------------------------------------------------------------------------
<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>
- ----------------------------------------------------------------------------------------------------------------------------------
<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>
- ----------------------------------------------------------------------------------------------------------------------------------
<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>
EXHIBIT 10.17
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,
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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.
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<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
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<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
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<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.
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<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
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<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:
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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.
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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.
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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.
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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.
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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,
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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.
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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
Page 19 of 23
<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.
Page 22 of 23
<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
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 5 of 7
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
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
</TABLE>
Page 6 of 7
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
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:
------------------------------
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APPENDIX C
Page 2 of 2
<PAGE>
APPENDIX D-1
LICENSED DISC MANUFACTURERS WHO ARE PAYING UNITED STATES AND CANADIAN RATES:
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
APPENDIX D-1
Page 1 of 1
<PAGE>
APPENDIX D-2
LICENSED DISC MANUFACTURERS NOT PAYING UNITED STATES AND CANADIAN RATES:
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
APPENDIX D-2
Page 1 of 1
<PAGE>
EXHIBIT 10.18
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>
EXHIBIT 10.19
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 10.20
1
DVD FORMAT AND LOGO LICENSE
This FORMAT AND LOGO LICENSE is made between Toshiba Corporation
("Licensor"), a corporation of Japan, having its principal place of business at
1-1, Shibaura 1-chome, Minato-ku, Tokyo 105-8001, Japan, and Future Media
Productions, Inc. ("Licensee"), a corporation of U.S.A., having its principal
place of business at 25136 Anza Drive Valencia, California 91536 U.S.A., and is
effective as of the later of the two signature dates below (the "Effective
Date").
WHEREAS, certain members of the DVD Forum as specified in each DVD Format
Book ("Format Owners") have developed the DVD specifications pertaining to one
or more DVD products, and have obtained know-how, trade secret and technical
information and copyrights embodied therein;
WHEREAS, the Format Owners have appointed Licensor as a licensing agent for
the DVD specifications;
WHEREAS, the Logo Owner (as defined below) of the trademark rights,
copyrights and other rights in and to the Logos (as defined below) has appointed
Licensor as agent for licensing the Logos;
WHEREAS, Licensee has obtained one or more DVD Format Book(s) (hereinafter
defined) for such DVD specifications from Licensor for evaluation purposes only
pursuant to a non-disclosure agreement that has been duly executed between
Licensor and Licensee and that is attached hereto and incorporated herein by
reference (the "NDA");
WHEREAS, Licensor and Licensee wish to enter into this Agreement which sets
forth the terms and conditions under which Licensor grants to Licensee certain
rights with respect to the DVD Format Books and Logos (each as defined below).
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
<PAGE>
2
1. Definitions
-----------
For purposes hereof, the following capitalized terms shall have the
respective meanings provided below and additional capitalized terms shall have
the respective meanings provided in Schedule A:
1.1 "Agreement" shall mean this DVD Format and Logo License, including all
schedules attached hereto, and any and all amendments to the Agreement and/or
such schedules.
1.2 "Affiliate" shall mean, with respect to either party hereto, any
corporation, firm, partnership, proprietorship, or other form of business
entity, in whatever country organized or resident, directly or indirectly
controlled by such party, and that is listed in Schedule C. For the purpose of
this definition, "control" shall mean more than 50% ownership, directly or
indirectly, or the equivalent power to direct or cause the direction of the
management or policies of such entity, directly or indirectly. Licensee may add
any Affiliate(s) of Licensee to Schedule C at any time with a prior written
notice to Licensor.
1.3 "DVD Format Books" shall mean the format books set forth in Schedule
A-1 containing DVD specifications pertaining to one or more DVD Products,
including any supplements, revisions, or updates made thereto from time to time;
provided, however, that each new version of a DVD Format Book shall be
considered a separate DVD Format Book, where "new version" shall mean new
specifications for a DVD format as represented by the change of the first digit
of the version number.
1.4 "DVD Graphic Standards Manual" shall mean the DVD Graphic Standards
Manual which sets forth the standards for using the Logos, as it may be revised
from time to time by Licensor.
1.5 "DVD Product" shall mean each DVD Product set forth on Schedule A-2.
1.6 "DVD Product Category" shall mean the categories of DVD Products set
forth on Schedule A-3.
1.7 "Logos" shall mean the DVD logos as set forth in the DVD Graphic
Standards Manual, which maybe revised from time to time by the Logo Owner.
1.8 "Logo Owner" shall mean the owner of the trademark rights, copyrights
and other rights in and to the Logos and shall include the current owner of such
rights, Time Warner Entertainment Company, L.P. ("TWE"), and any successor
of such rights pursuant to an assignment and/or transfer of such rights.
<PAGE>
3
1.9 "Schedule A" shall mean Schedule A attached to this Agreement, as such
schedule may be amended from time to time by Licensor.
1.10 "Schedule B" shall mean Schedule B attached to this Agreement, as such
schedule may be amended from time to time by Licensor.
1.11 "Schedule C" shall mean Schedule C attached to this Agreement, as such
schedule may be amended from time to time by Licensor.
1.12 "Schedule D" shall mean Schedule D attached to this Agreement, as such
schedule may be amended from time to time by Licensor.
2. DVD Format License
------------------
2.1 Upon the terms and conditions and with the limitations and exceptions
hereafter set forth, Licensor hereby grants to Licensee and its Affiliates
specified in Schedule C a non-exclusive license, on a worldwide basis during
the term hereof, to use the DVD Format Books identified on Schedule A-1 as being
licensed to Licensee, including the technical information, know-how and trade
secrets contained therein, solely in connection with Licensee's development,
manufacture (including having manufactured on a subcontract basis), sale, use or
other disposition of the DVD Products included in the DVD Product Category(ies)
identified on Schedule A-3 as being licensed to Licensee. Within thirty (30)
days after the Effective Date, Licensee shall select such DVD Format Book(s) and
DVD Product Category(ies) that are licensed to Licensee and its Affiliates under
this Agreement by checking the applicable column(s) in Schedule A-1. During the
term of this Agreement, Licensee may add such DVD Format Book(s) and DVD
Product Category(ies) that Licensee has not selected before and may be licensed
to Licensee and its Affiliates under this Agreement by (a) providing Licensor
with a revised Schedule A-1, with Licensee's selection of additional DVD Format
Book(s) and/or DVD Product Category(ies), and (b) making additional payment(s)
in accordance with Article 5.1. In the event that Licensee has the DVD Products
manufactured by a third party on a subcontract basis pursuant to this Section,
Licensee shall be responsible for such third party's compliance with the terms
and conditions of this Agreement, including compliance with the DVD Format Books
and confidentiality obligations.
2.2 Reserved for future addition of SID Code related provisions
<PAGE>
4
2.3 Licensor shall have made available to Licensee under the NDA for use
by Licensee and its Affiliates upon payment by Licensee of US$5,000, a copy of
the then current version of a DVD Format Book, which may not be copied by anyone
in whole or in part without prior written consent of Licensor. Licensee may
receive additional copies of any DVD Format Book that has been made available to
Licensee for an additional fee of $500 or other amount to be specified by
Licensor per copy under the NDA.
2.4 Licensee acknowledges that the right to use the DVD Format Books
licensed hereunder does not extend to its use in connection with any product
that does not comply with such DVD Format Books or that is incompatible with
products that comply with such DVD Format Books.
2.5 IT IS EXPRESSLY UNDERSTOOD THAT THE RIGHTS AND LICENSES GRANTED
PURSUANT TO THIS AGREEMENT DO NOT EXTEND TO ANY PRESENT OR FUTURE PATENT RIGHT
WHATSOEVER.]
3. DVD Logo License
----------------
3.1 Upon the terms and conditions and with the limitations and exceptions
hereafter set forth, Licensor hereby grants to Licensee and its Affiliates a
non-exclusive license to use the Logos solely on DVD Products that are within
the Category I Products or Category II Products, and packing materials, and in
related advertising and other sales and marketing literature, including
catalogues or brochures, and user manuals for such DVD Products, in the form and
manner specified in the DVD Graphic Standards Manual on a worldwide basis during
the term hereof. if Licensee manufactures and/or assembles computers that
incorporate DVD Drives as defined in Schedule A-2 and/or DVD Decoders as defined
in Schedule A-2 bearing the Logos, Licensee shall not be required to enter into
a license to use the Logos; provided, that (i) Licensee's sole use of the
Logos is the inclusion in such computers of DVD Drives and/or DVD Decoders
bearing the Logos; (ii) the manufacturer of such DVD Drives and/or DVD Decoders
has duly obtained a license to use the Logos on such DVD Drives and/or DVD
Decoders; (iii) such DVD Drives and/or DVD Decoders have been independently
verified by one of the laboratories listed on Schedule B-1 pursuant to the
procedures set forth in Article 4; and (iv) such DVD Drives and/or DVD
Decoders have not been materially altered; provided, further, that if Licensee
manufactures and/or assembles computers and affixes the Logos on the computers
as a whole system product, then Licensee shall be required to obtain a license
for the Logos pursuant to this Article 3.
<PAGE>
5
3.2 Licensee and its Affiliates are strictly prohibited from using the
Logos in any other form than that which is specifically set forth in the DVD
Graphic Standards Manual.
3.3 Licensee and its Affiliates shall ensure that there is imprinted
legibly and irremovably on all materials and things on or with which the Logos
appear in any form, the legends and notices required by the DVD Graphic
Standards Manual.
3.4 Licensee and its Affiliates shall not co-join, superimpose or combine
any other logo, trademark, trade name or other designation with the Logos.
Licensee shall not use the Logos in a manner which impairs the right in the
Logos.
3.5 Licensee and its Affiliates shall ensure that distributors' and
retailers' usage of the Logos in advertising, promotional materials, catalogues
or brochures offering Licensee's and its Affiliates' DVD Products for sale shall
comply with the DVD Graphic Standards Manual and Articles 3.2, 3.3, 3.4 and 4.1
of this Agreement.
3.6 Notwithstanding the foregoing, if Licensee develops, manufactures,
sells, uses or otherwise disposes of DVD Products that are within the Category
III Products, the license of the Logos and the rights and obligations of the
Licensee regarding such license set forth in this Article 3 shall not apply with
respect to such DVD Products.
4. Verification
------------
4.1 Licensee and its Affiliates (if Licensee has been granted the License
to use the Logos) agree that all products bearing or marketed under the Logos
shall be of high quality and shall conform to the applicable DVD Format Book and
such additional standards, specifications, instructions and other quality
controls regarding use of the Logos as may be communicated in writing by
Licensor from time to time, and that all uses of the Logos shall fully comply
with the DVD Graphic Standards Manual. Licensee and its Affiliates further agree
that in case the Licensee or any of its Affiliates sells any DVD Products that
are within the Category I Products or Category II Products, on an OEM basis to
third parties, the Licensee or any such Affiliate shall cause, and bear
responsibility for causing, such third parties to comply with the requirements
that all products bearing or marketed under the Logos and sold by the third
parties shall be of high quality and conform to the applicable DVD Format Book,
and that all uses of the Logos by the third parties shall comply with the DVD
Graphic Standards Manual.
4.2 Licensee and its Affiliates hereby agree that it will not manufacture,
sell, market, promote or distribute a DVD Product within the Category I Products
or Category II Products and bearing or marketed under the Logos other than in
full compliance with the
<PAGE>
6
applicable DVD Format Book and the procedures set forth below and in Schedules
B-3, B-4 and B-5.
4.3 If Final Failure (defined in Schedule B-3) is declared for a DVD
Product, Licensor shall have the right to terminate the rights relating to the
Logos granted to such Licensee under this Agreement with respect to the DVD
Product that has been declared the Final Failure, upon thirty (30) days' prior
written notice to Licensee.
4.4 If at any time during the term hereof, Licensor determines, in its
sole reasonable judgment and in cooperation with a Class A Verification
Laboratory listed in Schedule B-1, that Licensee or any of its Affiliates may be
manufacturing, selling, marketing, promoting or distributing a DVD Product
within the Category I Products or Category II Products and bearing or marketed
under Logos, which is not in full compliance with the applicable DVD Format
Book, at the request of Licensor, such Licensee shall follow procedures set
forth in Schedule B-5.
4.5 If Final Failure II (defined in Schedule B-5) is declared for a DVD
Product, Licensor shall have the right to terminate the rights relating to
the Logos granted to such Licensee under this Agreement with respect to the DVD
Product that has been declared the Final Failure II, upon thirty (30) days'
prior written notice to Licensee.
4.6 The right of termination set forth in Articles 4.3 and 4.5 above shall
not be exclusive of any other remedies or means of redress to which the Licensor
may be lawfully entitled, and all such remedies shall be cumulative. Upon
termination pursuant to Articles 4.3 or 4.5, all rights of Licensee granted
hereunder, relating to the Logos with respect to the DVD Product that failed to
meet the verification standards, shall cease and the termination procedures set
forth in Section 9.2 below shall apply to such termination.
4.7 For purposes of this Agreement, samples to be submitted pursuant to
this Article 4 shall be selected in a manner acceptable to the verification
laboratory to which they are submitted.
4.8 NO NOTICE OR STATEMENT OF ANY KIND SENT BY ANY LABORATORY LISTED ON
SCHEDULE B-1 OR BY LICENSOR, SHALL BE CONSTRUED AS A REPRESENTATION OR WARRANTY
OF ANY KIND WITH RESPECT TO THE DVD PRODUCT IDENTIFIED IN SUCH NOTICE OR
STATEMENT, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE OR INTERCHANGEABILITY WITH OTHER DVD
PRODUCTS.
<PAGE>
7
5. Fees
5.1 In consideration of the license granted hereunder, upon the terms and
conditions and with the limitations set forth herein, Licensee agrees to pay to
Licensor, within thirty (30) days after the Effective Date, the license fee set
forth on Schedule A for each DVD Format Book licensed to Licensee in each DVD
Product Category selected by Licensee, as identified on Schedule A-1; provided,
however, that Licensee may be entitled to a discount in the amount of $5,000
which Licensee had paid to Licensor under the NDA from the total license fee
payable hereunder. The license fee shall not be returnable or refundable in any
event. In the event that Licensee adds DVD Format Book(s) and DVD Product
Category(ies) in accordance with the provision of Article 2.1, Licensee agrees
to pay to Licensor, concurrently with such addition, the license fee set forth
on Schedule A-1 for each DVD Format Book newly licensed to Licensee in each DVD
Product Category newly selected by Licensee, as identified on Schedule A-1.
5.2 Licensee agrees to pay to the verification laboratory to which
Licensee submits a DVD Product for verification each time a sample DVD Product
and a test result are submitted to a verification laboratory pursuant to
Schedules B-3 or B-4 (regardless of the number of times a DVD Product is
submitted to a verification laboratory) the fees as charged by the verification
laboratory on a per-submission basis, promptly upon the receipt of an invoice
from the verification laboratory, provided that such fee shall not exceed the
amount as specified in Schedule B-2. The transportation fees for such submission
and return of Licensee's DVD Product sample or test results shall be borne by
Licensee.
5.3 All payments made by Licensee to Licensor or verification laboratories
under this Agreement shall be made without any deduction for any taxes, except
any income taxes that may be owed by Licensor that are required to be withheld
under any law of any jurisdiction outside Japan on any payments by Licensee to
Licensor under this Agreement, which taxes shall be withheld by Licensee to the
extent required by law and actually paid to the appropriate taxing authority.
Licensee shall provide written notice to Licensor before payment is made in
reasonable time to allow Licensor to object. Licensee shall within one month
following payment of any such taxes provide proof to Licensor of payment of such
taxes (including, but not limited to, official receipts in the name of Licensor
and photocopies of all forms filed by Licensee with the appropriate taxing
authorities) together with certified English translations of such
documentation (if not in the English language). Licensee shall indemnify
Licensor for any penalties and interest that may be payable as a result of
Licensee's failure to timely pay all taxes or other assessments of Licensor
that Licensee is obligated to withhold. All other taxes imposed on payments by
Licensee to Licensor or verification laboratories, including but not limited to
value added taxes, consumption taxes, and sales taxes, which may be imposed now
or in the future or under the laws of any applicable jurisdiction shall be
Licensee's sole responsibility and Licensee
<PAGE>
8
shall promptly transmit such taxes to the appropriate authorities as and when
they become due. Such taxes shall not affect Licensee's obligation to make
payments to Licensor or verification laboratories as required under this
Agreement.
6. Ownership of the DVD Format Books and Logos; Reservation of Rights
6.1 Licensee acknowledges that this Agreement does not transfer or convey
to Licensee ownership of or any rights in any of the DVD Format Books or the
Logos, except as expressly set forth herein. Licensee's use of the Logos (if
Licensee has been granted the license to use the Logos) shall inure solely to
the benefit of the Logo Owner, as owner of all rights in and to the Logos. Upon
termination of this Agreement, no monetary amounts shall be assigned as
attributable to any goodwill associated with such Licensee's use of the DVD
Format Books or the Logos.
6.2 Licensor hereby reserves all rights not herein expressly granted to
Licensee. Such reserved rights are the sole and exclusive property of the
Licensor and the Format Owners.
7. Confidentiality
7.1 Licensee agrees that Licensee and its Affiliates shall not disclose to
any third party information contained in the DVD Format Books licensed hereunder
and any other information provided by Licensor as confidential information
pursuant to the terms and conditions of the NDA. Licensee further agrees that
Licensee and its Affiliates shall use information contained in the DVD Format
Books licensed hereunder and any other information provided by Licensor as
confidential information pursuant to the terms and conditions of the NDA only
for the purpose of development, manufacture (including having manufactured),
sale, use and other disposition of the DVD Products included in the DVD Product
Category(ies) identified on Schedule A-3 and selected by Licensee.
8. Warranty and Disclaimer
8.1 LICENSOR, OTHER FORMAT OWNERS AND LOGO OWNER MAKE NO REPRESENTATION OR
WARRANTY AS TO THE VALUE OR UTILITY OF THE INFORMATION TO BE SUPPLIED TO
LICENSEE PURSUANT TO THIS AGREEMENT, SUCH AS BUT NOT LIMITED TO THE DVD FORMAT
BOOKS, THE DVD GRAPHICS STANDARDS MANUAL, AND TECHNICAL INFORMATION AND SUPPORT,
IF ANY, OR THE ABILITY OF LICENSEE TO MAKE USE THEREOF TO SECURE
INTERCHANGEABILITY WITH OTHER DVD PRODUCTS. LICENSOR,
<PAGE>
9
OTHER FORMAT OWNERS AND LOGO OWNER MAKE NO WARRANTY WHATSOEVER THAT THE USE OF
INFORMATION SUPPLIED BY LICENSOR DOES NOT INFRINGE OR WILL NOT CAUSE
INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHT OWNED OR CONTROLLED BY ANY
PERSON. LICENSEE UNDERSTANDS AND AGREES THAT THE LICENSOR, OTHER FORMAT OWNERS
AND LOGO OWNER MAKE NO WARRANTY WHATSOEVER THAT ANY MANUFACTURE, USE, SALE,
LEASE OR OTHER DISPOSAL OF LICENSED PRODUCTS WILL BE FREE FROM INFRINGEMENT OF
ANY THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS. IT IS EXPLICITLY UNDERSTOOD BY
LICENSEE THAT LICENSOR AND OTHER FORMAT OWNERS CLAIM TO HAVE ISSUED OR
PROSPECTIVE PATENTS PERTINENT TO THE LICENSED PRODUCTS, WHICH PATENTS ARE NOT
LICENSED HEREUNDER. LICENSOR, OTHER FORMAT OWNERS AND LOGO OWNER MAKE NO
REPRESENTATION AND WARRANTY, EXPRESSED OR IMPLIED, STATUTORY OR OTHERWISE, AND
EXPRESSLY DISCLAIM IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE AND ANY EQUIVALENTS UNDER THE LAWS OF ANY JURISDICTION THAT
MIGHT ARISE FROM ANY ACTIVITIES OR INFORMATION DISCLOSURES RELATING TO THIS
AGREEMENT.
9. Term and Termination
9.1 This Agreement shall become effective as of the Effective Date and
shall continue in force until December 31, 2004. The parties hereby agree that
prior to such expiration (other than earlier termination of this Agreement
pursuant to the provisions herein), the parties shall negotiate in good faith to
renew the license granted hereunder as such renewal may be subject to further
terms and conditions, including payment of then determined license fees.
9.2 Immediately upon expiration or earlier termination of this Agreement,
Licensee shall return to Licensor or destroy at Licensor's instruction, all DVD
Format Books licensed to Licensee hereunder, the DVD Graphics Standards Manual
(if Licensee has been granted the License to use the Logos), and all copies of
the foregoing documents, upon the last date that this Agreement remains in force
and effect. Licensee acknowledges that, on the last day of the term of this
Agreement or its earlier termination, all rights of Licensee granted hereunder
shall cease.
9.3 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 materially
breach or fail to perform any material obligation under this Agreement and such
default is not remedied within thirty (30) days after notice is given specifying
the nature of the default. Such right of
<PAGE>
10
termination shall not be exclusive of any other remedies or means of redress to
which the non-defaulting party may be lawfully entitled, and all such remedies
shall be cumulative.
Licensee hereby agrees (if Licensee has been granted the license to
use the Logos) that the use of the Logos in any way not in compliance with the
DVD Graphic Standards Manual, as such manual may be modified from time to time,
or on any product or in any advertisement or sales literature concerning any
product, which product does not comply with the applicable DVD Format Book,
shall constitute a material breach of this Agreement and infringement of the
Logos.
9.4 In the event that any Event of Bankruptcy occurs, then Licensor may
give notice to Licensee terminating this Agreement and this Agreement shall be
terminated in accordance with the notice. An "Event of Bankruptcy" occurs if:
(i) a decree or order by a court having jurisdiction in the premises has been
entered adjudging Licensee a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, readjustment,
arrangement, composition, winding up or similar relief for Licensee under
any applicable statute, or a decree or order of a court having jurisdiction
in the premises for the appointment of a liquidator, receiver,
administrator, trustee or assignee in bankruptcy or insolvency or other
similar person or official of Licensee or of a substantial part of the
property, or for the winding up or liquidation of the affairs of Licensee
has been entered and remains unstayed; or if any substantial part of the
property of Licensee has been sequestered or attached and has not been
returned to the possession of Licensee or released from such attachment
within 14 days thereafter; whether any such act or event occurs in Japan,
or any foreign country, subdivision thereof, or any other jurisdiction; or
(ii) Licensee institutes proceedings to be adjudicated a voluntary bankrupt or
insolvent, consents to the filing of a bankruptcy or insolvency proceeding
against it, files a petition or answer or consent seeking reorganization,
readjustment, arrangement, composition, winding up, administration,
receivership, or similar relief under any applicable statute or consents to
the filing of any such petition or the entry of any such order, makes an
assignment for the benefit of creditors, is determined to be unable to pay
its debts or admits in writing its inability to pay its debts generally as
they become due, or voluntarily suspends transactions of a substantial
portion of its usual business; whether any such act or event occurs in
Japan, or any foreign country or subdivision thereof, or any other
jurisdiction.
9.5 The provisions set forth in Articles 6, 7, 8 and 9 shall survive the
termination or expiration of this Agreement.
<PAGE>
11
10. Miscellaneous
10.1 Licensee agrees that it will not bring any actions for unauthorized
use or infringement of any of the DVD Format Books or the Logos. Licensee will
notify Licensor immediately should it learn of any such potential unauthorized
use or infringement. Licensor shall have the option, at its own expense, to
assume the defense of any suit or action brought against Licensee that
challenges or concerns the validity of any right granted by Licensor hereunder.
10.2 The performance by Licensor of its obligations hereunder shall be
conditioned upon and subject to the receipt of all necessary export approvals
required by and all restrictions or conditions imposed by any relevant
government.
10.3 Licensor represents and warrants that it has the rights to enter
into this Agreement and to grant a license to Licensee pursuant to the terms
hereof on behalf of the Format Owners and Logo Owner.
10.4 This Agreement and the rights granted hereunder shall be personal to
Licensee and shall not be assigned, pledged, divided or otherwise encumbered in
any way. Licensee shall not have the right to sublicense any rights granted
hereunder. Licensor shall have the right to assign this Agreement, at any time
during the term thereof, to any other party which succeeds Licensor in its
function as the licensor of the DVD Format Books and the Logos, upon prior
written notice to Licensee.
10.5 Notices. Wherever provision is made in this Agreement for the giving
of any notice, such notice shall be in writing and shall be deemed to have been
duly given if mailed by airmail, postage prepaid, addressed to the party
entitled to receive the same or delivered personally to such party, or sent by
facsimile transmission or sent by courier,
if to Licensor, to:
Strategic Partnership & Licensing Division
Digital Media Equipment & Services Company
Toshiba Corporation
1-1, Shibaura 1-Chome
Minato-ku, Tokyo 105-8001 Japan
Attention: Hirohide Tagawa
Fax No.: +81-3-5444-9430
and if to the Licensee, to:
Vice President
Future Media Productions, Inc.
<PAGE>
12
Attention: David Moss
Fax No.: +1-661-294-5582
or to such other address, in any such case, as any party hereto shall have last
designated by notice to the other party. Notice shall be deemed to have been
given on the day that it is so delivered personally or sent by facsimile
transmission and the appropriate answer back or confirmation of successful
transmission is received or, if sent by courier, shall be deemed to have been
given two business days after delivery by the courier company, or if mailed, ten
business days following the date on which such notice was so mailed.
10.6 THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED ACCORDING TO THE LAWS
OF THE STATE OF NEW YORK, AS IF THIS AGREEMENT WERE WHOLLY EXECUTED AND WHOLLY
PERFORMED WITHIN SUCH STATE, AND WITHOUT REFERENCE TO THE CONFLICTS OF LAWS
PRINCIPLES THEREOF.
10.7 ALL DISPUTES BETWEEN THE PARTIES HERETO ARISING OUT OF OR IN
CONNECTION WITH THE INTERPRETATION OR EXECUTION OF THIS AGREEMENT,
LICENSOR'S LICENSING OF THE LOGOS OR THE DVD FORMAT BOOKS, OR
LICENSEE'S USE OF THE DVD FORMAT BOOKS AND THE LOGOS, SHALL BE FINALLY
SETTLED BY THE FEDERAL OR STATE COURTS LOCATED IN THE COUNTY OF NEW
YORK IN THE STATE OF NEW YORK; AND EACH PARTY TO THIS AGREEMENT
HEREBY: (i) IRREVOCABLY CONSENTS TO THE EXCLUSIVE JURISDICTION OF
SUCH COURTS FOR THE RESOLUTION OF SUCH DISPUTES; (ii) IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS OF SAID COURTS IN ANY SUCH DISPUTE
BY PERSONAL DELIVERY OR MAILING OF PROCESS BY REGISTERED OR CERTIFIED
MAIL, POSTAGE PREPAID, AT THE RESPECTIVE ADDRESS SET FORTH IN SECTION
10.5 ABOVE; (iii) IRREVOCABLY WAIVES ANY OBJECTION THAT IT MAY NOW OR
HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN SUCH
COURTS OR TO THE CONVENIENCE OR INCONVENIENCE OF CONDUCTING OR
PURSUING ANY ACTION OR PROCEEDING IN ANY SUCH COURT; AND (iv)
IRREVOCABLY WAIVES ANY RIGHT TO A TRIAL BY JURY REGARDING THE
RESOLUTION OF ANY DISPUTES BETWEEN THE PARTIES HERETO ARISING OUT OF
OR IN CONNECTION WITH THIS AGREEMENT.
10.8 This Agreement shall inure to the benefit of the parties hereto and
each of their respective Affiliates, provided that (i) such Affiliates shall
comply with the terms of this Agreement, (ii) nothing herein shall relieve any
party of any of its obligations under the
<PAGE>
13
terms of this Agreement, and (iii) a party shall be responsible for the acts and
omissions of its Affiliates as if such acts and omissions had been the acts and
omissions of such party.
10.9 This Agreement sets forth the entire agreement and 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 set forth herein (including the exhibits
hereto), 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.
10.10 This Agreement may be executed in counterparts (including facsimile
transmission) each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized representatives as of the Effective Date.
TOSHIBA CORPORATION FUTURE MEDIA PRODUCTIONS, INC.
/s/ Koji Hase /s/ Louis Weiss
- ----------------------------------- -----------------------------------
By (Sign) By (Sign)
Koji Hase Louis Weiss
- ----------------------------------- -----------------------------------
Name (Print) Name (Print)
Vice President
Strategic Partnership & Licensing
Division Chief Financial Officer
- ----------------------------------- -----------------------------------
Title Title
January 11, 2000 12/30/99
- ----------------------------------- -----------------------------------
Date Date
<PAGE>
SCHEDULE A-1
------------
DVD Products, Corresponding DVD Format Books and License Fees
-------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
DVD Format Books* DVD Product License Fee Check if
Category Licensed
to
Licensee
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DVD-Video Book I US$10,000 10000
------------------------------------------------------------------
(DVD Specifications for Read- II US$10,000
------------------------------------------------------------------
Only Disc III US$10,000
Part 3: Video (Version 1.1)
- -------------------------------------------------------------------------------------------------------
DVD-ROM Book I US$10,000
------------------------------------------------------------------
(DVD Specifications for Read- II US$10,000
------------------------------------------------------------------
Only Disc III US$10,000 10000
Part 1: Physical (Version 1.01)
Part 2: File System (Version 1.01)
- -------------------------------------------------------------------------------------------------------
DVD-R Book I US$10,000
------------------------------------------------------------------
(DVD Specifications for II US$10,000
------------------------------------------------------------------
Recordable Disc III US$10,000
Part 1: Physical (Version 1.0)
Part 2: File System (Version 1.0)
- -------------------------------------------------------------------------------------------------------
DVD-RAM Book I US$10,000
------------------------------------------------------------------
(DVD Specifications for II US$10,000
------------------------------------------------------------------
Rewritable Disc III US$10,000
Part 1: Physical (Version 1.0)
Part 2: File System (Version 1.0)
- -------------------------------------------------------------------------------------------------------
DVD-Audio Book I US$10,000
------------------------------------------------------------------
(DVD Specifications for Read-Only II US$10,000
------------------------------------------------------------------
Disc III US$10,000
Part 4: Audio(Version 1.0))
- -------------------------------------------------------------------------------------------------------
Total Fees** 15000
- -------------------------------------------------------------------------------------------------------
</TABLE>
* A new version of a DVD Format Book as represented by the change of the first
digit of the version number shall be deemed a separate DVD Format Book, subject
to a separate license fee of $1O,000.
**US$5,000 may be discounted from the total fees.
<PAGE>
SCHEDULE A-2
------------
DVD PRODUCTS:
- -------------
DVD Discs shall mean any disc comprised of information encoded in
digital form or enabled to write in digital form or case for DVD-RAM disc, and
which conforms to the corresponding DVD Format Book(s) licensed to Licensee
hereunder.
DVD Drive shall mean a device conforming to the corresponding DVD
Format Book that is specifically designed and manufactured for the reproduction
or recording of information on a DVD Disc and conversion of such information,
which is bit-encoded according to the corresponding DVD Format Book, into
electrical signals in accordance with the corresponding DVD Format Book(s)
licensed to Licensee hereunder, which electrical signals are directly capable
and intended to be used for reproduction or recording of video, text, audio and
data-related information through data handling or data processing apparatus.
DVD Player shall mean a playback device conforming to the
corresponding DVD Format Book that is specifically designed and manufactured for
the reproduction of information stored on a DVD Disc and conversion of such
information, which is bit-encoded according to the corresponding DVD Format
Book, into electrical signals in accordance with the corresponding DVD Format
Book(s) licensed to Licensee hereunder, which electrical signals are directly
capable and intended to be used for visual reproduction through standard
television receivers or television monitors and/or audio reproduction.
DVD Decoder shall mean a decoder implemented in hardware or software
capable of receiving and decoding transmissions from a DVD Drive over a computer
system bus and that conforms to the corresponding DVD Format Book(s) licensed to
Licensee hereunder.
Integrated Products shall mean any product that incorporates or
integrates DVD Drive, DVD Player or DVD Decoder.
Other DVD Products: any product other than DVD Players, DVD Drives,
DVD Discs, DVD Decoders, or Integrated Products, including, but not limited to,
authoring tools, integrated circuits and encoders, that use the information
included in the corresponding DVD Format Book(s).
<PAGE>
SCHEDULE A-3
------------
DVD PRODUCT CATEGORIES
----------------------
Category I Products: DVD Discs.
Category II Products: DVD Players, DVD Drives, DVD Decoders and
Integrated Products.
Category III Products: Other DVD Products.
<PAGE>
SCHEDULE B-1
------------
VERIFICATION LABORATORIES
-------------------------
Class A Verification Laboratories
Tokyo (Hitachi) Laboratory
Hitachi, Ltd.
DVD Format Verification Laboratory
Hitachi AtagoBldg., 15-12, Nishi Shinbashi 2-chome
Minato-ku, Tokyo 105- 8430, Japan
Tel: +81-3-3506-1616
Fax: +81-3-3506-1603
Tokyo (Pioneer) Laboratory
Pioneer Electronic Corporation
AV & Recording Development Center
4-2610, Hanazono, Tokorozawa
Saitama 359-8522, Japan
TEL: +81-42-942-1300
FAX: +81-42-943-0395
Tokyo (Sony) Laboratory
Sony Corporation
Shinagawa Intercity, Tower C
2-15-3, Konan, Minato-ku
Tokyo 108-6201 Japan
Fax: +81.3.5769.5890
Tokyo (Toshiba) Laboratory
Toshiba Corporation
Yanagi-cho 69, Saiwai-ku
Kawasaki 210-8501, Japan
FAX: +81-3-5444-9430
Osaka (Matsushita) Laboratory
Matsushita Electric Industrial Co., Ltd.
DVD Verification Laboratory
2-15 Matsuba-cho, Kadoma City
Osaka 571-8503, Japan
TEL: +81-6-6905-4195
FAX: +81-6-6909-5027
<PAGE>
Europe (Philips) Laboratory
Royal Philips Electronics
Philips System Standards & Licensing
Licensing Support
P.O. Box 80002
5600 JB Eindhoven
The Netherlands
Fax: +31-40-2732113
http://www.licensing.philips.com
North America (WAMO) Laboratory
Warner Advance Media Operations
1400 E. Lackwanna Avenue
Olyphant, Pennsylvania 18448
U.S.A.
TEL: + 1-570-383-3291
FAX: + 1-570-383-7487
Asia (ITRI) Laboratory
Industrial Technology Research Institute
DVD Format Verification Laboratory
Bldg. 78, 195-8, Section 4, Chung Hsing Road,
Chutung, Hsinchu 310, Taiwan, R.O.C.
TEL: +886-3-5916786
FAX: +886-3-5917531
Class B Verification Laboratories
<PAGE>
SCHEDULE B-2
------------
MAXIMUM VERIFICATION FEES
-------------------------
(1) $5,000 for a DVD Disc.
(2) $10,000 for a DVD Player or any product that incorporates a DVD Player;
(3) $5,000 for a DVD Drive or any product that incorporates a DVD Drive; and
(4) $5,000 for a DVD Decoder
<PAGE>
SCHEDULE B-3
- ------------
1. At any time after the Effective Date but no later than sixty (60)
days after the initial commercial shipment of the First Production Model of
Category I Product or Category II Product as defined in the applicable Test
Specification attached hereto as Schedule B-6, Licensee or any of its Affiliates
shall test First Production Model using the verification tool and following the
instructions provided by a Class A Verification Laboratory listed on Schedule
B-1, to be selected at the option of the Licensee, and submit the results of
such test together with samples of such Model so tested to such Laboratory, and
concurrently send a notice of such submission to Licensor; provided, however
-------- -------
that if the DVD Drive or DVD Decoder is integrated into another product and the
Logo is placed anywhere on such integrated product other than on the DVD Drive
or DVD Decoder itself, such integrated product shall be tested. Reasonable
numbers of samples to be submitted shall be designated by such Class A
Verification Laboratory.
2. Before a DVD Product is submitted to a Class A Verification Licensee
and such Laboratory shall enter into a non-disclosure agreement the basic terms
and conditions of which are set forth in Schedule D attached hereto covering any
confidential information submitted by the Licensee.
3. After the receipt of the result of such test and such sample product,
(i) the Class A Verification Laboratory that received a test result and
samples of DVD Product shall inform such Licensee of the results of the
verification and concurrently send a copy of such correspondence to
Licensor, and the Class A Verification Laboratory may keep a reasonable
number of samples for Category I Products and Category II Products
submitted by such Licensee;
(ii) if the result of the verification is that such sample DVD Product does not
comply with the applicable DVD Format Book in the sole reasonable judgment
of such Class A Verification Laboratory, Licensor shall have the right to
request that such Licensee modify the non-compliant product so as to
comply, and submit sample(s) of such modified product to such Verification
Laboratory within thirty (30) days or a longer period specified by such
Verification Laboratory (Number of samples to be submitted shall be
designated by such Verification Laboratory). Upon request of Licensor,
Licensee shall promptly provide information necessary for Licensor to
trace the cause of such non-compliance with the applicable DVD Format
Book, including, without limitation, the names of authoring studios which
created the master discs for the non-compliant DVD Discs and third-party
suppliers of components for the non-compliant DVD Products; and
(iii) if, (a) as the result of the second verification, the sample product still
fails to comply with the applicable DVD Format Book in the sole reasonable
judgment of such Verification Laboratory, or (b) Licensee fails to submit
a modified product within such period set forth in the above paragraph
3(i), Licensor, in its sole discretion, shall have the right either to
request that such Licensee further modify the product
<PAGE>
and submit such further modified product to the same Class A Verification
Laboratory, or declare and inform Licensee of a final failure of such DVD
Product to conform to the applicable DVD Format Book (" Final Failure").
<PAGE>
SCHEDULE B-4
- ------------
1. During the term of this Agreement and no later than sixty (60) days
from the initial shipment of the Next Production Model of Category I Product or
Category II Product as defined in the applicable Test Specifications
(Schedule B-6), Licensee or its Affiliates shall (i) test such Second Production
Model at its own quality assurance division using the verification tools and in
accordance with procedures set forth in the Test Specifications or (ii) if
Licensee or its Affiliates does not have its own quality assurance division,
shall submit samples of such Second Production Model to a Class B Verification
Laboratory listed on Schedule B-1 for verification.
2. If Licensee verifies its Second Production Model at its own quality
assurance division, the following procedures shall apply.
(i) If, in its reasonable judgment, the result of the verification at its own
quality assurance division is that such Second Production Model does not
comply with the applicable DVD Format Book, Licensee shall modify the
non-compliant products so as to comply and verify such modified product.
(ii) If, in its reasonable judgment, the modified product still fails to
comply with the applicable DVD Format Book as the result of the second
verification, Licensee shall either further modify the non-compliant
modified products or determine not to ship such Second Production Model
with the Logos.
(iii) Licensee shall keep records of the verification conducted at its own
quality assurance division at least for two (2) years after the
discontinuation of production of the relevant model.
3. If Licensee submits samples of Second Production Model to a Class B
Verification Laboratory, the following procedures shall apply.
(i) Before a DVD Product is submitted to a Class B Verification Laboratory,
Licensee and such Laboratory shall enter into a non-disclosure agreement
the basic terms and conditions of which are set forth in Schedule D
attached hereto covering any confidential information submitted by the
Licensee.
(ii) After the receipt of such sample product,
(a) the Class B Verification Laboratory that received a sample DVD Product
shall inform such Licensee of the results of the verification, and the
Class B Verification Laboratory may keep a reasonable number of samples
for Category I Products and Category II Products submitted by such
Licensee;
<PAGE>
(b) if, in the sole reasonable judgment of such Class B Verification
Laboratory, the result of the verification is that such sample DVD
Product does not comply with the applicable DVD Format Book, such
Verification Laboratory shall have the right to request that such
Licensee modify the non-compliant product so as to comply, and submit
sample(s) of such modified product to such Verification Laboratory within
thirty (30) days or a longer period specified by such Verification
Laboratory (Number of samples to be submitted shall be designated by such
Verification Laboratory). Upon request of Licensor, Licensee shall
promptly provide information necessary for Licensor to trace the cause of
such non-compliance with the applicable D\DVD Format Book, including,
without limitation, the names of authoring studios which created the
master discs for the non-compliant DVD Discs and third-party suppliers of
components for the non-compliant DVD Products; and
(c) if, in the sole reasonable judgment of such Verification Laboratory, the
sample product still fails to comply with the applicable DVD Format Book
as the result of the second verification, Licensee shall either submit
the modified product to the same Class B Verification Laboratory or
determine not to ship such Second Production Model with the Logos.
<PAGE>
SCHEDULE B-5
1. Licensee shall immediately submit one sample of a DVD Product which
has been determined to be not in full compliance with the applicable DVD Format
Book pursuant to Article 4.4, to a Class A Verification Laboratory listed on
Schedule B-1 to be selected at the option of the Licensee and concurrently send
a notice of such submission to Licensor. After the receipt of such sample
product:
(i) The Class A Verification Laboratory that received a sample DVD Product
shall inform such Licensee of the results of the verification and
concurrently send a copy of such correspondence to Licensor;
(ii) if the result of the verification is that in the sole reasonable judgment
of such Class A Verification Laboratory such sample product does not
comply with the applicable DVD Format Book, Licensor shall have the right
to request that such Licensee modify the non-compliant product so as to
comply, and submit one sample of such modified product to such
Verification Laboratory within thirty (30) days or a longer period
specified by such Verification Laboratory. Upon request of Licensor,
Licensee shall promptly provide information necessary for Licensor to
trace the cause of such non-compliance with the applicable DVD Format
Book, including, without limitation, the names of authoring studios which
created the master discs for the non-compliant DVD Discs and third-party
suppliers of components for the non-compliant DVD Products; and
(iii) if, (a) as the result of the second verification in the sole reasonable
judgment of such Verification Laboratory the sample product still fails
to comply with the applicable DVD Format Book, or (b) Licensee fails to
submit a modified product within such period set forth in above
paragraph, Licensor, in its sole discretion, shall have the right either
to request that Licensee further modify the product and submit such
further modified product to the same Verification Laboratory, or declare
and inform Licensee of a final failure of such DVD Product to conform to
the applicable DVD Format Book ("Final Failure II").
(iv) Licensee shall pay to the Verification Laboratory to which Licensee
submitted the DVD Products a verification fee as charged by the
Verification Laboratory, promptly upon receipt of an invoice from the
Verification Laboratory, provided that Licensee shall not be required to
pay the verification fee to the Verification Laboratory for a DVD Product
which has been verified as compliant with the applicable DVD Format Book
pursuant to the procedures under this Schedule B-5.
<PAGE>
Table of Test Specification, Corresponding DVD Specifications and Product
- -------------------------------------------------------------------------
Category
- --------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
DVD Format Books DVD Applicable Test Specifications
Product
Category
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DVD-Video Book I DVD-Video Disc Test Specification
----------------------------------------------------------------------------------
II DVD Video Player Test Specification
PC DVD Player & Component Test Specification
DVD Audio Player Test Specification
----------------------------------------------------------------------------------
III
- ------------------------------------------------------------------------------------------------------------
DVD-ROM Book I DVD-Video/Audio Disc Test Specification
----------------------------------------------------------------------------------
II DVD Video Player Test Specification
PC DVD Player & Component Test Specification
DVD Audio Player Test Specification
----------------------------------------------------------------------------------
III
- ------------------------------------------------------------------------------------------------------------
DVD-R Book I DVD-R Disc, 3.9GB Test Specification
----------------------------------------------------------------------------------
II DVD-R Drivel 3.9GB Test Specification
----------------------------------------------------------------------------------
III
- ------------------------------------------------------------------------------------------------------------
DVD-RAM Book I DVD-RAM Disc/ 2.6GB Test Specification
----------------------------------------------------------------------------------
II DVD-RAM Drive/2.6GB Test Specification
DVD Video Recording Test Specification
----------------------------------------------------------------------------------
III
- ------------------------------------------------------------------------------------------------------------
DVD-Audio Book I DVD-Audio Disc Test Specification
----------------------------------------------------------------------------------
II DVD Audio Player Test Specification
----------------------------------------------------------------------------------
III
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE C
- ----------
List of Licensee's Affiliates
-----------------------------
<PAGE>
SCHEDULE D
Basic terms and conditions of the Non-Disclosure Agreement between
Licensee and verification laboratory
------------------------------------
1. Licensee and laboratory shall comply with the confidentiality obligations
for the following information:
(1) Laboratory:
a. Sample(s) of DVD products including technical information
relating to such sample(s) received from Licensee.
b. The result of verification performed by Licensee.
(2) Licensee:
a. The verification tool, including technical information relating
to such verification tool, provided by the laboratory.
b. The result of verification performed by laboratory.
2. The period of confidentiality obligations shall be at least three (3) years
after receipt of the other party's confidential information.
3. Licensee shall agree that the laboratory may disclose the result of the
verification performed by the laboratory to Licensor and other laboratories
specified in Schedule B-1, provided that Licensee's name and model numbers of
Licensee's sample products may not be disclosed to such other laboratories, and
provided further that Licensor and such other laboratories shall treat the
verification result confidential.
4. Licensee and Laboratory may use the other party's confidential information
only for the purpose of verifying Licensee's DVD products' conformance with the
applicable DVD Format Book.
5. The Non-Disclosure Agreement shall be effective as long as Licensee
manufactures DVD products, provided, however, that the confidential obligation
shall survive such termination or expiration of the Non-Disclosure Agreement.
6. Licensee and Laboratory shall comply with all applicable rules and
regulations of the United States, Japan and other countries and jurisdiction
relating to the export or re-export of confidential information.
<PAGE>
EXHIBIT 10.21
DVD VIDEO DISC AND DVD ROM DISC PATENT LICENSE AGREEMENT
--------------------------------------------------------
This Agreement having an effective date of October 1, 1999 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, California 91355 (hereinafter referred to as "Licensee")
WHEREAS, a new video and sound storage and reproduction system has been defined
by Koninkliike Philips Electronics N.V., (hereinafter referred to as "Philips"),
Sony Corporation of Japan ("Sony"), Pioneer Electronic Corporation of Japan
("Pioneer"), Hitachi Ltd. of Japan, Matsushita Electric Industrial Co. Ltd. of
Japan, Mitsubishi Electric Corporation of Japan, Thomson Multimedia of France,
Time Warner Entertainment Company L.P., of the USA, Toshiba Corporation of
Japan, and Victor Company of Japan Ltd., of Japan, which system has been
presented under the name "Digital Versatile Disc-Video System" ("DVD-Video
System"), as well as a data storage and reproduction systems, which has been
presented under the name "Digital Versatile Disc ROM-System" ("DVD-ROM System"),
hereinafter collectively referred to as the "DVD Systems";
WHEREAS, the DVD Systems result from research and development efforts of each of
the companies mentioned above;
WHEREAS, the DVD Systems have been formally adopted by the entity known as "the
DVD Forum";
WHEREAS, Philips, Sony and Pioneer each own certain patent rights relating to
the DVD) Systems;
WHEREAS, USPC has been authorized by Philips, Sony and Pioneer to grant licenses
for the DVD Systems under certain patent rights relating to the DVD Systems,
which are owned or controlled by Philips, Sony and its Associated Companies and
by Pioneer and its Associated Companies respectively, as well as such patent
rights relating to the DVD) Systems which are jointly owned by Pioneer, Sony
and/or Philips, while Philips, Sony and Pioneer retain the right also to license
their patent rights relating to the DVD Systems;
WHEREAS, Licensee desires the right to manufacture and sell discs based on one
or more DVD Systems, and wishes such discs to be in conformity with the relevant
Standard Specifications defining the DVD Systems;
NOW, THEREFORE, in consideration of the mutual obligations and covenants
hereinafter set forth, the parties hereto have agreed as follows:
<PAGE>
2
Article 1 - Definitions
-----------------------
The following terms used in this Agreement shall have the meanings set out
below:
1.01 "Disc": a non-recordable reflective disc-shaped information carrier
comprising any kind of information such as, but not limited to,
audio, -video-, text- and/or data-related information, which is
irreversibly stored in one or more information layers during and as an
integral part of the manufacturing process of the disc in a form which
is optically readable by play-back devices.
1.02 "DVD-Video Disc/DVD-ROM Disc": a replicated Disc comprising any kind
of information such as, but not limited to, audio-, video, text-,
and/or data-related information, encoded in digital form, which is
optically readable by a DVD-Video Player or a DVD-ROM Player (as
hereinafter defined) and conforms to the DVD-Video and DVD-ROM
Standard Specifications (as hereinafter defined), the DVD-Video Disc
and DVD-ROM Disc together being referred to as "DVD-Disc".
1.03 "DVD-Video and DVD-ROM Standard Specifications": the specifications
for the DVD) Systems, as have been defined in the Standard
Specifications for DVD and as specified in the document "DVD)
Specification for Read-Only Disc, version 1.0" of August 1996, or any
updated version thereof which has been formally approved by the DVD)
Forum.
1.04 "Player": a play-back device for optically reading information stored
on a Disc and converting such information into electrical signals for
reproduction purposes.
1 .05 "DVD-Video Player/DVD-ROM Player": a Player which is designed and
manufactured specifically for the reproduction of information stored
on a DVD-Disc and the conversion of such information, which is bit-
encoded according to the DVD-Video and DVD-ROM Standard
Specifications, into electrical signals by means prescribed in the
DVD-Video and DVD-ROM Standard Specifications, which electrical
signals are directly capable and intended to be used for visual
reproduction through standard television receivers and/or television
monitors, or for reproduction of video, text and data related
information through data handling and/or data processing equipment,
the DVD-Video Player and DVD-ROM Player together referred to as "DVD-
Player". Such DVD-Player may, in addition to reproducing information
on a DVD-Disc, also be capable of reproducing information stored on a
CD-Audio Disc and/or a CD-ROM Disc.
1.06 "Licensed Product(s)": a DVD-Video Disc or DVD-ROM Disc, having either
a single or dual information layer(s) (which is/are readable from one
side of the disc) or two single or dual information layers (which are
readable from opposite sides of the disc).
1.07 "Licensed Patents": all patent rights (or any one or more of the
patent rights as agreed in writing between USPC and Licensee on the
Effective Date) relating to DVD-Discs for which USPC has the right to
grant licenses to Licensee and its Associated Companies and which have
a first filing date or are entitled to a first filing date prior to
January 1, 1997 (but only to
<PAGE>
3
the extent that these patent rights are essential (as hereinafter
defined) to Licensed Products), as listed in Exhibit I.
The word "essential" as used in relation to patent rights in this
Agreement shall refer to patent rights, the use of which is necessary
(as a practical matter) for compliance with the Standard
Specifications defining the relevant DVD Systems.
Licensed Patents shall not include any patent rights relating to
methods or the manufacture, use or sale of equipment for compression
and/or decompression of audio signals concluding but not limited to
the system known as MPEG-2 Audio) or for the compression or
decompression of video signals in accordance with the system known
under the name MPEG-2 Video.
1.08 "Associated Company": any business entity, in which Philips, Sony,
Pioneer or Licensee controls, directly or indirectly, more than fifty
percent (50%) of the shares entitled to vote for the election of
directors, but any such business entity shall be deemed an Associated
Company only for as long as such control exists.
For the purpose of this Agreement, Discovision Associates shall not be
deemed an Associated Company of Pioneer.
1.09 "Territory": the geographic area known as the United States of
America, its territories and possessions.
Article 2 - Grant of rights
---------------------------
Subject to the terms and conditions of this Agreement
2.01 For the term of this Agreement, USPC hereby grants to Licensee and its
Associated Companies a non-exclusive, non-transferable license under
the Licensed Patents to manufacture Licensed Products within the
Territory and to use, sell or otherwise dispose of Licensed Products
so manufactured in all countries of the world.
2.02 USPC, on behalf of Philips, Sony and Pioneer, further agrees, for as
long as this Agreement is in force and effect, to grant Licensee and
its Associated Companies a non-exclusive, non-transferable license,
either by means of a sub-license arrangement or by means of individual
licenses from Philips, Sony and Pioneer respectively, on reasonable,
non-discriminatory terms, to manufacture Licensed Products within the
Territory and to use, sell or otherwise dispose of Licensed Products
so manufactured in all countries of the world, under any patent rights
not yet licensed pursuant to Article 2.01 which are essential to the
manufacture, use, sale or other disposal of Licensed Products, for
which Philips, Sony and Pioneer and their respective Associated
Companies have or may hereafter acquire the free right to grant
licenses to Licensee and its Associated Companies. It is acknowledged
and agreed that in respect of the patent rights as may be licensed
pursuant to this Article 2.02 additional
<PAGE>
4
royalties may have to be paid over and above the royalties specified
in Article 4.02 due on the basis of the use of Licensed Patents
pursuant to Article 2.01.
2.03 USPC, on behalf of Philips, Sony and Pioneer, further agrees to grant
Licensee and its Associated Companies upon their request, on
reasonable non-discriminatory rates and conditions to be agreed upon
from case to case, a non-exclusive, non-transferable license, either
in a sub-license arrangement or by way of individual licenses from
Philips, Sony and Pioneer respectively, to manufacture DVD-Players in
the Territory and to use, sell or otherwise dispose of such DVD-
Players so manufactured in all countries of the world, under any and
all present and future patent rights essential to the manufacture,
use, sale or other disposal of DVD-Players for which Philips, Sony and
Pioneer and their respective Associated Companies have or may
hereafter acquire the free right to grant licenses to Licensee and its
Associated Companies for the manufacture, use, sale or other disposal
of such DVD-Players.
2.04 In consideration of the undertakings set forth in Articles 2.01, 2.02
and 2.03 and similar undertakings by third party licensees of USPC
or Philips and without prejudice to the provisions of Article 10
hereof, for a period of ten years from the Effective Date (as
hereinafter defined) Licensee agrees to grant Philips, Sony and
Pioneer and their respective Associated Companies and to other third
parties who enter or have entered into a license agreement with USPC,
Philips or an Associated Company of Philips concerning Licensed
Products non-exclusive, non-transferable licenses, on reasonable, non-
discriminatory conditions comparable to those set forth herein, to
manufacture, use, sell or otherwise dispose of Licensed Products,
under any and all present and future patent rights, for which Licensee
or its Associated Companies may now have or may hereafter acquire the
right to grant licenses and which are essential to the manufacture,
use, sale or other disposal of Licensed Products, and which patent
rights were first filed in any country of the world up to the date of
termination of this Agreement. For the avoidance of doubt, the above
undertakings shall only apply to those companies which accept or have
accepted a similar undertaking as contained in this Article 2.04.
2.05 In addition, in consideration of the undertakings set forth in
Articles 2.01, 2.02 and 2.03 and similar undertakings by third party
licensees of USPC or Philips and without prejudice to the provisions
of Article 10 hereof, for a period of ten years from the Effective
Date, Licensee agrees to grant Philips, Sony and Pioneer and their
respective Associated Companies and to other third parties who enter
or have entered into a license agreement with USPC, Philips or an
Associated Company of Philips concerning DVD-Players non-exclusive,
non-transferable licenses, on reasonable, non-discriminatory
conditions to be agreed upon from case to case, to manufacture, use,
sell or otherwise dispose of DVD-Players under any or all present and
future patent rights, for which Licensee or its Associated Companies
may now have or may hereafter acquire the right to grant licenses and
which are essential to the manufacture, use sale or other disposal of
such DVD-Players and which patent rights were first filed in any
country of the world up to the date of termination of this Agreement.
For the avoidance of doubt, the undertaking set out in the preceding
sentence shall only apply to those companies which accept or have
accepted a similar undertaking as contained in this Article 2.05.
<PAGE>
5
IT IS EXPRESSLY ACKNOWLEDGED AND AGREED THAT:
(I) THE LICENSES AND LICENSE UNDERTAKINGS HEREIN CONTAINED WITH RESPECT
TO THE MANUFACTURE OF LICENSED PRODUCTS DO NOT COVER RECORDING
MACHINES, EQUIPMENT OR METHODS FOR THE REPLICATION OF DISCS NOR THE
MANUFACTURE OF MATERIALS OR REPRODUCTION RIGHTS FOR INFORMATION
(SUCH AS AUDIO, VIDEO, TEXT AND/OR DATA-RELATED INFORMATION),
CONTAINED ON DISCS TO BE PLAYED BACK ON A PLAYER; NOR DO THE LICENSE
UNDERTAKINGS WITH RESPECT TO THE MANUFACTURE OF PLAYERS EXTEND TO
THE MANUFACTURE OF COMPONENTS OF PLAYERS INCLUDING BUT NOT LIMITED
TO SEMICONDUCTOR DEVICES, INTEGRATED CIRCUITS, LASERS, MOTORS AND
LENSES, EXCEPT FOR PATENT RIGHTS RELATING TO CIRCUITRY AND/OR SYSTEM
ASPECTS SPECIFIC TO THE DVD SYSTEMS (AND SIMILAR OPTICAL READ-OUT
SYSTEMS),
(II) THE RIGHTS AND LICENSES GRANTED UNDER THIS AGREEMENT APPLY ONLY TO
SUCH PART OF A COMBINATION OF ONE OR MORE LICENSED PRODUCTS OR DVD
PLAYERS WITH ANY OTHER ELEMENTS, PRODUCTS, SYSTEMS, EQUIPMENT OR
SOFTWARE WHICH IS IN COMPLIANCE WITH THE DVD-VIDEO AND DVD-ROM
STANDARD SPECIFICATIONS.
2.07 It is acknowledged and agreed that Exhibit I may be amended from time to
time, based upon an evaluation of the Licensed Patents by an independent
patent expert appointed by Philips. In the event that, as a result of
such evaluation, any of the Licensed Patent(s) are found not to be
essential (as defined in Article 1.07) such Licensed Patent(s) shall be
deleted from Exhibit I and Licensee shall be so notified. Notwithstanding
such deletion, Licensee shall retain the right to continue the use of
such deleted patent right(s) in accordance with this Agreement, without
any additional payment, unless Licensee explicitly notifies USPC in
writing of its decision to refrain from exercising such right.
Article 3 -- Have made
----------------------
3.01 The licenses and rights granted to Licensee and its Associated Companies
pursuant to Article 2 include the right for Licensee and its Associated
Companies to have third parties manufacture Licensed Products for
Licensee's or its Associated Companies' use and account in accordance
with the provisions hereof.
Article 4 - Royalties, Reports and Payments
-------------------------------------------
4.01 Upon execution of this Agreement, Licensee will make a non-refundable
payment of ten thousand US Dollars (US$ 10,000) to USPC. From this amount
of US$ 10,000, an amount of
<PAGE>
6
five thousand US Dollars (US$ 5,000) shall be regarded as an advance
payment against royalties payable pursuant to Article 4.02.
4.02 In consideration of the rights granted hereunder by USPC to Licensee,
Licensee agrees to pay to USPC royalties on each Licensed Product sold
by Licensee or any of its Associated Companies, in which any one or more
Licensed Patents is (are) used, irrespective of whether such Licensed
Patent(s) is (are) used in the country of manufacture, use, sale or other
disposal.
These royalties shall amount to five US Dollar Cents (US$ 0.05) on each
Licensed Product.
A Licensed Product shall be considered sold when invoiced or, if not
invoiced, when delivered by any party or otherwise disposed of to a party
other than Licensee or an Associated Company of Licensee.
No royalties shall be payable on Licensed Products purchased by Licensee
or any of its Associated Companies on a "have made" basis in accordance
with Article 3 from third party manufacturers, duly licensed by USPC or
Philips, provided that Licensee can demonstrate to USPC's satisfaction,
that such party manufacturer has paid to USPC or Philips the royalties
due in respect of such Licensed Products.
For the avoidance of doubt, in the event that none of the Licensed
Patents would be infringed by the manufacture of Licensed Products within
the Territory, Licensee shall have no obligation to pay royalties in
respect of Licensed Products manufactured within the Territory and which
are directly exported for final use to a country in which no Licensed
Patents subsist.
4.03 Within thirty (30) days following 31 March, 30 June, 30 September and 31
December of each year during the term of this Agreement, Licensee shall
submit to USPC (even in the event that no sales have been made) a written
statement, signed by a duly authorized officer on behalf of Licensee,
setting forth with respect to the preceding quarterly period:
(1) the quantities of Licensed Products manufactured and sold by
Licensee and its Associated Companies specified per individual
type of Licensed Product, to wit:
- DVD-Video Discs;
- DVD-ROM Discs;
(2) on a per country basis specified for each individual type
of Licensed Product:
(a) the trademarks used on or in connection with the sale of
Licensed Products; and
(b) the quantities of Licensed Products sold or otherwise
disposed of;
(3) a computation of the royalties due under this Agreement.
<PAGE>
7
Licensee shall submit to USPC, once per calendar year, a written
statement by its external auditors, who shall be independent certified
accountants, confirming that the quarterly royalty statements as
submitted by Licensee to USPC for the last four quarterly periods, were
true, complete and accurate in every respect.
Licensee shall pay the royalties due to USPC concurrently with the
submission of the aforementioned written statement.
4.04 Within 30 days following the expiration or termination of this Agreement,
Licensee shall submit to USPC a certified report on the number of
Licensed Products in stock at the time of expiration or termination of
this Agreement. Royalties shall be due and payable on all Licensed
Products manufactured prior to, but remaining in stock with Licensee
and/or its Associated Companies at the date of expiration or termination
of this Agreement. For the purpose of royalty computation, all Licensed
Products in stock will be deemed to have been sold or otherwise disposed
of in the same countries and in proportionally the same quantities as in
the last two full reporting quarters during the term of this Agreement.
For the avoidance of doubt, this Article 4.04 shall be without prejudice
to the provisions of Article 10.05.
4.05 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
amount permitted by law, whichever is lower.
4.06 All payments to USPC under this Agreement shall be made by transfer in
such currency, convertible in the sense of Articles VIII and XIX of the
Articles of Agreement of the International Monetary Fund, as designated
by USPC. The rate of exchange for converting the currency of the
Territory shall be the telegraphic transfer selling rate of the
designated currency (or other convertible currency as the case may be) in
terms of the currency officially quoted in the Territory by the
officially authorized foreign exchange bank for payment of currency
transactions on the day that the amount is due and payable.
4.07 All costs, stamp duties, taxes and other similar levies arising 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 made by Licensee to USPC hereunder and
requires Licensee to withhold such tax from such payments, Licensee may
deduct such tax from such payments. In such event, Licensee shall
promptly provide USPC with tax receipts issued by the relevant tax
authorities so as to enable USPC to support a claim for credit against
income taxes which may be payable by USPC.
4.08 In order that the royalty statements provided for in this Article 4 may
be verified, Licensee shall maintain complete and accurate books and
records covering all sales or other disposals of Licensed Products by
Licensee and/or its Associated Companies, for a period of three (3) years
following such sales or other disposals.
In order to verify the accuracy of the aforementioned royalty statements
USPC shall have the right to inspect such books and records of Licensee
and/or its Associated Companies from time to time, but not more than once
per calendar year, by an independent certified
<PAGE>
8
accountant appointed by USPC. Such inspection shall be conducted at USPC's
own expense provided that if any discrepancy or error exceeding three
percent (3%) of the monies actually due is established, the cost of such
inspection shall be borne by Licensee, without prejudice to any other
claims that USPC may have under this Agreement or under applicable law.
4.09 Without prejudice to the provisions of Article 4.08, Licensee shall provide
relevant additional information as USPC may reasonably request from time to
time to enable USPC to ascertain which products manufactured, sold or
otherwise disposed of by Licensee and/or its Associated Companies are
subject to the payment of royalties to USPC hereunder, the patent rights
which have been used in connection with such products, and the amount of
royalties payable.
4.10 Within thirty (30) days after execution of this Agreement, Licensee shall
pay to USPC a royalty, calculated according to the provisions of Article
4.02, on products which would have been Licensed Products under this
Agreement and were manufactured, used, sold or otherwise disposed of by
Licensee and/or its Associated Companies before the Effective Date of this
Agreement and shall submit to USPC concurrently with this royalty, as
calculated herein, a royalty statement in respect of such products, in
accordance with Article 4.03. Upon the payment of this royalty, as
calculated herein, such products shall become Licensed Products.
Article 5 - Most Favourable Conditions
--------------------------------------
5.01 In the event that licenses under the patent rights referred to in Article 2
would be granted by USPC for Licensed Products to a third party, under
substantially similar conditions but at a royalty rate more favourable
than the rate payable by Licensee under this Agreement, Licensee shall be
entitled to the same royalty rate applicable to such third party, provided
always that this right of Licensee shall not apply in respect of cross-
license agreements or other agreements providing for a consideration which
is not exclusively based on payment of royalties and further provided that
this right of Licensee shall not apply in respect of licenses or other
arrangements made pursuant to a court decision or the settlement of a
dispute between USPC and a third party, irrespective of the nature of such
dispute, the terms of the court decision or the settlement terms.
Article 6 -- No Warranty and Indemnification
--------------------------------------------
6.01 USPC makes no representation or warranty as to the completeness or accuracy
of any information as may be provided in connection with this Agreement,
nor with respect to the ability of Licensee to achieve interchangeability
with respect to Licensed Products through the use of such information. USPC
makes no warranty whatsoever that the use of information supplied by USPC
or Philips does not infringe or may not cause infringement of any
industrial or intellectual property rights owned or controlled by third
parties, or any industrial or intellectual property rights owned or
controlled by USPC, Philips, Sony and Pioneer or their respective
Associated Companies not licensed pursuant to Article 2.
<PAGE>
9
It is acknowledged by the parties hereto that third parties may own
industrial and/or intellectual property rights in the field of Licensed
Products and Licensee acknowledges and agrees that USPC, Philips, Sony and
Pioneer and their respective Associated Companies make no warranty
whatsoever that manufacture, use, sale or other disposal of any Licensed
Product will be free from infringement of any industrial and/or
intellectual property rights other than the Licensed Patents. USPC,
Philips, Sony and Pioneer and their respective Associated Companies shall
be fully indemnified and held harmless by Licensee from and against any
and all third party claims in connection with Licensed Products
manufactured, sold or otherwise disposed of by Licensee and/or any of its
Associated Companies.
Article 7 - Confidentiality
---------------------------
7.01 Licensee and its Associated Companies shall, during the term of this
Agreement as specified in Article 10.01 and for a period of three (3) years
thereafter, not disclose to any third party any information relating to the
manufacture and sale of Licensed Products acquired from USPC, Philips or
Philips' Associated Companies, or use such information for any other
purpose than the manufacture or disposal of Licensed Products in accordance
with this Agreement. This obligation shall not apply to the extent
information so acquired:
(a) was known to Licensee or its Associated Companies prior to the date on
which such information was acquired from USPC, Philips, Sony or
Pioneer or any of their Associated Companies, as shown by records
of Licensee or any Associated Company of Licensee or otherwise
demonstrated to USPC's satisfaction;
(b) is or has become available to the public through no fault of Licensee
or any of its Associated Companies;
(c) was or is received from a third party who was under no confidentiality
obligation in respect of such information..
In protecting information acquired from USPC, Philips or Philips'
Associated Companies relating to the manufacture of Licensed Products,
Licensee and its Associated Companies shall 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 shall protect such
information in the same manner and with the same degree of care with which
Licensee protects its own information of a confidential nature.
Article 8 - Patent Markings
---------------------------
8.01 If requested by USPC, Licensee shall place appropriate patent markings on
an exposed surface of the Licensed Products made, used, sold 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.
<PAGE>
10
Article 9 - Assignment
----------------------
9.01 This Agreement shall inure to the benefit of and be binding upon each of
the parties hereto and their respective assignees. It may not be assigned
in whole or in part by Licensee without the prior consent in writing of
USPC except in the event of a bona fide and solvent merger, consolidation
or other transfer of all or substantially all the assets of Licensee and
except that Licensee may freely assign this Agreement to any of its
Associated Companies provided that Licensee shall remain liable hereunder
and the transferee has the capability to perform all obligations on
Licensee's part hereunder.
Article 10 - Term and Termination
---------------------------------
10.01 This Agreement shall enter into force on the "Effective Date", being the
date first written above, or, in the case validation of this Agreement is
required by the competent governmental authorities, the date of such
validation. This Agreement shall remain in force for a period of ten (10)
years from the Effective Date, unless terminated earlier in accordance
with the provisions of this Article 10.
10.02 Without prejudice to the provisions of Article 10.03 through 10.05, each
party may terminate this Agreement at any time by means of written notice
to the other party in the event that the other party fails to comply with
any material obligation under this Agreement and, such failure is not
remedied within thirty (30) days after receipt of a notice specifying the
nature of such failure and requiring it to be remedied. 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 and all
such remedies shall be cumulative. Any such termination shall not affect
any royalties or other payment obligations under this Agreement accrued
prior to such termination.
10.03 USPC may terminate this Agreement forthwith by means of notice in writing
to Licensee in the event that a creditor or other claimant takes
possession of, or a receiver, administrator or similar officer is
appointed over any of the assets of Licensee or in the event that Licensee
makes any voluntary arrangement with its creditors or becomes subject to
any court or administration order pursuant to any bankruptcy or insolvency
law.
10.04 USPC shall have the right to terminate this Agreement forthwith or to
revoke the license granted under any of USPC's, Philips', Sony's or
Pioneer's respective patent rights in the event that Licensee or any of
its Associated Companies brings a lawsuit or other proceeding for
infringement of any of its essential patents related to Licensed Products
or DVD Players against Philips, Sony or Pioneer and/or any of their
respective Associated Companies respectively and Licensee refuses to
license such patents on fair and reasonable terms to Philips, Sony and
Pioneer respectively.
10.05 Upon the termination by USPC for any reason pursuant to Article 10.02
through 10.04, Licensee shall immediately cease the manufacture, sale or
other means of disposal of
<PAGE>
11
Licensed Products in which the Licensed Patents are used. Further, upon
such termination, any and all amounts outstanding hereunder shall become
immediately due and payable
Article 11 - Miscellaneous
--------------------------
11.01 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.
it is addressed to:
Future Media Productions, Inc.
25136 Anza Drive
Valencia, California 91355
and in respect to USPC, to:
U.S. Philips Corporation
580 White Plains Road
Tarrytown, New York 10591
Fax. No.: 914-332-0615
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.
11.02 This Agreement sets forth the entire understanding and agreement between
the parties as to the subject matter hereof and supersedes and replaces
all prior arrangements, discussions and understandings between the parties
specifically relating thereto. Neither party shall be bound by any
obligation, warranty, waiver, release or representation, except as
expressly provided herein, or as may subsequently be agreed in writing
between the parties.
11.03 Nothing contained in this Agreement shall be construed
(a) as imposing on either party any obligation to instigate 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 relates to the validity of any of such patent
rights. Licensee shall have no right to instigate 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 relates to the validity of any such patent right
licensed by USPC hereunder;
<PAGE>
12
(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 imitate the appearance
and/or design of any product,
(d) as conferring any license under the patent rights licensed pursuant
to Article 2 hereof, to manufacture, use, sell or otherwise dispose
of any product or device other than a Licensed Product. This sub
clause (d) of this Article 11.03 shall however not be considered a
prohibition of Licensee to manufacture Licensed Products as part of
and incorporated in combination products.
11.04 Neither the failure nor delay of either party to enforce any provisions of
this Agreement shall constitute a waiver of such provision or of the right
of either party to enforce each and every provision of this Agreement.
11.05 Should any provision of this Agreement be finally determined void or
unenforceable in any judicial proceeding, such determination shall not
affect the operation of the remaining provisions hereof.
11.06 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 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.
AS WITNESS, the parties hereto have caused this Agreement to be signed on the
date first written above.
U.S. PHILIPS CORPORATION FUTURE MEDIA PRODUCTIONS, INC.
/s/ Algy Tamoshunas /s/ Louis Weiss
- ---------------------------------- ---------------------------------------
Algy Tamoshunas Name: Louis Weiss
Title: Vice President Title: CFO
--------------------------- ---------------------------------
Date: 2/8/00 Date: 1/21/00
--------------------------- ----------------------------------
<PAGE>
DVD - Video/ROM Disc Patent List Philips
<TABLE>
<CAPTION>
=================================================================================================================================
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date
=================================================================================================================================
<S> <C> <C> <C> <C>
N 6493 NL 72.11999/ - Read out of optical disc via substrate. PS 5,068,846/ -
02.09.1972 26.11.2008
- ---------------------------------------------------------------------------------------------------------------------------------
N 14.746 EP 94.200.387.2/ EFM + -Modulation scheme for high density PS 5,696,505/ PPU 97-512,392/
15.02.1994 disc.
08.02.2015 01.02.2015
A 08-900,275
- ---------------------------------------------------------------------------------------------------------------------------------
N 15.093 BE 094.01044/ Disc size on disc. A 08-558,517/ PPU 97-507,946/
18.11.1994
31.10.2015
- ---------------------------------------------------------------------------------------------------------------------------------
N 14.752 EP 94.200.339.3/ SD Block format, with error coding PS 5,838,696/ PPU 96-509,316/
interleave.
16.02.1994 16.02.2015 14.02.2015
A 09-136,650
- ---------------------------------------------------------------------------------------------------------------------------------
N 13.409 NL 90.01771/ DVD Sector and word offset in headers PS 5,740,310/ PPU 92-233,380/
06.08.1990 for video block pointers. 04.06.2011
PS 5,745,641/
- ---------------------------------------------------------------------------------------------------------------------------------
N 15.156 EP 94.203.642.7/ DVD/DVB Subtitle compression (pixel based A 08-572,255/ PPU 97-509,552/
region/subregion). 13.12.2015 12.12.2015
14.12.1994
=================================================================================================================================
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this is
considered to be concluded as an integral part of this list.
<PAGE>
DVD - Video/ROM Disc Patent List Philips
<TABLE>
<CAPTION>
=================================================================================================================================
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date
=================================================================================================================================
<S> <C> <C> <C> <C>
N 15.395 EP 95.202.012.1/ DVD Subtitle duration A 08-516,836/ A 97-506,485/
21.07.1995
18.08.2015 12.07.2016
- ---------------------------------------------------------------------------------------------------------------------------------
N 15.424 EP 95.202.215.0/ DVD path control system. A 08-692,918/ PCT-JP 96/02, 188/
16.08.1995
31.07.2016 02.08.2016
- ---------------------------------------------------------------------------------------------------------------------------------
B 33.971 } GB 95.02172.1/ DVD Subtitle compression (run-length A 08-593,963/ PPU 98-500,273/
} 03.02.1995 coding). 26.01.2016
B 33.973 } GB 95.03063/
16.02.1995
- ---------------------------------------------------------------------------------------------------------------------------------
N 15.110 EP 94.203.466.1/ Variable bitrate Optical Recording System. A 08-562,660/ PPU 97-509,004/
29.11.1994
27.11.2015 16.11.2015
A 08-858,482/
- ---------------------------------------------------------------------------------------------------------------------------------
Q88.053 US A 07.157832/ Method of affixing information on read PS 4,961,077/ PS 2,810,950/
19.02.1988 only optical discs.
19.02.2008 20.02.2009
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this is
considered to be concluded as an integral part of this list.
<PAGE>
DVD - Video/ROM Disc Patent List Philips
<TABLE>
<CAPTION>
==================================================================================================================
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date
==================================================================================================================
<S> <C> <C> <C> <C> <C>
N 14.950 EP 94.202262.5/ Mastering write strategy. PS 5,605,782/ PPU 95-320,208/
05.08.1994 22.12.2014 22.12.2014
PS 5,790,512/
22.12.2014
==================================================================================================================
N 14.789 EP 94.200.922.6/ A Rate 8/9 DC-FREE Code PS 5,642,113/ PPU 96-511,405/
05.04.1994 15.02.2015 21.03.2015
==================================================================================================================
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this list
considered to be concluded as an integral part of this list.
<PAGE>
DVD - Video/ROM Disc Patent List Sony
<TABLE>
<CAPTION>
=======================================================================================================================
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date
=======================================================================================================================
<S> <C> <C> <C> <C>
#01 S55-050,887 ECC for the sector ID PS 4,364,081/
S55-056,882 16.04.2001
- -----------------------------------------------------------------------------------------------------------------------
#02 S56-017,734 DSV control word PS 4,456,905/ PS 1,547,082/
08.02.2002 09.02.2001
- -----------------------------------------------------------------------------------------------------------------------
#03 H06-157,175 8/16 Modulation PS 5,818,367/ LN1108-03l,100
06.10.2015
- -----------------------------------------------------------------------------------------------------------------------
#04 H06-116,213 Branching Operation Re. 33,765/ PS 2,544,333/
01.05.2006 29.05.2005
- --------------------------------------------------------------------------------------------------------------------------
#05 S61-093,892 Flag for variable bit-rate ID) PS 4,819,236/ PS 2,740,163/
H08-008,149 04.04.2009 23.04.2006
PS 2,728,076
23.04.2006
----------------------------------------------------------------------------------------------------------------------
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this list
considered to be concluded as an integral part of this list.
<PAGE>
2
DVD - Video/ROM Disc Patent List Sony
<TABLE>
<CAPTION>
====================================================================================================================================
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ: PPU/Exp. date
====================================================================================================================================
<S> <C> <C> <C> <C>
#06 S63-025,475 AV sync. code PS 2,636,294/
H07-037,627 14.08.2009
LN1107-21l,007
- ------------------------------------------------------------------------------------------------------------------------------------
#07 H04-249,791 24 Hz encoding for 2/3 pull down video signals PS 5,461,420/ LN1107-099,603
H04-249,792 17.09.2013
H05-166,746
H05-233,894
- ------------------------------------------------------------------------------------------------------------------------------------
#08 H04-277,956 Data search information entry point PS 5,455,684/ PS 2,785,220/
H04-350,577 22.09.2013 04.12.2012
H04-355,558 PS 5,568,274/ LN1106-144,522
22.10.2013
- ------------------------------------------------------------------------------------------------------------------------------------
#09 S57-029,472 Transform coding and band dividing PS 1,756,619/
25.02.2002
- ------------------------------------------------------------------------------------------------------------------------------------
#10 H01-186,603 Frame Size Control PS 5,299,238/ LN1103-052,332
PS 5,299,239/
PS 5,299,240/
29.03.2011
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this list
considered to be concluded as an integral part of this list.
<PAGE>
DVD - Video/ROM Disc Patent List Sony
<TABLE>
<CAPTION>
====================================================================================================================================
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date
====================================================================================================================================
<S> <C> <C> <C> <C>
#11 H02-021,210 An optical recording medium PS 5,533,001/ LN1103-225,650
02.07.2013 LN1109-185,852
LN1109-204,688
LN1109-204,689
- ------------------------------------------------------------------------------------------------------------------------------------
#12 H02-021,210 An optical disc system PS 5,587,990/ LN1103-225,650
24.12.2013 LN1109-185,852
LN1109-204,688
LN1109-204,689
- -----------------------------------------------------------------------------------------------------------------------------------
#13 H02-021,210 An optical disc PS 5,757,733/ LN1103-225,650
30.01.2011 LN1109-185,852
LN1109-204,688
LN1109-204,689
- ------------------------------------------------------------------------------------------------------------------------------------
#14 H02-021,210 An optical recording and/or reproducing apparatus PS 5,610,880/ LN1103-225,650
30.01.2011 LN1109-185,852
LN1109-204,688
LN1109-204,689
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this list
considered to be concluded as an integral part of this list.
<PAGE>
DVD - Video/ROM Disc Patent List Sony
<TABLE>
<CAPTION>
====================================================================================================================================
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date
====================================================================================================================================
<S> <C> <C> <C> <C>
#15 H07-088,607 Color-control of subtitle PS 5,748,256/ LN1108-265,661
21.03.2016
- ---------------------------------------------------------------------------------------------------------------------------------
#16 H07-099,436 Position-information for displaying subtitle A 08/627,742 LN1108-275,205
- ---------------------------------------------------------------------------------------------------------------------------------
#17 H07-202,703 Information for searching subtitle data A 08/683,344 LN1109-035,458
- ---------------------------------------------------------------------------------------------------------------------------------
#18 H07-200,121 Path control A 08/692,918 LN1109-106,631
H07-200,122
H08-203,966
- ---------------------------------------------------------------------------------------------------------------------------------
#19 H07-214,675 Top-field-flag of GOP A 08/701,754 LN1109-121,360
H08-221,592
- ---------------------------------------------------------------------------------------------------------------------------------
#20 H07-215,506 Subtitle-displaying duration PS 5,748,217/ LN1109-051,502
24.07.2016
- ---------------------------------------------------------------------------------------------------------------------------------
#21 H06-306,971 Disc having layer number LN1109-147,762
- ---------------------------------------------------------------------------------------------------------------------------------
#22 H07-006,902 Line 21 data for closed caption A 08/586,158 LN1108-205,075
- ---------------------------------------------------------------------------------------------------------------------------------
#23 H07-211,420 IPP address for closed caption A 08/688,819 LN1109-046,712
- ---------------------------------------------------------------------------------------------------------------------------------
#24 H07-200,082 Aspect ratio data for VBID/WSS A 08/692,276 LN1109-051,501
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this list
considered to be concluded as an integral part of this list.
<PAGE>
DVD - VIDEO/ROM Disc Patent List Sony
<TABLE>
<CAPTION>
====================================================================================================================================
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date
====================================================================================================================================
<S> <C> <C> <C> <C>
#25 H07-197,816 Availability flag of audio/sub-picture stream A 08/690,873 LNI109-102,932
H08-133,644
- ------------------------------------------------------------------------------------------------------------------------------------
#26 H08-023,500 Interleaved unit size for seamless play PS 5,721,591/ LN1109-274,769
H09-026,238 30.01.2017
====================================================================================================================================
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this list
considered to be concluded as an integral part of this list.
<PAGE>
1
DVD - Video/ROM Disc Patent List Pioneer
<TABLE>
<CAPTION>
====================================================================================================================================
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date
====================================================================================================================================
<S> <C> <C> <C> <C>
42P30201 J 63-67598/ Method of recording and reproducing picture PS 4,953,035/ PS 2,811,445/
22.03.1988 information, recording medium, and recording 23.09.2008 22.03.2008
medium playing apparatus.
- ------------------------------------------------------------------------------------------------------------------------------------
41P30564 J 62-169368/ Method of recording and reproducing information and PPU 01-12,777
07.07.1987 recording medium.
- ------------------------------------------------------------------------------------------------------------------------------------
42P30166 J 63-46604/ Method of recording and reproducing picture PS 2,735,557/
29.02.1988 information and recording medium. 29.02.2008
-----------------------------------------------------------------------------------------------------------------------------------
42P30229 J 63-57401/ Method of recording and reproducing picture PS 5,315,400/ PPU 01-232,573
11.03.1988 information, recording medium, and recording medium 24.05.2011
playing apparatus.
- ------------------------------------------------------------------------------------------------------------------------------------
42P30236 J 63-102175/ Method and apparatus for recording and PS 5,063,551/ PPU 01-273,268
25.04.1988 reproducing picture information and recording medium 31.01.2009
- ------------------------------------------------------------------------------------------------------------------------------------
47P40013 J 04-243803/ Video disc having an aspect ratio information and A 115,771 PPU 06-98,291
11.09.1992 video disc player having an aspect ratio A 334,374
converting function.
- ------------------------------------------------------------------------------------------------------------------------------------
47P30077 J 04-293888/ Audio recording medium and audio reproducing PPU 06-124,540
07.10.1992 apparatus thereof.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this list
considered to be concluded as an integral part of this list.
<PAGE>
DVD -- Video/ROM Disc Patent List Pioneer
<TABLE>
<CAPTION>
===================================================================================================================================
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date
===================================================================================================================================
<S> <C> <C> <C> <C>
48P40116 J 05-282514/ Optical disk having synchronous marks and data PS 5,629,924/ PS 2,849,033/
11.11.1993 marks to satisfy certain criteria Optical disc and 07.11.2014 11.11.2013
spindle servo circuit for playing apparatus thereof. A 08-236,411
- -----------------------------------------------------------------------------------------------------------------------------------
48P30016 J 05-124068/ Recording medium and karaoke reproducing apparatus. PS 5,473,106/ PPU 06-332,485
26.05.1993 24.05.2014
- -----------------------------------------------------------------------------------------------------------------------------------
48P30015 J 05-124070/ Recording medium and karaoke reproducing apparatus. PS 5,466,883/ PPU 06-332,481
26.05.1993 25.05.2014
- -----------------------------------------------------------------------------------------------------------------------------------
48P30019 J 05-124067/ Recording medium playing apparatus and recording A 719,466 A 08-336,031
26.05.1993 medium.
- -----------------------------------------------------------------------------------------------------------------------------------
45P40038 J 02-179794/ Information storage medium and apparatus for PS 5,336,844/ A 10-315,653
06.07.1990 reproducing information therefrom. 09.08.2011
- -----------------------------------------------------------------------------------------------------------------------------------
48P30012 J 05-148156/ Recording medium playing apparatus and recording A 719,466 A 08-336,054
18.06.1993 medium
- -----------------------------------------------------------------------------------------------------------------------------------
50P40030 J 06-174511/ Multi-layered recording disk and PS 5,608,715/ PPU 08-96,406
26.07.1994 recording/reproducing system using the same. 20.07.2015
- -----------------------------------------------------------------------------------------------------------------------------------
50P40040 J 07-166024/ Information recording medium, and apparatus for A 670,533 PPU 09-17,159
30.06.1995 recording or reproducing on or from the same. Notice of Allowance
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this list
considered to be concluded as an integral part of this list.
<PAGE>
3
DVD -- Video/ROM Disc Patent List Pioneer
<TABLE>
<CAPTION>
===================================================================================================================================
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date
===================================================================================================================================
<S> <C> <C> <C> <C>
50P40041 J 07-170913/ Method and apparatus for recording record medium, A 675,016 PPU 09-23,404
06.07.1995 and apparatus for reproducing the same. Notice of Allowance
- -----------------------------------------------------------------------------------------------------------------------------------
50P40166 J 08-41942/ Information record media, apparatus for recording A 806,459 PPU 09-231,730
28.02.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
50P40188 J 08-41943/ Information record media, apparatus for recording A 806,458 PPU 09-231,677
28.02.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
50P40174 J 08-57757/ Information record media, apparatus for recording A 815,956 PPU 09-251,759
14.03.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
50P40171 J 08-59834/ Information record media, apparatus for recording A 816,889 PPU 09-251,760
15.03.1996 the same and apparatus for reproducing the same. Notice of Allowance
- -----------------------------------------------------------------------------------------------------------------------------------
50P40189 J 08-59835/ Information record media, apparatus for recording A 815,184 PPU 09-251,717
15.03.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
50P40182 J 08-59836/ Information record media, apparatus for recording A 812,882 PPU 09-252,449
15.03.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
50P40167 J 08-59837/ Information record media, apparatus for recording A 816,686 PPU 09-252,450
15.03.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this list
considered to be concluded as an integral part of this list.
<PAGE>
4
DVD -- Video/ROM Disc Patent List Pioneer
<TABLE>
<CAPTION>
===================================================================================================================================
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date
===================================================================================================================================
<S> <C> <C> <C> <C>
50P40164 J 08-59838/ Information record media, apparatus for recording A 816,941 PPU 09-251,761
15.03.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
50P40176 J 08-61470/ Information record media, apparatus for recording A 822,157 PPU 09-251 ,763
18.03.1996 the same and apparatus for reproducing the same. Notice of Allowance
- -----------------------------------------------------------------------------------------------------------------------------------
50P40165 J 08-61471/ Information record media, apparatus for recording A 819,012 PPU 09-261,584
18.03.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
50P40187 J 08-61472/ Information record media, apparatus for recording A 819,011 PPU 09-251,723
18.03.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
50P40186 J 08-61473/ Information record media, apparatus for recording PS 5,805,537/ PPU 09-251,762
18.03.1996 the same and apparatus for reproducing the same. 17.03.2017
- -----------------------------------------------------------------------------------------------------------------------------------
50P40180 J 08-63590/ Information record media, apparatus for recording A 820,256 PPU 09-259,573
19.03.1996 the same and apparatus for reproducing the same. Notice of Allowance
- -----------------------------------------------------------------------------------------------------------------------------------
50P40184 J 08-63591/ Information record media, apparatus for recording A 820,257 PPU O9-259,574
19.03.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
50P40169 J 08-66403/ Information record media, apparatus for recording A 821,424 PPU 09-259,541
22.03.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this list
considered to be concluded as an integral part of this list.
<PAGE>
DVD -- Video/ROM Disc Patent List Pioneer
<TABLE>
<CAPTION>
===================================================================================================================================
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date
===================================================================================================================================
<S> <C> <C> <C> <C>
50P40185 J 08-66404/ Information record media, apparatus for recording PS 5,742,569/ PPU 09-259,506
22.03.1996 the same and apparatus for reproducing the same. 21.03.2017
- -----------------------------------------------------------------------------------------------------------------------------------
50P40168 J 08-66405/ Information record media, apparatus for recording A 822,457 PPU 09-259,542
22.03.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
50P40175 J 08-68730/ Information record media, apparatus for recording A 825,560 PPU 09-265,765
25.03.1996 the same and apparatus for reproducing the same. Notice of allowance
- -----------------------------------------------------------------------------------------------------------------------------------
50P40163 J 08-82932/ Information record media, apparatus for recording A 834,806 PPU 09-274,776
04.04.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
50P40179 J 08-83478/ Information record media, apparatus for recording A 831,716 PPU 09-282,848
05.04.1996 the same and apparatus for reproducing the same.
- -----------------------------------------------------------------------------------------------------------------------------------
50P40181 J 08-85808/ Information record media, apparatus for recording A 833,476 PPU 09-282,849
08.04.1996 the same and apparatus for reproducing the same. Notice of allowance
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this list
considered to be concluded as an integral part of this list.
<PAGE>
Exhibit 10.22
PATENT LICENSE AGREEMENT FOR THE USE OF AC-3 TECHNOLOGY IN THE MANUFACTURE
--------------------------------------------------------------------------
OF DVD DISCS
------------
This Agreement having an effective date of October 1, 1999 by and between U.S.
PHILIPS CORPORATION, having its principal office at 580 White Plains Road,
Tarrytown, New York 10591 (hereinafter referred to as "Philips")
and
Future Media Productions, Inc., having its principal office at 25136 Anza Drive,
Valencia, California 91355 (hereinafter referred to as "Licensee")
WHEREAS, Licensee is engaged in the manufacture of DVD-Video and DVD-ROM Discs
(together hereinafter referred to as "DVD Discs") and, in the process of such
manufacture, is making use of the technology developed by Dolby Laboratories and
known as AC-3;
WHEREAS, Koninklijke Philips Electronics N.V. (hereinafter referred to as
"Philips"), Institut fur Rundfunk Technik G.m.b.H. of Munchen, Germany, (IRT)
and the Centre Commun d'Etudes Telediffusion et Telecommunications of Cesson-
Sevigne, France (CCETT) own certain patents rights relating to the AC-3
technology, these patent rights (hereinafter referred to as "Licensed Patents")
are listed in Annex 1 hereto;
WHEREAS, USPC has been authorized by Philips, IRT and CCETT to grant licenses
for the use of the Licensed Patents in connection with the use of the AC-3
technology.
WHEREAS, Licensee wishes to be licensed under the Licensed Patents in
connection with the manufacture of DVD-Discs making use of AC-3 and Philips is
willing to grant such license in accordance with the provisions hereof;
IT IS HEREBY AGREED AS FOLLOWS:
Article 1 - Definitions
-----------------------
1.01 "Disc": a non-recordable reflective disc-shaped information carrier
comprising any kind of information such as, but not limited to, audio,-
video-, text- and/or data-related information, which is irreversibly
stored in one or more layers during and as an integral part of the
manufacturing process of the disc in a form which is optically readable by
play-back devices.
1.02 "Player": a playback device for optically reading information stored on a
Disc and converting such information into electrical signals for
reproduction purposes.
1.03 "DVD-Video Disc/DVD-ROM Disc": a replicated Disc comprising any kind of
information such as, but not limited to, audio,- video,- text,- and/or
data-related information,
<PAGE>
2
encoded in digital form, which is optically readable by a DVD-Video Player
or a DVD-ROM Player.
1.04 "DVD-Video Player/DVD-ROM Player": a Player which is designed and
manufactured specifically for the reproduction of information stored on a
DVD Disc and the conversion of such information, which is bit-encoded
according to the DVD-Video and DVD-ROM Standard Specifications, into
electrical signals by means prescribed in the DVD-Video and DVD-ROM
Standard Specifications, which electrical signals are directly capable and
intended to be used for visual reproduction through standard television
receivers and/or television monitors, or for reproduction of video, text
and data related information through data handling and/or data processing
equipment, (the DVD-Video Player and DVD-ROM Player together referred to
as "DVD Player").
1.05 "Licensed Product(s)": DVD Discs incorporating AC-3 technology.
1.06 "Licensed Patents": The patents as listed in Annex I hereto.
The word "essential" as used in relation to patent rights in this
Agreement shall refer to patent rights, the use of which is necessary (as
a practical matter) for the use of the AC-3 technology in connection with
the Licensed Products.
1.07 "Associated Company": any business entity, in which Philips, IRT, CCETT or
Licensee controls, directly or indirectly, more than fifty percent (50%)
of the shares entitled to vote for the election of directors, but any such
business entity shall be deemed an Associated Company only for as long as
such control exists.
1.08 "Territory"; the geographic area known as the United States of America,
its territories and possessions.
Article 2 -- Grant of rights
----------------------------
2.01 For the term of this Agreement and subject to the provisions hereof, USPC
hereby grants to Licensee and its Associated Companies a non-exclusive,
non-transferable license under the Licensed Patents to use the AC-3
technology in the manufacture of Licensed Products within the Territory
and to use, sell or otherwise dispose of Licensed Products so manufactured
in all countries of the world.
2.02 In consideration of the undertakings set forth in Articles 2.01, Licensee
agrees to grant to Philips, IRT, CCETT and their respective Associated
Companies, for a period of ten years from the Effective Date (as
hereinafter defined), non-exclusive, non-transferable licenses, on
reasonable, non-discriminatory conditions comparable to those set forth
herein, to use the AC-3 technology in the manufacture of DVD Discs and to
use, sell or otherwise dispose of DVD Discs so manufactured in all
countries of the world, under any and all present and future patent
rights, for which Licensee or its Associated Companies may now have or may
hereafter acquire the right to grant licenses and which are essential to
the use of AC-3
<PAGE>
3
technology in the manufacture of DVD Discs and the subsequent use, sale or
other disposal thereof, and which patent rights were first filed in any
country of the world up to the date of termination of this Agreement.
Article 3 - Roya1ties, Reports and Payments
-------------------------------------------
3.01 In consideration of the rights granted hereunder by USPC to Licensee,
Licensee agrees to pay to USPC, a royalty of US$0.003 (three tenths of a
US dollar cent) on each Licensed Product sold by Licensee or any of its
Associated Companies, in which any one or more Licensed Patent(s) is (are)
used, irrespective of whether such licensed Patent(s) is (are) used in the
country of manufacture, use, sale or other disposal.
A Licensed Product shall be considered sold when invoiced or, if not
invoiced, when delivered by any party or otherwise disposed of to a party
other than Licensee or an Associated Company of Licensee.
For the avoidance of doubt, in the event that none of the Licensed Patents
would be infringed by the manufacture of Licensed Products within the
Territory, Licensee shall have no obligation to pay the royalties due on
the basis of this Agreement in respect of Licensed Products manufactured
within the Territory and which are directly exported for final use to a
country in which no Licensed Patents subsist.
3.02 Within thirty (30) days following 31 March, 30 June, 30 September and 31
December of each year during the term of this Agreement, Licensee shall
submit to USPC (even in the event that no sales have been made) a written
statement, signed by a duly authorized officer on behalf of Licensee,
setting forth with respect to the preceding quarterly period:
(1) the quantities of Licensed Products manufactured and sold by Licensee
and its Associated Companies:
(2) a computation of the royalties due under this Agreement.
Licensee shall submit to USPC, once per calendar year, a written statement
by its external auditors, who shall be independent certified accountants,
confirming that the quarterly royalty statements as submitted by Licensee
to USPC for the last four quarterly periods, were true, complete and
accurate in every respect.
Licensee shall pay the royalties due to USPC concurrently with the
submission of the aforementioned written statement.
3.03 Within 30 days following the expiration or termination of this Agreement,
Licensee shall submit to USPC a certified report on the number of Licensed
Products in stock at the time of expiration or termination of this
Agreement. Royalties shall be due and payable on all Licensed Products
manufactured prior to, but remaining in stock with Licensee and/or its
Associated Companies at the date of expiration or termination of this
Agreement. For the
<PAGE>
4
purpose of royalty computation, all Licensed Products in stock will be
deemed to have been sold or otherwise disposed of in the same countries
and in proportionally the same quantities as in the last two full
reporting quarters during the term of this Agreement. For the avoidance of
doubt, this Article 3.03 shall be without prejudice to the provisions
of Article 5.05.
3.04 Any 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
amount permitted by law, whichever is lower.
3.05 All payments to USPC under this Agreement shall be made by transfer in
such currency, convertible in the sense of Articles VIII and XIX of the
Articles of Agreement of the International Monetary Fund, as designated by
USPC. The rate of exchange for converting the currency of the Territory
shall be the telegraphic transfer selling rate of the designated currency
(or other convertible currency as the case may be) in terms of the
currency officially quoted in the Territory by the officially authorized
foreign exchange bank for payment of currency transactions on the day that
the amount is due and payable.
3.06 All costs, stamp duties, taxes and other similar levies arising 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 made by Licensee to USPC hereunder and
requires Licensee to withhold such tax from such payments, Licensee may
deduct such tax from such payments. In such event, Licensee shall promptly
provide USPC with tax receipts issued by the relevant tax authorities so
as to enable USPC to support a claim for credit against income taxes which
may be payable by USPC.
3.07 Licensee shall maintain complete and accurate books and records covering
all sales or other disposals of Licensed Products by Licensee and/or its
Associated Companies, for a period of three (3) years following such sales
or other disposals.
In order to verify the accuracy of the royalty statements mentioned in
Article 3.02, USPC shall have the right to inspect such books and records
of Licensee and/or its Associated Companies from time to time, but not
more than once per calendar year, by an independent certified accountant
appointed by USPC. Such inspection shall be conducted at USPC's own
expense provided that if any discrepancy or error exceeding three percent
(3%) of the monies actually due is established, the cost of such
inspection shall be borne by Licensee, without prejudice to any other
claims that USPC may have under this Agreement or under applicable law.
3.08 Without prejudice to the provisions of Article 3.07, Licensee shall
provide relevant additional information as USPC may reasonably request
from time to time to enable USPC to ascertain which products manufactured,
sold or otherwise disposed of by Licensee and/or its Associated Companies
are subject to the payment of royalties to USPC hereunder, the patent
rights which have been used in connection with such products, and the
amount of royalties payable.
<PAGE>
5
3.09 Within thirty (30) days after execution of this Agreement, Licensee shall
pay to USPC a royalty, calculated in accordance with the provisions of
Article 3.01, on products which would have been Licensed Products under
this Agreement and were manufactured, used, sold or otherwise disposed of
by Licensee and/or its Associated Companies before the Effective Date of
this Agreement and shall submit to USPC concurrently with this royalty, as
calculated herein, a royalty statement in respect of such products, in
accordance with Article 3.02. Upon the payment of this royalty, as
calculated herein, such products shall become Licensed Products.
Article 4 - No Warranty and Indemnification
-------------------------------------------
4.01 It is acknowledged by the parties hereto that third parties may own
industrial and/or intellectual property rights in the field of AC-3 and
Licensee acknowledges and agrees that USPC, Philips, IRT and CCETT and
their respective Associated Companies make no warranty whatsoever that the
use of the AC-3 technology or the manufacture, use, sale or other disposal
of any Licensed Product will be free from infringement of any industrial
and/or intellectual property rights other than the Licensed Patents.
Article 5 - Term and Termination
--------------------------------
5.01 This Agreement shall enter into force on the "Effective Date", being the
date first written above, or, in the case validation of this Agreement is
required by the competent governmental authorities, the date of such
validation. This Agreement shall remain in force for a period of ten (10)
years from the Effective Date, unless terminated earlier in accordance
with the provisions of this Article 5.
5.02 Without prejudice to the provisions of Article 5.03 through 5.05, each
party may terminate this Agreement at any time by means of written notice
to the other party in the event that the other party fails to comply with
any material obligation under this Agreement and, such failure is not
remedied within thirty (30) days after receipt of a notice specifying the
nature of such failure and requiring it to be remedied. 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 and all
such remedies shall be cumulative. Any such termination shall not affect
any royalties or other payment obligations under this Agreement accrued
prior to such termination.
5.03 USPC may terminate this Agreement forthwith by means of notice in writing
to Licensee in the event that a creditor or other claimant takes
possession of, or a receiver, administrator or similar officer is
appointed over any of the assets of Licensee or in the event that Licensee
makes any voluntary arrangement with its creditors or becomes subject to
any court or administration order pursuant to any bankruptcy or insolvency
law.
5.04 USPC shall have the right to terminate this Agreement forthwith or to
revoke the license granted under any of USPC's, Philips', IRT's or CCETT's
respective patent rights in the
<PAGE>
6
event that Licensee or any of its Associated Companies brings a lawsuit or
other proceeding for infringement of any of its patents essential for the
use of the AC-3 technology in the manufacture of DVD Discs and/or the
use, sale or other disposal thereof against USPC, Philips, IRT or CCETT
and/or any of their respective Associated Companies respectively and
Licensee refuses to grant licenses under such patents on fair and
reasonable terms to USPC, Philips, IRT and CCETT respectively.
5.05 Upon the termination by USPC for any reason pursuant to Article 5.02
through 5.04, Licensee shall immediately cease the manufacture, sale or
other means of disposal of Licensed Products in which the Licensed
Patents are used. Further, upon such termination, any and all amounts
outstanding hereunder shall become immediately due and payable.
Article 6 - Miscellaneous
-------------------------
6.01 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,
it is addressed to:
Future Media Productions, Inc.
25136 Anza Drive
Valencia, California 91355
in respect of USPC, to:
U.S. Philips Corporation
580 White Plains Road
Tarrytown, New York 10591
Fax. No.: 914-332-0615
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.
6.02 This Agreement sets forth the entire understanding and agreement between
the parties as to the subject matter hereof and supersedes and replaces
all prior arrangements, discussions and understandings between the
parties specifically relating thereto. Neither party shall be bound by any
obligation, warranty, waiver, release or representation, except as
expressly provided herein, or as may subsequently be agreed in writing
between the parties.
6.03 Nothing contained in this Agreement shall be construed:
<PAGE>
7
(a) as imposing on either party any obligation to instigate 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 relates to the validity of any of such patent
rights. Licensee shall have no right to instigate 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 relates to the validity of any such patent right
licensed by USPC hereunder;
(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 imitate the appearance
and/or design of any product;
(d) as conferring any license under the patent rights licensed pursuant
to Article 2 hereof, to manufacture, use, sell or otherwise dispose
of any product or device other than a Licensed Product.
6.04 Neither the failure nor delay of either party to enforce any provisions of
this Agreement shall constitute a waiver of such provision or of the right
of either party to enforce each and every provision of this Agreement.
6.05 Should any provision of this Agreement be finally determined void or
unenforceable in any judicial proceeding, such determination shall not
affect the operation of the remaining provisions hereof.
6.06 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 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.
AS WITNESS, the parties hereto have caused this Agreement to be signed on the
date first written above.
U.S. PHILIPS CORPORATION FUTURE MEDIA PRODUCTIONS, INC.
/s/ Algy Tamoshunas /s/ Louis Weiss
- --------------------------------- --------------------------------
Algy Tamoshunas Name: Louis Weiss
Title: VP Title CFO
--------------------------- --------------------------
Date: 2/8/00 Date: 1/21/00
--------------------------- --------------------------
<PAGE>
DVD - Video/ROM Disc Patent List AC3
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date Appln. No/Exp. date Publ.PPU/Exp. date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
IRT-2 DE 3,639,753 Method for transfer of digital audio signals PS 4,972,484 PS 1.501.435
21.11.1986 20.11.2007 20,11,2007
- ---------------------------------------------------------------------------------------------------------------------------------
IRT-3 DE3.440.613 Method for digitally transferring a broadcast
07.11.1984 program signal
- ---------------------------------------------------------------------------------------------------------------------------------
N 13.241 NL 89.01402 Universal subband coder format PS 5, 323,396 PPU 91-24834
02.06.1989 21.06.2011 01.06.2010
NL 90.00338 PS 5,606,618
13.02.1990 23.07.2013
PS 5,777,992
21.06.2011
PS 5,539,829
23,07.2013
A 08/488,536
PS 5,530,655
25.06.2013
- ---------------------------------------------------------------------------------------------------------------------------------
Q 93.002 08/032915 Matrixing of bit rate reduced signals PS 5,481,643
18.03.1993 18.03.2013
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents considered to be
concluded as an integral part of this list.
<PAGE>
MPEG-2 AUDIO PATENT LICENSE AGREEMENT
-------------------------------------
This Agreement is entered into this 1st day of October, 1999 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, California 91355 (hereinafter referred to as "Licensee")
WHEREAS the parties hereto have entered into a DVD Video Disc and DVD ROM Disc
Patent License Agreement (hereinafter referred to as the "DVD Agreement"),
whereby USPC has granted to Licensee the right to use certain patent rights
owned by Koninklijke Philips Electronics N.V., Sony Corporation and Pioneer
Electronic Corporation, respectively in connection with the manufacture and sale
of Licensed Products (as defined in the DVD Agreement);
WHEREAS Philips, together with the Institut fur Rundfunk Technik G.m.b.H. of
Munchen (Germany) and the Centre Commun d'Etudes Telediffusion et
Telecommunications of CessonSevigne (France) own certain patents rights
relating to the MPEG-2 Audio technology, which are being used in connection with
the manufacture of Licensed Products (as defined in the DVD Agreement); these
patent rights (hereinafter referred to as "the MPEG-2 Audio Patents") are listed
in Annex I hereto;
It is hereby agreed as follows:
USPC hereby grants to Licensee and its Associated Companies and Licensee hereby
accepts the right to use the MPEG-2 Audio Patents solely for the decoding of
digital audio signals in accordance with the ISO/IEC 13818-3 MPEG-2 Audio
Standard in connection with the manufacture of Licensed Products (as defined in
the DVD Agreement), for no additional royalty consideration and for the duration
of the DVD Agreement, provided that Licensee fully complies with all its
obligations under the DVD Agreement.
Further, Licensee and its Associated Companies shall have the right to use the
MPEG-2 Audio logo on Licensed Products manufactured by it (them) in accordance
with the provisions of this Agreement and the DVD Agreement.
<PAGE>
2
In addition to the reporting of Licensed Products in accordance with Article
4.03 of the DVD Agreement, Licensee shall also report the quantities of Licensed
Products making use of the above-mentioned MPEG-2 Audio Standard.
The relevant provisions of the DVD Agreement shall apply, mutatis mutandis, to
this Agreement.
Signed for and on behalf of:
U.S. PHILIPS CORPORATION FUTURE MEDIA PRODUCTIONS, INC.
/s/ Algy Tamoshunas /s/ Louis Weiss
- -------------------------------- --------------------------------
Algy Tamoshunas
Title: VP Title: CFO
------------------------- -------------------------
Date: 2/8/00 Date: 01/21/00
-------------------------- --------------------------
<PAGE>
DVD - Video/ROM Disc Patent List MPEG 2 Audio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date
Appln. No/Exp. date Publ. PPU/Exp. date
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PCT-IRT DE 36 39 753/ Method for transfer of digital PS 4,972,484/ A 01-501.435/
21.11.1986 audio signals.
20.11.2007 .......2007
- ---------------------------------------------------------------------------------------------------------------------------
IRT-1 DE 41.02.324/ Method for transfer of digital WO-92.13396/ WO-92.13396/
26.01.1991 subband coded audio signals by
use of scaling factors. ........ 27.06.2011
- ---------------------------------------------------------------------------------------------------------------------------
IRT-2 DE 41.24.493/ Method for transfer of digital bit WO-93.02508/ WO-93.02508/
24.07.1991 rate reduced audio signals using
an overall monitoring threshold. ........ 21.07.2012
- ---------------------------------------------------------------------------------------------------------------------------
IRT-3 DE 34.40.613/ Method for digitally transferring - -
07.11.1984 a broadcast program signal.
- ---------------------------------------------------------------------------------------------------------------------------
IRT-4 DE 42.29.372/ Method for transfer of the bitrate - -
03.09.1992 allocation information in a digital
bit rate reduced audio coding
method.
- ---------------------------------------------------------------------------------------------------------------------------
F 85.506 FR 85-01429/ Digital analysis/synthesis
filter bank. - -
01.02.1985
- ---------------------------------------------------------------------------------------------------------------------------
Q 89.018 EP 89.201.408/ Digital transmission system using PS 5,214,678/ PPU 91-82,233/
02.06.1989 subband coding of digital signals.
25.05.2010 02.06.2010
- -------------------------------------------------------------------------------------------------------------------------- -
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this considered
to be concluded as an integral part of this list.
<PAGE>
2
DVD - Video/ROM Disc Patent List MPEG 2 Audio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date
Appln. No/Exp. date Publ. PPU/Exp. date
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N 12.967 NL 89.01402/ Universal subband coder format. PS 5,323,396/ PPU 91-24,834/
02.06.1989 21.06.2011 01.06.2010
N 13.241 NL 90.00338/ PS 5,777,992/
12.02.1990 .....
PS 5,539,829/
23.07.2013
A 08-488,536/
.....
PS 5,530,655/
25.06.2013
- ----------------------------------------------------------------------------------------------------------------------------
N 14.361 EP 93.200156.3/ Three channel transmission of L-, PS 5,610,985/ PPU 94-318,922/
R- and Centre
22.01.1993 21.01.2014 21.01.2014
- ----------------------------------------------------------------------------------------------------------------------------
N 14.615 EP 93.203.000.0/ SB splitting prior to multiplexing PS 5,544,247/ A 95-5l2,501/
27.03.1993 signals L, R, C. 25.10.2014
PS 5,818,943/ 18.10.2014
25.10.2014
......
25.10.2014
- ----------------------------------------------------------------------------------------------------------------------------
Q 93.002 US A08-032915/ Matrixing of bitrate reduces PS 5,481,643/ -
18.03.1993 signals
18.03.2013
- ----------------------------------------------------------------------------------------------------------------------------
N 15.812 EP 96.201.261.3/ Audio frequency scalability A 08-852,761/ A 97-539,685/
on DVD
08.05.1996
07.05.2017 30.04.2017
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this
considered to be concluded as an integral part of this list.
<PAGE>
3
DVD - Video/ROM Disc Patent List MPEG 2 Audio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Licensor's Priority DOC/ Title US Patent PS JP Patent PS
Ref. No. Priority Date
Appln. No/Exp. date Publ. PPU/Exp. date
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
N 15.808 EP 96.201.259.7/ Selection of Masked thresholds A08-826,919/ A97-536,003/
08.05.1996
09.04.2017 02.04.2017
- ----------------------------------------------------------------------------------------------------------------------------
N 15.787 EP 96.201216.7/ N channel transmission compatible
02.05.1996 with 2- and 1-channel transmission. A 08-795,120/ A97-528,333/
07.02.2017 31.01.2017
- ----------------------------------------------------------------------------------------------------------------------------
N 15.760 EP 96.200.937.9/ Multi channel encoding A 08-826,916/ A97-536,00l/
10.04.1996
09.04.2017 01.04.2017
- ----------------------------------------------------------------------------------------------------------------------------
N 15.678 EP 96.200.274.7/ 7-channel backwards compatible PS 5,850,456/ A97-528,329/
08.02.1996 encoding.
06.02.2017 24.01.2017
- ----------------------------------------------------------------------------------------------------------------------------
N 14.834 EP 94.201.214.7/ Intensity stereo coding on subband PS 5,850,418/ PPU 97-512,971/
02.05.1994 signals.
01.05.2015 25.04.2015
- ----------------------------------------------------------------------------------------------------------------------------
N 15.653 EP 96.200.063.4/ Change bitpool to obtain constant
12.01.1996 bitrate output. A 08-768,353/ A97-525,026/
17.12.2016 11.12.2016
- ----------------------------------------------------------------------------------------------------------------------------
N 15.516 EP 95.202866.0/ Repeated coding/decoding with
24.10.1995 variable delay. A 08-738,990/ PPU 98-512,131/
24.10.2016 18.10.2016
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
All corresponding patent applications, patents, divisions, continuations and
reissues based upon any of the patent applications or patents of this considered
to be concluded as an integral part of this list.
<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 February 25, 2000 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
Los Angeles, California
March 13, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 7,468
<ALLOWANCES> 266
<INVENTORY> 767
<CURRENT-ASSETS> 8,253
<PP&E> 41,231
<DEPRECIATION> 11,394
<TOTAL-ASSETS> 41,089
<CURRENT-LIABILITIES> 16,165
<BONDS> 0
0
0
<COMMON> 3,790
<OTHER-SE> 15,679
<TOTAL-LIABILITY-AND-EQUITY> 41,089
<SALES> 53,002
<TOTAL-REVENUES> 53,002
<CGS> 31,938
<TOTAL-COSTS> 31,938
<OTHER-EXPENSES> 4,921
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,404
<INCOME-PRETAX> 14,740
<INCOME-TAX> 2
<INCOME-CONTINUING> 14,738
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,738
<EPS-BASIC> 1.64
<EPS-DILUTED> 1.43
</TABLE>
