<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 12, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
DVD EXPRESS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 5735 95-4603442
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) No.)
</TABLE>
--------------------------
7083 HOLLYWOOD BOULEVARD
LOS ANGELES, CALIFORNIA 90028
(323) 465-1183
(Address, Including Zip Code and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
--------------------------
MICHAEL J. DUBELKO
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
DVD EXPRESS, INC.
7083 HOLLYWOOD BOULEVARD
LOS ANGELES, CALIFORNIA 90028
(323) 465-1183
(Name, Address, Including Zip Code and Telephone Number, Including Area Code, of
Agent for Service)
--------------------------
COPIES TO:
SCOTT W. ALDERTON, ESQ. BRUCE R. HALLETT, ESQ.
SCOTT D. GALER, ESQ. ALLEN Z. SUSSMAN, ESQ.
JENNIFERLYNN GREGA, ESQ. SEAN M. PENCE, ESQ.
TROOP STEUBER PASICH REDDICK & TOBEY, LLP BROBECK, PHLEGER & HARRISON, LLP
2029 CENTURY PARK EAST 38 TECHNOLOGY DRIVE
LOS ANGELES, CALIFORNIA 90067 IRVINE, CALIFORNIA 92618
(310) 728-3200 (949) 790-6300
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered in this form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, 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
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $.0001 par value........................................ $57,500,000 $15,985
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee, in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
--------------------------
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 SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE 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 WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 12, 1999
PROSPECTUS
SHARES
DVD EXPRESS, INC.
COMMON STOCK
------------------
DVD EXPRESS is a leading Web-based retailer of movies and videos in the
digital versatile disc format, commonly known as DVD. We operate our online
store at www.dvdexpress.com and offer value-added content, community and other
related information through our Web site at www.dvd.com.
This is our initial public offering, and we are offering shares of
common stock. We anticipate that the initial public offering price will be
between $ and $ per share. We have applied to list the common stock on
the Nasdaq National Market under the symbol "DVDS."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT YOU SHOULD CONSIDER BEFORE YOU INVEST IN THE COMMON STOCK BEING SOLD WITH
THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public Offering Price................................................... $ $
Underwriting Discounts and Commissions.................................. $ $
Proceeds to DVD EXPRESS................................................. $ $
</TABLE>
The underwriters may purchase up to an additional shares from
DVD EXPRESS at the public offering price, less underwriting discounts, solely to
cover over allotments.
The underwriters are severally underwriting the shares being offered. The
underwriters are offering the shares when, as and if delivered to and accepted
by them, subject to various prior conditions, including their right to reject
orders in whole or in part. The underwriters expect to deliver the shares
against payment in New York, New York on , 1999.
ING BARING FURMAN SELZ LLC FRIEDMAN BILLINGS RAMSEY
----------------
THIS PROSPECTUS IS DATED , 1999.
<PAGE>
[PICTURES OF THE HOMEPAGES OF OUR WEB SITES]
DVD EXPRESS is our registered trademark. All other trademarks or services marks
used in this prospectus are the property of their respective holders.
2
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS APPEARING
ELSEWHERE IN THIS PROSPECTUS.
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS: (i) REFLECTS
THE AUTOMATIC CONVERSION OF OUR OUTSTANDING SERIES A CONVERTIBLE PREFERRED STOCK
INTO COMMON STOCK IMMEDIATELY PRIOR TO THE CLOSING OF THIS OFFERING; (ii)
REFLECTS OUR REINCORPORATION IN DELAWARE AND A CONCURRENT 3-FOR-2 STOCK SPLIT OF
OUR COMMON STOCK IMMEDIATELY PRIOR TO THE CLOSING OF THIS OFFERING; (iii)
REFLECTS OUR CHANGE FROM AN S CORPORATION TO A C CORPORATION FOR INCOME TAX
PURPOSES; AND (iv) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT
BE EXERCISED.
OUR COMPANY
We are a leading Web-based retailer of movies and videos in the digital
versatile disc format, commonly known as DVD. We operate our online store at
www.dvdexpress.com and offer value-added content, community and other related
information through our Web site at www.dvd.com. Hyperlinks provide easy access
between our two Web sites. Our customers benefit from our extensive product
selection and availability, convenient shopping experience, helpful customer
service, competitive prices and value-added services. Our management's
entertainment background, our close relationships with major and independent
studios and our Hollywood location provide a unique value to our customers. To
enhance our brand recognition and increase traffic to our online store, we have
entered into strategic marketing agreements with America Online, Infoseek
Corporation (Go.com) and AltaVista as well as other marketing agreements with
several hardware and Internet companies.
We maintain an inventory of nearly every title available in the DVD format
in our warehouse. Through our online store, we offer customers the convenience
and flexibility of shopping 24 hours a day, seven days a week. We ship our
products directly from our warehouse to the customer, usually on the same day
orders are received.
We have grown rapidly since we commenced our online activities in April
1997. Our revenues were $8.9 million in the fourth quarter of 1998, up from
$808,000 in the fourth quarter of 1997. We had revenues of $16.9 million in 1998
compared to $1.3 million in 1997.
OUR MARKET OPPORTUNITY
We believe that we are well positioned to take advantage of the continued
growth of online shopping, the rapid adoption of the DVD format, the attractive
demographics of online consumers and the propensity of DVD owners to shop
online.
The Internet is an increasingly significant global medium for
communications, content and commerce. International Data Corporation estimates
that the number of Web users worldwide grew to approximately 97 million by the
end of 1998 and will grow to approximately 320 million by 2002. International
Data Corporation also estimates that the total value of goods and services
purchased worldwide over the Web grew from $296 million in 1995 to $32.4 billion
in 1998 and will increase to $426 billion in 2002.
We believe that DVD will eventually become the standard format for home
video, music, games, computer software and data storage. Forrester Research
projects that more than 4.3 million DVD players will be installed in North
America by the end of 1999 and that penetration will approach 9 million players
by the end of 2000. Paul Kagan Associates projects that annual U.S. retail
revenue from DVD-Video sales will be $661 million in 1999, $1.3 billion in 2000
and $2.9 billion in 2002. International Data Corporation predicts approximately
14.3 million DVD-ROM drives will be installed in personal computers in the
United States during 2000, up from an estimated 11.1 million DVD-ROM drives to
be installed in 1999.
3
<PAGE>
Forrester Research estimates that in 1998 U.S. households earning more than
$50,000 a year accounted for 74% of U.S. online spending and that in 2003 this
group will still generate 66% of U.S. online revenues. Forrester Research also
estimates that 47% of DVD owners have an online connection at home, 58% of DVD
owners research products online and 40% of DVD owners shop online.
We believe that many consumers find the video shopping experience,
especially at traditional retail outlets, to be time consuming and frustrating
due to factors such as inconvenient store hours, location and layout, as well as
limited product selection and inadequate customer service.
OUR SOLUTION
Our online store provides consumers with an enjoyable shopping experience
which offers a compelling alternative to traditional video retailing. Our focus
on the DVD format and commitment to customer service, along with the
informational content and value-added services on our Web sites, enable us to
address the needs and desires of our customers. The key components of our
solution include:
- PREMIERE INTERNET ADDRESS. We were an early entrant in the online DVD
market and acquired the exclusive rights to the Internet address
www.dvd.com which provides high visibility and easy access to our Web
sites.
- EXTENSIVE PRODUCT SELECTION AND AVAILABILITY. We offer and expect to
continue to offer nearly every title available in the DVD format.
- RAPID DELIVERY. We manage our inventory so that order shipment usually
occurs the same day orders are received.
- CONVENIENT SHOPPING EXPERIENCE. Our online store is available 24 hours a
day, seven days a week from the customer's home or office and features
user-friendly browsing and search technologies.
- CONTENT AND COMMUNITY. We offer reviews, recommendations, news and
information about new and existing titles and products and over 700
streaming movie trailers.
- COMMITMENT TO CUSTOMER SERVICE. We are committed to providing the highest
level of customer service and sales support via both e-mail and toll-free
telephone service.
- VALUE-ADDED SERVICES. We offer real-time inventory status, order tracking
and the ability to order titles up to two months in advance of their
release.
OUR STRATEGY
Our goal is to enhance our position as a leading online retailer of DVDs and
related entertainment products and services. Our strategy includes the following
elements:
- BUILD BRAND RECOGNITION. We use a combination of online and traditional
marketing strategies to maximize customer awareness and enhance our brand
recognition.
- DEVELOP AND MAINTAIN STRATEGIC RELATIONSHIPS WITH THE MAJOR
STUDIOS. Michael Dubelko, our founder, has significant experience in and
relationships throughout the entertainment industry. As a result, we
currently purchase a majority of our inventory directly from major and
independent studios. We also regularly create product-specific promotions,
contests and giveaways funded by the studios.
- ESTABLISH OPERATIONS IN INTERNATIONAL MARKETS. We have taken steps to
establish a physical presence in certain international markets where we
believe we can benefit from the growth of the DVD format.
4
<PAGE>
- PURSUE INCREMENTAL REVENUE OPPORTUNITIES. We are considering offering
complementary products to our customers, such as music and entertainment
memorabilia, as well as an expanded selection of games. In addition, we
are also considering selling ancillary services, advertising and
sponsorships to interested parties. We believe these opportunities will
present incremental revenue opportunities.
- CONTINUOUSLY IMPROVE CUSTOMER EXPERIENCE. We promote customer loyalty and
build repeat purchase relationships with our customers by enhancing our
service, content and community offerings.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.................................. Shares
Total shares outstanding after this offering.......... Shares(1)
Use of proceeds....................................... Marketing payments to America Online, repay bank debt,
expand infrastructure, expand sales and marketing and
for general corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol................ DVDS
</TABLE>
- ------------------------------
(1) Excludes (i) 2,250,000 shares of common stock available for issuance
pursuant to our stock incentive plan, of which 974,250 shares were subject
to outstanding options as of the date of this prospectus at a weighted
average exercise price of $3.50 per share; (ii) 300,000 shares of common
stock subject to options granted to an employee at an exercise price of
$.0667 per share; and (iii) 1,384,007 shares of common stock subject to a
warrant granted to America Online at an exercise price of $5.60 per share.
CORPORATE INFORMATION
We were incorporated in California in 1996 and will be reincorporated in
Delaware in connection with this offering. Unless the context otherwise
requires, "DVD EXPRESS," "we," "our," and similar expressions refer to DVD
Express, Inc., a Delaware corporation, and its predecessor, DVD Express, Inc., a
California corporation. Our executive offices are located at 7083 Hollywood
Boulevard, Los Angeles, California 90028, and our telephone number is (323)
465-1183. Information on our Web sites does not constitute part of this
prospectus.
5
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth certain of our summary financial data. This
information should be read in conjunction with the financial statements and
notes thereto appearing elsewhere in this prospectus. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
pro forma statement of operations data gives effect to the change in our status
from an S corporation to a C corporation as if it had occurred on October 18,
1996, the date of our inception.
<TABLE>
<CAPTION>
OCTOBER 18
(INCEPTION)
TO YEARS ENDED
DECEMBER DECEMBER 31,
31, --------------------
1996 1997 1998
----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ -- $ 1,269 $ 16,907
Cost of revenues......................................... -- (1,046) (15,086)
----------- --------- ---------
Gross profit............................................. -- 223 1,821
Operating expenses(1).................................... (17) (365) (6,261)
----------- --------- ---------
Operating loss........................................... (17) (142) (4,440)
Interest expense......................................... -- -- (74)
Provision for income taxes............................... -- -- --
----------- --------- ---------
Net loss................................................. $ (17) $ (142) $ (4,514)
----------- --------- ---------
----------- --------- ---------
Basic and diluted loss per common share................ $ (0.00) $ (0.01) $ (0.30)
----------- --------- ---------
----------- --------- ---------
Weighted average shares outstanding
Basic.................................................. 15,000,000 15,000,000 15,000,000
----------- --------- ---------
----------- --------- ---------
Diluted................................................
----------- --------- ---------
----------- --------- ---------
PRO FORMA STATEMENT OF OPERATIONS DATA:
Loss before provision for income taxes................... $ (17) $ (142) $ (4,514)
Pro forma provision for income taxes..................... -- -- --
----------- --------- ---------
Pro forma net loss....................................... $ (17) $ (142) $ (4,514)
----------- --------- ---------
----------- --------- ---------
Basic and diluted pro forma loss per common share......
----------- --------- ---------
----------- --------- ---------
Pro forma weighted average shares outstanding
Basic..................................................
----------- --------- ---------
----------- --------- ---------
Diluted................................................
----------- --------- ---------
----------- --------- ---------
</TABLE>
- ------------------------
(1) Operating expenses included $97,000 of sales and marketing expenses in 1997
and $4,160,000 of sales and marketing expenses in 1998.
6
<PAGE>
The following table summarizes certain balance sheet data of our business.
The pro forma column reflects the sale of Series A Convertible Preferred Stock
on January 4, 1999 for net proceeds of $11.3 million and the sale of 135,000
shares of common stock on January 15, 1999 for net proceeds of $630,000. The pro
forma as adjusted column adjusts the pro forma column to reflect the conversion
of the Series A Convertible Preferred Stock concurrent with this offering and
the receipt and application by us of the net proceeds of this offering, which
are estimated to be $45.9 million.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................................... $ 905 $ 8,535 $ 44,385
Working capital............................................................... 2,244 14,174 60,024
Total assets.................................................................. 19,489 30,119 72,969
Total debt.................................................................... (4,300) (3,000) --
Total stockholders' (deficit) equity.......................................... 11,823 23,753 69,603
</TABLE>
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE YOU DECIDE TO BUY
OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY
ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES MAY ALSO ADVERSELY
IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR,
OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER.
IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY
LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THESE STATEMENTS REFER TO OUR FUTURE PLANS, GOALS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE STATEMENTS MAY BE IDENTIFIED BY
THE USE OF WORDS SUCH AS "PLANS," "EXPECTS," "INTENDS" AND "ANTICIPATES," AS
WELL AS SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE
INDICATED IN SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT COULD CONTRIBUTE TO
THESE DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND
ELSEWHERE IN THIS PROSPECTUS.
WE HAVE ONLY BEEN OPERATING OUR BUSINESS SINCE APRIL 1997.
We began selling DVD products in April 1997 and, accordingly, we have a very
limited operating history. You must consider our prospects in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly companies in a new and rapidly evolving
market, such as online commerce. Such risks include, but are not limited to, the
inability to respond promptly to changes in a rapidly evolving and unpredictable
business environment and the inability to manage growth. To address these risks,
we must, among other things:
- expand our customer base;
- successfully implement our business and marketing strategies;
- continue to develop and upgrade our Web sites and transaction-processing
systems;
- provide superior customer service and order processing;
- respond to competitive developments; and
- attract and retain qualified personnel.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT TO CONTINUE TO INCUR LOSSES FOR THE
FORESEEABLE FUTURE.
To date, we have not been profitable. As of December 31, 1998, we had
accumulated losses of $4.7 million. During 1998, we incurred net losses of $4.5
million. We intend to invest heavily in marketing and promotion, Web site
development and technology, and development of our administrative organization.
As a result, we expect to incur substantial operating losses for the foreseeable
future at rates significantly above current levels. Because our gross margin is
relatively low, achieving profitability depends upon our ability to generate and
sustain substantially higher revenues. We expect to use a portion of the net
proceeds from this offering to fund operating losses. If such net proceeds,
together with cash generated by operations, cannot sufficiently fund future
operating losses, we may be required to raise additional funds. Such financing
may not be available in amounts or on terms acceptable to us, if at all.
OUR FUTURE OPERATING RESULTS MAY FLUCTUATE AND ARE UNPREDICTABLE.
Our limited operating history makes it difficult to forecast accurately our
revenues, operating expenses and operating results. As a result, we may be
unable to adjust our spending in a timely manner to compensate for any
unexpected revenue shortfall. We may also be unable to increase our
8
<PAGE>
spending and expand our operations in a timely manner to meet customer demand
should it exceed our expectations.
Our future operating results may fluctuate significantly due to a variety of
factors, many of which are outside our control. These factors include, but are
not limited to:
- our ability to retain existing customers, attract new customers and
maintain customer satisfaction;
- the introduction of new or enhanced Web pages, services, products and
strategic alliances by us and our competitors;
- price competition or higher wholesale prices;
- the timing and popularity of future DVD releases and our access to those
releases;
- our ability to manage inventory levels;
- fluctuations in the amount of consumer spending on DVDs and related
products;
- decreases in the number of visitors to our Web sites or our inability to
convert visitors to our Web sites into customers;
- the termination of existing, or failure to develop new, strategic
marketing relationships through which we receive exposure to traffic on
third-party Web sites;
- increases in the cost of online or offline advertising;
- our ability to attract new personnel in a timely and effective manner or
retain existing personnel;
- unexpected increases in shipping costs or delivery times;
- government regulations related to use of the Internet for commerce;
- our ability to maintain, upgrade and develop our Web sites, transaction
processing systems or network infrastructure;
- technical difficulties, system downtime or Internet brownouts;
- the amount and timing of operating costs and capital expenditures relating
to expansion of our business, operations and infrastructure;
- the timing of promotions and sales programs; and
- general economic conditions and economic conditions specific to the
Internet and the DVD industry.
As a result of the factors listed above, our quarterly or annual results of
operations in future periods may not meet the expectations of securities
analysts or investors. This could result in a decline in the value of our common
stock.
OUR BUSINESS WILL PROBABLY BE AFFECTED BY SEASONAL BUYING PATTERNS.
We believe that our revenues will be subject to seasonal consumer buying
patterns. Sales in the traditional video industry are highest in the fourth
quarter of each calendar year. To date, our limited operating history and rapid
growth make it difficult for us to determine what effect, if any, seasonality
has on our business. Although seasonal sales cycles can be fairly predictable,
shifts may occur due to changes in the economy or other factors affecting the
market for our products. Such shifts could cause our quarterly or annual results
of operations in future periods to fall below the expectations of securities
analysts or investors. This could result in a decline in the value of our common
stock.
9
<PAGE>
WE MUST MAINTAIN ADEQUATE SYSTEMS CAPACITY TO SERVICE OUR CUSTOMERS.
A key element of our strategy is to generate higher volumes of traffic on
our Web sites. Our reputation and ability to attract, retain and serve our
customers hinge upon the reliable performance of our Web sites, network
infrastructure and transaction-processing systems. Interruptions in these
systems could make our Web sites unavailable and hinder our ability to fill
orders, thereby reducing the volume of products we can sell. Such interruptions
could also diminish the overall attractiveness of our product and service
offerings to existing and potential customers. If we experience a substantial
increase in traffic volume on our Web sites or in the number of orders placed by
customers, we will need to expand and upgrade our network infrastructure,
technology and transaction-processing systems by adding additional hardware and
software. We may not be able to project the rate of increase in traffic or order
volume on our Web sites. If we do not or are unable to make these improvements
on a timely basis, we may encounter:
- unanticipated system disruptions;
- slower response times;
- a decline in the quality of our customer service;
- reduced accuracy and/or speed of order fulfillment; and
- delays in reporting accurate financial information.
WE RELY ON THIRD PARTIES TO DEVELOP AND SERVICE OUR COMMERCE SYSTEMS.
We depend on Pandesic LLC to develop and service our commerce systems,
including the software and hardware that operates our transaction-processing
systems. Our current agreement with Pandesic runs through May 2000. If Pandesic
terminates the agreement early or if the agreement is not renewed, we would be
forced to either enter into a relationship with another third-party provider or
undertake to develop and service our commerce systems internally. In either
event, we would have to incur additional expenses in connection with such
conversion. Also, the new commerce system could be more expensive to maintain
than our current system and may not function as well as our current system.
WE FACE THE RISK OF SYSTEM FAILURES AND WE DO NOT MAINTAIN REDUNDANT FACILITIES.
Our ability to successfully receive and process orders and provide
high-quality customer service depends on the efficient and uninterrupted
operation of our computer and communications systems. Our systems and operations
are vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, earthquake and similar events. Although we have
implemented security measures, our systems are subject to computer viruses,
physical or electronic break-ins and similar disruptions. We also operate our
business from and warehouse all of our inventory at a single location. Although
we have instituted security measures, this facility is subject to damage from
fire, flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. We do not presently have redundant systems or a formal disaster
recovery plan and do not carry sufficient business interruption insurance to
compensate us for losses that may occur.
WE RELY ON OUR ABILITY TO PURCHASE PRODUCTS DIRECTLY FROM MAJOR STUDIOS.
A key element of our strategy involves purchasing a majority of our
inventory directly from major and independent studios. This allows us to buy
product at lower prices than can be obtained through distributors. We also rely
on studios for joint promotions and believe our close relationships with them
may allow us to develop certain incremental revenue sources. Although we believe
our relationships with the studios are good, we do not have any long-term supply
agreements with any studio. If we are
10
<PAGE>
unable to maintain our relationships with these studios, we would have to
purchase our product from distributors and our profit margins would be reduced.
WE FACE INTENSE COMPETITION.
The online commerce market is new, rapidly evolving and intensely
competitive, and we expect that competition could further intensify in the
future. Barriers to entry are limited, and current and new competitors can
launch Web sites at a relatively low cost. In addition, the broader retail video
industry is intensely competitive. We currently compete with a variety of online
vendors who specialize in DVDs and videos, as well as those who also sell books,
music and other entertainment products. We also compete with specialty video
retailers, mass merchandisers, consumer electronic stores, and non-store
retailers such as mail-order video clubs. Many of these traditional retailers
also support or may introduce dedicated Web sites that compete directly with
ours. As the DVD rental market matures, we may also face increased competition
from DVD rental stores. New technologies and the expansion of existing
technologies may increase the competitive pressures on us. For example,
applications that rank specific titles from a variety of Web sites based on
factors such as price may channel customers to online retailers that compete
with us.
We believe that the primary competitive factors in the online market are:
- brand recognition;
- product selection;
- value-added services;
- ease of use;
- site content;
- customer service; and
- price.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than us. Certain competitors
have and may continue to utilize aggressive pricing or inventory availability
practices and devote substantially more resources to Web site and systems
development than us. Increased competition may result in reduced operating
margins, loss of market share and diminished brand recognition.
We may not be able to compete successfully against current and future
competitors. Further, as a strategic response to changes in the competitive
environment, we may from time to time make certain pricing, service or marketing
decisions or acquisitions that could have a material adverse effect on our
business, prospects, financial condition and results of operations.
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET AND ONLINE COMMERCE.
Our success depends in part on widespread consumer acceptance and use of the
Internet as a way to buy products. This consumer practice is at an early stage
of development, and demand and continued market acceptance is uncertain. We
cannot predict the extent to which consumers will be willing to shift their
purchasing habits from traditional to online retailers.
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The Internet may not become a viable commercial marketplace due to
inadequate development of network infrastructure and enabling technologies that
address consumer concerns about:
- network performance;
- security;
- reliability;
- speed of access;
- ease of use; and
- bandwidth availability.
In addition, the Internet's viability as a commercial marketplace could be
adversely affected by increased government regulation. Changes in or
insufficient availability of telecommunications or other services to support the
Internet also could result in slower response times and adversely affect general
usage of the Internet. Also, negative publicity and consumer concern about the
security of transactions conducted on the Internet and the privacy of users may
also inhibit the growth of commerce on the Internet.
DVD TECHNOLOGY MAY NOT BECOME WIDELY ACCEPTED OR MAY BECOME OBSOLETE.
Consumers may not accept DVD technology on a widespread basis, or such
acceptance may be delayed, due to:
- a reluctance by studios or others to release titles in the DVD format;
- consumer confusion because of competing DVD formats, such as DIVX;
- potentially high switching costs from VHS to DVD; and
- the availability of pay-per-view and other forms of online transmission as
an alternative to DVD.
The foregoing factors could result in delays in the acceptance of DVD
technology. Also, the electronic online delivery of information, through such
distribution media as the Internet, satellites or cable television, competes
with DVD technology. Recent and continuing developments in broadband online data
delivery have led to speculation regarding the decreasing viability of physical
media such as DVD products.
WE MUST RESPOND TO TECHNOLOGICAL CHANGE.
To remain competitive, we must continue to enhance and improve the
responsiveness, reliability, functionality and features of our online store. The
Internet and the online commerce industry are characterized by rapid
technological change, changes in user and customer requirements and preferences,
frequent new product and service introductions embodying new technologies and
the emergence of new industry standards and practices. These developments could
render our Web sites and proprietary technology and systems obsolete. Our
success will depend, in part, on our ability to:
- enhance our existing services;
- develop new features, services and technology that address the
increasingly sophisticated and varied needs of prospective customers; and
- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
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Also, new technologies may make our existing features and services obsolete.
We believe that our future success will depend in part on our ability to deliver
products and services which meet changing technology and customer needs.
OUR SUCCESS DEPENDS ON CERTAIN KEY PERSONNEL AND OUR ABILITY TO HIRE ADDITIONAL
PERSONNEL.
We depend substantially on the continued services and performance of our
senior management and other key employees, particularly Michael Dubelko, our
Chairman, Chief Executive Officer and President, and Andrew Crist, our Chief
Financial Officer. The loss of any of these officers or key employees could
disrupt our business. Although we have entered into an employment agreement with
both Mr. Dubelko and Mr. Crist, each may terminate it at his sole discretion. In
addition, we maintain key person life insurance on Mr. Dubelko, however we
cannot be certain that such insurance will adequately compensate us for the loss
of his services. Our future success also depends on our ability to identify,
attract, hire, train, retain and motivate other highly skilled technical,
managerial, editorial, merchandising, marketing and customer service personnel.
Competition for such personnel is intense, and we may not be able to
successfully attract, assimilate or retain sufficiently qualified personnel.
WE FACE ONLINE COMMERCE SECURITY RISKS.
In the online commerce business, consumer confidence largely depends upon
the privacy of their activities and the secured transmission of confidential
information over public networks. To secure transmission of our customers'
confidential information, such as their credit card numbers, we rely on licensed
encryption and authentication technology. However, our current security measures
may not be adequate. Advances in computer capabilities, new discoveries in the
field of cryptology, or other developments may interfere with the methods we use
to secure customer transactions. Should someone circumvent our security
measures, he could misappropriate proprietary information and cause
interruptions in our operations. Such security breaches could expose us to
lawsuits for failing to secure confidential customer information. As a result,
we may be required to expend a significant amount of money and other resources
to protect against security breaches or to alleviate any problems they may
cause.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH OR EXPANSION.
We have expanded rapidly since we commenced operations in April 1997. We
anticipate that further expansion will be required to address our growth in our
customer base and our market opportunities. During 1998, we grew from seven to
72 employees, and several members of management have only recently joined us. We
may choose to expand our operations by:
- developing new Web sites;
- promoting new or complementary products or sales formats;
- expanding the breadth and depth of products and services offered; or
- expanding our market presence through relationships with third parties.
Any future expansion, internally or through acquisitions, may place
significant demands on our management, operational, administrative and financial
resources. Furthermore, any new business or product line we launch that is not
favorably received by our consumers could damage our reputation, brand or
results of operations. Our future performance and profitability will depend in
part on our ability to recruit, motivate and retain qualified personnel, and the
implementation of enhancements to our operational and financial systems. We
cannot be certain that our systems, procedures or controls will be adequate to
support our expanding operations, or that management will be able to respond
effectively to any such growth.
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WE RELY ON STRATEGIC MARKETING ALLIANCES AND ONLINE AND TRADITIONAL ADVERTISING.
We rely on strategic alliances and online and traditional advertising to
attract customers to our Web sites. We have entered into marketing agreements
with America Online Inc., One Zero Media, Inc. (AltaVista), Infoseek Corporation
(Go.com), Cowabunga Enterprises Inc. (a wholly owned subsidiary of Gateway
Inc.), Toshiba America Consumer Products, Inc., Compaq Computer Corporation,
Microsoft Corporation and NBC Mutlimedia, Inc. Our ability to generate higher
revenues will largely depend on increased traffic and purchases through these
agreements and similar agreements we may enter into in the future. However,
these marketing agreements may not generate a sufficient number of new customers
or revenues to justify their costs. We cannot be sure that we will be able to
renew or expand successful advertising programs or our strategic alliances
beyond their initial terms or at acceptable terms. In addition, we commit
substantial resources to promoting our brand name through online, print and
radio advertising campaigns. However, we cannot be certain that these methods of
advertising will successfully attract additional customers to our Web sites.
PROTECTION OF OUR DOMAIN NAMES IS UNCERTAIN.
We currently hold various domain names relating to our brand, including
DVDEXPRESS.COM and DVD.COM. The acquisition and maintenance of domain names
generally are regulated by governmental agencies and their designees. For
example, in the United States, the National Science Foundation has appointed
Network Solutions, Inc. as the current exclusive registrar for the ".com,"
".net" and ".org" generic top-level domains. The regulation of domain names in
the United States and in foreign countries is subject to change in the near
future. Such changes in the United States are expected to include a transition
from the current system to a system which is controlled by a non-profit
corporation and the creation of additional top-level domains. Governing bodies
may establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result, we
may be unable to acquire or maintain relevant domain names in all countries in
which we conduct business. Furthermore, the relationship between regulations
governing domain names and laws protecting trademarks and similar proprietary
rights is unclear. Therefore, we may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or otherwise decrease
the value of our trademarks and other proprietary rights.
PROTECTION OF OUR TRADEMARKS AND PROPRIETY RIGHTS IS UNCERTAIN.
We regard our trademarks, trade secrets and similar intellectual property as
critical to our success. We rely on trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with employees,
customers, partners and others to protect our proprietary rights. We have
pursued the registration of our trademarks in the United States and
internationally, and have applied for the registration of certain of our
trademarks and service marks. In December 1997, the United States Patent and
Trademark Office granted us a registered trademark for "DVD EXPRESS" for retail
distributorship in the field of pre-recorded films, games, music and computer
software. Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our products and
service are made available online. We cannot be certain that we have taken
adequate steps to protect our proprietary rights, especially in countries where
the laws may not protect our rights as fully as in the United States. In
addition, third parties may infringe or misappropriate our proprietary rights,
and we could be required to incur significant expenses in preserving them.
INTELLECTUAL PROPERTY CLAIMS AGAINST US COULD BE COSTLY AND RESULT IN THE LOSS
OF SIGNIFICANT RIGHTS.
Other parties may assert infringement or unfair competition claims against
us. In the past, other parties have sent us notice of claims of infringement of
proprietary rights, and we expect to receive other notices in the future. We
cannot predict whether third parties will assert claims of infringement against
us, or whether any past or future assertions or prosecutions will adversely
affect our business. If we are forced to defend against any such claims, whether
they are with or without merit or are determined in our favor, then we may face
costly litigation and diversion of technical and management personnel. As a
result of such disputes, we may have to develop non-infringing property or enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all.
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WE MAY ENCOUNTER RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION.
A significant component of our business strategy is to expand our
international sales. Although we currently sell products to international
customers from within the United States, we intend to establish a physical
presence in certain international markets in the future. Conducting business in
foreign countries involves inherent risks, such as:
- unexpected changes in regulatory requirements;
- export restrictions;
- tariffs and other trade barriers;
- difficulties in protecting intellectual property rights;
- difficulties in staffing and managing foreign operations;
- problems collecting accounts receivable;
- longer payment cycles;
- political instability;
- fluctuations in currency exchange rates; and
- potentially adverse tax consequences.
One or more of the foregoing factors could hinder our plans to expand our
international operations.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
Based on our current operating plan, we anticipate that the net proceeds of
this offering, together with our available funds, will be sufficient to satisfy
our anticipated needs for working capital, capital expenditures and business
expansion for at least the next 18 months. After that time, we may need
additional capital. Alternatively, we may need to raise additional funds sooner
in order to fund more rapid expansion, to develop new or enhanced services, and
to respond to competitive pressures. If we raise additional funds by issuing
equity or convertible debt securities, the percentage ownership of our
stockholders will be diluted. Furthermore, any new securities could have rights,
preferences and privileges senior to those of our common stock.
We currently do not have any commitments for additional financing. We cannot
be certain that additional financing will be available when and to the extent
required or that, if available, it will be on acceptable terms. If adequate
funds are not available on acceptable terms, we may not be able to fund our
expansion, develop or enhance our products or services or respond to competitive
pressures.
WE FACE INVENTORY RISK IF CONSUMER PREFERENCES CHANGE.
The market for DVDs is subject to rapidly changing trends in consumer
tastes. It is critical to our success that we accurately predict these trends
and stock sufficient amounts of popular titles and other products on a timely
basis and not overstock unpopular titles. Our failure to sufficiently stock
popular titles would adversely affect our operating results. We carry a
significant level of inventory. As a result, the changing trends in the market
for DVDs subjects us to inventory risks. The demand for certain titles can
change between the time we order products and the date we receive them. In the
event that one or more titles do not achieve widespread consumer acceptance, we
may be required to take significant inventory markdowns, which would adversely
affect our business. We believe that this risk will increase if we enter new
product categories due to our lack of experience in purchasing products for
these categories. In addition, to the extent that demand for our products
increase over time, we
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may be forced to increase inventory levels. Any such increase would subject us
to additional inventory risks.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The United States Congress recently
enacted Internet laws regarding children's privacy, copyrights, taxation and the
transmission of sexually explicit material. The European Union recently enacted
its own privacy regulations. The law of the Internet, however, remains largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet. In
addition, the growth and development of the market for online commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on companies conducting
business online. The adoption or modification of laws or regulations relating to
the Internet could adversely affect our business.
We may also be subject to the provisions of the recently enacted
Communications Decency Act (the "CDA") or similar laws that may be enacted in
the future. Among other things, the CDA imposes substantial fines and/or
criminal penalties on anyone who distributes or displays certain prohibited
material over the Internet or knowingly permits a telecommunications device
under its control to be used for such purpose. We cannot fully determine the
manner in which the CDA will be interpreted and enforced. As a result, we are
unable to determine its effect on our operations. The CDA could also limit the
growth of the Internet generally and decrease the acceptance of the Internet as
an advertising medium.
In addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications services.
For example, America's Carriers Telecommunications Association has petitioned
the FCC for this purpose. The growing popularity and use of the Internet has
burdened the existing telecommunications infrastructure and many areas with high
Internet use have begun to experience interruptions in phone service. As a
result, local telephone carriers, such as Pacific Bell, have petitioned the FCC
to regulate and impose access fees on Internet and online service providers in a
manner similar to long distance telephone carriers. If the FCC grants either of
these petitions or gives the relief sought in them, the costs of communicating
on the Internet could increase substantially, potentially slowing the growth in
its use. This could make shopping online less desirable to potential consumers
of our products, which may in turn hurt our business.
WE MAY BE SUBJECT TO LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER THE
INTERNET.
We may be considered a publisher or distributor of both our own and
third-party content, and people may download or copy such material from our Web
sites and distribute it to others. As a result, individuals may bring claims
against us for defamation, negligence, copyright or trademark infringement,
invasion of privacy and publicity, unfair competition or other theories based on
the nature and content of this material. For example, claims could be made
against us if material deemed inappropriate for viewing by young children could
be accessed through our Web sites. Although we carry general liability
insurance, our insurance may not cover claims of this type or may not adequately
cover the costs we could incur in defending potential claims. Further, our
insurance may not fully indemnify us for all liability that may be imposed. Our
business, financial condition and operating results could suffer if costs
resulting from these claims are not covered by our insurance or exceed our
policy limits.
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WE MAY BE SUBJECT TO LIABILITY FOR SALES AND OTHER TAXES.
We currently collect sales or other similar taxes on the shipment of goods
only in the State of California. Tax authorities in many states are currently
reviewing the appropriate tax treatment of Internet and catalogue retail
companies and are currently considering an agreement with some of these
companies regarding the assessment and collection of sales taxes. We are not
participating in any of these discussions. Any resulting state tax regulations
could subject us to the assessment of sales and income taxes in other states.
Since our service is available over the Internet in multiple states and in
foreign countries, these jurisdictions may require us to qualify to do business
in each such state and foreign country. If we fail to qualify in a jurisdiction
that requires us to do so, we could face expenditures for taxes and penalties.
WE MUST EXPAND OUR WAREHOUSE AND ORDER PROCESSING CAPABILITIES.
We must increase the size of our warehouse and order processing operations
in order to accommodate increases in the total number of DVD titles available
for sale, as well as any significant increase in the volume of customer orders.
Our current warehouse operations are not adequate to accommodate significant
increases in the number of DVD titles or in customer demand. We will have to
relocate some of our operations within the next twelve months, and we have
recently commenced a search for suitable locations. We may also be required to
automate order processing tasks that are currently performed manually. All of
these factors could adversely affect our business.
WE FACE RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE.
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities.
We use software, hardware, computer technology and other services that we
developed and or purchased from third-party vendors that may fail due to the
Year 2000 issue. We are dependent on financial institutions to process our
customers' credit card payments for Internet services. We are also dependent on
telecommunications vendors to maintain our network, and the United States Postal
Service, Federal Express and other third-party carriers to deliver orders to
customers.
If Year 2000 issues prevent our customers from accessing the Internet,
accessing our Web sites, processing orders through our third party provided
systems or using their credit cards, or if we are unable to purchase product
from our suppliers or deliver product to our customers, our operations may be
materially adversely affected. We cannot currently predict the extent to which
the Year 2000 issue will affect our computer systems, suppliers and shippers,
such as the United States Postal Service and Federal Express, or the extent to
which we would be vulnerable to the failure to remedy any Year 2000 issues on a
timely basis. Also, we cannot be certain that our customers' credit card vendors
and those organizations responsible for maintaining and providing Internet
access will rectify their Year 2000 issues. Moreover, the costs related to Year
2000 compliance could be significant. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Year 2000 Issue."
WE ARE CONTROLLED BY MICHAEL DUBELKO, OUR FOUNDER.
Upon completion of this offering, our founder, Michael Dubelko, will
beneficially own approximately % ( % if the underwriters' over-allotment
option is exercised in full) of our outstanding shares of common stock. As a
result, Michael Dubelko will have the ability to control matters requiring the
vote of the stockholders, including the election of our directors and most of
our
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corporate actions. Such control could delay, defer or prevent others from
initiating a potential merger, takeover or other change in our control, even if
such actions would benefit our stockholders and us. This could adversely affect
the voting and other rights of our other stockholders, and could depress the
market price of our common stock.
WE HAVE BROAD DISCRETION AS TO USE OF PROCEEDS.
We estimate the net proceeds of this offering to be approximately $45.9
million ($52.8 million if the underwriters' over-allotment option is exercised
in full). We expect to use the net proceeds to satisfy contractual obligations
with America Online, repay bank debt, expand our infrastructure and expand our
sales and marketing efforts, with the balance used for working capital. However,
we may change the allocation of these proceeds in response to economic or
industry developments or changes. Accordingly, our management will have broad
discretion in applying the net proceeds of this offering. See "Use of Proceeds."
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never paid dividends and currently do not intend to declare or pay
dividends. We plan to follow a policy of retaining earnings to finance the
growth of our business. Whether or not we declare or pay dividends is up to our
Board of Directors and will depend on results of operations, financial
condition, contractual and legal restrictions and other factors our Board deems
relevant at that time.
PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase common stock in this offering, you will incur immediate and
substantial dilution in the net tangible book value of the shares purchased. We
estimate this dilution to be approximately $ per share, or
approximately % (based on an initial public offering price of $ ).
Additional dilution may occur upon the exercise of outstanding stock options or
warrants.
NO PRIOR PUBLIC MARKET EXISTS FOR OUR COMMON STOCK.
Prior to this offering, there has been no public market for our common
stock. We cannot be sure that an active trading market for the common stock will
develop or continue as a result of this offering.
OUR STOCK PRICE COULD FLUCTUATE WIDELY.
The trading price of our common stock is likely to be volatile and could
fluctuate widely in response to factors such as the following, some of which are
beyond our control:
- variations in our operating results;
- announcements of technological innovations or new services by us or our
competitors;
- changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;
- changes in operating and stock price performance of other Internet and
online companies similar to us;
- conditions or trends in the Internet industry;
- additions or departures of key personnel; and
- future sales of our common stock.
Domestic and international stock markets often experience significant price
and volume fluctuations. These fluctuations, as well as general economic and
political conditions unrelated to our
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performance may adversely affect the price of our common stock. In particular,
following initial public offerings, the market prices for stocks of Internet and
technology-related companies often reach levels that bear no established
relationship to the operating performance of these companies. These market
prices are generally not sustainable and could vary widely. The market prices of
the securities of Internet-related and online companies have been especially
volatile. If our common stock trades to such high levels following this
offering, it could eventually experience a significant decline.
OUR OFFERING PRICE DOES NOT NECESSARILY RELATE TO ANY ESTABLISHED CRITERIA OF
VALUE.
Through negotiations with the underwriters, we determined the public
offering price of the shares of our common stock. This price does not
necessarily relate to our book value, assets, past operating results, financial
condition or other established criteria of value. As a result, the shares being
offered may trade at market prices below the initial public offering price.
WE MAY SELL ADDITIONAL SHARES INTO THE PUBLIC MARKET.
Sales of substantial amounts of our common stock in the public market after
this offering could adversely affect the prevailing market price of our common
stock. Upon completion of this offering, we will have shares of
common stock outstanding. Of those shares, a total of shares (plus
additional shares if the underwriters exercise their over-allotment
option in full) will be freely tradable under the Securities Act unless
purchased or held by our "affiliates," as that term is defined in Rule 144 under
the Securities Act. As part of this offering, our executive officers, directors
and stockholders have agreed with the underwriters that they will not offer or
sell any shares of common stock for a period of 180 days after the date of this
prospectus without the prior written consent of ING Baring Furman Selz LLC,
except for options granted pursuant to our stock incentive plan. ING Baring
Furman Selz LLC may, in its sole discretion, at any time and without notice,
release all or any portion of the shares of common stock subject to these
agreements. Sales of substantial amounts of common stock in the public market,
or the perception that such 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.
CERTAIN PROVISIONS IN OUR CHARTER DOCUMENTS COULD DETER TAKEOVER EFFORTS.
Provisions of our Certificate of Incorporation, Bylaws and Delaware law
could make it more difficult for a third-party to acquire us, even if doing so
would be beneficial to our stockholders. See "Description of Capital
Stock--Certain Anti-Takeover Effects."
MINORITY STOCKHOLDERS MAY NOT BE ABLE TO ELECT ANY OF OUR DIRECTORS.
Our Certificate of Incorporation does not provide for cumulative voting. As
a result, it is more difficult for minority stockholders to obtain
representation on our Board of Directors, which may deter takeover attempts.
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address, among
other things, trends in online commerce and DVD technology, our strategies, use
of proceeds and our financial condition or results of operations. These
forward-looking statements may be found in "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and elsewhere in this prospectus. In some
cases you can identify forward-looking statements by terminology such as
"believes," "anticipates," "expects," "estimates," "may," "will," "should,"
"could," "plans," "predicts," "potential," "continue" or similar terms.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. These statements involve known and
unknown risks, uncertainties and other factors that may cause actual results to
be materially different from any future results expressed or implied by such
forward-looking statements. Such factors include those listed under "Risk
Factors" and elsewhere in this prospectus. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus, even if new information becomes available or
other events occur in the future. All forward-looking statements contained in
this prospectus are expressly qualified in their entirety by this cautionary
notice.
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TERMINATION OF S CORPORATION STATUS
We have been exempt from payment of federal income taxes and have paid
certain state income taxes at a reduced rate as a result of our S corporation
election. As of January 1, 1999, our S corporation status terminated. Pro forma
statement of income data reflect the income tax expense that would have been
recorded had we not been exempt from paying taxes under the S corporation
election. Such pro forma expense would be zero as a result of the operating
losses. There are no additional deferred taxes based upon the increase in the
effective tax rate from our S corporation status to C corporation status to be
recorded as all net deferred tax assets have been fully offset by a valuation
allowance as their realizability is uncertain. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and notes 2 and 8 to
the financial statements.
We have entered into a tax indemnification agreement with Michael Dubelko
relating to our respective income tax liabilities. This agreement is intended to
assure that taxes are borne by us on the one hand and Mr. Dubelko on the other
only to the extent that each of us received the related income giving rise to
such taxes. This agreement generally provides that, if an adjustment is made to
our taxable income for a year in which we were treated as an S corporation, we
will indemnify Mr. Dubelko and Mr. Dubelko will indemnify us against any
increase in the indemnified party's income tax liability (including interest and
penalties and related costs and expenses), with respect to any tax year to the
extent such increase results in a related decrease in the income tax liability
of the indemnifying party for any year. We will also indemnify Mr. Dubelko for
all taxes imposed upon him as the result of his receipt of an indemnification
payment under the tax indemnification agreement. The Internal Revenue Service or
state taxing authorities may consider any payment we make to Mr. Dubelko
pursuant to the tax indemnification agreement to be non-deductible for income
tax purposes.
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USE OF PROCEEDS
We estimate the net proceeds from this offering to be approximately $45.9
million ($52.8 million if the underwriters' exercise their over-allotment option
in full), after deducting the underwriting discounts and commissions and
estimated offering expenses.
We expect to use $7 million of these net proceeds to fund amounts that will
be payable to America Online pursuant to our marketing agreement with them. We
expect to use $3 million of the net proceeds to repay two credit lines with
Wells Fargo Bank, National Association. The $2 million line bears interest at
.25% below prime rate (7.5% at December 31, 1998) and the $1 million line bears
interest at .75% above the prime rate (8.5% at December 31, 1998). These credit
lines were used for general corporate purposes. Michael Dubelko has personally
guaranteed the repayment of both credit lines.
We plan to use the balance of the net proceeds to expand our physical and
technological infrastructure, our customer service and order processing
capabilities and our sales and marketing and promotion activities, as well as
for working capital and other general corporate purposes. Pending such uses, we
intend to invest the net proceeds in interest-bearing investment grade
instruments, certificates of deposit or direct or guaranteed obligations of
United States governmental agencies.
Other than with respect to payments to America Online and Wells Fargo Bank,
we intend to maintain flexibility in our use of the remaining proceeds of this
offering. The amounts actually expended for each such use are at our discretion
and may vary significantly depending upon a number of factors, including the
progress of our marketing programs, capital spending requirements, and
developments in the DVD market and Internet commerce. Accordingly, we reserve
the right to reallocate the proceeds of this offering as we deem appropriate.
From time to time, in the ordinary course of business, we evaluate possible
acquisitions of, or investments in, businesses, products and technologies that
are complementary to our business. A portion of the net proceeds may be used to
fund acquisitions or investments. We currently have no arrangements, agreements
or understandings, and are not engaged in active negotiations with respect to
such acquisitions or investments.
DIVIDEND POLICY
To date, we have not declared or paid any dividends on our common stock. We
do not intend to declare or pay dividends on our common stock in the foreseeable
future, but rather to retain any earnings to finance the growth of our business.
Any future determination to pay dividends will be at the discretion of our Board
of Directors and will depend on our results of operations, financial condition,
contractual and legal restrictions and other factors it deems relevant.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998.
Our capitalization is presented on: (i) an actual basis; (ii) a pro forma basis
to give effect to the sale of 1,714,285 shares (not adjusted to reflect the
conversion and stock split referred to in (iii) below) of Series A Convertible
Preferred Stock on January 4, 1999 for net proceeds of $11.3 million and the
sale of 135,000 shares of common stock on January 15, 1999 for net proceeds of
$630,000; and (iii) a pro forma as adjusted basis to adjust the pro forma column
to reflect the receipt and application by us of the net proceeds of this
offering, which are estimated to be $45.9 million and to give effect to the
automatic conversion of the 1,714,285 shares of Series A Convertible Preferred
Stock into 2,571,428 shares of common stock (post 3-for-2 stock split) upon the
closing of this offering.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current portion.......................................... $ -- $ -- $ --
--------- ----------- -----------
Stockholders' equity(1):
Preferred Stock, $.0001 par value; 10,000,000 shares authorized; no shares
issued or outstanding on an actual or pro forma as adjusted basis;
1,714,285 shares issued and outstanding on a pro forma basis.............. -- -- --
Common Stock, $.0001 par value; 50,000,000 shares authorized; 15,000,000
shares issued and outstanding; 15,135,000 shares issued and outstanding on
a pro forma basis; shares outstanding on a pro forma as adjusted
basis..................................................................... 2 2 2
Additional paid-in capital.................................................. 16,494 23,751 69,601
Retained earnings (accumulated deficit)..................................... (4,673) -- --
--------- ----------- -----------
Total stockholders' equity.................................................... (11,823) 23,753 69,603
--------- ----------- -----------
Total capitalization...................................................... $ 11,823 $ 23,753 $ 69,603
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------------
(1) Excludes (i) 2,250,000 shares of common stock available for issuance
pursuant to our stock incentive plan, of which 974,250 shares were subject
to outstanding options as of the date of this prospectus at a weighted
average exercise price of $3.50 per share; (ii) 300,000 shares of common
stock subject to options granted to an employee at an exercise price of
$.0667 per share; and (iii) 1,384,007 shares of common stock subject to a
warrant granted to America Online at an exercise price of $5.60 per share.
23
<PAGE>
DILUTION
Purchasers of the common stock offered hereby will experience an immediate
and substantial dilution in the pro forma net tangible book value of the common
stock from the initial public offering price. The pro forma net tangible book
value (deficit) of the common stock as of December 31, 1998, was $
or $ per share. 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
sale of 1,714,285 shares of Series A Convertible Preferred Stock on January 4,
1999 for net proceeds of $11.3 million; (ii) the sale of 135,000 shares of
common stock on January 15, 1999 for net proceeds of $630,000; and (iii) the
automatic conversion of the 1,714,285 shares of Series A Convertible Preferred
Stock into 2,571,428 shares of common stock (post 3-for-2 stock split) upon the
closing of this offering. After giving effect to the sale of shares
of common stock offered by us hereby and the receipt and the application of the
estimated net proceeds therefrom (at an assumed initial public offering price of
$ per share, after deducting the underwriting discounts and
commissions, and estimated offering expenses), our pro forma net tangible book
value as of December 31, 1998 would have been approximately $
or $ per share. This represents an immediate increase
in net tangible book value of $ per share to our current
stockholders and an immediate and substantial dilution of $ per share
to new stockholders 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, 1998............. $
Increase attributable to new stockholders.............................
---------
Pro forma net tangible book value as of December 31, 1998 after this
offering..............................................................
---------
Dilution to new stockholders............................................ $
---------
---------
</TABLE>
The following table summarizes on a pro forma basis as of December 31, 1998,
the differences between the number of shares of common stock purchased, the
total consideration paid and the average price per share paid by the existing
stockholders and the new investors purchasing shares of common stock in this
offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................................... % $ % $
New investors............................................... $
--------- ----- ---------- -----
100.0% $ 100.0%
--------- ----- ---------- -----
--------- ----- ---------- -----
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options or warrants. At March 31, 1999, 974,250 shares of common stock were
subject to outstanding options under our stock incentive plan at a weighted
average exercise price of $3.50 per share, up to 300,000 shares could be
purchased pursuant to an option granted to a certain employee at an exercise
price of $.0667 per share and up to 1,384,007 shares of common stock could be
purchased upon exercise of the warrant granted to America Online. To the extent
options or warrants are exercised, there will be further dilution to new
investors.
24
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of our business for
the periods indicated. The statement of operations data set forth below with
respect to the period ended December 31, 1996 and the years ended December 31,
1997 and 1998, and the balance sheet data as of December 31, 1998 are derived
from our audited financial statements and the notes thereto appearing elsewhere
in this prospectus. The following data should be read in conjunction with our
financial statements and related notes thereto and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
OCTOBER 18
(INCEPTION)
TO YEARS ENDED DECEMBER 31,
DECEMBER 31, ----------------------------
1996 1997 1998
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................................ $ -- $ 1,269 $ 16,907
Cost of revenues.................................................... -- (1,046) (15,086)
------------- ------------- -------------
Gross profit........................................................ -- 223 1,821
Operating expenses(1)............................................... (17) (365) (6,261)
------------- ------------- -------------
Operating loss...................................................... (17) (142) (4,440)
Interest expense.................................................... -- -- (74)
------------- ------------- -------------
Loss before income taxes............................................ (17) (142) (4,514)
Provision for income taxes.......................................... -- -- --
------------- ------------- -------------
Net loss............................................................ $ (17) $ (142) $ (4,514)
------------- ------------- -------------
------------- ------------- -------------
Basic and diluted loss per common share........................... $ (0.00) $ (0.01) $ (0.30)
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares outstanding................................. 15,000,000 15,000,000 15,000,000
Basic.............................................................
------------- ------------- -------------
------------- ------------- -------------
Diluted...........................................................
------------- ------------- -------------
------------- ------------- -------------
PRO FORMA STATEMENT OF OPERATIONS DATA(2)(UNAUDITED):
Loss before provision for income taxes............................ $ (17) $ (142) $ (4,514)
Pro forma provision for income taxes.............................. -- -- --
Pro forma net loss................................................ $ (17) $ (142) $ (4,514)
------------- ------------- -------------
------------- ------------- -------------
Basic and diluted pro forma loss per common share................. $ $ $
------------- ------------- -------------
------------- ------------- -------------
Pro forma weighted average shares outstanding.......................
Basic.............................................................
------------- ------------- -------------
------------- ------------- -------------
Diluted...........................................................
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
PRO PRO FORMA
1997 1998 FORMA(3) AS ADJUSTED(4)
--------- --------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ -- $ 905 $ 8,535 $ 44,385
Working capital................................................. 157 2,244 14,174 60,024
Total assets.................................................... 310 19,489 30,119 72,969
Total debt...................................................... -- (4,300) (3,000) --
Total stockholders' equity (deficit)............................ 191 11,823 23,753 69,603
</TABLE>
- ------------------------------
(1) Operating expenses included $97,000 of sales and marketing expenses in 1997
and $4,160,000 of sales and marketing expenses in 1998.
(2) We have been exempt from payment of federal income taxes and have paid
certain state income taxes at a reduced rate as a result of our S
corporation election. As of January 1, 1999, our S corporation status
terminated. Pro forma statement of income data reflect the income tax
expense that would have been recorded had we not been exempt from paying
taxes under the S corporation election. Such pro forma expense would be zero
as a result of our operating losses. There are no additional deferred taxes
based upon the increase in the effective tax rate from our S corporation
status to C corporation status to be recorded as all net deferred tax assets
have been fully offset by a valuation allowance as their realizability is
uncertain. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and notes 2 and 8 to the financial statements.
(3) Reflects the sale of 1,714,285 shares (not adjusted to reflect the
conversion or stock split referred to in footnote (3) below) of Series A
Convertible Preferred Stock on January 4, 1999 for net proceeds of $11.3
million and the sale of 135,000 shares of common stock on January 15, 1999
for net proceeds of $630,000.
(4) Adjusts the pro forma column to reflect the receipt and application by us of
the net proceeds of this offering, which are estimated to be $45.9 million
and to give effect to the automatic conversion of the 1,714,285 shares of
Series A Convertible Preferred Stock into 2,571,428 shares of common stock
(post 3-for-2 stock split) upon the closing of this offering.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS TOGETHER WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND
THE NOTES TO SUCH STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT DVD EXPRESS AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THE "RISK FACTORS" SECTION AND ELSEWHERE IN THIS PROSPECTUS. WE
UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR
ANY REASON, EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN
THE FUTURE.
OVERVIEW
We are a leading Web-based retailer of movies and videos in the digital
versatile disc format, commonly known as DVD. We operate our online store at
www.dvdexpress.com and offer value-added content, community and other related
information through our Web site at www.dvd.com.
We commenced our online activities in April 1997 and have since grown
rapidly. Our revenues were $8.9 million in the fourth quarter of 1998, up from
$808,000 in the fourth quarter of 1997. We had revenues of $16.9 million in 1998
compared to $1.3 million in 1997.
Because of the early stage of our operations, we believe that
period-to-period comparisons of our operating results are not meaningful, and
should not be relied upon as an indication of our future performance. We report
our results on an accrual basis and recognize revenue when we ship products to
our customers. Our revenues are received primarily from customer credit card
payments within three days of our shipments and concurrent billings.
We incurred net losses of $4.5 million for 1998, $142,000 for 1997 and
$17,000 for 1996. At December 31, 1998, we had an accumulated deficit of $4.7
million. These losses and accumulated deficit resulted from a lack of
substantial revenues, advertising costs, the costs of the significant
infrastructure and other costs incurred for the development and initial rollout
of our Web sites. Because of our aggressive expansion plans, we expect to incur
significant operating losses for the foreseeable future. Although we have
experienced revenue growth in recent periods, such growth may not be sustainable
and, therefore, these recent periods should not be considered indicative of
future performance. We may never achieve significant revenues or profitability,
or if we achieve significant revenues they may not be sustained.
TERMINATION OF S CORPORATION STATUS
Prior to January 1, 1999, we operated as an S corporation, and therefore
were not subject to federal income taxes and only minimally to state income
taxes. As an S corporation, our stockholders were subject to federal and state
taxes based on our earnings. There are no deferred taxes based upon the increase
in the effective tax rate from our S corporation status to C corporation status
to be recorded as all net deferred tax assets have been fully offset by a
valuation because their realizability is uncertain.
RESULTS OF OPERATIONS
QUARTERLY RESULTS.
The following tables set forth certain unaudited statement of operations
data, in dollars and as a percentage of revenues, for the last four quarters and
have been prepared on the same basis as our
27
<PAGE>
annual information and, in our opinion, include all adjustments necessary to
present fairly the information for the quarters presented.
<TABLE>
<CAPTION>
1998
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues........................................... $ 1,645 $ 2,623 $ 3,730 $ 8,909
Cost of revenues................................... 1,365 2,297 3,309 8,115
----------- --------- ------ -----------
Gross profit....................................... 280 326 421 794
----------- --------- ------ -----------
Operating expenses:
Operating and development........................ 102 225 298 684
Sales and marketing.............................. 127 205 433 3,395
General and administrative....................... 49 155 174 414
----------- --------- ------ -----------
Operating profit (loss)............................ 2 (259) (484) (3,699)
Interest expense................................... -- -- (16) (58)
----------- --------- ------ -----------
Net income (loss).................................. $ 2 $ (259) $ (500) $ (3,757)
----------- --------- ------ -----------
----------- --------- ------ -----------
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues................................... 83.0 87.6 88.7 91.1
----------- --------- ------ -----------
Gross profit....................................... 17.0 12.4 11.3 8.9
----------- --------- ------ -----------
Operating expense:
Operating and development........................ 6.2 8.6 8.0 7.7
Sales and marketing.............................. 7.7 7.8 11.6 38.1
General and administrative....................... 3.0 5.9 4.7 4.6
----------- --------- ------ -----------
Operating profit (loss)............................ 0.1 (9.9) (13.0) (41.5)
Interest expense................................... -- -- (0.4) (0.6)
----------- --------- ------ -----------
Net income (loss).................................. 0.1% (9.9)% (13.4 )% (42.1 )%
----------- --------- ------ -----------
----------- --------- ------ -----------
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for 1998 totaled $16.9 million compared to $1.3 million
for 1997. Revenues consist of the selling price of DVD Video, DVD-ROM and other
merchandise, net of sales discounts, as well as shipping and handling charges.
Revenues increased as a result of significant growth in our customer base as the
DVD format gained popularity, repeat orders from existing customers and three
additional months of operations in 1998.
COST OF REVENUES AND GROSS PROFITS. Cost of revenues for 1998 totaled $15.1
million compared to $1.0 million for 1997. Cost of revenues increased
significantly as a result of the large increase in revenues. Cost of revenues
consisted of the cost of merchandise, packaging and shipping.
As DVD products increasingly gained consumer acceptance over the last 12
months, certain of our competitors have advertised and sold DVDs at prices we
believe to be at or below their cost of acquisition. Our gross profit margins,
as a percentage of revenues, declined to 10.8% for 1998 from 17.6% for 1997.
This decline resulted from our short-term tactical decision to match some
competitors' prices on certain products. We believe our competitors' discounting
activities may decline as their or other online retailers' margins are
negatively impacted by these practices. Also, during 1998, approximately 25% of
our cash purchases of DVDs were made directly from studios. We expect this
28
<PAGE>
percentage to further increase as we expand our studio direct purchasing
efforts. There can be no assurance that our gross profit margins will not
continue to decline for the foreseeable future.
OPERATING AND DEVELOPMENT EXPENSES. Operating and development expenses
totaled $1.3 million for 1998 compared to $177,000 for 1997 due to the growth of
our business. Operating expenses consisted primarily of the costs of purchasing,
inventory management, order processing and customer service, including related
payroll, insurance and depreciation expenses. Development expenses consisted
primarily of the costs of software acquisition and development, technical
infrastructure, graphic design, editorial and Web site content and related
payroll. We anticipate that operating and development expenses will increase in
absolute dollars as we expand our customer base and product offering, but
gradually decline as a percentage of revenues.
SALES AND MARKETING EXPENSES. Sales and marketing expenses totaled $4.2
million for 1998 compared to $97,000 for 1997. Sales and marketing expenses
consisted primarily of advertising and promotional expenses and bank and other
related transaction fees, as well as payroll associated with personnel involved
in our advertising, marketing and public relations efforts. Sales and marketing
expenses increased significantly as we expanded our efforts to attract more
customers and increase brand awareness. During the second half of 1998, we
entered into several marketing agreements, including agreements with America
Online, One Zero Media (AltaVista) and Infoseek Corporation (Go.com), which
require aggregate payments of up to $26.9 million over a 3-year period, $2.9
million of which was paid in 1998. The agreement with America Online also
includes a warrant to purchase up to 1,384,007 shares of common stock. Such
payments and the fair value of other equity consideration are capitalized and
amortized based on the number of impressions delivered by each company. In
addition, each of these agreements provides for additional payments based on the
revenues we generate as a result of such agreements. We have other marketing
relationships with several other Internet and hardware companies. We typically
pay these marketing partners a percentage of the revenues generated from such
relationships. We anticipate that sales and marketing expenses will continue to
increase as we expand our online and traditional marketing programs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
totaled $792,000 for 1998 compared to $91,000 for 1997. General and
administrative expenses consisted of executive management, accounting and
administrative personnel, facilities and other overhead costs. Through December
31, 1998, no salary had been charged or paid to Michael Dubelko, our Chairman,
Chief Executive Officer and President. In March 1999, we entered into employment
agreements with both Michael Dubelko and Andrew Crist. We anticipate that
general and administrative expenses will increase in absolute dollars as we
expand our executive management team and general staff, but gradually decline as
a percentage of revenue. In addition we believe we will incur additional costs
related to our growth and being a public company.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $3.6 million and $290,000 was used for operating activities for
1998 and 1997, respectively, primarily as a result of net losses generated
during those periods. Cash used in operations during 1998 included aggregate
payments of $2.9 million under marketing agreements and increases in inventories
of $1.6 million, offset by an increase in payables of $3.2 million.
Net cash used in investing activities, consisting of purchases of fixed and
intangible assets, totaled $897,000 for 1998 and $42,000 for 1997.
Net cash provided by financing activities, consisting of capital
contributions, stockholder loans and advances on lines of credit, totaled $5.5
million for 1998 and $320,000 for 1997.
We have funded our operations and capital expenditures primarily through
capital contributions and loans from our founder, Michael Dubelko, as well as
bank credit lines that Mr. Dubelko has
29
<PAGE>
guaranteed. At December 31, 1998, we had a cash balance of $905,000. We have two
credit lines totaling $3 million with Wells Fargo Bank, N.A., which were fully
utilized as of December 31, 1998. The $2 million line bears interest at .25%
below prime rate (7.5% at December 31, 1998) and the $1 million line bears
interest at .75% above the prime rate (8.5% at December 31, 1998). We plan to
use a portion of the proceeds of this offering to repay these lines. In
addition, at December 31, 1998, we owed Michael Dubelko $1.3 million as a result
of loans he made during 1998. These loans bore interest at 8.5%.
During January 1999, we sold 1,714,285 shares of Series A Convertible
Preferred Stock to certain private investors for net proceeds of $11.3 million.
The 1,714,285 shares of Series A Convertible Preferred Stock will convert into
2,571,428 shares of common stock (post 3-for-2 stock split) upon the closing of
this offering. In an unrelated transaction, we sold 135,000 shares of common
stock to three directors for net proceeds of $630,000. A portion of the proceeds
from these sales were used to pay back the loans made by Michael Dubelko
described in the preceding paragraph and to pay certain amounts due under our
marketing agreement with America Online.
Although we expect negative cash flow from operations for the foreseeable
future as we continue to develop and market our operations, we believe that the
proceeds of this offering, together with our cash on hand will be sufficient to
finance our planned operations and capital expenditures for the next 18 months,
including a planned move to larger warehouse facilities, anticipated inventory
increases and increased selling, general and administrative expenses. In
addition, our marketing agreements require aggregate additional payments of up
to approximately $24.0 million over the next three years.
SEASONALITY
The demand for DVDs, like many other consumer products, will likely be
highest in the fourth quarter, concurrent with the holiday gift purchasing
season. Although our growth has mitigated the seasonal effects in our historic
quarterly results, in the future we expect that our fourth quarter will
generally be the strongest. See "Risk Factors--Our business will probably be
affected by seasonal buying patterns."
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities.
We use software, hardware, computer technology and other services that we
developed and or purchased from third-party vendors that may fail due to the
Year 2000 issue. We are dependent on financial institutions to process our
customers' credit card payments for Internet services. We are also dependent on
telecommunications vendors to maintain our network and the United States Postal
Service, Federal Express and other third-party carriers to deliver orders to
customers.
We have completed an assessment of both our information technology and
non-information technology. We do not believe that we have material exposure to
the Year 2000 issue with respect to our own operating and information systems as
well as the systems developed by Pandesic. Based upon our assessment, we believe
that these systems are Year 2000 compliant and we do not anticipate incurring
material costs to become Year 2000 compliant. We also believe that all
non-information technology upon which we are materially dependent is Year 2000
compliant.
30
<PAGE>
We are currently assessing the Year 2000 readiness of other third-party
supplied software, computer technology and other services and of our vendors.
Based upon the results of this assessment, we will develop and implement, if
necessary, a remediation plan with respect to third-party software, third-party
vendors and computer technology and services that may fail to be Year 2000
compliant. At this time, the expenses associated with this assessment and
potential remediation plan cannot be determined. The failure of our software and
computer systems and of our third-party suppliers to be Year 2000 complaint
would have a material adverse effect on us.
The Year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the integrity
and stability of the Internet to provide our services. We also depend on the
Year 2000 readiness of the computer systems and financial services used by
consumers. A significant disruption in the ability of consumers to access the
Internet or portions of it, or to use their credit cards, would have an adverse
effect on demand for our services.
We do not currently have a formal contingency plan to deal with the scenario
that might occur if technologies we are dependent upon are not Year 2000
compliant and fail to operate effectively as the year 2000 approaches. We intend
to develop a plan for this scenario during 1999. See "Risk Factors-- We face
risks associated with the Year 2000 issue."
31
<PAGE>
BUSINESS
OUR COMPANY
We are a leading Web-based retailer of movies and videos in the digital
versatile disc format, commonly known as DVD. We operate our online store at
www.dvdexpress.com and offer value-added content, community and other related
information through our Web site at www.dvd.com. Hyperlinks provide easy access
between our two Web sites. Our customers benefit from our extensive product
selection and availability, convenient shopping experience, helpful customer
service, competitive prices and value-added services. Our management's
entertainment background, our close relationships with major and independent
studios and our Hollywood location provide a unique value to our customers. To
enhance our brand recognition and increase traffic to our online store, we have
entered into strategic marketing agreements with America Online, Infoseek
Corporation (Go.com) and AltaVista as well as other marketing agreements with
several hardware and Internet companies.
We maintain an inventory of nearly every title available in the DVD format
in our warehouse. Through our online store, we offer customers the convenience
and flexibility of shopping 24 hours a day, seven days a week. We ship our
products directly from our warehouse to the customer, usually on the same day
orders are received.
We have grown rapidly since we commenced our online activities in April
1997. Our revenues were $8.9 million in the fourth quarter of 1998, up from
$808,000 in the fourth quarter of 1997. We had revenues of $16.9 million in 1998
compared to $1.3 million in 1997.
MARKET OVERVIEW
ONLINE COMMERCE. The Internet is an increasingly significant global medium
for communications, content and commerce. International Data Corporation
estimates that the number of Web users worldwide grew to approximately 97
million by the end of 1998 and will grow to approximately 320 million by 2002.
We believe that growth in Internet usage has been fueled by a number of factors:
- the large and growing installed base of personal computers in the
workplace and homes;
- advances in the performance and speed of personal computers and modems;
- improvements in network infrastructure, security and bandwidth;
- easier and cheaper access to the Internet; and
- increased awareness of the Internet among businesses and consumers.
The increasing functionality, accessibility and overall usage of the
Internet and online services have made them an attractive commercial medium. The
Internet and other online services are evolving into a unique sales and
marketing channel, similar to retail stores, mail-order catalogs and television
shopping. Online retailers can interact directly with customers by frequently
adjusting their featured selections, editorial insights, shopping interfaces,
pricing and visual presentations. Online retailers can also easily obtain
demographic and behavioral data about customers, increasing opportunities for
targeted direct marketing and personalized services. We believe that the minimal
cost to publish on the Web, the ability to reach and serve a large and global
group of customers electronically from a central location, and the potential for
personalized low-cost customer interaction all provide additional economic
benefits for online retailers. According to International Data Corporation, the
number of Web buyers worldwide is estimated to increase from 27.6 million in
1998 to 128.4 million in 2002, representing a compounded annual growth rate of
46.9%.
An increasingly broad base of products is being sold successfully online,
including computers, travel services, brokerage services, automobiles, music,
videos and books. International Data Corporation estimates that the total value
of goods and services purchased worldwide over the Web grew from $296 million in
1995, to $32.4 billion in 1998, and will increase to $425.7 billion in 2002.
Unlike traditional retail channels, online retailers do not have the costs of
managing and maintaining a
32
<PAGE>
significant retail store infrastructure or the continuous printing and mailing
costs of catalog marketing. Because of these advantages, we believe that online
retailers have the potential to build large, global customer bases quickly and
cost effectively and to achieve superior economic returns over the long term.
HOME VIDEO BUSINESS. According to Paul Kagan Associates, the U.S. market
for both VHS and DVD videos combined will increase from $8.9 billion in 1998 to
$11.1 billion in 2002, representing a compounded annual growth rate of 5.7%.
Since the introduction of the VCR over twenty years ago, renting and purchasing
pre-recorded home videos has become a mainstream form of entertainment. Not only
are more movies today viewed on video than in any other format, but the
emergence of the pre-recorded video business has also created a large and
growing market for the thousands of older and historic films. Each new
generation represents potential new audiences for these older motion pictures.
We believe that substantial growth opportunities exist in the retail online
pre-recorded home video industry. We also believe that the DVD-Video format will
eventually replace the VHS format in the video market.
THE DVD FORMAT. DVD technology is similar in functionality to CD-ROM and
CD-Audio technology, however a DVD, which is the same size as a CD, is able to
store substantially more data than a CD. A typical DVD can hold a 135-minute
motion picture with up to eight different spoken language tracks, thirty-two
foreign language subtitles and six-channel, digital-surround sound. Added
features such as the movie's soundtrack, director's notes, story-based games and
other CD-ROM applications are also possible with the higher storage capacity
afforded with DVDs. As a result, we believe the DVD format will be the first
medium to embrace and allow for cross-promotion between video, audio and
software products.
We believe DVDs will initially compete most directly with sales and rentals
of pre-recorded videotapes. DVD players have become more affordable and are
currently available from several manufacturers at retail prices generally
ranging from $250 to $1,000. Forrester Research reports that by the end of 1999,
less than three years since its launch, 4.3 million DVD players will be
installed in North American households, far outpacing the debut of both the CD
player and VCR in their first years. Paul Kagan Associates estimates that the
installed base of DVD players in U.S. households will increase from 1.1 million
in 1998 to 12.0 million in 2002, representing a compounded annual growth rate of
81.7%. We believe that as the installed base of DVD players increases, the
demand for DVD-Video titles will also increase. Currently, approximately 2,600
motion picture titles are available on the DVD format and we expect that number
to grow rapidly as the format gains popularity. Paul Kagan Associates also
estimates that DVD-Video discs sold in the United States will increase from 13.4
million discs in 1998 to approximately 159.6 million discs in 2002, representing
a compounded annual growth rate of 85.7%. According to Paul Kagan Associates,
during the same period the number of VHS tapes sold in the United States is
estimated to decrease from 609.2 million in 1998 to 556.5 million in 2002.
While DVDs are initially expected to serve as substitutes for video tapes,
they are also expected to be a better distribution medium than CD-Audio and
CD-ROM. We anticipate that the market for DVDs could eventually exceed that of
CD-ROM and CD-Audio. Microsoft's Windows 98 operating system supports DVD, and
Intel Corporation has started shipping a new DVD-compatible motherboard.
International Data Corporation predicts that DVD-ROM drives sold for United
States households will increase from 2.7 million in 1998 to 19.7 million in
2002, representing a compound annual growth rate of 64.3%.
Another important advantage of the DVD format, which we believe will
accelerate its market penetration, is its backward compatibility. DVD players
and DVD-ROM drives are designed to read CD-Audio and CD-ROMs, respectively,
which we expect to increase consumers' acceptance of this new technology. Unlike
the introduction of CDs, consumers will be able to acquire the new DVD
technology without making their music collections obsolete because DVD players
will also be capable
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of playing CD-Audio. We believe these factors will contribute to the DVD format
becoming the standard medium for home video, music and software distribution.
TRADITIONAL VIDEO RETAIL INDUSTRY. We believe that traditional store-based
retailers face a number of challenges in providing a satisfying shopping
experience for consumers of video products. We believe these same challenges
apply to the sale of DVDs:
- The amount of physical space available in the store limits the number of
titles and the amount of product inventory that a traditional store-based
retailer can carry in any one store. As a result, many traditional
store-based retailers focus their product selection on the most popular
products that produce the highest inventory turns, thereby further
limiting consumer selection.
- Store configuration constraints limit merchandising flexibility. As a
result, traditional retailers generally display products by category, such
as action, comedy or drama, and cannot easily modify or reconfigure these
merchandising strategies.
- Traditional store-based retailers must open new stores to serve additional
geographic areas, resulting in significant investments in inventory, real
estate and the hiring and training of store personnel.
- Traditional store-based retailers face challenges in hiring, training and
retaining knowledgeable sales staff, thereby limiting the level of
customer service available to consumers.
In addition, we believe that many consumers find the video shopping
experience, especially at traditional mass market retail outlets, to be
time-consuming and frustrating due to factors such as inconvenient store hours,
location and layout, as well as limited product selection and inadequate
customer service.
OUR SOLUTION
Our online store provides consumers with an enjoyable shopping experience
which offers a compelling alternative to traditional video retailing. Our focus
on the DVD format and commitment to customer service, along with the
informational content and value-added services on our Web sites, enable us to
address the needs and desires of our customers. The key components of our
solution include:
PREMIERE INTERNET ADDRESS. We were an early entrant in the online DVD
market and acquired the exclusive rights to the Internet address www.dvd.com
which provides high visibility and easy access to our Web sites.
EXTENSIVE PRODUCT SELECTION AND AVAILABILITY. We offer and expect to
continue to offer nearly every title available in the DVD format. In addition,
we sell certain video and DVD-ROM games and accessories.
RAPID DELIVERY. We manage our inventory so that order shipment usually
occurs the same day orders are received, including weekends.
CONVENIENT SHOPPING EXPERIENCE. Our online store provides customers with an
easy-to-use shopping interface that is available 24 hours a day, seven days a
week from the convenience of a customer's home or office. Our online store
enables us to deliver a broad selection of titles to customers in locations that
do not have easy access to physical stores. We also make the shopping experience
convenient by categorizing our DVDs by movie genre. Our search technology makes
it easy for consumers to locate products efficiently based on pre-selected
criteria, such as title, actor or other key words.
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CONTENT AND COMMUNITY. Our Web sites educate and entertain visitors and
provide an interactive community for DVD enthusiasts. We offer reviews,
recommendations, news and information about new and existing titles and
products, answers to frequently asked questions and the opportunity to preview
over 700 streaming movie trailers. Our editorial staff maintains and updates our
Web sites daily to provide our visitors a comprehensive source of information,
interaction and commerce.
COMMITMENT TO CUSTOMER SERVICE. We provide comprehensive sales support via
e-mail and toll-free telephone service during extended hours. Once an order is
placed, a customer can view the status of his or her order on our Web site or
contact a customer service representative.
VALUE-ADDED SERVICES. Through our online store, we offer real-time
inventory status, order tracking and the ability to order titles up to two
months in advance of their release. In addition, our technology platform enables
us to provide specific recommendations based upon our customers' preferences.
OUR STRATEGY
Our goal is to enhance our position as a leading online retailer of DVDs and
related entertainment products and services. Our strategy includes the following
elements:
BUILD BRAND RECOGNITION. We intend to become a primary destination for
consumers of DVDs. We attempt to target purchasers of DVD products through our
Web sites, advertising and promotional activities. We use offline and online
marketing strategies to maximize customer awareness and enhance our brand
recognition:
- STRATEGIC MARKETING RELATIONSHIPS AND ONLINE ADVERTISING. We utilize
marketing arrangements with companies in the Internet, computer, and
consumer electronics industries, including America Online, One Zero Media
(AltaVista) and Infoseek Corporation (Go.com), as well as Gateway, Toshiba
America Consumer Products, Compaq, Microsoft and NBC Mutlimedia. We also
advertise on sites including Yahoo!, AOL, AltaVista, HotBot, Excite,
Lycos, Go.com, MSN.com and VideoSeeker.
- OFFLINE ADVERTISING. We use offline advertising to promote both our brand
name and specific merchandising opportunities. Our advertising campaigns
utilize traditional print and radio media. We advertise in THE WALL STREET
JOURNAL and entertainment related publications such as ENTERTAINMENT
WEEKLY, PREMIERE, MOVIELINE and HOME THEATER. We advertise in several
major radio markets, including New York, Los Angeles and Chicago.
- DIRECT ONLINE MARKETING. In order to drive traffic and repeat purchases,
we deliver special offers, promotions and information to customers who
visit our Web sites or who elect to receive semimonthly e-mail messages.
DEVELOP AND MAINTAIN STRATEGIC RELATIONSHIPS WITH THE MAJOR
STUDIOS. Michael Dubelko, our founder, has built meaningful relationships in
his 20-year career in the entertainment industry. As a result, we currently
purchase a majority of our inventory directly from major and independent
studios. Since many of our competitors are not able to do so, we believe we
enjoy a significant cost advantage over them. Also, we regularly create
product-specific promotions, contests and giveaways funded by the studios.
ESTABLISH OPERATIONS IN INTERNATIONAL MARKETS. We have taken steps to
establish warehouses and customer service centers in certain international
markets where we believe we can benefit from the growth of the DVD format. An
international physical presence should reduce our overseas shipping costs and
allow us to respond quickly to customer inquiries.
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PURSUE INCREMENTAL REVENUE OPPORTUNITIES. We are considering offering
complementary products to our customers, such as music and entertainment
memorabilia, as well as an expanded selection of games. In addition, we are also
considering selling ancillary services, advertising and sponsorships to
interested parties. We believe these opportunities will present incremental
revenue opportunities.
CONTINUOUSLY IMPROVE CUSTOMER EXPERIENCE. We promote customer loyalty and
build repeat purchase relationships with our customers by enhancing our service,
content and community offerings. Specifically, we are dedicated to customer
service, developing personalization features and programs, upgrading our user
interface and increasing the automation and efficiency of our supply chain and
order processing activities.
OUR WEB SITES
We provide customers and other visitors with a compelling online experience
by combining commerce, content and community on our Web sites. Hyperlinks
provide for easy access between our commerce-focused online store
(www.dvdexpress.com) and the content and community driven Web site
(www.dvd.com). Set forth below is a recent image of our Web sites, the content
of which we update regularly:
[GRAPHICAL PICTURE OF THE HOMEPAGES OF THE WEB SITES]
[text under the www.dvdexpress.com picture--Our online store has been
designed to be intuitive and easy to use, while providing a substantial number
of user features that enhance the shopping experience.]
[text under the www.dvd.com picture--This content and community site
educates and entertains consumers and provides an interactive community for DVD
enthusiasts.]
DVDEXPRESS.COM. We designed our online store to be intuitive and easy to
use, while providing a substantial amount of user features that enhance the
shopping experience. Consumers shopping on our Web site can, in addition to
ordering products, conduct targeted searches, view recommended products,
participate in promotions and check their order status. The following highlights
some of the key features of our online store:
- BROWSING. The DVD EXPRESS online store offers visitors a variety of
highlighted subject areas and special features arranged in a simple,
easy-to-use layout intended to enhance product search and selection.
Customers can browse by category, such as action, drama and comedy, or use
a keyword search in order to locate a specific title. Also, customers can
execute more sophisticated searches based on numerous pre-selected
criteria, such as name of actors or directors, languages, price range,
year of release and video or audio format such as Dolby Digital.
- PRODUCT INFORMATION. One of the unique advantages of an Internet retail
store is the ability to interweave product information and editorial
content. At our online store, customers can find detailed product
information, including reviews and recommendations of related titles and
view over 700 streaming movie trailers.
- ORDERING. We have designed our ordering system based on comments from our
customers. A customer simply clicks on the "order" button to add products
to his virtual shopping cart. A customer can add and subtract products
from his shopping cart as he browses around our store, prior to making a
final purchase decision. During a shopping session at DVD EXPRESS, a
customer can click on a title and determine, in real-time, whether the
item is in stock at our warehouse. A customer can then put the item in his
personal shopping cart for immediate shipping, or if out of stock, to be
shipped upon availability. When the customer is ready to complete an
order, he simply proceeds to the checkout page, enters his name, shipping
and billing information, selects a shipping and payment method, and
completes the transaction. If
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requested, we keep the customer's information in our database, which
facilitates repeat purchases by eliminating the need to resubmit
information on future orders.
- PAYING. Customers generally use a credit card or debit card which is
authorized during the checkout process and charged when the item is
shipped to the customer. Our online store uses an encryption technology
that works with the most common Internet browsers to prevent unauthorized
parties from reading information sent by our customers. Our system
automatically confirms receipt of each order via e-mail within minutes and
notifies the customer when we ship the order, which is usually on the same
day.
- GETTING HELP. From every page of our online store, a customer can click on
a "customer service" button to go to our customer service area. The
customer service area of our online store contains extensive information
for first-time and repeat visitors. In this area, we assist customers in
searching for, shopping for, ordering and returning our products. In
addition, we provide customers with information on our policies, answer
their most frequently asked questions and enable them to send us
suggestions via e-mail. Furthermore, our customer service representatives
are available to answer questions about products and the shopping process
during extended hours via our toll-free number, which is displayed in the
customer service area of our online store.
We provide an extensive selection of DVD titles that would be economically
impractical to stock in a traditional store. Unlike traditional store-based
retail formats, our online store provides us significant flexibility with regard
to the organization and presentation of our product selection without having to
alter the layout of a physical store.
To encourage purchases, we feature various rotating promotions and
continuously update our online recommendations. We also actively create and
maintain pages that are artistically designed to highlight certain titles. We
believe this strategy provides us with an excellent opportunity to promote
impulse purchases by customers. Finally, our value-added services such as our
recommendations enable us to display and promote our product selection in a
flexible and targeted manner.
DVD.com. We operate an information and entertainment Web site located at
www.dvd.com which is linked to our online store. This site educates and
entertains consumers and provides an interactive community for DVD enthusiasts.
Where specific movies are discussed or otherwise presented, there is a link to
our online store so that the title can be easily researched and purchased. Our
site is maintained and updated regularly by our editorial staff to provide our
users with a comprehensive source of information and interaction, and is
organized into the following five distinct areas:
- SCOOP. Features the latest DVD news, reviews of the newest DVD releases
and original feature stories on digital entertainment trends. Scoop also
contains message boards where users can share information.
- LEARN. Displays features on home theater components, the latest
information on DVD technology, reasons why DVD is a superior format to VHS
or laserdisc and a "DVDictionary," which provides understandable
explanations of technical terms.
- FIX. Introduces DVD enthusiasts to "Doc DVD," a DVD specialist in hardware
functionality, software, and player/disc compatibility issues who
personally responds to any DVD-related questions via e-mail, usually
within 24 hours. Doc DVD's answers to frequently asked questions about DVD
technology are also available on our Web site.
- SCHMOOZE. Takes users inside the DVD movie process. Each month, an
acclaimed director or filmmaker talks about technology's effect on the
industry. Schmooze also goes behind-the-scenes with the production teams
at various studios to get an insiders look at the film-making process.
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- PLAY. Features product reviews and other information on personal digital
products, as well as articles and celebrity interviews, digital postcards
and DVD-specific reviews, which differentiate DVD movies from other
formats.
We believe that we are providing a valuable service to existing and
potential customers by making it quick and easy for visitors to become more
acquainted with new technologies and the benefits and features of the DVD
format.
SALES AND MARKETING
Our target market is DVD owners and online shoppers. Forrester Research
estimates that 47% of DVD owners have an online connection at home, 58% of these
consumers research products online and 40% shop online. In addition, Forrester
Research estimates that in 1998 United States households earning more than
$50,000 a year accounted for 74% of U.S. online spending and that in 2003 this
group will account for 66% of U.S. online revenues. We believe that our company
will enjoy growth fueled by the rapid adoption of the DVD format, the growth and
acceptance of Internet commerce and the attractive demographics of online
consumers and DVD owners. The fundamental elements of our sales and marketing
strategy are as follows:
- build brand recognition;
- increase consumer traffic to our Web sites;
- add new customers and convert visitors into buyers; and
- build customer loyalty.
Like many other Internet retailers, we advertise on major search and
directory providers, as well as certain movie-specific sites. We believe we have
purchased a substantial portion of the available banner advertising on
well-recognized search engines for the keyword "DVD." We believe that this
targeting strategy is more cost-effective than other methods of advertising on
the Internet. We currently advertise on sites including Yahoo!, AOL, AltaVista,
HotBot, Excite, Lycos, Go.com, MSN.com and VideoSeeker.
In addition to Internet-specific marketing and advertising, we also conduct
campaigns utilizing traditional print, outdoor and radio advertising. We
advertise in publications which serve our customers' demographic profile, such
as THE WALL STREET JOURNAL, and entertainment related publications such as
ENTERTAINMENT WEEKLY, PREMIERE, MOVIELINE and HOME THEATER. We advertise in
several major radio markets, including New York, Los Angeles and Chicago.
We began selling DVDs shortly after the introduction of the first DVD
players. We have over 150,000 registered users in our e-mail database to whom we
regularly send information regarding new releases, promotions and contests. We
use this database to stimulate interest in new releases and to keep the DVD
EXPRESS brand name in the minds of customers. Since we consider early adopters
among the most active consumers in a product class, we believe our database is a
strategic asset for the growth of our business.
STRATEGIC MARKETING RELATIONSHIPS
We currently have the following strategic marketing agreements in place:
AMERICA ONLINE. In August 1998, we entered into an agreement with America
Online Inc. pursuant to which America Online will provide us with premier
positioning throughout the America Online service (including the Entertainment,
Shopping, Lifestyles, Travel, Influence and Research and Learn channels) on AOL
and America Online's Digital City. The initial term of the agreement ends
October 2001. As part of our commitment to the strategic relationship, we will
provide promotions and
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special offers to America Online members, and to users of AOL and Digital City.
We have guaranteed payments during the term to America Online of $15 million ($5
million of which has been paid through March 31, 1999) and, under certain
circumstances, a percentage of our revenues attributable to America Online
member traffic. We have also granted to America Online a warrant to purchase up
to 1,384,007 shares of our common stock. See "Description of Capital
Stock--Warrants."
ONE ZERO MEDIA (ALTAVISTA). In September 1998, we entered into an agreement
with One Zero Media, Inc. One Zero Media is the exclusive producer and
aggregating partner for the "Entertainment Zone," the entertainment content area
within the "AltaVista" Web site. Pursuant to the agreement, we have been
appointed as the sole provider of the Entertainment Zone's DVD Store Area. The
agreement also contemplates significant promotional efforts on our behalf in
both the Entertainment Zone and on the Wild Wild Web syndicated television show.
We pay One Zero Media based on the amount of traffic originating from AltaVista.
INFOSEEK CORPORATION (GO.com). In October 1998, we entered into a
distribution agreement with Infoseek Corporation (commonly known as Go.com)
pursuant to which Go.com will feature us in its Entertainment Channel and
various other areas throughout the service. During the 24-month term of the
agreement, we are obligated to pay Infoseek a minimum of $5.3 million plus a
percentage of our revenues attributable to Go.com member traffic.
We also currently have marketing arrangements with several other companies,
including Cowabunga Enterprises Inc. (a wholly owned subsidiary of Gateway
Inc.), Toshiba America Consumer Products, Inc., Compaq Computer Corporation,
Microsoft Corporation and NBC Multimedia, Inc. We typically pay these marketing
partners a percentage of the revenues generated from the relationship.
SUPPLY ARRANGEMENTS; STUDIO RELATIONSHIPS
We believe we are one of the few online retailers that purchase DVDs
directly from major studios. Although we enjoy this status in part due to the
number of DVDs we sell, the industry experience and studio relationships of our
founder, Michael Dubelko, helps facilitate purchasing directly from studios. In
addition to better pricing, we receive cooperative advertising and market
development funds from several studios. To date, we have awarded premiums such
as T-shirts and movie memorabilia to our customers. In the future, we intend to
use these funds to help pay for print and online advertising. In the first
quarter of 1999, approximately 45% of our cash purchases of DVDs were made
directly from studios. We expect this percentage to increase further as we
expand our studio direct purchasing efforts.
PRODUCT DISTRIBUTION
We ship customer orders from our approximately 8,000 square foot warehouse
located in Hollywood, California. We currently stock approximately 2,600
different DVD titles. Orders are communicated from our Web site to our warehouse
through an order processing system that controls the pick, pack and ship
processes. This system also provides our Web site with data on inventory
activity and status, which enables it to display individual product
availability. Orders are usually shipped on the same day they are received.
Customers can select to have their order shipped via Federal Express or the
United States Postal Service. Shipping costs are paid by the customer. We feel
our rapid delivery contributes substantially to the satisfaction of our
customers.
CUSTOMER SERVICE
We believe that superior customer service and support is critical to
retaining and expanding our customer base. We provide timely and accurate
responses to both telephone and e-mail inquiries. Our customer service
representatives are available from 8:00 am until 6:00 pm, Pacific Time, seven
days a week. During 1999, we expect to increase the number of hours that we
provide telephone support. We
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currently have 20 full time customer service representatives. Our customer
service team is responsible for handling general customer inquiries, answering
customer questions about the ordering process, investigating the status of
orders, shipments and payments, as well as processing customer orders. Our
customer service representatives are a valuable source of feedback regarding
customer satisfaction. We use BizRate, an online market research company, to
compile customer comments on their experiences. BizRate provides monthly reports
that enable us to make improvements in response to our customers' comments. Our
online store site also contains a customer service page that outlines store
policies and provides answers to frequently asked questions.
TECHNOLOGY
Since May 1998, we have been using a specialized electronic commerce system
from Pandesic LLC to operate our Web site and process orders. Pandesic, a joint
venture between Intel and SAP, provides this system and related equipment,
management services and support. As one of Pandesic's first customers, we have
entered into an agreement by which we assist Pandesic in the development of new
software features to enhance their system. In exchange, Pandesic provides us
with marketing support.
With this system, customers have the ability to access their account
information, track their order, preorder products, cancel and change orders and
receive credit card approvals online. They can also check the exact availability
of every product we display at our online store. Customers can elect to hold
orders until all items are available or generate multiple shipments as items
become available. Orders and invoices are automatically confirmed by e-mail as
they are processed.
We continue to extend and enhance the online features of our Web sites
through a combination of internal software development and the licensing of
third-party software, including that provided by Pandesic. We are focusing our
development efforts on features that appeal to our customers, such as online
movie trailers and customized product recommendations.
Our systems have been designed by Pandesic to reduce downtime in the event
of outages or catastrophic occurrences. Our system hardware is hosted at their
facility in Folsom, California which provides redundant communications lines and
emergency power backup.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive, and we expect that competition will further intensify in the
future. Barriers to entry are not extensive, and current and new competitors can
launch new sites at a relatively low cost. In addition, the broader retail video
industry is intensely competitive. We currently compete with a variety of online
vendors who specialize in DVDs and videos, as well as those who also sell books,
music and other entertainment products. We also compete with traditional
retailers, including specialty video retailers, mass merchandisers, department
and consumer electronics stores, as well as non-store retailers such as
mail-order video clubs. Many of these traditional retailers also support
dedicated Web sites that compete with us directly.
We believe that the principal competitive factors in the online market are
brand recognition, product selection, value-added services, ease of use, site
content, customer service and price. We believe that we compete favorably with
respect to brand recognition, product selection, value-added services, ease of
use, site content and customer service. Many of our current and potential
competitors have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial, marketing and other
resources than we do. Certain of our competitors have adopted, and may continue
to adopt, aggressive pricing or inventory availability policies and devote
substantial resources to Web site and systems development. Increased competition
may reduce our operating margins, market share and brand recognition.
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INTELLECTUAL PROPERTY
We regard our trademarks (particularly "DVD EXPRESS"), trade secrets and
similar intellectual property as critical to our success, and we rely on
trademark and trade secret protection and confidentiality and/or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. We have registered our "DVD EXPRESS" trademark in the United
States and have applied for the registration of our "DVD EXPRESS" trademark
internationally. Effective trademark and trade secret protection may not be
available in every country in which our products and service are made available
online.
EMPLOYEES
As of December 31, 1998, we had 72 employees. We vary the number of
part-time and temporary employees to respond to fluctuating market demand for
our products. Our employees are not covered by a collective bargaining
agreement. We consider our relationships with our employees to be good.
PROPERTIES
Our executive offices, sales and marketing operations and warehouse are
located at 7083 Hollywood Boulevard, Los Angeles, California 90028, where we
lease approximately 18,800 square feet of space. The current monthly rental due
under this lease is approximately $30,600. A portion of the lease expires in
April 2001 with the remainder expiring in October 2003. We will have to relocate
some of our operations within the next 12 months and we currently are conducting
a search for suitable locations. We believe that suitable additional or
alternative space will be available on commercially reasonable terms.
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of DVD EXPRESS as of March 15, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- --------------------------------------------------
<S> <C> <C>
Chairman of the Board, Chief Executive Officer and
Michael J. Dubelko........ 46 President
Andrew T. Crist........... 43 Chief Financial Officer and Secretary
Joan A. Abend............. 40 Vice President of Operations
Alison I. Johns........... 38 Vice President and Executive Editor
Susan M. Daniher.......... 29 Vice President of Marketing
Jason L. Vagner........... 27 Vice President of Technology
Steven S. Antebi(1)(2).... 55 Director
Kimberly S. Eads(1)....... 32 Director
Norman J. Pattiz(2)....... 56 Director
Stephen J. Cannell........ 58 Director
Harold E. Hughes.......... 53 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of Compensation Committee.
MICHAEL J. DUBELKO has been our Chairman of the Board, Chief Executive
Officer and President since DVD Express was founded in October 1996. From
December 1986 through June 1995, Mr. Dubelko served as President of the Cannell
Studios; from May 1982 through November 1986, he was Executive Vice President of
Cannell. In his role at Cannell, he oversaw the production and distribution of
over 30 prime-time television series, developed the largest motion picture and
television studio in Canada and formed a broadcast group of independent
television stations. Under his direction, Cannell grew to become one of the
largest privately-held film entertainment companies, prior to its sale to New
World Entertainment in 1995, which was shortly thereafter acquired by News Corp.
From October 1980 to April 1982, he was employed by Jess S. Morgan & Co., an
entertainment business management firm. From January 1974 through September
1980, Mr. Dubelko was employed by Touche Ross & Co. as a certified public
accountant. Mr. Dubelko received his B.B.A. in Finance from Cleveland State
University.
ANDREW T. CRIST has served as our Chief Financial Officer and Secretary
since February 1999. Prior to joining us, Mr. Crist was Vice President of
Financial Operations/Mergers and Acquisitions with Blockbuster Entertainment
Corporation from September 1996 to February 1999. From 1987 to 1996, Mr. Crist
was Executive Director of International Development and Senior Director of
Retail Product Management with Alamo Rent A Car, Inc. He began his career with a
seven-year tenure at KPMG Peat Marwick in 1979. Mr. Crist has an M.B.A. degree
with honors from The University of Michigan and a B.A. degree in accounting from
Duke University. He is a certified public accountant.
JOAN A. ABEND joined us in February 1997 as Vice President of Operations.
From September 1994 to January 1997, Ms. Abend was employed by Cannell Motion
Pictures as a development executive. From January 1987 to June 1994, Ms. Abend
was employed by The Education Group as Vice President of Operations. From
October 1986 to August 1988, Ms. Abend was employed by The MGM Store as its
Retail Manager.
ALISON I. JOHNS joined us in June 1998 as Vice President and Executive
Editor. From September 1994 to July 1997, Ms. Johns was a Content Director in
Artdirect, Inc., a Web design studio. From March 1986 to June 1994, Ms. Johns
was employed by MILLIMETER, The Magazine of Motion
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Picture, Television and New Media Production. During the last four years at
MILLIMETER, she served as Editor-in-Chief. Ms. Johns has been a journalist for
over ten years covering entertainment, technology and culture. Ms. Johns
graduated from Rutgers College with a B.A. in English Literature.
SUSAN M. DANIHER joined us in March 1998 as Vice President of Marketing.
From June 1992 to March 1998, Ms. Daniher was employed by Blockbuster
Entertainment Group in Washington, DC, Philadelphia and Dallas in various
marketing capacities, most recently as National Product Marketing Manager. From
June 1991 to May 1992, Ms. Daniher was employed by Marlo Furniture as its
Advertising Coordinator. Ms. Daniher received her B.A. in Advertising from the
University of Florida.
JASON L. VAGNER joined us in February 1998 as Vice President of Technology.
From September 1997 to January 1998, Mr. Vagner was an information security
analyst at Charles Schwab and Co. Mr. Vagner was employed by Strategic
Interactive Group from August 1996 to August 1997 as a Senior Unix
Administrator. From January 1996 to April 1996, Mr. Vagner was employed as a
senior systems administrator at Cape Internet. Mr. Vagner received his B.A. in
English from Arizona State University.
STEVEN S. ANTEBI has served as a Director since July 1998. Mr. Antebi is the
Manager of Fontenelle LLC, a personal holding company specializing in
telecommunications and Internet investments. He is also the general partner of
Maple Partners, a California partnership with investments in equities and is
managing partner of JLA Partners, a venture capital partnership specializing in
late stage development companies. Mr. Antebi is also President and Chairman of
the Board of Novante Communications, a Nevada corporation which invests in debt
and equity marketable securities. From March 1973 through June 1991, Mr. Antebi
was employed by Bear Stearns & Co. Inc., and from 1986 through 1991 served as a
Managing Director.
KIMBERLY S. EADS has served as a Director since January 1999. Since December
1998, Ms. Eads has been General Partner of Geocapital Partners, a venture
capital firm. From June 1997 to November 1998, she served as a Principal with
Geocapital Partners and from June 1995 to May 1997 she was an associate with the
firm. From August 1992 to March 1995, Ms. Eads was Vice President of Lease
Guarantee Corporation, a technology start-up that she co-founded. Ms. Eads
received her B.S. degree in Mechanical and Aeronautical Engineering from
Princeton University.
NORMAN J. PATTIZ has served as a Director since January 1999. Mr. Pattiz is
Chairman of the Board of Westwood One, Inc., a leading producer and distributor
of nationally sponsored radio programs and the nation's largest radio network.
Mr. Pattiz founded Westwood One, Inc. in 1976 and was Chief Executive Officer
until February 1994.
STEPHEN J. CANNELL has served as a Director since January 1999. Mr. Cannell
is the Emmy Award-winning creator and producer of over 35 television series, and
one of television's most prolific writers, with over 1,500 episodes to his
credit. He is also a national best-selling author of four novels. Mr. Cannell
was the founder and Chief Executive Officer and Chairman of the Board of the
Cannell Studios until its sale to New World Entertainment in July 1995.
HAROLD E. HUGHES has served as a Director since March 1999. Mr. Hughes is
the Chairman and Chief Executive Officer of Pandesic LLC. Pandesic is an
eCommerce software supplier owned jointly by Intel and SAP. Prior to joining
Pandesic, Mr. Hughes worked for 23 years at Intel Corporation during which time
he held a number of positions in financial and operational management. His most
recent assignments were as Vice President and Director of Planning and Logistics
and Chief Financial Officer. Prior to joining Intel, he served as an Officer in
the U.S. Army from 1968-1972. He received a B.A. from the University of
Wisconsin in 1968 and M.B.A. from the University of Michigan in 1974. He is on
the boards of the London Pacific Group, Merant PLC, and Hummingbird
Communications.
We have a staggered Board of Directors. Each Director holds office until the
annual meeting for the year in which his term expires or until his successor
shall be duly elected and qualified. Our Bylaws
43
<PAGE>
presently provide that the number of directors shall be fixed at six. Vacancies
on our Board of Directors may be filled only by a majority of the remaining
directors. In no case will our Board of Directors reduce the number of directors
to shorten the term of any incumbent director.
Executive officers are appointed and serve at the discretion of our Board of
Directors, subject to applicable employment contracts.
COMMITTEES OF OUR BOARD OF DIRECTORS
Our Board of Directors recently created a compensation committee and an
audit committee. The compensation committee will evaluate our compensation
policies and administer our stock option plan. The members of the compensation
committee are Steven Antebi and Norman Pattiz. The audit committee will review
the scope of our audits, the engagement of our independent auditors and their
audit reports. The audit committee will also meet with the financial staff to
review accounting procedures and reports. The members of the audit committee are
Steven Antebi and Kimberly Eads.
DIRECTOR COMPENSATION
We intend to pay non-employee directors fees of $1,000 for each meeting
attended. Directors are also eligible to receive options under our Stock
Incentive Plan. As of March 31, 1999, we had granted options to purchase an
aggregate of 187,500 shares of common stock to our directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a compensation committee for the fiscal year ended December
31, 1998. For the fiscal year ended December 31, 1998, all decisions regarding
executive compensation were made by our Board of Directors. No interlocking
relationship exists between any of our executive officers or 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 sets forth both the compensation paid or to be paid by
us to Michael Dubelko, our President and Chief Executive Officer (the "Named
Executive Officer"), for services rendered during 1998. No executive officer
received compensation in excess of $100,000 for 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION NUMBER OF
FISCAL YEAR ----------------------------- SECURITIES
ENDED OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION DECEMBER 31 SALARY BONUS COMPENSATION OPTIONS
- ---------------------------------------- ----------- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael J. Dubelko, Chairman, Chief
Executive Officer and President(1).... 1998 -0- -0- -0- -0-
</TABLE>
- ------------------------
(1) Michael Dubelko did not receive a salary during 1998. Mr. Dubelko will be
entitled to receive an annual base salary of $50,000 for 1999 pursuant to
his employment agreement. For a description of Mr. Dubelko's employment
agreement, see "Employment Agreements with Executive Officers," below.
44
<PAGE>
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Michael Dubelko has entered into a three-year employment agreement with us,
effective as of March 1, 1999, pursuant to which Mr. Dubelko will serve as our
Chairman, Chief Executive Officer and President. Pursuant to this agreement, Mr.
Dubelko will be entitled to a base salary of $50,000 per year, subject to
increase at the discretion of our Board of Directors. The employment agreement
terminates on February 28, 2002 unless sooner terminated pursuant to its terms.
If Mr. Dubelko's employment is terminated without cause or as a result of a
change in control, he will be entitled to continue to receive his base salary
for a one-year period following such termination.
Andrew Crist has entered into a two-year employment agreement with us,
effective as of March 1, 1999, pursuant to which Mr. Crist will serve as our
Chief Financial Officer. Pursuant to this agreement, Mr. Crist will be entitled
to a base salary of $150,000 per year, subject to increase at the discretion of
our Board of Directors. The employment agreement terminates on February 28, 2001
unless sooner terminated pursuant to its terms. If Mr. Crist's employment is
terminated without cause or as a result of a change in control, he will be
entitled to continue to receive his base salary for a one-year period following
such termination.
Other than Michael Dubelko and Andrew Crist, officers are appointed by and
serve at the discretion of our Board of Directors.
STOCK INCENTIVE PLAN
We adopted a Stock Incentive Plan (the "Stock Plan") in 1998. Each of our
executive officers, other employees, directors or consultants (or those of any
of our future subsidiaries) is eligible to be considered for the grant of awards
under the Stock Plan. A maximum of 2,250,000 shares of common stock may be
issued pursuant to awards granted under the Stock Plan, subject to certain
adjustments to prevent dilution. Any shares of common stock subject to an award
which for any reason expires or terminates unexercised are again available for
issuance under the Stock Plan.
The Stock Plan will be administered by our Board of Directors or by a
committee of two or more directors appointed by our Board of Directors. Subject
to the provisions of the Stock Plan, the Administrator will have full and final
authority to select the executives and other employees to whom awards will be
granted thereunder, to grant the awards and to determine the terms and
conditions of the awards and the number of shares to be issued pursuant thereto.
AWARDS. The Stock Plan authorizes the Administrator to enter into both
incentive and non-statutory options. An award under the Stock Plan may permit
the recipient to pay all of the purchase price of the shares by delivering
previously owned shares of our capital stock.
PLAN DURATION. The Stock Plan became effective upon its adoption by our
Board of Directors and the stockholder in January 1998. As of the date hereof,
our Board has granted options covering an aggregate of 974,250 shares of common
stock to our directors, officers and employees, with a weighted average exercise
price of $3.50 per share. No options have been exercised. Although any award
that was duly granted on or prior to such date may thereafter be exercised or
settled in accordance with its terms, no shares of common stock may be issued
pursuant to any award made on or after December 31, 2007.
AMENDMENTS. The Administrator may amend or terminate the Stock Plan at any
time and in any manner, provided, however no recipient of any option may,
without his or her consent, be deprived of any of his or her rights under the
option as a result of such amendment or termination. Stockholder approval is
required to, among other things, increase the number of shares available for
issuance under the Stock Plan.
45
<PAGE>
FORM S-8 REGISTRATION. We intend to file a registration statement under the
Securities Act to register the 2,250,000 shares of common stock reserved for
issuance under the Stock Plan, and the option to purchase 300,000 shares granted
to a certain employee. Such registration statement is expected to be filed
shortly following the date of this prospectus and will become effective
immediately upon filing with the Commission. Shares issued under the Stock Plan
after the effective date of such registration statement generally will be
available for sale to the public without restriction, except for the 180-day
lock-up provisions and except for shares issued to 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 Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for (i) any breach of
their duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit. Such limitation of liability does not
apply to liabilities arising under the federal securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
recession.
Our Certificate of Incorporation and Bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our Certificate of Incorporation
also permits us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the provisions of law would permit such
indemnification.
We plan to enter into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our Certificate of
Incorporation. These agreements, among other things, provide for indemnification
of our directors and executive officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
DVD EXPRESS, arising out of such person's services as a director or executive
officer of DVD EXPRESS, any subsidiary of DVD EXPRESS or any other company or
enterprise to which the person provides services at our request. We believe that
these provisions and agreements are necessary to attract and retain qualified
persons as directors and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
46
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1998, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company or any of
its subsidiaries was or is to be a party, in which the amount involved exceeded
or will exceed $60,000 and in which any director, executive officer, holder of
more than 5% of the common stock of the Company or any member of the immediate
family of any of the foregoing persons had or will have a direct or indirect
material interest other than (i) compensation agreements and other arrangements,
which are described where required in "Management," and (ii) the transactions
described below.
We have entered into a tax indemnification agreement with Michael Dubelko
relating to our respective income tax liabilities. See "Termination of S
Corporation Status."
On January 15, 1999, we sold an aggregate of 135,000 shares of our common
stock to three of our directors, Steven Antebi, Norman Pattiz and Stephen
Cannell, for a purchase price of $4.67 per share.
On January 4, 1999, we sold an aggregate of 1,714,285 shares of our Series A
Convertible Preferred Stock to Geocapital V, L.P., Geocapital IV, L.P. and
Broadview Partners Group for an aggregate purchase price of $12 million. The
1,714,285 shares of Series A Convertible Preferred Stock will convert into
2,571,428 shares of common stock (post 3-for-2 stock split) upon the closing of
this offering. In connection with the Series A Convertible Preferred Stock
financing, Kimberly Eads, a general partner of Geocapital Partners, was elected
to our Board of Directors.
In December 1998, we borrowed $1,000,000 from Michael Dubelko. The loan was
repayable upon demand and bore interest at 8.5%. The loan was repaid in full
during the first quarter of 1999.
In December 1998, we borrowed $300,000 from Michael Dubelko. The loan was
repayable upon demand and bore interest at 8.5%. The loan was repaid in full
during the first quarter of 1999.
Michael Dubelko has personally guaranteed the $2 million credit line and the
$1 million credit line we have with Wells Fargo Bank. We plan to repay these
credit lines with a portion of the net proceeds of this offering. Mr. Dubelko's
guarantees will terminate upon repayment of the credit lines. Mr. Dubelko has
also guaranteed the lease on our office space.
On March 25, 1998, we entered into an E-Business Solution Agreement with
Pandesic to provide our electronic commerce system. Harold Hughes is the
Chairman and Chief Executive Officer of Pandesic, and joined our Board of
Directors in March 1999. We have paid approximately $500,000 to Pandesic under
this agreement through March 31, 1999.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the common stock as of March 31, 1999, and as adjusted for our sale
of shares of common stock offered by this prospectus, for (i) each person
who is known to us to be the beneficial owner of more than 5% of the outstanding
common stock, (ii) each of our directors, (iii) the Named Executive Officer, and
(iv) all of our directors and executive officers as a group. The address of each
person listed is in care of us, at 7083 Hollywood Boulevard, Los Angeles,
California 90028, unless otherwise set forth below such person's name.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED(1)
NUMBER OF SHARES ---------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------------- ------------------ --------------- ---------------
<S> <C> <C> <C>
Michael J. Dubelko(2).................................. 14,904,000 84.2% %
Geocapital V, L.P.
Two Executive Drive
Fort Lee, New Jersey 07024............................. 1,500,000 8.5% %
Geocapital IV, L.P.
Two Executive Drive
Fort Lee, New Jersey 07024............................. 1,056,428 6.0% %
America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166(3).............................. 1,384,007 7.2% %
Broadview Partners Group
One Bridge Plaza
Fort Lee, New Jersey 07024............................. 15,000 * *
Steven S. Antebi....................................... 45,000 * *
Stephen J. Cannell..................................... 45,000 * *
Norman J. Pattiz....................................... 45,000 * *
Kimberly S. Eads(4).................................... 0 * *
Harold E. Hughes....................................... 0 * *
All of the directors and executive officers as a group
(11 persons)(4)(5)................................... 15,280,667 85.1% %
</TABLE>
- ------------------------
* Less than 1%.
(1) Percentage ownership is based on 17,706,428 shares outstanding as of April
12, 1999, including 2,571,428 shares of common stock issuable upon
conversion of all outstanding preferred stock at the closing of this
offering, but excluding 1,384,007 shares of common stock which may be
purchased upon the exercise of the warrant granted to America Online. Shares
of common stock subject to options currently exercisable or exercisable
within 60 days of April 12, 1999 are deemed outstanding for purposes of
computing the percentage ownership of the person holding such options but
are not deemed outstanding for computing the percentage ownership of any
other person. Except pursuant to applicable community property laws or as
indicated in the footnotes to this table, each stockholder identified in the
table possesses sole voting and investment power with respect to all shares
of common stock shown as beneficially owned by such stockholder.
(2) Includes 300,000 shares of common stock held in the Dubelko 1999 Children's
Trust dated January 1, 1999, of which Michael Dubelko is trustee.
(3) Represents shares of common stock which may be purchased upon exercise of a
warrant.
(4) Kimberly Eads is a General Partner of Geocapital V, L.P. and Geocapital IV,
L.P. Ms. Eads disclaims beneficial ownership of the shares held by
Geocapital V, L.P. and Geocapital IV, L.P.
(5) Includes 241,667 shares of common stock which may be purchased upon exercise
of options.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 50,000,000 shares of common stock, par value
$.0001 per share, and 10,000,000 shares of preferred stock, par value $.0001 per
share. As of the date of this prospectus, there were 17,706,428 shares of common
stock outstanding and there were 24 holders of record of the common stock. There
are no shares of preferred stock outstanding. The following statements are brief
summaries of certain provisions relating to 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.
The holders of common stock are entitled to receive ratably dividends when, as
and if declared by our Board of Directors out of funds legally available
therefor. 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 ratably in all assets remaining
available for distribution to them after payment of liabilities and after
provision is made for each class of stock, if any, having preference over the
common stock.
The holders of common stock have no preemptive or conversion rights and they
are not subject to further calls or assessments by us. There are no redemption
or sinking fund provisions applicable to our common stock. The outstanding
shares of common stock are, and the common stock issuable pursuant to this
prospectus will be, when issued, fully paid and nonassessable.
PREFERRED STOCK
Our Board of Directors has the authority to issue the authorized and
unissued preferred stock in one or more series with such designations, rights
and preferences as it may determine from time to time. Accordingly, our Board of
Directors is empowered, without stockholder approval, to issue preferred stock
with dividend, liquidation, conversion, voting or other rights superior to, or
which otherwise adversely affect, the voting power or other rights of the
holders of our common stock. In the event of issuance, our preferred stock could
be utilized, under certain circumstances, as a way of discouraging, delaying or
preventing an acquisition or change in our control. After this offering, we will
not have any shares of preferred stock outstanding, and we do not presently
intend to issue any shares of preferred stock, although we may do so.
OPTIONS
As of the date hereof, our Board of Directors has granted, under our Stock
Plan, options covering an aggregate of 974,250 shares of common stock to our
directors, officers and employees, with a weighted average exercise price of
$3.50 per share. Such options typically vest over a three year period.
In addition, on June 1, 1997, our Board of Directors granted stock options
to purchase up to 300,000 shares of common stock at $.0667 per share to Joan
Abend. These options vest over a four year period.
WARRANTS
On August 1, 1998, we granted a warrant to America Online, Inc. (the
"America Online Warrant") to purchase up to 1,384,007 shares of common stock at
an exercise price $5.60 per share. The America Online Warrant is fully vested
and expires on August 1, 2008. The America Online Warrant does not have any
voting rights, dividend rights or preferences until such time as it is exercised
for shares of common stock.
49
<PAGE>
REGISTRATION RIGHTS
After this offering, holders of the 2,571,428 shares of common stock
issuable upon conversion of the outstanding preferred stock upon the closing of
this offering will be entitled to registration rights with respect to their
shares. These holders can require us to register all or part of their shares at
any time following 180 days after this offering, subject to certain conditions.
In addition, subject to certain limitations, these holders may also require us
to include their shares in future registration statements that we file and may
require us to register their shares on Form S-3. Upon registration, such shares
are freely tradable in the public market without restriction.
Also, the holder of the America Online Warrant is entitled to registration
rights with respect to the shares of common stock that can be purchased upon
exercise of such warrant. This holder can similarly require us to register all
or part of its shares at any time following 180 days after this offering,
subject to certain conditions. In addition, subject to certain limitations, this
holder may also require us to
include its shares in future registration statements we file and may require us
to register their shares on Form S-3. Upon registration, such shares are freely
tradable in the public market without restriction.
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of Delaware law and our Certificate of Incorporation and
Bylaws could make our acquisition and the removal of our incumbent officers and
directors by means of a tender offer, a proxy contest or otherwise more
difficult. These provisions, summarized below, are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of DVD EXPRESS to negotiate first
with our management. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in an "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of interested
stockholder status, did own) 15% or more of a corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by our Board of Directors,
including discouraging attempts that might result in a premium over the market
price for the shares of Common Stock held by stockholders.
Our Certificate of Incorporation and Bylaws, provide for a staggered Board
of Directors, do not provide for cumulative voting in the election of directors,
eliminate the right of stockholders to act by written consent and provides that
special meetings of the stockholders can only be called by our Board of
Directors, Chairman, Chief Executive Officer or President. Also, the
authorization of undesignated preferred stock makes it possible for our Board of
Directors to issue preferred stock with voting of other rights or preferences
that could impede the success of any attempt to change our control. These and
other provisions may have the effect of deterring hostile takeovers or delaying
changes in our control or management.
TRANSFER AGENT
Our transfer agent and registrar for our common stock is U.S. Stock Transfer
Corporation.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of common stock
outstanding. Of those shares, a total of ( if the
underwriters' over-allotment option if 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.
In general, under Rule 144 as currently in effect, any of our affiliates who
have beneficially owned restricted securities for at least one year would be
entitled to sell within any three-month period commencing 90 days after the date
of this prospectus a number of shares that does not exceed the greater of 1.0%
of the then outstanding shares of common stock ( shares immediately
after the completion of this offering) or the reported average weekly trading
volume during the four weeks preceding the sale. Sales under Rule 144 are also
subject to certain manner of sale restrictions and notice requirements and to
the availability of current public information concerning us. Commencing 180
days after the date of this prospectus, 14,904,000 shares of common stock held
by our affiliates will be eligible for sale pursuant to Rule 144, subject to the
restrictions under Rule 144 referred to above and, as described below, subject
to the agreement of certain holders of common stock to certain restrictions on
their ability to sell common stock for a period of 180 days following the
consummation of this offering.
Pursuant to certain lock-up agreements, we and our executive officers,
directors and stockholders, have agreed that we will not, without the prior
written consent of ING Baring Furman Selz LLC, on behalf of the underwriters,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant or any option to
purchase or other sale or disposition) of any shares of common stock or any
securities convertible into, or exercisable or exchangeable for, any shares of
common stock, or other similar securities of ours for a period of 180 days from
the date of this prospectus, except that such agreements do not prevent us from
granting additional options under our Stock Plan or from issuing shares pursuant
to our Stock Plan. After such 180 day period, this restriction will expire and
shares permitted to be sold under Rule 144 will be eligible for sale. ING Baring
Furman Selz LLC may, in its sole discretion, at any time and without notice,
release all or any portion of the securities subject to such lock-up agreements.
Within 90 days after the date of this prospectus, we intend to file a
registration statement on Form S-8 covering the 2,250,000 shares of common stock
that have been reserved for issuance under the Stock Plan and 300,000 shares of
common stock that may be issued upon exercise of options granted to an employee.
Shares of common stock issued upon exercise of options after the effective date
of the Form S-8 will be available for sale in the public market, subject to Rule
144 volume limitations applicable to our affiliates and to the lock-up
agreements.
Also, holders of 2,571,428 shares of common stock issuable upon exercise of
the outstanding preferred stock upon the closing of this offering and the holder
of the America Online Warrant are entitled to registration rights. Such holders
can require us to register all or part of their shares at any time following 180
days after this offering, subject to certain conditions. If such holders elect
to register and sell a large number of shares into the public market, such sales
could have an adverse effect on the market price of the common stock.
Prior to this offering, there has been no public market for the common
stock, and no predictions can be made with respect to the effect, if any, that
future sales of shares, or the availability of shares for future sale, will have
on the prevailing market price for our common stock. Sales of substantial
amounts of our common stock in the public market following this offering, or the
perception that such sales may occur, could adversely affect the prevailing
market prices for our common stock and impair our ability to raise capital
through the sale of equity securities.
51
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
, 1999, the underwriters named below, who are represented by ING
Baring Furman Selz LLC and Friedman, Billings, Ramsey & Co., Inc., have
severally agreed to purchase from DVD Express the number of shares of common
stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
ING Baring Furman Selz LLC.........................................................
Friedman, Billings, Ramsey & Co., Inc..............................................
-----
Total..............................................................................
-----
-----
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock (other than those shares
covered by the over-allotment option described below) if any are purchased.
The underwriters propose initially to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $ per share.
The underwriters may allow, and such dealers may re-allow, to certain other
dealers, a concession not in excess of $ per share.
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
EXERCISE NO EXERCISE FULL
- ------------------------------------------------------------------------ ------------- ---------
<S> <C> <C>
Per share............................................................... $ $
Total................................................................... $ $
</TABLE>
Other expenses of this offering (including the registration fees and the
fees and expenses of the financial printer, counsel and accountants) payable by
us are expected to be approximately $ .
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of additional shares of common stock at the
public offering price less the underwriting discounts and commissions. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of such additional shares based on
such underwriter's percentage underwriting commitment as indicated in the table
above.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in respect of any of those
liabilities.
DVD EXPRESS, along with our executive officers and directors and certain of
our existing stockholders, has agreed not to offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock or any securities
52
<PAGE>
convertible into or exercisable or exchangeable for common stock or enter into
any swap or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any shares of common stock for a
period of 180 days from the date of this prospectus without the prior written
consent of ING Baring Furman Selz LLC. Such consent may be given at any time
without public notice. In addition, during such period, we have also agreed not
to file any registration statement with respect to, and each of our executive
officers, directors and all of our stockholders that hold such rights have
agreed not to make any demand for, or exercise any right with respect to, the
registration of any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock without the prior written consent
of ING Baring Furman Selz LLC.
No action has been taken by us or the underwriters that would permit a
public offering of the shares of common stock offered hereby in any jurisdiction
other than the United States where action for that purpose is required. The
shares of common stock offered hereby may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about, and to observe, any restrictions
relating to the offering of the common stock and the distribution of this
prospectus. This prospectus is not an offer to sell or a solicitation of an
offer to buy any shares of common stock offered hereby in any jurisdiction in
which such an offer or solicitation is unlawful.
ING Baring Furman Selz LLC has advised DVD EXPRESS that the underwriters do
not intend to confirm sales to any account over which they exercise
discretionary authority.
The underwriters and dealers may engage in passive market-making
transactions in the common stock in accordance with Rule 103 under Regulation M
promulgated by the SEC. In general, a passive market-maker may not bid for or
purchase shares of common stock at a price that exceeds the highest independent
bid. In addition, the net daily purchases made by any passive market-maker
generally may not exceed 30% of its average daily trading volume in the common
stock during a specified two-month prior period, or 200 shares, whichever is
greater. A passive market-maker must identify passive market-making bids as such
on the Nasdaq electronic inter-dealer reporting system. Passive market-making
may stabilize or maintain the market price of the common stock above independent
market levels. Underwriters and dealers are not required to engage in passive
market-making and may end passive market-making activities at any time.
In connection with this offering, the underwriters may engage in
transactions on the Nasdaq National Market or the over-the-counter market or
otherwise that stabilize, maintain or otherwise affect the price of the common
stock. Specifically, the underwriters may overallot this offering, creating a
syndicate short position. In addition, the underwriters may bid for and purchase
shares of common stock in the open market to cover syndicate short positions or
to stabilize the price of the common stock. In addition, ING Baring Furman Selz
LLC, on behalf of the underwriters, may reclaim selling concessions allowed to
an underwriter or dealer if the underwriting syndicate repurchases shares
distributed by that underwriter or dealer. These activities may stabilize or
maintain the market price of the common stock above independent market levels.
The underwriters are not required to engage in these activities and may end any
of these activities at any time.
53
<PAGE>
Prior to this offering, there has been no public market for the common
stock. As a result, the initial public offering price for the common stock has
been determined by negotiation between DVD EXPRESS and the underwriters. Among
the factors considered in determining the public offering price were:
- prevailing market conditions;
- DVD EXPRESS' results of operations in recent periods;
- the present stage of DVD EXPRESS' development;
- the market capitalizations and development stages of other companies that
we and the underwriters believe to be comparable to DVD EXPRESS; and
- estimates of DVD EXPRESS' growth potential.
54
<PAGE>
LEGAL MATTERS
Our counsel, Troop Steuber Pasich Reddick & Tobey, LLP, Los Angeles,
California, has rendered an opinion to the effect that the common stock offered
by us upon sale will be duly and validly issued, fully paid and non-assessable.
Brobeck, Phleger & Harrison, LLP, Irvine, California, has acted as counsel to
the underwriters in connection with certain legal matters relating to this
offering.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of such firm as experts in giving
said reports.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission in Washington,
D.C., a registration statement under the Securities Act with respect to the
shares offered hereby. This prospectus does not contain all of the information
set forth in such registration statement and the exhibits thereto. Statements
contained in this prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and with respect to any
contract or other document filed as an exhibit to such registration statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement is qualified in its entirety by such
reference. For further information with respect to us and the shares offered
hereby, reference is hereby made to such registration statement and exhibits
thereto. A copy of such registration statement, including the exhibits thereto,
may be inspected without charge at the Securities and Exchange Commission's
principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
certain prescribed rates.
Upon consummation of this offering, we will become subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports and other information with the Securities and Exchange
Commission in accordance with its rules. Such reports and other information
concerning us may be inspected and copied at the public reference facilities
referred to above as well as certain regional offices of the Securities and
Exchange Commission.
The Securities and Exchange Commission maintains a Web site which contains
reports, proxy and information statements and other information regarding
issuers such as us that file electronically with the Securities and Exchange
Commission at http://www.sec.gov.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent public accountants.................... F-2
Balance sheets as of December 31, 1998 and 1997............. F-3
Statements of operations for the years ended December 31,
1998 and 1997 and for the period from October 18
(inception) to December 31, 1996.......................... F-4
Statements of stockholder's (deficit) equity for the years
ended December 31, 1998 and 1997 and for the period from
October 18 (inception) to December 31, 1996............... F-5
Statements of cash flows for the years ended December 31,
1998 and 1997 and for the period from October 18
(inception) to December 31, 1996.......................... F-6
Notes to the financial statements........................... F-7
</TABLE>
F-1
<PAGE>
After the reincorporation and the concurrent 3-for-2 stock split of each
outstanding share of common stock, as discussed in Note 9 of Notes to
Consolidated Financial Statements is effected, we expect to be in a position to
render the following audit report.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 1, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDER OF DVD EXPRESS, INC.:
We have audited the accompanying balance sheets of DVD EXPRESS, Inc. (a
California corporation, the "Company") as of December 31, 1998 and 1997, and the
related statements of operations, stockholder's (deficit) equity, and cash flows
for the years ended December 31, 1998 and 1997 and the period from October 18
(inception) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 DVD EXPRESS, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1998 and 1997 and the period from October 18 to
December 31, 1996 in conformity with generally accepted accounting principles.
Los Angeles, California
February 1, 1999 (except with
regard to the matters discussed
in Note 9, as to which the date is
, 1999)
F-2
<PAGE>
DVD EXPRESS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1997 1998
----------- ------------- PRO FORMA
STOCKHOLDERS'
EQUITY AS OF
DECEMBER 31,
1998
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 200 $ 904,865
Accounts receivable................................................. 18,409 254,661
Inventories......................................................... 250,689 1,803,948
Prepaid advertising................................................. -- 6,884,901
Other assets........................................................ 6,037 61,269
----------- -------------
Total current assets.............................................. 275,335 9,909,644
Property and equipment, net........................................... 34,653 646,528
Other assets:
Prepaid advertising................................................. -- 8,745,523
Intangible assets, net.............................................. -- 187,015
----------- -------------
Total assets...................................................... $ 309,988 $ 19,488,710
----------- -------------
----------- -------------
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
Current liabilities:
Accounts payable.................................................... $ 116,785 $ 3,082,334
Accrued expense and other........................................... 1,800 283,627
Advances under lines of credit...................................... -- 3,000,000
Stockholder loans................................................... -- 1,300,000
----------- -------------
Total current liabilities......................................... 118,585 7,665,961
----------- -------------
Commitments and contingencies
Stockholder's (Deficit) Equity:
Preferred stock, $.0001 par value, 10,000,000 shares authorized,
none issued and outstanding....................................... -- -- $ 171
Share capital, $.0001 par value, 50,000,000 shares authorized,
15,000,000 issued and outstanding................................. 1,500 1,500 1,514
Additional paid-in capital.......................................... 348,500 16,494,288 23,751,064
Accumulated deficit................................................. (158,597) (4,673,039) --
----------- ------------- -------------
Total stockholder's (deficit) equity.............................. 191,403 11,822,749 $ 23,752,749
----------- ------------- -------------
Total liabilities and stockholder's (deficit) equity.............. $ 309,988 $ 19,488,710
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
DVD EXPRESS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
OCTOBER 18 TO YEARS ENDED DECEMBER 31,
DECEMBER 31, -----------------------------
1996 1997 1998
------------- ------------- --------------
<S> <C> <C> <C>
Revenues........................................................... $ -- $ 1,269,241 $ 16,906,630
Cost of revenues................................................... -- (1,046,112) (15,085,763)
------------- ------------- --------------
Gross profit................................................... -- 223,129 1,820,867
------------- ------------- --------------
Operating expenses:
Operating and development........................................ -- (177,051) (1,309,232)
Sales and marketing.............................................. -- (96,640) (4,160,015)
General and administrative....................................... (17,007) (91,028) (792,063)
------------- ------------- --------------
Operating loss................................................. (17,007) (141,590) (4,440,443)
Interest expense................................................... -- -- (73,999)
------------- ------------- --------------
Net loss........................................................... $ (17,007) $ (141,590) $ (4,514,442)
------------- ------------- --------------
------------- ------------- --------------
Basic and diluted loss per common share............................ $ (0.00) $ (0.01) $ (0.30)
------------- ------------- --------------
------------- ------------- --------------
Weighted average number of shares.................................. 15,000,000 15,000,000 15,000,000
------------- ------------- --------------
------------- ------------- --------------
Basic and diluted pro forma loss per common share.................. $ (0.00) $ (0.01) $ (0.30)
------------- ------------- --------------
------------- ------------- --------------
Pro forma weighted average number of shares........................ 15,000,000 15,000,000 15,000,000
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
DVD EXPRESS, INC.
STATEMENTS OF STOCKHOLDER'S (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------------- ADDITIONAL STOCKHOLDER'S
NUMBER OF PAID-IN ACCUMULATED (DEFICIT)
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------ --------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Beginning balance.................................. -- $ -- $ -- $ -- $ --
Capital contribution............................. -- -- 30,000 -- 30,000
Net loss......................................... -- -- -- (17,007) (17,007)
------------ --------- ------------- ------------- --------------
Balance, December 31, 1996......................... -- -- 30,000 (17,007) 12,993
Issuance of common stock......................... 15,000,000 1,500 318,500 -- 320,000
Net loss......................................... -- -- -- (141,590) (141,590)
------------ --------- ------------- ------------- --------------
Balance, December 31, 1997......................... 15,000,000 1,500 348,500 (158,597) 191,403
Capital contribution............................. -- -- 1,150,000 -- 1,150,000
Fair value of options issued in connection with
purchase of intangible assets.................. -- -- 3,463 -- 3,463
Amortization of fair value of warrants issued in
connection with advertising agreements......... -- -- 14,992,325 -- 14,992,325
Net loss......................................... -- -- -- (4,514,442) (4,514,442)
------------ --------- ------------- ------------- --------------
Balance, December 31, 1998......................... 15,000,000 $ 1,500 $ 16,494,288 $ (4,673,039) $ 11,822,749
------------ --------- ------------- ------------- --------------
------------ --------- ------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
DVD EXPRESS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 18 TO YEARS ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1996 1997 1998
------------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $ (17,007) $ (141,590) $ (4,514,442)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization...................................... -- 7,706 101,125
Non-cash advertising cost.......................................... -- -- 1,249,360
Changes in certain assets and liabilities
Increase in prepaid advertising.................................. -- -- (1,887,459)
Increase in accounts receivable.................................. -- (18,409) (236,252)
Increase in inventories.......................................... -- (250,689) (1,553,259)
Increase in other assets......................................... -- (6,037) (55,232)
Increase in accounts payable..................................... -- 116,785 2,965,549
Increase in accrued expenses and other........................... -- 1,800 281,827
------------- ----------- -------------
Net cash used in operating activities.......................... (17,007) (290,434) (3,648,783)
------------- ----------- -------------
Cash flows from investing activities:
Additions to property and equipment.................................. -- (42,359) (695,999)
Purchase of intangible assets........................................ -- (200,553)
------------- ----------- -------------
Net cash used in investing activities.......................... -- (42,359) (896,552)
------------- ----------- -------------
Cash flows from financing activities:
Capital contributions................................................ 30,000 320,000 1,150,000
Advances on lines of credit.......................................... -- -- 3,000,000
Stockholder loans.................................................... -- -- 1,300,000
------------- ----------- -------------
Net cash provided by financing activities...................... 30,000 320,000 5,450,000
------------- ----------- -------------
Net increase (decrease) in cash and cash equivalents................... 12,993 (12,793) 904,665
Cash and cash equivalents, beginning of period......................... -- 12,993 200
------------- ----------- -------------
Cash and cash equivalents, end of period............................... $ 12,993 $ 200 $ 904,865
------------- ----------- -------------
------------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS RISKS
DVD EXPRESS, Inc. (the "Company") a subchapter S corporation (see Note 8),
is a specialty retail online video store which uses the Internet as its primary
channel of selling and marketing digital versatile disk ("DVD") movies, games,
and accessories. The Company was incorporated and commenced principal operations
on October 18, 1996.
RISKS OF BUSINESS
The Company has a limited operating history on which to base an evaluation
of its business. The Company will encounter numerous risks including, but not
limited to, the need to respond to changes in a rapidly evolving and
unpredictable business environment and the ability to manage growth effectively.
The Company must, among other things, expand its customer base, successfully
implement its business and marketing strategies, continue to develop and upgrade
its Web site and provide superior customer service. If the Company is not
successful in addressing such risks, it will be materially adversely affected.
SIGNIFICANT LOSSES FROM OPERATIONS
The Company is an early stage enterprise and has incurred significant net
losses since its inception. To date, the Company has funded operations through
the sale of Company stock, bank debt, and loans from the sole stockholder. There
can be no assurance that the Company will continue to be able to raise
additional capital as needed, which could have a material adverse effect on the
Company's business, financial condition or results of operations. Additionally,
there is no assurance that the Company will attain profitability in the future.
The Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in the early stages of
development, particularly companies in new and rapidly evolving markets such as
online commerce.
The Company intends to continue investing heavily in marketing and
promotion, strategic alliances, Web site development and technology, and
development of its administrative organization. As a result, the Company
believes that it will continue to incur substantial operating losses for the
foreseeable future, and at rates significantly above current levels. Achieving
profitability depends upon the Company's ability to generate and sustain
substantially increased revenue levels. There can be no assurance that the
Company will be able to generate sufficient revenues or gross margins to achieve
or sustain profitability in the future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to consist of all highly
liquid debt instruments purchased with an initial maturity of three months or
less.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of credit card receivables. The
carrying amount of these receivables approximates realizable value.
INVENTORY
Inventories are comprised of DVD movies, videos and DVD-ROM software and are
stated at the lower of cost (first-in, first-out method) or market.
PREPAID ADVERTISING
The Company has entered into certain long-term marketing agreements.
Payments made and the fair value of other equity consideration are capitalized
as prepaid advertising which are amortized over the expected useful life based
upon the term or guaranteed impressions (see Note 5).
INTANGIBLE ASSET
Intangible assets consists of amounts paid for domain names on the World
Wide Web (URL's). The Company entered into an agreement for the purchase of the
following domain names: "dvd.com," "hometheater.com," and "hometheater.net" for
$200,553 in cash and the grant of stock options to purchase 10,000 shares of
common stock at an exercise price of $7.00 per share. Such options are fully
vested and expire on August 15, 1999. The options have been valued in accordance
with the provisions of Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") (see also Note 7). The
assets are being amortized over 5 years on a straight-line basis.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed utilizing the straight-line method. These assets are
depreciable over the estimated useful lives as follows:
<TABLE>
<S> <C>
Furniture and equipment........................... 5 years
Computer equipment................................ 3 years
Leasehold improvements............................ Life of lease or asset life if shorter
</TABLE>
Major renewals and improvements are capitalized. Any maintenance and repairs
which do not improve or extend the life of the assets are expensed as incurred.
The cost and accumulated depreciation for property and equipment sold,
retired or otherwise disposed of are relieved from the respective accounts and
resulting gains and losses are reflected in income.
F-8
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG LIVED ASSETS
The Company had adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed of." This statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. The
carrying value of existing assets are reviewed when events or changes in
circumstances indicate that an impairment test is necessary in order to
determine if an impairment has occurred. When factors indicate that such assets
should be evaluated for possible impairment, the Company will estimate the
future cash flows expected to result from the use of the assets and their
eventual disposition, and compare the amounts to the carrying value of the
assets to determine if an impairment loss has occurred.
REVENUE RECOGNITION
Revenues, which consists primarily of DVD movies sold via the Internet,
include outbound shipping and handling charges and are recognized when the
products are shipped.
PRO FORMA NET LOSS PER COMMON SHARE
The Company has presented pro forma net loss per share amount for the years
ended December 31, 1998, 1997 and the period from October 18 to December 31,
1996 pursuant to Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share" and the Securities and Exchange Commission Staff accounting
Bulletin No. 98. Basic loss per share is calculated by dividing net loss
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted loss per share, which replaced fully diluted
loss per share, reflects the potential dilution from the exercise or conversion
of securities into common stocks.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 specifies an asset and liability approach, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events, which have been recognized in the Company's financial
statements.
The Company has historically elected to file federal and state income tax
returns as a S corporation and as a result, is not subject to federal income tax
but may be subject to state income tax in certain states. In accordance with the
S corporation election, taxable income or loss of the Company is included in the
computation of adjusted gross income of the Company's sole stockholder. As the
Company has reported losses since inception and is paying only the minimum state
tax required, no state income tax provision has been recorded.
As of January 1, 1999, the Company terminated its S corporation status and
will record the effect of such termination in the first quarter of 1999 (see
Note 8).
F-9
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the accompanying balance
sheets, liabilities exceed assets at December 31, 1998; nevertheless, the
management of the Company intends to fund operations as necessary in order for
the Company to continue as a going concern through at least December 31, 1999.
COMPREHENSIVE INCOME
Aside from net income (loss), there are no other comprehensive income items
for the years ended December 1998 and 1997 and the period from October 18, 1996
to December 31, 1996.
SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131") in 1998. This statement
requires companies to report certain information about operating segments in a
financial statement and information about their products and services, the
geographic areas in which they operate, and their major customers. The Company
has adopted SFAS 131 in 1998. As the Company has only one reportable operating
segment of its business there is no segment information to report for the years
ended December 1998 and 1997 and the period from October 18 to December 31,
1996, other than the following geographic information. The Company has no assets
outside the United States and all transactions are denominated in United States
dollars.
Revenues earned from product shipments to geographic areas are as follows in
1998: United States and possessions $9,274,828; Europe $3,456,798; and rest of
world $2,119,555. In 1997, product shipments were: United States and possesions
$660,380; Europe $246,129; and rest of world $150,915.
Revenues from total worldwide shipping charges totaled $2,055,450 and
$146,351 in 1998 and 1997, respectively.
F-10
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Furniture and equipment................................ $ 8,168 $ 270,869
Computer equipment..................................... 34,191 221,652
Leasehold improvements................................. -- 245,837
------- --------
42,359 738,358
Less: Accumulated depreciation......................... (7,706) (91,830)
------- --------
$ 34,653 $ 646,528
------- --------
------- --------
</TABLE>
4. BANK AND OTHER DEBT
LINES OF CREDIT
In July 1998, the Company entered into a revolving line of credit with Wells
Fargo Bank National Association aggregating $1,000,000. The interest expense is
computed at a rate of .75% above prime rate (8.5% at December 31, 1998)
beginning on September 1, 1998. The revolving line of credit expires on
September 1, 1999.
In October 1998, the Company entered into an additional revolving line of
credit with Wells Fargo Bank National Association aggregating $2,000,000. The
interest expense is computed at a rate of .25% below prime rate (7.5% at
December 31, 1998) beginning on October 1, 1998. The revolving line of credit
expires on November 1, 1999.
5. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
Management believes, based upon the advice of legal counsel, that there are
no proceedings, either threatened or pending, against the Company that could
result in a material adverse effect on the results of operations or the
financial condition of the Company.
LETTERS OF CREDIT
On February 11, 1998, the Company entered into an agreement expiring on
September 1, 1999 under which Wells Fargo Bank, National Association will issue
standby letters of credit not to exceed $750,000. As of December 31, 1998, the
Company has no letters of credits outstanding.
OPERATING LEASE AGREEMENTS
Prior to April 1998, the Company occupied business premises subject to a
month to month lease. The Company entered into a three-year operating lease
agreement for office space on April 1, 1998, which was amended to include
additional premises on August 5, 1998. Total rent expense for the years ended
December 31, 1998 and 1997, and the period from October 18 to December 31, 1996
was $159,598, $18,267, and $0, respectively.
F-11
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments at December 31, 1998, relating to the
Company's non-cancelable operating leases, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- ----------------------------------------------------------------------------------
<S> <C>
1999.............................................................................. $ 324,842
2000.............................................................................. 324,842
2001.............................................................................. 91,319
----------
$ 741,003
----------
----------
</TABLE>
MARKETING AGREEMENTS, STRATEGIC ALLIANCES AND SYSTEM PROVIDERS
AMERICA ONLINE AGREEMENT
In August 1998, the Company entered into an agreement with America Online
Inc. pursuant to which America Online will provide the Company with premier
positioning throughout the America Online service (including the Entertainment,
Shopping, Lifestyles, Travel, Influence and Research and Learn channels) on AOL
and America Online's Digital City. The initial term of the agreement ends
October 2001. The Company has guaranteed payments during the term to America
Online of $15 million and, under certain circumstances, a percentage of our
revenues attributable to America Online member traffic. (See also Note 7).
INFOSEEK AGREEMENT
In October 1998, the Company entered into a distribution agreement with
Infoseek Corporation (commonly known as Go.com) pursuant to which Go.com will
feature us in its Entertainment Channel and various other areas throughout the
service. During the 24-month term of the agreement, the Company is obligated to
pay Infoseek a minimum of $5.3 million plus a percentage of our revenues
attributable to Go.com member traffic.
ONE ZERO MEDIA AGREEMENT
In September 1998, the Company entered into an agreement with One Zero
Media, Inc. One Zero Media is the exclusive producer and aggregating partner for
the "Entertainment Zone," the entertainment content area within the "AltaVista"
Web site. Pursuant to the agreement, the Company has been appointed as the sole
provider of the Entertainment Zone's DVD Store Area. The agreement also
contemplates significant promotional efforts on behalf of the Company in both
the Entertainment Zone and on the Wild Wild Web syndicated television show. The
Company pays One Zero Media based on the amount of traffic originating from
AltaVista.
SYSTEM PROVIDERS
The Company depends on Pandesic LLC ("Pandesic") to develop and service its
commerce systems, including the software that operates the
transaction-processing systems. The current agreement with Pandesic runs through
May, 2000 and requires minimum payments plus a percentage of revenues to be
made. If Pandesic terminates the agreement early or if the agreement is not
renewed, the
F-12
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Company would be forced to either enter into a relationship with another
third-party provider or undertake to develop and service its commerce systems
internally.
The Company is required to pay aggregate minimum fees under marketing
agreements, strategic alliances and system providers as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -------------------------------------------------------------------------------
<S> <C>
1999........................................................................... $ 13,942,575
2000........................................................................... 7,839,394
2001........................................................................... 2,475,000
-------------
$ 24,256,969
-------------
-------------
</TABLE>
The costs associated with its marketing agreements and strategic alliances
are being amortized over the contract terms, with the amortization method
primarily based on the rate of delivery of the guaranteed number of impressions
to be received during the contract term.
Many of the Company's agreements, including the AOL, Go.com, and OZM
Agreements, contain provisions which may require additional payments to be made
by the Company based on factors such as click-throughs and new customers
generated. Such payments are expensed as incurred. The Company will continue to
evaluate the realizability of assets recorded, if any, related to the AOL,
Go.com, OZM and other agreements, and, if necessary, write down the assets to
realizable value.
6. RELATED PARTY TRANSACTIONS
In December 1998, the Company entered into two agreements to borrow a total
of $1,300,000 from its sole stockholder. Through December 31, 1998, the sole
stockholder has not drawn a salary for his services.
7. SHARE CAPITAL
The Company has authorized 50,000,000 $.0001 par value shares of Common
Stock and 10,000,000 $.0001 par value shares of Preferred Stock. The sole
stockholder has contributed capital of $1,500,000 as of December 31, 1998 and
holds 15,000,000 shares of issued and outstanding Common Stock.
AOL WARRANT
On October 1, 1998, the Company granted a warrant to America Online, Inc.
("AOL Warrant") to purchase up to 1,384,007 shares of Common Stock at an
exercise price of $5.60 per share. The AOL Warrant is fully vested. The AOL
Warrant expires on August 1, 2008. The AOL Warrant does not have any voting
rights, dividend rights or preferences until such time as it is exercised for
shares of Common Stock.
STOCK OPTION PLAN
The Company adopted a stock option incentive plan (the "Plan") during 1998.
The Plan allows for the granting of up to 2,250,000 stock options to certain
employees, officers or consultants at a price not
F-13
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
7. SHARE CAPITAL (CONTINUED)
less than 100% of the market value of the Company's Common Stock or issue
nonqualified stock options pursuant to the Plan. The Plan prescribes general
terms for the exercise of options and option periods subject to the condition
that all options terminate not more than ten years from the date of grant.
Options granted are at the discretion of the Board of Directors, however, in no
event shall any option vest at a rate of less than 20% per year over five years
from the grant date.
The Company accounts for the Plan under APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Under APB Opinion No. 25, compensation cost is not
recognized for options issued at market value of the Common Stock at the date of
the grant. Had compensation cost for the Plan been determined consistent with
SFAS 123, the Company's net loss would have been increased to the following pro
forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998
------------- ---------------
<S> <C> <C>
Net loss--as reported............................. $(141,590) $(4,514,442)
Net loss--pro forma............................... $(142,740) $(4,607,880)
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the minimum value method with the following weighted average assumptions for
grants during 1998 and in 1997, respectively: risk-free interest rates of 5.47%
and 6.44%, expected lives of four years, zero volatility and payments of no
dividends.
Information regarding stock options awarded under the Plan are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------- ----------------------------
WTD AVG. WTD AVG.
SHARES EX. PRICE SHARES EX. PRICE
--------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Options outstanding at beginning of
period................................ -- -- -- $ --
Granted............................... -- -- 591,000 2.83
Exercised............................. -- -- -- --
Canceled.............................. -- -- (9,000) 4.00
--------- --- ------------- -----
Options outstanding at end of period.... -- $ -- 582,000 2.81
--------- --- ------------- -----
--------- --- ------------- -----
Options exercisable at end of period.... -- $ -- 177,225 $ 1.40
--------- --- ------------- -----
--------- --- ------------- -----
</TABLE>
The following summarizes the number of shares exercisable and the exercise
price at December 31, 1998:
<TABLE>
<CAPTION>
EXERCISE PRICE SHARES
- ----------------------------------------------------------------------------------- ---------
<S> <C>
$1.33.............................................................................. 41,781
$1.67.............................................................................. 27,213
$3.34.............................................................................. 43,919
$4.00.............................................................................. 49,312
$4.70.............................................................................. 15,000
---------
177,225
---------
---------
</TABLE>
F-14
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
7. SHARE CAPITAL (CONTINUED)
The Company has also granted options to purchase 300,000 shares of common
stock to an employee at an exercise price of $.0667 per share. As of December
31, 1998 118,767 of these shares are exercisable.
The weighted average remaining contractual life of all outstanding options
at December 31, 1998, was 9.3 years.
8. INCOME TAXES
Prior to January 1, 1999, the Company operated as a S corporation, and
therefore was not subject to federal income taxes and only to state income taxes
at a reduced rate. As a S corporation, the Company's stockholders were subject
to federal and state taxes based on the Company's earnings. As a result of
terminating the Company's S corporation status on January 1, 1999, the Company
will be required to record a one-time, non-cash charge against historical
earnings for additional deferred taxes based upon the increase in the effective
tax rate from the Company's S corporation status to C corporation status. The
deferred taxes are a result of timing differences, principally depreciation
expense, operating losses and other accrued expenses between amounts deducted
for tax purposes as compared to financial statement purposes. This charge will
be zero as all net deferred tax assets have been fully offset by a valuation
allowance as their realization is uncertain in the first quarter of 1999. The
following pro forma tax information is presented as if the Company was a C
corporation since inception.
Under SFAS 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods and for
loss carryforwards. A valuation allowance is recognized if, based on the weight
of available evidence, it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
The tax effects of temporary differences which give rise to deferred tax
assets (liabilities) for 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization........................ $ -- $ 25,993
Accrued expenses and other........................... -- 8,082
Net operating loss................................... 64,977 1,904,153
-------- -----------------
Subtotal gross tax (assets)........................ 64,977 1,938,228
Valuation allowance.................................. (64,977) (1,938,228)
-------- -----------------
Net deferred tax assets............................ $ -- $ --
-------- -----------------
-------- -----------------
</TABLE>
F-15
<PAGE>
DVD EXPRESS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
8. INCOME TAXES (CONTINUED)
The pro forma provision for income taxes for the years ended December 31,
1998, 1997 and for the period from October 18 to December 31, 1996 follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
OCTOBER 18 TO -------------------------
DECEMBER 31, 1996 1997 1998
----------------- ---------- -------------
<S> <C> <C> <C>
Current
Federal....................................... $ (5,952) $ (49,557) $ (1,599,117)
State......................................... (1,021) (8,447) (274,134)
------- ---------- -------------
(6,973) (58,004) (1,873,251)
Deferred........................................ 6,973 58,004 1,873,251
------- ---------- -------------
Pro forma provision for income taxes.......... $ -- $ -- $ --
------- ---------- -------------
------- ---------- -------------
</TABLE>
The following is a summary reconciliation of the effective tax rate to the
assumed federal tax rate:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
OCTOBER 18 TO ------------------------
DECEMBER 31, 1996 1997 1998
--------------------- ----- -----
<S> <C> <C> <C>
Assumed federal tax rate on pre-tax book loss............. 35% 35% 35%
State taxes............................................... 6% 6% 6%
Valuation allowance....................................... (41)% (41)% (41)%
-- -- --
Effective pro forma tax rate.............................. 0% 0% 0%
-- -- --
-- -- --
</TABLE>
9. REINCORPORATION AND STOCK SPLIT
On (BLANK DATE), 1999, the Company reincorporated in Delaware and effected a
concurrent 3-for-2 stock split of each outstanding share of Common stock. All
share, stock option and warrant data have been restated to reflect the stock
split.
10. SUBSEQUENT EVENTS
On January 4, 1999, the Company entered into a Series A Convertible
Preferred Stock Purchase Agreement with Geocapital IV, L.P. and Geocaptial V,
L.P. ("Geocapital"). The Company has sold to Geocapital 1,714,285 shares of its
Series A Convertible Preferred Stock for $12,000,000 less offering costs of
$720,000. The shares are convertible into Common Stock at the rate of 3-for-2
upon completion of the Company's initial public offering. On January 15, 1999,
the Company sold 135,000 shares of Common Stock for net proceeds of $630,000.
Unaudited pro forma stockholders' equity reflects the assumed conversion of the
Series A Preferred Stock and the conversion from an S corporation to a C
corporation.
On January 7, 1999, the Company launched dvd.com, the first full-service
information destination for up-to-the-minute information on DVD entertainment,
technology and news. It will deliver DVD news and resources, entertaining
celebrity and DVD features, personalized technical help, reviews, and
behind-the-scenes of the production of movies and DVD.
F-16
<PAGE>
[PICTURES OF COMPANY PRODUCTS]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, THIS INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY US OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATED OR AN
OFFER TO SELL, OR A SOLICITATION OR AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Cautionary Notice Regarding Forward-Looking Statements.................... 20
Termination of S Corporation Status....................................... 21
Use of Proceeds........................................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Dilution.................................................................. 24
Selected Financial Data................................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 27
Business.................................................................. 32
Management................................................................ 42
Certain Relationships and Related Transactions............................ 47
Principal Stockholders.................................................... 48
Description of Capital Stock.............................................. 49
Shares Eligible For Future Sale........................................... 51
Underwriting.............................................................. 52
Legal Matters............................................................. 55
Experts................................................................... 55
Additional Information.................................................... 55
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
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.
SHARES
[LOGO]
DVD EXPRESS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
ING BARING FURMAN SELZ LLC
FRIEDMAN BILLINGS RAMSEY
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses we incurred in connection with
this offering, 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.............. $ 15,985
NASD filing fee................................................... 6,250
Nasdaq National Market fee........................................ 50,000
Accounting fees and expenses...................................... 175,000
Legal fees and expenses (other than blue sky)..................... 250,000
Blue sky fees and expenses, including legal fees.................. 5,000
Printing; stock certificates...................................... 100,000
Transfer agent and registrar fees................................. 5,000
Miscellaneous..................................................... 42,765
---------
Total........................................................... $ 650,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for (i) any breach of
their duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit. Such limitation of liability does not
apply to liabilities arising under the federal securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
recession.
Our Certificate of Incorporation and Bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers,
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our Certificate of Incorporation
also permits us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the provisions of law would permit such
indemnification.
In addition to the indemnification provided for in our Certificate of
Incorporation, we plan to enter into agreements to indemnify our directors and
executive officers. These agreements, among other things, provide for
indemnification of our directors and executive officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of DVD EXPRESS, arising out of such person's services as a director or
executive officer of DVD EXPRESS, any subsidiary of DVD EXPRESS or any other
company or enterprise to which the person provides services at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are
II-1
<PAGE>
not aware of any threatened litigation or proceeding that might result in a
claim for such indemnification.
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.
We plan to obtain director and officer liability insurance.
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 that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Proposed form of Underwriting Agreement*..................................... 1.1
Registrant's Certificate of Incorporation.................................... 3.3
Registrant's Bylaws.......................................................... 3.4
Registrant's Form of Indemnification Agreement............................... 10.4
Tax Agreement*............................................................... 10.5
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On June 1, 1997, we issued stock options to purchase up to 300,000 shares of
Common Stock at $.0667 per share to Joan Abend. 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 to Rule 701 because the offer and sale of
the securities was pursuant to a compensatory benefit plan relating to
compensation.
On March 1, 1998, we issued pursuant to the Stock Plan stock options to
purchase up to 150,000 shares of Common Stock at $1.34 per share to Jason
Vagner. 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 to Rule 701 because the offer and sale of the securities was pursuant
to a compensatory benefit plan relating to compensation.
On April 1, 1998, we issued pursuant to the Stock Plan stock options to
purchase an aggregate of 108,750 shares of Common Stock at $1.67 per share to
four of our employees. 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 to Rule 701 because the offer and sale of the securities was pursuant
to a compensatory benefit plan relating to compensation.
On June 1, 1998, we issued pursuant to the Stock Plan stock options to
purchase an aggregate of 70,500 shares of Common Stock at $3.34 per share to
eight of our employees. 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 to Rule 701 because the offer and sale of the securities was pursuant
to a compensatory benefit plan relating to compensation.
On August 1, 1998, we issued pursuant to the Stock Plan stock options to
purchase up to 112,500 shares of Common Stock at $4.00 per share to Steven
Antebi. The issuance and sale of these securities
II-2
<PAGE>
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 to Rule 701 because the offer and sale of the
securities was pursuant to a compensatory benefit plan relating to compensation.
On August 1, 1998, we issued pursuant to the Stock Plan stock options to
purchase an aggregate of 84,750 shares of Common Stock at $4.00 per share to six
of our employees. 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 to Rule 701 because the offer and sale of the securities was pursuant
to a compensatory benefit plan relating to compensation.
On August 1, 1998, we granted a warrant to purchase up to 1,384,007 shares
of Common Stock at $5.60 per share to America Online, Inc. 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.
On August 15, 1998, we issued pursuant to the Stock Plan stock options to
purchase up to 15,000 shares of Common Stock at $4.67 per share to Tushar Patel.
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 to
Rule 701 because the offer and sale of the securities was pursuant to a
compensatory benefit plan relating to compensation.
On December 1, 1998, we issued pursuant to the Stock Plan stock options to
purchase an aggregate of 40,500 shares of Common Stock at $4.00 per share to six
of our employees. 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 to Rule 701 because the offer and sale of the securities was pursuant
to a compensatory benefit plan relating to compensation.
On January 4, 1999, we sold an aggregate of 1,714,285 shares of our Series A
Convertible Preferred Stock to Geocapital V, L.P., Geocapital IV, L.P. and
Broadview Partners Group for an aggregate offering price of $12 million less
$720,000 in underwriting commissions. The 1,714,285 shares of Series A
Convertible Preferred Stock will convert into 2,571,428 shares of common stock
(post 3-for-2 stock split) upon the closing of this offering. Post conversion
and stock split, the purchase price of the Series A Convertible Preferred Stock
is effectively $4.67 per share. The issuance and sale of these securities is
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) and Rule 506 of the Securities Act as a transaction not involving
any public offering.
On January 15, 1999, we sold an aggregate of 135,000 shares of our Common
Stock to three directors, Steve Antebi, Norman Pattiz and Stephen Cannell, for a
purchase price of $4.67 per share. The issuance and sale of these securities is
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) and Rule 506 of the Securities Act as a transaction not involving
any public offering. On January 15, 1999, we also issued pursuant to the Stock
Plan options to purchase an aggregate of 75,000 shares of Common Stock at $4.67
per share to each of Mr. Pattiz and Mr. Cannell. 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 to Rule 701 because the offer and sale of
the securities was pursuant to a compensatory benefit plan relating to
compensation.
On February 1, 1999, we issued pursuant to the Stock Plan stock options to
purchase an aggregate of 225,000 shares of Common Stock at $4.00 per share to
two of our employees. The issuance and sale of these securities is exempt from
the registration requirements of the Securities Act pursuant to
II-3
<PAGE>
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 February 1, 1999, we issued pursuant to the Stock Plan stock options to
purchase up to 65,250 shares of Common Stock at $4.67 per share to eleven of our
employees. 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 to Rule 701 because the offer and sale of the securities was pursuant
to a compensatory benefit plan relating to compensation.
On March 1, 1999, we issued pursuant to the Stock Plan stock options to
purchase an aggregate of 27,000 shares of Common Stock at $8.00 per share to
three of our employees. 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 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 the Registrant's predecessor.
3.2 Amended and Restated Bylaws of the Registrant's predecessor.
3.3 Certificate of Incorporation of Registrant.
3.4 Bylaws of Registrant.
4.1 Specimen Stock Certificate of Common Stock of Registrant.*
5.1 Opinion and Consent of Troop Steuber Pasich Reddick & Tobey, LLP.*
10.1 1998 Stock Incentive Plan.
10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock Option).
10.3 Form of Registrant's Stock Option Agreement (Incentive Stock Option).
10.4 Form of Director and Officer Indemnification Agreement.
10.5 Tax Indemnification Agreement, dated March 1, 1999, between Registrant and Michael Dubelko.*
10.6 Employment Agreement, dated March 1, 1999, between the Registrant and Michael Dubelko.*
10.7 Employment Agreement, dated March 1, 1999, between the Registrant and Andrew Crist.*
10.8 Office Space Lease, dated January 16, 1998, between the Registrant and Jahra Investments, N.V., as
amended by the First Amendment to Office Building Lease dated August 5, 1998.
10.9 Interactive Marketing Agreement, dated August 1, 1998, between the Registrant and America Online, Inc.+
10.10 Common Stock Subscription Warrant, dated August 1, 1998, between the Registrant and America Online,
Inc.*
10.11 Affiliate Agreement, dated September 1, 1998, between the Registrant and One Zero Media, Inc.+
10.12 Distribution Agreement, dated October 13, 1998, between the Registrant and Infoseek Corporation.+
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.13 E-Business Solution Agreement, dated March 25, 1998, between the Registrant and Pandesic, LLC, as
amended on April 9, 1999.+
10.14 Purchase Agreement for DVD.COM, dated August 3, 1998, between the Registrant and Tushar Patel.
10.15 Revolving Line of Credit Note, dated July 23, 1998, between the Registrant and Wells Fargo Bank,
National Association, as amended by the Addendum to Promissory Note dated July 23, 1998, and the
Continuing Guaranty to Wells Fargo Bank, National Association, dated January 23, 1998, executed by
Michael J. Dubelko.
10.16 Revolving Line of Credit Note, dated October 1, 1998, between the Registrant and Wells Fargo Bank,
National Association, as amended by the Addendum to Promissory Note dated October 1, 1998, and the
Continuing Guaranty to Wells Fargo Bank, National Association, dated October 1, 1998, executed by
Michael J. Dubelko.
10.17 Letter of Credit, dated February 11, 1998, issued by Wells Fargo Bank, National Association to the
Registrant.
10.18 Registration Rights Agreement, dated December 31, 1998, between the Registrant, Michael Dubelko, America
Online, Inc., Geocapital V, L.P., Geocapital IV, L.P. and Broadview Partners Group.*
10.19 Option Agreement, dated June 1, 1997, between the Registrant and Joan Abend.
11.1 Earnings (Loss) per share.*
23.1 Consent of Troop Steuber Pasich Reddick & Tobey, LLP (included in its opinion filed as Exhibit 5.1
hereto).*
23.2 Consent of Arthur Andersen LLP.*
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by Amendment.
+ Confidential treatment requested as to certain portions of this exhibit.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 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.
II-5
<PAGE>
(c) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, 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 of 1933, 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 this offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 April 12, 1999.
<TABLE>
<S> <C> <C>
DVD EXPRESS, INC.
By: /s/ MICHAEL J. DUBELKO
-----------------------------------------
Michael J. Dubelko, CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Michael
Dubelko and Andrew Crist, 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 of 1933 and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ MICHAEL J. DUBELKO Chairman of the Board,
- ------------------------------ Chief Executive Officer April 12, 1999
Michael J. Dubelko and President
Chief Financial Officer
/s/ ANDREW T. CRIST and Secretary (Principal
- ------------------------------ Financial and Accounting April 12, 1999
Andrew T. Crist Officer)
/s/ STEVEN S. ANTEBI
- ------------------------------ Director April 12, 1999
Steven S. Antebi
/s/ KIMBERLY S. EADS
- ------------------------------ Director April 12, 1999
Kimberly S. Eads
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ NORMAN J. PATTIZ
- ------------------------------ Director April 12, 1999
Norman J. Pattiz
/s/ STEPHEN J. CANNELL
- ------------------------------ Director April 12, 1999
Stephen J. Cannell
/s/ HAROLD E. HUGHES
- ------------------------------ Director April 12, 1999
Harold E. Hughes
</TABLE>
II-8
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
DVD EXPRESS, INC.
Michael J. Dubelko hereby certifies that:
1. He is the President and the Chief Financial Officer of DVD Express, Inc.
(hereinafter called the "Corporation"), a corporation organized and existing
under and by virtue of the provisions of the laws of the State of California.
2. Article IV Section B.1. of the Articles of Incorporation of the Corporation
is amended and restated to read in its entirety as follows:
"1. Designation of Shares. The first series of Preferred Stock shall
consist of 1,714,285 shares and is hereby designated "Series A Convertible
Preferred Stock"."
3. The foregoing amendment of Articles of Incorporation has been duly approved
by the Board of Directors of the Corporation.
4. The foregoing Amended and Restated Articles of Incorporation have been duly
approved by the required vote of shareholders in accordance with Section 902 of
the General Corporation Law of the State of California. The total number of
outstanding shares of the Corporation's Common Stock is 10,000,000. No shares of
the Series A Convertible Preferred Stock are outstanding. The number of shares
of Common Stock voting in favor of the amendment was more than 50% of the
outstanding shares. The percentage vote required was a majority of the
outstanding shares of Common Stock and a majority of the outstanding shares of
Series A Convertible Preferred Stock.
The undersigned further declares 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 his own knowledge.
[SIGNATURE ON FOLLOWING PAGE]
<PAGE>
Executed in the City of Los Angeles, State of California, on this 30 day of
December, 1998.
/s/ Michael J. Dubelko
--------------------------------------
Michael J. Dubelko
President and Chief Financial Officer
<PAGE>
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
DVD EXPRESS, INC.
Michael J. Dubelko hereby certifies that:
1. He is the President and the Chief Financial Officer of DVD Express, Inc.
(hereinafter called the "Corporation"), a corporation organized and existing
under and by virtue of the provisions of the laws of the State of California.
2. The Articles of Incorporation of the Corporation are amended and restated to
read in their entirety as follows:
* * *
ARTICLE I
The name of this Corporation is DVD Express, Inc.
ARTICLE 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 other than the banking business, the trust company business, or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE 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, for the indemnification of agents (as defined in Section 317 of the
General Corporation Law of California (the "GCL")) of this Corporation in excess
of that expressly permitted for those agents by Section 317 of the GCL, 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 or her and incurred by him or her in any such capacity, or arising
out of his or her status as such, whether or not this Corporation would have the
power to indemnify against such liability under the provisions of law; and
<PAGE>
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 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 or former director of this Corporation existing at the
time of such repeal or modification.
ARTICLE IV
A. Authorized Stock.
1. This Corporation is authorized to issue 50,000,000 shares of Common
Stock, par value $.01 per share (hereinafter referred to as the "Common Stock"),
and 10,000,000 shares of Preferred Stock, par value $.01 per share (hereinafter
referred to as the "Preferred Stock").
2. The Preferred Stock may be divided into such number of series as the
Board of Directors of this Corporation may determine. The Board of Directors of
this Corporation is authorized to determine and alter the rights, preferences,
privileges and restrictions granted to and imposed upon the Preferred Stock or
any series thereof with respect to any wholly unissued class or series of
Preferred Stock, and to fix the number of shares of any series of Preferred
Stock and the designation of any such series of Preferred Stock. The Board of
Directors of this Corporation, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors of this Corporation
originally fixing the number of shares constituting any series, may increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any series subsequent to the issue of that series.
B. Designation of Preferred Stock and Determination of Powers, Preferences and
Rights.
1. Designation of Shares. The first series of Preferred Stock shall
consist of 1,428,571 shares and is hereby designated "Series A Convertible
Preferred Stock".
2. Voting.
2A. General. Except as may be otherwise provided in these terms of
the Series A Convertible Preferred Stock or by law, the Series A Convertible
Preferred Stock shall vote together with all other classes and series of stock
of the Corporation as a single class on all actions to be taken by the
stockholders of the Corporation. Each share of Series A Convertible Preferred
Stock shall entitle the holder thereof to such number of votes per share on each
such action as shall
<PAGE>
equal the number of shares of Common Stock (including fractions of a share) into
which each share of Series A Convertible Preferred Stock is then convertible.
2B. Board Seat. The holders of the Series A Convertible Preferred
Stock, voting as a separate series, shall be entitled to elect one (1) director
of the Corporation. At any meeting (or in a written consent in lieu thereof)
held for the purpose of electing directors, the presence in person or by proxy
(or the written consent) of the holders of a majority of the shares of Series A
Convertible Preferred Stock then outstanding shall constitute a quorum of the
Series A Convertible Preferred Stock for the election of directors to be elected
solely by the holders of the Series A Convertible Preferred Stock. A vacancy in
any directorship elected by the holders of the Series A Convertible Preferred
Stock shall be filled only by vote or written consent of the holders of the
Series A Convertible Preferred Stock.
3. Dividends. The holders of the Series A Preferred Stock will be entitled
to receive dividends, when, as and if declared by the Board of Directors of the
Corporation (the "Board"), out of funds of the Corporation legally available
therefor, in preference and prior to the payment of any dividend on the Common
Stock (payable other than in Common Stock or other securities and rights
convertible into or entitling the holder thereof to receive, directly or
indirectly, additional shares of Common Stock). No dividends shall be paid on
shares of Common Stock unless dividends shall have been first paid, or declared
and set apart for payment, to the Series A Preferred Stock in an aggregate
amount equal to the product of (i) the per share dividends declared and to be
paid on the Common Stock and (ii) the number of shares of Common Stock into
which the Series A Preferred Stock is convertible immediately prior to the
record date of such dividend. The right to dividends on shares of the Series A
Preferred Stock shall not be cumulative, and no right shall accrue to holders of
the Series A Preferred Stock by reason of the fact that dividends on said shares
are not declared in any prior period.
4. Liquidation.
4A. Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, prior to December 31, 1999, the
holders of the shares of Series A Convertible Preferred Stock shall be entitled,
before any distribution or payment is made upon any stock ranking on liquidation
junior to the Series A Convertible Preferred Stock, to be paid an amount equal
to $10.50 per share of Series A Preferred Stock plus dividends previously
declared and unpaid thereon, if any. After such payment shall have been made in
full to the holders of the Series A Convertible Preferred Stock, the remaining
assets available for distribution shall be distributed ratably among the holders
of the Common Stock and the Series A Convertible Preferred Stock, with the
holders of the Series A Convertible Preferred Stock deemed to hold that number
of shares equal to the number of shares of Common Stock into which such shares
of Series A Convertible Preferred Stock are then convertible pursuant to
paragraph 6.
4B. Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, between December 31, 1999 and
December 31, 2001, the holders of the shares of Series A Convertible Preferred
Stock shall be entitled, before any distribution or payment is made upon any
stock ranking on liquidation junior to the Series A Convertible Preferred Stock,
to be paid an amount per share equal to (i) $10.50 multiplied by a fraction, (A)
the numerator of which shall be 730 minus the number of days which have passed
(as of the date of such distribution) since
<PAGE>
December 31, 1999; and (B) the denominator of which shall be 730 plus (ii)
dividends previously declared and unpaid thereon, if any. After such payment
shall have been made in full to the holders of the Series A Convertible
Preferred Stock, the remaining assets available for distribution shall be
distributed ratably among the holders of the Common Stock and the Series A
Convertible Preferred Stock, with the holders of the Series A Convertible
Preferred Stock deemed to hold that number of shares equal to the number of
shares of Common Stock into which such shares of Series A Convertible Preferred
Stock are then convertible pursuant to paragraph 6.
4C. Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after December 31, 2001, the
holders of the shares of Series A Convertible Preferred Stock shall be entitled,
before any distribution or payment is made upon any stock ranking on liquidation
junior to the Series A Convertible Preferred Stock, to be paid an amount per
share equal to the greater of (i) $7.00 per share of Series A Preferred Stock
plus dividends previously declared and unpaid thereon, if any, or (ii) such
amount per share as would have been payable had each such share been converted
to Common Stock pursuant to paragraph 6 immediately prior to such liquidation,
dissolution or winding up.
4D. Upon any such liquidation, dissolution or winding up of the
Corporation (without duplication), the holders of Series A Convertible Preferred
Stock shall not be entitled to any further payment beyond that specified in
subparagraphs 4A, 4B or 4C, such amount payable with respect to one share of
Series A Convertible Preferred Stock being sometimes referred to as the
"Liquidation Payment" and with respect to all shares of Series A Convertible
Preferred Stock being sometimes referred to as the "Liquidation Payments." If
upon such liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of
Series A Convertible Preferred Stock and securities ranking pari pasu with
respect to liquidation shall be insufficient to permit payment to the holders of
Series A Convertible Preferred Stock and securities ranking pari pasu with
respect to liquidation of the amount distributable as aforesaid, then the entire
assets of the Corporation to be so distributed shall be distributed ratably
among the holders of Series A Convertible Preferred Stock and securities ranking
pari pasu with respect to liquidation. Upon any such liquidation, dissolution or
winding up of the Corporation, after the holders of Series A Convertible
Preferred Stock shall have been paid in full the amounts to which they shall be
entitled, the remaining net assets of the Corporation may be distributed to the
holders of stock ranking on liquidation junior to the Series A Convertible
Preferred Stock. Written notice of such liquidation, dissolution or winding up,
stating a payment date, the amount of the Liquidation Payments and the place
where said Liquidation Payments shall be payable, shall be delivered in person,
mailed by certified or registered mail, return receipt requested, or sent by
telecopier or telex, not less than 20 days prior to the payment date stated
therein, to the holders of record of Series A Convertible Preferred Stock, such
notice to be addressed to each such holder at its address as shown by the
records of the Corporation. The consolidation or merger of the Corporation into
or with any other entity or entities which results in the exchange of
outstanding shares of the Corporation for securities or other consideration
issued or paid or caused to be issued or paid by any such entity or affiliate
thereof (other than a merger to reincorporate the Corporation in a different
jurisdiction, or a transaction in which the holders of the outstanding voting
stock of the Corporation immediately prior to such transaction hold stock
constituting a majority of the voting power of the Corporation immediately upon
the consummation of such transaction), and the sale, lease, abandonment,
transfer or other disposition by the Corporation of all or substantially all its
assets, shall be deemed to be a liquidation, dissolution or winding up of the
Corporation within
<PAGE>
the meaning of the provisions of this paragraph 4 and paragraph 3 hereof. For
purposes hereof, the Common Stock shall rank on liquidation junior to the Series
A Convertible Preferred Stock.
5. Restrictions.
5A. Restrictions Requiring Series A Preferred Shareholder Consent.
For so long as 357,142 shares (appropriately adjusted for any stock split,
dividend, combination, or recapitalization) of Series A Convertible Preferred
Stock are outstanding, except where the vote or written consent of the holders
of a greater number of shares of the Corporation is required by law or by the
Articles of Incorporation and in addition to any other vote required by law or
the Articles of Incorporation, without the approval of the holders of at least a
majority of the then outstanding shares of Series A Convertible Preferred Stock,
given in writing or by a vote at a meeting, consenting or voting (as the case
may be) separately as a series, the corporation will not:
(i) Create or authorize the creation of any additional class
or series of shares of stock unless the same ranks junior to the Series A
Convertible Preferred Stock as to dividends, distribution of assets on the
liquidation, dissolution or winding up of the Corporation, or increase the
authorized amount of the Series A Convertible Preferred Stock or increase the
authorized amount of any additional class or series of shares of stock unless
the same ranks junior to the Series A Convertible Preferred Stock as to
dividends, distribution of assets on the liquidation, dissolution or winding up
of the Corporation, or create or authorize any obligation or security
convertible into shares of Series A Convertible Preferred Stock or into shares
of any other class or series of stock unless the same ranks junior to the Series
A Convertible Preferred Stock as to dividends, distribution of assets on the
liquidation, dissolution or winding up of the Corporation, whether any such
creation, authorization or increase shall be by means of amendment to the
Articles of Incorporation or by merger, consolidation or otherwise;
(ii) Consent to any liquidation, dissolution or winding up of
the Corporation or consolidate or merge into or with any other entity or
entities or sell, lease, abandon, transfer or otherwise dispose of 50% or more
of its assets (except for such sales, leases, transfers or dispositions of
equipment or inventory which are in the ordinary course of the Corporation's
business and consistent with past practice);
(iii) Amend, alter or repeal its Articles of Incorporation or
By-laws if the effect would be detrimental or adverse in any manner with respect
to the rights of the holders of the Series A Convertible Preferred Stock (except
that the Corporation may complete a `reverse split' of its Common Stock without
the consent of the holders of the Series A Preferred Stock);
(iv) Redeem or otherwise acquire any shares of Common Stock in
excess of an aggregate of five hundred thousand (500,000) shares; or
(v) Enter into any agreement that would restrict the
Corporation's ability to perform its contracted obligations to the holders of
the Series A Preferred Stock.
5B. Restrictions Requiring Board Consent. For so long as 357,142
shares (appropriately adjusted for any stock split, dividend, combination, or
recapitalization) of Series A Convertible Preferred Stock are outstanding, and
in addition to any other vote required by law or the
<PAGE>
Certificate of Incorporation, without the affirmative vote or consent, of at
least two-thirds (2/3) of the Board of Directors of the Corporation taken by
such Directors who are then in office, the Corporation will not:
(i) issue securities of the Corporation to employees, officers
or directors (except securities issuable upon the exercise of outstanding
options and warrants, or issuable upon the exercise of options granted in the
future at fair market value as approved by the Board);
(ii) issue securities of the Corporation for less than fair
market value (except as may be required by contractual commitments existing as
of December 31, 1998); or
(iii) enter into any related party transaction or series of
transactions, including loans with any officer, director of other affiliate of
the Corporation or with their affiliates and family members, involving one
hundred thousand dollars ($100,000) or more per year individually or three
hundred fifty thousand dollars ($350,000) or more per year in the aggregate; or
(iv) adopt any additional stock option plan or increase the
number of shares available for issuance under existing stock option plans.
6. Conversions. The holders of shares of Series A Convertible Preferred
Stock shall have the following conversion rights:
6A. Right to Convert. Subject to the terms and conditions of this
paragraph 6, the holder of any share or shares of Series A Convertible Preferred
Stock shall have the right, at its option at any time, to convert any such
shares of Series A Convertible Preferred Stock (except that upon any liquidation
of the Corporation the right of conversion shall terminate at the close of
business on the business day fixed for payment of the amount distributable on
the Series A Convertible Preferred Stock) into such number of fully paid and
non-assessable shares of Common Stock as is obtained by (i) multiplying the
number of shares of Series A Convertible Preferred Stock so to be converted by
$7.00 and (ii) dividing the result by the conversion price of $7.00 per share
or, in case an adjustment of such price has taken place pursuant to the further
provisions of this paragraph 6, then by the conversion price as last adjusted
and in effect at the date any share or shares of Series A Convertible Preferred
Stock are surrendered for conversion (such price, or such price as last
adjusted, being referred to as the "Conversion Price"). Such rights of
conversion shall be exercised by the holder thereof by giving written notice
that the holder elects to convert a stated number of shares of Series A
Convertible Preferred Stock into Common Stock and by surrender of a certificate
or certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of the Series A
Convertible Preferred Stock) at any time during its usual business hours on the
date set forth in such notice, together with a statement of the name or names
(with address) in which the certificate or certificates for shares of Common
Stock shall be issued.
6B. Issuance of Certificates; Time Conversion Effected. Promptly
after the receipt of the written notice referred to in subparagraph 6A and
surrender of the certificate or certificates for the share or shares of Series A
Convertible Preferred Stock to be converted, the Corporation shall issue and
deliver, or cause to be issued and delivered, to the holder, registered in such
name or names as such holder may direct, a certificate or certificates for the
number of whole
<PAGE>
shares of Common Stock issuable upon the conversion of such share or shares of
Series A Convertible Preferred Stock. To the extent permitted by law, such
conversion shall be deemed to have been effected and the Conversion Price shall
be determined as of the close of business on the date on which such written
notice shall have been received by the Corporation and the certificate or
certificates for such share or shares shall have been surrendered as aforesaid,
and at such time the rights of the holder of such share or shares of Series A
Convertible Preferred Stock shall cease, and the person or persons in whose name
or names any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares represented thereby.
6C. Fractional Shares; Dividends; Partial Conversion. No fractional
shares shall be issued upon conversion of Series A Convertible Preferred Stock
into Common Stock and no payment or adjustment shall be made upon any conversion
on account of any cash dividends on the Common Stock issued upon such
conversion. At the time of each conversion, the Corporation shall pay in cash an
amount equal to all dividends declared and unpaid on the shares of Series A
Convertible Preferred Stock surrendered for conversion. In case the number of
shares of Series A Convertible Preferred Stock represented by the certificate or
certificates surrendered pursuant to subparagraph 6A exceeds the number of
shares converted, the Corporation shall, upon such conversion, execute and
deliver to the holder, at the expense of the Corporation, a new certificate or
certificates for the number of shares of Series A Convertible Preferred Stock
represented by the certificate or certificates surrendered which are not to be
converted. If any fractional share of Common Stock would, except for the
provisions of the first sentence of this subparagraph 6C, be delivered upon such
conversion, the Corporation, in lieu of delivering such fractional share, shall
pay to the holder surrendering the Series A Convertible Preferred Stock for
conversion an amount in cash equal to the Conversion Price of such fractional
share.
6D. Adjustment of Price Upon Issuance of Common Stock.
From December 31, 1998 until December 31, 1999, except as provided
in subparagraph 6E, if and whenever the Corporation shall issue or sell, or is,
in accordance with subparagraphs 6D(1) through 6D(7), deemed to have issued or
sold, any shares of Common Stock without consideration or for a consideration
per share less than the Conversion Price in effect immediately prior to the time
of such issue or sale, then, forthwith upon such issue or sale, the Conversion
Price shall be reduced so as to be equal to the lowest net consideration per
share received for each additional shares upon such issuance.
From December 31, 1999 on, except as provided in subparagraph 6E, if
and whenever the Corporation shall issue or sell, or is, in accordance with
subparagraphs 6D(1) through 6D(7), deemed to have issued or sold, any shares of
Common Stock for a consideration per share less than the Conversion Price in
effect immediately prior to the time of such issue or sale, then, forthwith upon
such issue or sale, the Conversion Price shall be reduced to the price
determined by dividing (i) an amount equal to the sum of (a) the number of
shares of Common Stock outstanding immediately prior to such issue or sale
multiplied by the then existing Conversion Price and (b) the consideration, if
any, received by the Corporation upon such issue or sale, by (ii) the total
number of shares of Common Stock outstanding immediately after such issue or
sale.
<PAGE>
For purposes of this subparagraph 6D, the following subparagraphs
6D(1) to 6D(7) shall also be applicable:
6D(1) Issuance of Rights or Options. In case at any time the
Corporation shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or exchangeable
stock or securities being called "Convertible Securities") whether or not such
Options or the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon the conversion or exchange of
such Convertible Securities (determined by dividing (i) the total amount, if
any, received or receivable by the Corporation as consideration for the granting
of such Options, plus the minimum aggregate amount of additional consideration
payable to the Corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange thereof,
by (ii) the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options) shall be less
than the Conversion Price in effect immediately prior to the time of the
granting of such Options, then the total maximum number of shares of Common
Stock issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities issuable upon the
exercise of such Options shall be deemed to have been issued for such price per
share as of the date of granting of such Options or the issuance of such
Convertible Securities and thereafter shall be deemed to be outstanding. Except
as otherwise provided in subparagraph 6D(3), no adjustment of the Conversion
Price shall be made upon the actual issue of such Common Stock or of such
Convertible Securities upon exercise of such Options or upon the actual issue of
such Common Stock upon conversion or exchange of such Convertible Securities.
6D(2) Issuance of Convertible Securities. In case the
Corporation shall in any manner issue (whether directly or by assumption in a
merger or otherwise) or sell any Convertible Securities, whether or not the
rights to exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange (determined by dividing (i) the total amount
received or receivable by the Corporation as consideration for the issue or sale
of such Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (ii) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities)
shall be less than the Conversion Price in effect immediately prior to the time
of such issue or sale, then the total maximum number of shares of Common Stock
issuable upon conversion or exchange of all such Convertible Securities shall be
deemed to have been issued for such price per share as of the date of the issue
or sale of such Convertible Securities and thereafter shall be deemed to be
outstanding, provided that (a) except as otherwise provided in subparagraph
6D(3), no adjustment of the Conversion Price shall be made upon the actual issue
of such Common Stock upon conversion or exchange of such Convertible Securities
and (b) if any such issue or sale of such Convertible Securities is made upon
exercise of any Options to purchase any such Convertible Securities for
<PAGE>
which adjustments of the Conversion Price have been or are to be made pursuant
to other provisions of this subparagraph 6D, no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.
6D(3) Change in Option Price or Conversion Rate. Upon the
happening of any of the following events, namely, if the purchase price provided
for in any Option referred to in subparagraph 6D(1), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 6D(1) or 6D(2), or the rate
at which Convertible Securities referred to in subparagraph 6D(1) or 6D(2) are
convertible into or exchangeable for Common Stock shall change at any time
(including, but not limited to, changes under or by reason of provisions
designed to protect against dilution), the Conversion Price in effect at the
time of such event shall forthwith be readjusted to the Conversion Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold; and on the termination of any such Option or
any such right to convert or exchange such Convertible Securities, the
Conversion Price then in effect hereunder shall forthwith be increased to the
Conversion Price which would have been in effect at the time of such termination
had such Option or Convertible Securities, to the extent outstanding immediately
prior to such termination, never been issued.
6D(4) Stock Dividends. In case the Corporation shall declare a
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock (except for dividends or distributions upon the Common
Stock), Options or Convertible Securities, any Common Stock, Options or
Convertible Securities, as the case may be, issuable in payment of such dividend
or distribution shall be deemed to have been issued or sold at a price per share
equal to $.01.
6D(5) Consideration for Stock. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Corporation therefor, without deduction therefrom of any expenses incurred or
any underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith. In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration as
determined in good faith by the Board of Directors of the Corporation, without
deduction of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection therewith. In case
any Options shall be issued in connection with the issue and sale of other
securities of the Corporation, together comprising one integral transaction in
which no specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued for such consideration
as determined in good faith by the Board of Directors of the Corporation.
6D(6) Record Date. In case the Corporation shall take a record
of the holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Options or
Convertible Securities or (ii) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date shall be deemed to be
the date of the issue or sale of the shares of Common Stock deemed to have been
issued or
<PAGE>
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
6D(7) Treasury Shares. The disposition of any shares of Common
Stock owned or held by or for the account of the Corporation shall be considered
an issue or sale of Common Stock for the purpose of this subparagraph 6D.
6E. Certain Issues of Common Stock Excepted. Anything herein to the
contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Conversion Price in the case of the issuance, from and after
the date of filing of these terms of the Series A Convertible Preferred Stock,
of up to an aggregate of 800,000 shares of Common Stock or options to issue
Common Stock, or such greater number as is approved by two-thirds (2/3) of the
Board of Directors of the Corporation, as adjusted to reflect the occurrence of
any event described in subparagraphs 6F or 6G, to directors, officers, employees
or consultants of the Corporation in connection with their service as directors
of the Corporation, their employment by the Corporation or their retention as
consultants by the Corporation, plus such number of shares of Common Stock which
are repurchased by the Corporation from such persons after such date pursuant to
contractual rights held by the Corporation and at repurchase prices not
exceeding the respective original purchase prices paid by such persons to the
Corporation therefor.
6F. Subdivision or Combination of Common Stock. In case the
Corporation shall at any time subdivide (by any stock split, stock dividend or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and, conversely, in case the outstanding
shares of Common Stock shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased. In the case of any such subdivision, no further
adjustment shall be made pursuant to subparagraph 6D(4) by reason thereof.
6G. Reorganization or Reclassification. If any capital
reorganization or reclassification of the capital stock of the Corporation shall
be effected in such a way that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization or reclassification, lawful
and adequate provisions shall be made whereby each holder of a share or shares
of Series A Convertible Preferred Stock shall thereupon have the right to
receive, upon the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock immediately theretofore receivable upon
the conversion of such share or shares of Series A Convertible Preferred Stock,
such shares of stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately theretofore
receivable upon such conversion had such reorganization or reclassification not
taken place, and in any such case appropriate provisions shall be made with
respect to the rights and interests of such holder to the end that the
provisions hereof (including without limitation provisions for adjustments of
the Conversion Price) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of such conversion rights.
6H. Notice of Adjustment. Upon any adjustment of the Conversion
Price, then and in each such case the Corporation shall give written notice
thereof, by mailing such notice by
<PAGE>
United States Postal Service via Certified or Registered Mail, Return Receipt
Requested, addressed to each holder of shares of Series A Convertible Preferred
Stock at the address of such holder as shown on the books of the Corporation,
which notice shall state the Conversion Price resulting from such adjustment,
setting forth in reasonable detail the method upon which such calculation is
based.
6I. Other Notices. In case at any time:
(1) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(2) the Corporation shall offer for subscription pro rata to
the holders of its Common Stock any additional shares of stock of any class or
other rights;
(3) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or a consolidation or
merger of the Corporation with or into another entity or entities, or a sale,
lease, abandonment, transfer or other disposition of all or substantially all
its assets; or
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation; then, in any one or more of said
cases, the Corporation shall give, by mailing such notice(s) by United States
Postal Service via Certified or Registered Mail, Return Receipt Requested,
addressed to each holder of any shares of Series A Convertible Preferred Stock
at the address of such holder as shown on the books of the Corporation, (a) at
least 20 days' prior written notice of the date on which the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification, consolidation, merger,
disposition, dissolution, liquidation or winding up and (b) in the case of any
such reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, at least 20 days' prior written notice
of the date when the same shall take place. Such notice in accordance with the
foregoing clause (a) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto and such notice in accordance with the foregoing
clause (b) shall also specify the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding up, as the case may be.
6J. Stock to be Reserved. The Corporation will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the conversion of Series A Convertible Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Series A Convertible Preferred
Stock. The Corporation covenants that all shares of Common Stock which shall be
so issued shall be duly and validly issued and fully paid and nonassessable and
free from all taxes, liens and charges created by the Company or caused by the
Company with respect to the issue thereof, and, without limiting the generality
of the foregoing, the Corporation covenants that it will from time to time take
all such action as may be requisite to assure that the par value per share of
the Common Stock is at all times equal to or less than the Conversion Price in
effect at the time.
<PAGE>
The Corporation will take all such action as may be necessary to assure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirement of any national securities exchange
upon which the Common Stock may be listed. The Corporation will not take any
action which results in any adjustment of the Conversion Price if the total
number of shares of Common Stock issued and issuable after such action upon
conversion of the Series A Convertible Preferred Stock would exceed the total
number of shares of Common Stock then authorized by the Articles of
Incorporation.
6K. No Reissuance of Series A Convertible Preferred Stock. Shares of
Series A Convertible Preferred Stock which are converted into shares of Common
Stock as provided herein shall not be reissued.
6L. Issue Tax. The issuance of certificates for shares of Common
Stock upon conversion of Series A Convertible Preferred Stock shall be made
without charge to the holders thereof for any issuance tax in respect thereof,
provided that the Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Series A Convertible
Preferred Stock which is being converted.
6M. Closing of Books. The Corporation will at no time close its
transfer books against the transfer of any Series A Convertible Preferred Stock
or of any shares of Common Stock issued or issuable upon the conversion of any
shares of Series A Convertible Preferred Stock in any manner which interferes
with the timely conversion of such Series A Convertible Preferred Stock, except
as may otherwise be required to comply with applicable securities laws.
6N. Definition of Common Stock. As used in this paragraph 6, the
term "Common Stock" shall mean and include the Corporation's authorized Common
Stock, par value $.01 per share, as constituted on the date of filing of these
terms of the Series A Convertible Preferred Stock, and shall also include any
capital stock of any class of the Corporation thereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; provided that the shares of Common Stock receivable upon conversion
of shares of Series A Convertible Preferred Stock shall include only shares
designated as Common Stock of the Corporation on the date of filing of this
instrument, or in case of any reorganization or reclassification of the
outstanding shares thereof, the stock, securities or assets provided for in
subparagraph 6F.
6O. Mandatory Conversion. If at any time holders of a majority of
the Series A Convertible Preferred Stock then outstanding so consent or the
Corporation shall effect a firm commitment underwritten public offering of
shares of Common Stock at a gross offering price of at least $5.00 per share
(appropriately adjusted for any stock split, dividend, combination or
recapitalization) and in which the aggregate gross price received for such
shares by the Corporation shall be at least $10,000,000, then effective upon
such consent or upon the closing of the sale of such shares by the Corporation
pursuant to such public offering, all outstanding shares of Series A Convertible
Preferred Stock shall automatically convert to shares of Common Stock on the
basis set forth in this paragraph 6. Holders of shares of Series A Convertible
Preferred Stock so converted may deliver to the Corporation at its principal
office (or such other office or agency of the
<PAGE>
Corporation as the Corporation may designate by notice in writing to such
holders) during its usual business hours, the certificate or certificates for
the shares so converted. As promptly as practicable thereafter, the Corporation
shall issue and deliver to such holder a certificate or certificates for the
number of whole shares of Common Stock to which such holder is entitled,
together with any cash dividends and payment in lieu of fractional shares to
which such holder may be entitled pursuant to subparagraph 6C. Until such time
as a holder of shares of Series A Convertible Preferred Stock shall surrender
his or its certificates therefor as provided above, such certificates shall be
deemed to represent the shares of Common Stock to which such holder shall be
entitled upon the surrender thereof.
7. Redemption. The shares of Series A Convertible Preferred Stock shall be
redeemed as follows:
7A. Redemption Generally. On December 31, 2002, and on each of the
next two anniversaries thereafter (the "Redemption Dates", and each a
"Redemption Date"), the Corporation shall, upon the written request of the
holders of a majority of the then outstanding shares of Series A Convertible
Preferred Stock made within five (5) days after receipt of the Redemption Notice
(as defined in Section 7C) (which request shall bind and inure to the benefit of
all holders of Series A Convertible Preferred Stock), redeem any and all
outstanding shares of Series A Convertible Preferred Stock according to the
schedule and percentages listed below:
Percentage of Shares of Series A Convertible
Preferred Stock Then Outstanding
Date of Redemption To Be Redeemed
------------------ --------------
December 31, 2002 33-1/3% of all the shares of Series A
Convertible Preferred Stock Outstanding
on December 31, 2002
December 31, 2003 50% of all the shares of Series A
Convertible Preferred Stock Outstanding
on December 31, 2003
December 31, 2004 100% of all the shares of Series A
Convertible Preferred Stock Outstanding
on December 31, 2004
7B. Redemption Price and Payment. The shares of Series A Convertible
Preferred Stock to be redeemed on any Redemption Date shall be redeemed by
paying for each share in cash an amount equal to $7.00 per share plus, in the
case of each share an amount equal to all other dividends declared but unpaid
thereon, if any, computed to such Redemption Date, such amount being referred to
as the "Redemption Price".
7C. Redemption Mechanics. At least 45 but not more than 60 days
prior to each Redemption Date, written notice (the "Redemption Notice") shall be
given by the Corporation by delivery in person, certified or registered mail,
return receipt requested, telecopier or telex, to each holder of record (at the
close of business on the business day next preceding the day on which the
<PAGE>
Redemption Notice is given) of shares of Series A Convertible Preferred Stock
notifying such holder of the redemption and specifying the Redemption Price,
such Redemption Date, the number of shares of Series A Convertible Preferred
Stock to be redeemed from such holder (computed on a pro rata basis in
accordance with the number of such shares held by all holders thereof) and the
place where said Redemption Price shall be payable. The Redemption Notice shall
be addressed to each holder at his address as shown by the records of the
Corporation. From and after the close of business on a Redemption Date, unless
there shall have been a default in the payment of the Redemption Price, all
rights of holders of shares of Series A Convertible Preferred Stock (except the
right to receive the Redemption Price) shall cease with respect to the shares to
be redeemed on such Redemption Date, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever. If the funds of the Corporation legally available for
redemption of shares of Series A Convertible Preferred Stock on a Redemption
Date are insufficient to redeem the total number of shares of Series A
Convertible Preferred Stock to be redeemed on such Redemption Date, the holders
of such shares shall share ratably in any funds legally available for redemption
of such shares according to the respective amounts which would be payable to
them if the full number of shares to be redeemed on such Redemption Date were
actually redeemed. The shares of Series A Convertible Preferred Stock required
to be redeemed but not so redeemed shall remain outstanding and entitled to all
rights and preferences provided herein. At any time thereafter when additional
funds of the Corporation are legally available for the redemption of such shares
of Series A Convertible Preferred Stock, such funds will be used, at the end of
the next succeeding fiscal quarter, to redeem the balance of such shares, or
such portion thereof for which funds are then legally available, on the basis
set forth above.
7D. Redeemed or Otherwise Acquired Shares to be Retired. Any shares
of Series A Convertible Preferred Stock redeemed pursuant to this Paragraph 7 or
otherwise acquired by the Corporation in any manner whatsoever shall be canceled
and shall not under any circumstances be reissued; and the Corporation may from
time to time take such appropriate corporate action as may be necessary to
reduce accordingly the number of authorized shares of Series A Convertible
Preferred Stock.
8. Fair Market Value Determinations. The fair market value of property
(including securities) received by the Corporation upon any liquidation,
dissolution or winding up of the Corporation or shall be determined in good
faith by the Board of Directors of the Corporation after taking into
consideration all factors which it deems appropriate including, without
limitation, valuations of comparable companies or the absence of a going concern
in the case of a liquidation, but in each case, without any discount for
minority ownership position. The Board of Directors shall notify the holders of
the Series A Convertible Preferred Stock by written notice, postage prepaid at
its address shown on the records of the Corporation as to its determination of
the fair market value of such property within thirty (30) days of a liquidation
event as set forth in Section 4 hereof. The holders of the Series A Convertible
Preferred Stock have the right, after receiving notice of such determination,
within ten business days of any given notice, to contest such determination. In
such case, the holders of the Series A Convertible Preferred Stock shall have
the right to elect an independent appraisal firm, at their own expense, to make
such determination, which firm shall be acceptable to the Corporation in its
discretion. If the independent appraisal firm is not so acceptable, the
Corporation shall select an independent appraisal firm, and the independent
appraisal firm selected by the Corporation and by the holders shall jointly
select a third independent
<PAGE>
appraisal firm, who shall make such determination. The independent appraisal
firm so chosen shall not be informed of the identity of the party paying its
fee, and shall make its determination as to the fair market value within
thirty (30) days of engagement, which determination shall be final.
9. Amendments. No provision of these terms of the Series A Convertible
Preferred Stock may be amended, modified or waived without the written consent
or affirmative vote of the holders of at least a majority of the then
outstanding shares of Series A Convertible Preferred Stock.
* * *
3. The foregoing Amended and Restated Articles of Incorporation have been duly
approved by the Board of Directors of the Corporation.
4. The foregoing Amended and Restated Articles of Incorporation have been duly
approved by the required vote of shareholders in accordance with Section 902 of
the General Corporation Law of the State of California. The total number of
outstanding shares of the Corporation is 10,000,000. The number of shares voting
in favor of the amendments was over 50% of the outstanding shares. The
percentage vote required was a majority.
[SIGNATURE ON FOLLOWING PAGE]
<PAGE>
The undersigned further declares 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 his own knowledge.
Executed in the City of Los Angeles, State of California, on this 23rd day of
December, 1998.
/s/ Michael J. Dubelko
--------------------------------------
Michael J. Dubelko
President and Chief Financial Officer
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
DVD EXPRESS, INC.
A California Corporation
<PAGE>
BYLAWS
OF
DVD EXPRESS, INC.
A California Corporation
Page
----
ARTICLE I CORPORATE OFFICES..................................................1
Section 1. PRINCIPAL EXECUTIVE OFFICE.................................1
Section 2. OTHER OFFICES..............................................1
ARTICLE II SHAREHOLDERS MEETINGS.............................................1
Section 1. PLACE OF MEETINGS..........................................1
Section 2. ANNUAL MEETINGS............................................1
Section 3. SPECIAL MEETINGS...........................................2
Section 4. NOTICE AND REPORTS TO SHAREHOLDERS.........................2
Section 5. QUORUM.....................................................3
Section 6. ADJOURNED MEETING AND NOTICE THEREOF.......................3
Section 7. VOTING.....................................................4
Section 8. VALIDATION OF DEFECTIVELY CALLED OR
NOTICED MEETINGS...........................................4
Section 9. ACTION WITHOUT MEETING.....................................5
Section 10. PROXIES....................................................6
Section 11. INSPECTORS OF ELECTION.....................................6
Section 12. RECORD DATE................................................7
ARTICLE III DIRECTORS........................................................7
Section 1. POWERS.....................................................7
Section 2. NUMBER AND QUALIFICATIONS..................................8
Section 3. ELECTION AND TERM OF OFFICE................................8
Section 4. VACANCIES..................................................8
Section 5. PLACE OF MEETING...........................................9
Section 6. REGULAR MEETINGS...........................................9
Section 7. SPECIAL MEETINGS..........................................10
Section 8. QUORUM AND REQUIRED VOTE..................................10
Section 9. VALIDATION OF DEFECTIVELY CALLED
OR NOTICED MEETINGS.......................................10
Section 10. ADJOURNMENT...............................................11
Section 11. ACTION WITHOUT MEETING....................................11
Section 12. FEES AND COMPENSATION.....................................11
Section 13. COMMITTEES................................................11
i
<PAGE>
ARTICLE IV OFFICERS.........................................................12
Section 1. OFFICERS..................................................12
Section 2. ELECTION OF OFFICERS......................................12
Section 3. SUBORDINATE OFFICERS......................................12
Section 4. REMOVAL AND RESIGNATION OF OFFICERS.......................12
Section 5. VACANCIES IN OFFICES......................................13
Section 6. CHAIRMAN OF THE BOARD.....................................13
Section 7. PRESIDENT.................................................13
Section 8. VICE PRESIDENTS...........................................13
Section 9. SECRETARY.................................................13
Section 10. CHIEF FINANCIAL OFFICER...................................14
ARTICLE V INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS......................................14
Section 1. AGENTS, PROCEEDINGS AND EXPENSES..........................14
Section 2. ACTIONS OTHER THAN BY THE CORPORATION.....................15
Section 3. ACTIONS BY THE CORPORATION................................15
Section 4. SUCCESSFUL DEFENSE BY AGENT...............................16
Section 5. REQUIRED APPROVAL.........................................16
Section 6. ADVANCE OF EXPENSES.......................................16
Section 7. OTHER CONTRACTUAL RIGHTS..................................16
Section 8. LIMITATIONS...............................................17
Section 9. INSURANCE.................................................17
Section 10. FIDUCIARIES OF CORPORATE EMPLOYEE BENEFIT PLAN............18
ARTICLE VI RECORDS AND REPORTS..............................................18
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER.
.........................................................18
Section 2. MAINTENANCE AND INSPECTION OF BYLAWS......................18
Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE
RECORDS...................................................19
Section 4. INSPECTION BY DIRECTORS...................................19
Section 5. ANNUAL REPORT TO SHAREHOLDERS.............................19
Section 6. FINANCIAL STATEMENTS......................................20
Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION...................21
Section 8. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS.................21
Section 9. CORPORATE CONTRACTS AND INSTRUMENTS; HOW
EXECUTED..................................................21
Section 10. CERTIFICATES FOR SHARES...................................21
ii
<PAGE>
Section 11. LOST CERTIFICATES.........................................21
Section 12. REPRESENTATION OF SHARES OF OTHER
CORPORATIONS..............................................22
Section 13. STOCK PURCHASE PLANS......................................22
Section 14. CONSTRUCTION AND DEFINITIONS..............................22
ARTICLE VII AMENDMENT.......................................................22
iii
<PAGE>
Bylaws
Bylaws for the regulation, except
as otherwise provided by statute or
its Articles of Incorporation, of
DVD Express, Inc.
(a California corporation)
ARTICLE I
CORPORATE OFFICES
Section 1. PRINCIPAL EXECUTIVE OFFICE. The principal executive
office of the corporation is hereby fixed and located at:
7083 Hollywood Boulevard
Los Angeles, California 90028
The Board is hereby granted full power and authority to change the principal
executive office from one location to another. Any such change shall be noted in
the Bylaws opposite this Section, or this Section may be amended to state the
new location.
Section 2. OTHER OFFICES. Branch or subordinate business offices may
at any time be established by the Board at any place or places.
ARTICLE II
SHAREHOLDERS MEETINGS
Section 1. PLACE OF MEETINGS. Meetings of the shareholders shall be
held at the principal executive office of the corporation, or at any other place
within or without the State of California as may from time to time be designated
for that purpose either by the Board or by the written consent of all persons
entitled to vote thereat and not present at the meeting, given either before or
after the meeting and filed with the Secretary of the corporation.
Section 2. ANNUAL MEETINGS. The annual meeting of shareholders shall
be held on such date and time as may be fixed by the Board; provided, however,
that if such day is a legal holiday, then at the same time and place in the next
day thereafter ensuing which is a
-1-
<PAGE>
full business day. At the annual meeting the shareholders shall elect directors,
consider reports of the affairs of the corporation, and transact any other
proper business.
Section 3. SPECIAL MEETINGS. Special meetings of the shareholders
for the purpose of taking any action which the shareholders are permitted to
take under the General Corporation Law of the State of California (herein, as
the same may from time to time hereafter be amended, referred to as the "General
Corporation Law") may be called at any time by the Chairman of the Board or the
President, or by the Board, or by any Vice President, or by one or more
shareholders entitled to cast not less than 10 percent of the votes of the
meeting. Upon request in writing to the Chairman of the Board, President, Vice
President or Secretary by any person (other than the Board) entitled to call a
special meeting of shareholders that a special meeting be held for any proper
purpose, the officer receiving the request shall forthwith cause notice to be
given to the shareholders entitled to vote that a meeting will be held at the
time requested by the person or persons calling the meeting, not less than 35
nor more than 60 days after the receipt of the request. If the notice is not
given within 20 days after receipt of the request, the persons entitled to call
the meeting may give the notice.
Section 4. NOTICE AND REPORTS TO SHAREHOLDERS. Written notice of
each meeting of shareholders, annual or special, shall be given to each
shareholder entitled to vote thereat, not less than 10 nor more than 60 days
before the date of the meeting. The notice of each such annual or special
meeting of shareholders shall state the place, the date, and the hour of the
meeting, and (1) in the case of a special meeting, the general nature of the
business to be transacted at the meeting (and no other business may be
transacted at the meeting), or (2) in the case of the annual meeting, those
matters which the Board, at the time of the mailing of the notice, intend to
present for action by the shareholders, and any proper matter may be presented
at the meeting for action, provided, however, that the notice shall specify the
general nature of a proposal, if any, to take action with respect to approval of
(i) a contract or other transaction with an interested director pursuant to
Section 310 of the General Corporation Law, (ii) amendment of the Articles of
Incorporation pursuant to Section 902 of the General Corporation Law, (iii) a
reorganization of the corporation pursuant to Section 1201 of the General
Corporation Law, (iv) voluntary dissolution of the corporation pursuant to
Section 1900 of the General Corporation Law or (v) a distribution in dissolution
other than in accordance with the rights of outstanding preferred shares, if
any, pursuant to Section 2007 of the General Corporation Law. The notice of any
meeting at which directors are to be elected shall include the names of nominees
intended at the time of the notice to be presented by management for election.
Notice of a shareholders' meeting or any report shall be given
either personally or by first-class mail (or in the case the corporation's
outstanding shares are held of record by 500 or more persons on the record date
for the shareholders' meeting, notice may be sent by third-class mail) or other
means of written communication, charges prepaid, addressed to such shareholder
at the address of such shareholder appearing on the books of the corporation or
given by the shareholder to the corporation for the purpose of notice. If no
such address appears on the
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corporation's books or is given, the notice or report shall be deemed to have
been given if sent to that shareholder by mail or other means of written
communication addressed to the place where the principal executive office of the
corporation is situated, or if published at least once in some newspaper of
general circulation in the county in which said principal executive office is
located. The notice or report shall be deemed to have been given at the time
when delivered personally or deposited in the mail or sent by other means of
written communication. An affidavit of mailing of any notice or report in
accordance with the provisions of this Section, executed by the Secretary,
Assistant Secretary or any transfer agent of the corporation shall be prima
facie evidence of the giving of the notice.
If any notice or any report addressed to the shareholder at the
address of that 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
or report to the shareholder at such address, all future notices or reports
shall be deemed to have been duly given without further mailing if the same
shall be available for the shareholder upon written demand of the shareholder at
the principal executive office of the corporation for a period of one year from
the date of the giving of the notice or report to all other shareholders.
Section 5. QUORUM. A majority of the shares entitled to vote,
present in person or by proxy, shall constitute a quorum for the transaction of
business at any meeting of shareholders. Except as provided in the next
sentence, the affirmative vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the shareholders, unless a vote of a greater number is required by
the General Corporation Law or the Articles of Incorporation. 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 6. ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders'
meeting, annual or special, whether or not a quorum is present, may be adjourned
from time to time by the vote of a majority of the shares present, either in
person or by proxy, but in the absence of a quorum no other business may be
transacted at such meeting, except as expressly provided in Section 5 of this
Article with respect to the right of the shareholders present at a duly called
or held meeting to continue to do business until adjournment, notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
When any shareholders' meeting, either annual or special, is
adjourned to another time and place, it shall not be necessary to give any
notice of the time and place of the adjourned meeting or of the business to be
transacted thereat, other than by announcement of the time and place thereof at
the meeting at which such adjournment is taken; provided, however, that if any
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such shareholders' meeting is adjourned for 45 days or more, or if after
adjournment a new record date is fixed for the adjourned meeting, notice of the
adjourned meeting shall be given as in the case of an original meeting. At the
adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
Section 7. VOTING. The shareholders entitled to notice of any
meeting or to vote at any such meeting shall only be persons in whose names
shares stand on the stock records of the corporation on the record date
determined in accordance with Section 12 of this Article; provided, however,
that if no such record date shall be fixed by the Board, only persons in whose
names shares stand on the stock records of the corporation at the close of
business on the business day next preceding the day on which notice of the
meeting is given or if such notice is waived, at the close of business on the
business day next preceding the day on which the meeting of shareholders is
held, shall be entitled to vote at such meeting, and such day shall be the
record date for such meeting.
Voting shall in all cases be subject to the provisions of Sections
702 through 704, inclusive, of the General Corporation Law (relating to voting
of shares held by fiduciaries, held in the name of a corporation, or held in
joint ownership).
The shareholders' vote may be viva voce or by ballot; provided,
however, that all elections for directors must be by ballot upon demand made by
a shareholder at the meeting and before the voting begins.
At a shareholders' meeting at which directors are to be elected, no
shareholder shall be entitled to cumulate votes for any one or more candidates
unless the candidate's or candidates' names have been placed in nomination prior
to the voting and the shareholder has given notice at the meeting prior to the
voting of such shareholder's intention to cumulate votes; provided, that if any
shareholder has given such notice, then every shareholder entitled to vote at
the election may cumulate votes for candidates 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 that shareholder's shares are
entitled, or distribute the shareholder's votes on the same principle among any
or all of the candidates, as the shareholder thinks fit. The candidates
receiving the highest number of votes, up to the number of directors to be
elected, shall be elected.
Section 8. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The
transactions of any meeting of shareholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each of the
persons entitled to vote, not present in person or by proxy, or who, although
present, has, at the beginning of the meeting, properly objected to the
transaction of any business because the meeting was not lawfully called or
convened or to particular matters of business legally required to be included in
the notice, but not so included, signs a written
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waiver of notice, or a consent to the holding of such meeting, or an approval of
the minutes thereof. The waiver of notice or consent need not specify either the
business to be transacted or the purpose of any annual or special meeting of
shareholders, except that the waiver of notice or consent shall state the
general nature of the proposal of any action taken or proposed to be taken with
respect to approval of (i) a contract or other transaction with an interested
director pursuant to Section 310 of the General Corporation Law, (ii) amendment
of the Articles of Incorporation pursuant to Section 902 of the General
Corporation Law, (iii) a reorganization of the corporation pursuant to Section
1201 of the General Corporation Law, (iv) voluntary dissolution of the
corporation pursuant to Section 1900 of the General Corporation Law, or (v) a
distribution and dissolution other than in accordance with the rights of
outstanding preferred shares, if any, pursuant to Section 2007 of the General
Corporation Law. If such statement is not included in such written waiver of
notice or consent, then any shareholder approval at the meeting, other than
unanimous approval of those entitled to vote, to any such matters shall be
invalid. All 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 and presence at the 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 any matter legally
required to be included in the notice of meeting, but not so included, if that
objection is expressly made at the meeting and before any vote is taken on such
matter.
Section 9. ACTION WITHOUT MEETING. Any action which may be taken at
any annual or special meeting of shareholders may be taken without a meeting and
without prior notice, except as hereinafter set forth, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take that action at a meeting at which all shares entitled to
vote on that action were present and voted. Notwithstanding the foregoing,
directors may not be elected without a meeting by written consent except by
unanimous written consent of all shares entitled to vote for the election of
directors; provided, however, that a director may be elected at any time to fill
a vacancy on the Board (other than a vacancy created by the removal of a
director) that has not been filled by the directors, by the written consent of
the holders of a majority of the outstanding shares entitled to vote for the
election of directors. Any shareholder giving a written consent, or the
shareholder's proxy holder, or a transferee of the shares, or a personal
representative of the 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, but not thereafter. Such revocation
is effective upon its receipt by the Secretary of the corporation.
If the consents of all shareholders entitled to vote have not been
solicited in writing, or if the unanimous written consent of all such
shareholders shall not have been received, the
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Secretary shall give prompt notice of the corporate action approved by the
shareholders without a meeting to those shareholders entitled to vote and who
have not consented in writing to the action authorized by such approval. Such
notice shall be given, and shall be deemed to have been given, in the same
manner as provided in Section 4 of this Article. In the case of approval of (i)
contracts or transactions in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the General Corporation Law, (ii)
indemnification of agents of the corporation pursuant to Section 317 of the
General Corporation Law, (iii) a reorganization of the corporation pursuant to
Section 1201 of the General Corporation Law, or (iv) a distribution and
dissolution other than in accordance with the rights of outstanding preferred
shares pursuant to Section 2007 of the General Corporation Law, the notice shall
be given at least 10 days before the consummation of any action authorized by
such approval.
Unless, as provided in Section 12 of this Article, the Board has
fixed a record date for the determination of shareholders entitled to notice of
and to give such written consent, the record date for such determination shall
be the day on which the first written consent is given. All such written
consents shall be filed with the Secretary of the corporation and shall be
maintained in the corporate records.
Section 10. PROXIES. Every person entitled to vote shares shall have
the right to do so either in person or by one or more persons authorized by a
written proxy executed by such shareholder or his duly authorized agent and
filed with the Secretary of the corporation. Any proxy duly executed which does
not state that it is irrevocable shall continue in full force and effect until
(i) an instrument revoking it is filed with the Secretary of the corporation or
a duly executed proxy bearing a later date is presented to the meeting prior to
the vote pursuant thereto, (ii) the person executing the 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, however, that no proxy shall be valid
after the expiration of 11 months from the date of its execution, unless
otherwise provided in the proxy. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
705(e) and Section 705(f) of the General Corporation Law.
Section 11. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the Board may appoint any persons other than nominees for office
as inspectors of election to act at such meeting or any adjournment thereof. If
no inspectors of election are so appointed, the chairman of any such meeting
may, and on the request of any shareholder or his proxy shall, make such
appointment at the meeting. The number of inspectors shall be either one or
three. If appointed at a meeting on the request of one or more shareholders or
proxies, the majority of shares present in person or by proxy shall determine
whether one or three inspectors are to be appointed. In case any person
appointed as inspector fails to appear or refuses to act, the vacancy may, and
on the request of any shareholder or a shareholder's proxy shall, be filled
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by appointment by the Board in advance of the meeting, or at the meeting by the
chairman of the meeting.
The duties of such inspector shall be as prescribed by Section 707
of the General Corporation Law and shall include: determining the number of
shares outstanding and voting power of each; the shares represented at the
meeting; the existence of a quorum; the authenticity, validity and effect of
proxies; receiving votes, ballots or consents; hearing and determining all
challenges and questions in any way arising in connection with the right to
vote; counting and tabulating all votes or consents; determining when the polls
shall close; determining the result; and performing such acts as 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.
Section 12. RECORD DATE. The Board may fix, in advance, a record
date for the determination of the shareholders entitled to notice of any meeting
or to vote or entitled to give consent to corporate action in writing without a
meeting, to receive any report, to receive any dividend or distributions or any
allotment of rights, or to exercise rights in respect of any other lawful
action. The record date so fixed shall be not more than 60 days nor less than 10
days prior to the date of any meeting nor more than 60 days prior to any other
event for the purposes of which it is fixed. When a record date is so fixed,
only shareholders of record at the close of business on that date are entitled
to notice of and to vote at any such meeting, to give consent without a meeting,
to receive any report, to receive dividends, distributions or allotments 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.
ARTICLE III
DIRECTORS
Section 1. POWERS. Subject to the provisions of the General
Corporation Law and any limitations in the Articles of Incorporation and these
Bylaws as to action required to be approved by the shareholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate power shall be exercised by or under the direction of the
Board. The Board may delegate the management of the day-to-day operation of the
business of the corporation to a management company or other persons, provided
that the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised under the ultimate direction of the Board.
Without prejudice to such powers, but subject to the same limitation, it is
hereby expressly declared that the directors shall have the following powers in
addition to other powers enumerated in these Bylaws:
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(a) To select and remove all officers, agents and employees of
the corporation; prescribe any powers and duties for them that are consistent
with law, with the Articles of Incorporation, and with these ByLaws; fix their
compensation; and require from them security for faithful service;
(b) To conduct, manage and control the affairs and business of
the corporation, and to make rules and regulations therefor consistent with law,
with the Articles of Incorporation and with these Bylaws;
(c) To change the principal executive office or the principal
business office in the State of California from one location to another; to fix
and locate from time to time one or more other offices of the corporation within
or without the State of California; to cause the corporation to be qualified to
do business and to conduct business in any other state, territory, dependency or
country; and to designate any place within or without the State of California
for the holding of any shareholders' meeting or meetings, including annual
meetings;
(d) To adopt, make and use a corporate seal; to prescribe the
forms and certificates of stock; and to alter the form of the seal and
certificates;
(e) To authorize the issuance of shares of stock of the
corporation from time to time, upon such terms and for such consideration as may
be lawful;
(f) To borrow money and incur indebtedness for the purposes of
the corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations, and other evidences of debt and securities therefor.
Section 2. NUMBER AND QUALIFICATIONS. The number of directors shall
be six (6) until changed by a duly adopted amendment to the Articles of
Incorporation or by a ByLaw amending this Section 2 approved by the affirmative
vote of a majority of the outstanding shares entitled to vote; provided,
however, that an amendment to the Articles or a ByLaw reducing the number of
directors to a number less than five cannot be adopted if the votes cast against
its adoption at a meeting or the shares not consenting to its adoption in the
case of action by written consent are equal to more than 16-2/3% of the
outstanding shares entitled to vote.
Section 3. ELECTION AND TERM OF OFFICE. The directors shall be
elected at each annual meeting of the shareholders but if such annual meeting is
not held or the directors are not elected thereat, the directors may be elected
at a special meeting of shareholders held for that purpose. Each director shall
hold office until the next annual meeting and until a successor has been elected
and qualified.
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Section 4. VACANCIES. A vacancy or vacancies in the Board shall be
deemed to exist in case of the death, resignation or removal of any director, or
if the authorized number of directors be increased, or if the shareholders fail,
at any annual or special meeting of shareholders at which any director or
directors are elected, to elect the full authorized number of directors to be
voted for at that meeting.
Any director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary or the Board, unless the
notice specifies a later date for the effectiveness of such resignation. If the
Board accepts the resignation of a director tendered to take effect at a future
time, the Board or the shareholders shall have the power to elect a successor to
take office when the resignation is to become effective.
Vacancies in the Board (other than a vacancy created by the removal
of a director) may be filled by a majority of the remaining directors, though
less than a quorum, or by a sole remaining director, and each director so
elected shall hold office until the next annual meeting and until such
director's successor has been elected; subject, however, to the right of any
shareholder or shareholders of the corporation holding at least 5% in the
aggregate of the outstanding voting shares of the corporation, in accordance
with the provisions of Section 305(c) of the General Corporation Law, to a
special meeting to elect the entire Board in the event that after the filling of
any such vacancy by the directors, the directors elected by the shareholders
shall constitute less than a majority of the directors then in office.
The shareholders may elect a director or directors at any time to
fill any vacancy or vacancies not filled by the directors, and shall have the
right, to the exclusion of the directors, to fill any vacancy or vacancies
created by the removal of one or more directors. The election of any director or
directors to fill a vacancy or vacancies created by the removal of one or more
directors shall require the affirmative vote of a majority of the shares
represented and voting at a duly held meeting at which a quorum is present
(which shares voting affirmatively also constitute at least a majority of the
required quorum) or the unanimous written consent of all shares entitled to vote
for the election of directors.
No reduction of the authorized number of directors shall have the
effect of removing any directors prior to the expiration of his term of office.
Subject to the provisions of Section 303(a) of the General
Corporation Law, any or all of the directors may be removed from office, without
cause, if such removal is approved by a vote of a majority of the outstanding
shares entitled to vote.
Section 5. PLACE OF MEETING. Regular and special meetings of the
Board shall be held at any place within or without the State of California which
has been designated from time to time by resolution of the Board or by written
consent of the members of the Board. In
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the absence of such designation, regular meetings shall be held at the principal
executive office of the corporation.
Section 6. REGULAR MEETINGS. Immediately following each annual
meeting of shareholders, the Board shall hold a regular meeting at the place of
that annual meeting or at such other place as shall be fixed by the Board for
the purpose of organization, election of officers and the transaction of other
business.
Other regular meetings of the Board shall be held without call at
such time and place as the Board may from time to time deem appropriate;
provided, however, should the day fall upon a legal holiday, then said meeting
shall be held at the same time on the next day thereafter ensuing which is a
full business day. Call and notice of regular meetings of the Board are hereby
dispensed with.
Section 7. SPECIAL MEETINGS. Special meetings of the Board 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 by any two directors.
Written notice of the time and place of special meetings shall be
delivered personally to each director or communicated to each director by
telephone or by telegraph or 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 in the place
in which the principal executive office of the corporation is located at least
four days prior to the time of the holding of the meeting. In case such notice
is delivered personally or by telephone or telegraph, it shall be delivered
personally or by telephone or to the telegraph company at least 48 hours before
the time of the holding of the meeting. The notice need not specify the place of
the meeting, if the meeting is to be held at the principal executive office of
the corporation, or the purpose of the meeting.
Section 8. QUORUM AND REQUIRED VOTE. Presence of a majority of the
authorized number of directors at a meeting of the Board constitutes a quorum
for the transaction of business, except to adjourn as hereinafter provided.
Members of the Board may participate in a meeting through use of conference
telephone or similar communications equipment, and such members shall be
considered present in person, as long as all members participating in such
meeting can hear one another. Subject to the provisions of Section 5(a) of
Article V of these Bylaws, 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. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of a
director or directors, provided that any action taken is approved by at least a
majority of the required quorum for such meeting.
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Section 9. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The
transactions of any meeting of the Board, however called and noticed or wherever
held, shall be as valid as though made or performed at a meeting duly held after
regular call and notice, if a quorum is present and if, either before or after
the meeting, each of the directors not present or who, though present, has prior
to the meeting or at its commencement protested the lack of proper notice to
such director, signs a written waiver of notice or a consent to holding such
meeting or approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
Section 10. ADJOURNMENT. A majority of the directors present,
whether or not a quorum is present, may adjourn any meeting to another time and
place. Notice of the time and place of holding an adjourned meeting need not be
given to absent directors if the time and place is fixed at the meeting
adjourned; provided, however, that if the meeting is adjourned for more than 24
hours, notice of adjournment to another time or place shall be given prior to
the time of the adjourned meeting to the directors who are not present at the
time of the adjournment.
Section 11. ACTION WITHOUT MEETING. Any action by the Board may be
taken without a meeting if all members of the Board shall individually or
collectively consent in writing to such action. Such written consent or consents
shall be filed with the minutes of the proceedings of the Board and shall have
the same force and effect as a unanimous vote of the Board.
Section 12. FEES AND COMPENSATION. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by resolution of the
Board.
Section 13. COMMITTEES. The Board may appoint one or more
committees, each consisting of two or more directors, and delegate to such
committees any of the authority of the Board except with respect to:
(a) The approval of any action for which the General
Corporation Law, the Articles of Incorporation or these Bylaws also require
shareholders' approval or approval of the outstanding shares;
(b) The filling of vacancies on the Board or on 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;
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(e) The amendment or repeal of any resolution of the Board
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; or
(g) The appointment of other committees of the Board or the
members thereof.
Any such committee must be designated by resolution adopted by a
majority of the authorized number of directors and may be designated an
Executive Committee or by such other name as the Board shall specify. The
appointment of members and alternate members of any such committee shall require
the affirmative vote of a majority of the authorized number of directors. The
Board shall have the power to prescribe the manner in which proceedings of any
such committee shall be conducted. In the absence of any such prescription, such
committee shall have the power to prescribe the manner in which its proceedings
shall be conducted. Unless the Board or such committee shall otherwise provide,
the regular and special meetings and other actions of any such committee shall
be governed by the provisions of this Article applicable to meetings and actions
of the Board. Minutes shall be kept of each meeting of each committee.
ARTICLE IV
OFFICERS
Section 1. OFFICERS. The officers of the corporation shall be a
President, a Secretary and a Chief Financial Officer. The corporation may also
have, at the discretion of the Board, a Chairman of the Board, one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers,
and such other officers as may be appointed in accordance with the provisions of
Section 3 of this Article. Any number of offices may be held by the same person.
Section 2. ELECTION OF OFFICERS. 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, shall be chosen annually by the Board,
and each shall serve at the pleasure of the Board, subject to the rights, if
any, of an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The Board may appoint, and may
empower the President 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 may from time to time determine.
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Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Without prejudice to
the rights, if any, of an officer under any contract of employment, any officer
may be removed, either with or without cause, by the Board, at any regular or
special meeting of the Board, or, except in case of an officer chosen by the
Board, by any officer upon whom such power of removal may be conferred by the
Board.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; the acceptance of the
resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the corporation under any contract
to which the officer is a party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification 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 such
an officer be elected, shall, if present, preside at all meetings of the Board
and exercise and perform such other powers and duties as may be from time to
time assigned to him by the Board. If there is no President, the Chairman of the
Board shall in addition be Chief Executive Officer of the corporation and shall
have the powers and duties prescribed in Section 7 of this Article.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board to the Chairman of the Board, if there be such an
officer, the President shall be the General Manager and Chief Executive Officer
of the corporation and shall, subject to the control of the Board, have general
supervision, direction and control of the business and the officers of the
corporation. The President 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. The President shall have the general powers and duties of
management usually vested in the office of president and general manager of a
corporation, and shall have such other powers and duties as may be prescribed by
the Board.
Section 8. VICE PRESIDENTS. In the absence or disability of the
President, the Vice Presidents, if any, in order of their rank as fixed by the
Board, 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, 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 may direct, a
book of minutes of
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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.
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, as determined by resolution of the Board, a share register, or a
duplicate share register, showing the names of all shareholders and their
addresses, the number and classes of share 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 required by the Bylaws or by law
to be given, and he shall keep the seal of the corporation, if one be adopted,
in safe custody, and shall have such other powers and perform such other duties
as may be prescribed by the Board.
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, retained earnings and shares,
and shall send or cause to be sent to the shareholders of the corporation such
financial statements and reports as are bylaw or these Bylaws required to be
sent to them. The books of account shall at all reasonable times be open to
inspection by any director.
The Chief Financial Officer shall deposit all monies and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board. The Chief Financial Officer
shall disburse the funds of the corporation as may be ordered by the Board,
shall render to the President and directors, whenever they request it, an
account of all transactions undertaken 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.
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purposes of
this Article, "agent" means any person who is or was a director, officer,
employee or other agent of the corporation, or is or was a director, officer,
employee or other agent of the
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corporation as a director, officer, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise, or
was a director, officer, employee or agent of a foreign or domestic corporation
which was a predecessor corporation of the corporation or of another enterprise
at the request of such predecessor corporation; "proceeding" means any
threatened, pending or complete action or proceeding, whether civil, criminal,
administrative, or investigative; and "expenses" includes, without limitation,
attorneys' fees and any expenses of establishing a right to indemnification
under Section 4 or Section 5(c) of this Article.
Section 2. ACTIONS OTHER THAN BY THE CORPORATION. The corporation
shall indemnify any person who was or is a party, or is threatened to be made a
party, to any proceeding (other than an action by or in the right of the
corporation to procure a judgment in its favor) by reason of the fact that such
person is or was an agent of the corporation, against expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with such proceeding if that person acted in good faith and in a
manner that person reasonably believed to be in the best interests of the
corporation, and in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of that person was unlawful. The termination of any
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which the person reasonably
believed to be in the best interests of the corporation or that the person had
reasonable cause to believe that the person's conduct was unlawful.
Section 3. ACTIONS BY THE CORPORATION. The corporation shall
indemnify any person who was or is a party, or is threatened to be made a party,
to any threatened, pending or completed action by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that that
person is or was an agent of the corporation, against expenses actually and
reasonably incurred by that person in connection with the defense or settlement
of that action if that person acted in good faith, in a manner that person
believed to be in the best interests of the corporation and its shareholders. No
indemnification shall be made under this Section 3 for any of the following:
(a) In respect of any claim, issue or matter as to which that
person shall have been adjudged to be liable to the corporation in the
performance of that person's duty to the corporation and its shareholders,
unless and only to the extent that the court in which that proceeding is or was
pending shall determine upon application that, in view of all the circumstances
of the case, that person is fairly and reasonably entitled to indemnification
for expenses and then only to the extent that the court shall determine;
(b) Of amounts paid in settling or otherwise disposing of a
pending action, without court approval; or
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(c) Of expenses incurred in defending a pending action which
is settled or otherwise disposed of without court approval.
Section 4. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent
of the corporation has been successful on the merits in defense of any
proceeding referred to in Sections 2 or 3 of this Article, or in defense of any
claim, issue or matter therein, the agent shall be indemnified against expenses
actually and reasonably incurred by the agent in connection therewith.
Section 5. REQUIRED APPROVAL. Except as provided in Section 4 of
this Article, any indemnification under this Article shall be made by the
corporation only if authorized in the specific case on a determination that
indemnification of the agent is proper in the circumstances because the agent
has met the applicable standard of conduct set forth in Sections 2 or 3 of this
Article, by any of the following:
(a) A majority vote of a quorum consisting of directors who
are not parties to the proceeding;
(b) If a quorum as described in Section 5(a) of this Article
is not obtainable, by independent legal counsel in a written opinion;
(c) Approval by the affirmative vote of a majority of the
shares of the corporation represented and voting at a duly held meeting at which
a quorum is present (which shares voting also constitute at least a majority of
the required quorum) or by the written consent of holders of a majority of the
outstanding shares entitled to vote. For this purpose, the shares owned by the
person to be indemnified shall not be considered outstanding or entitled to vote
thereon; or
(d) The court in which the proceeding is or was pending, on
application made by the corporation or the agent or the attorney or other person
rendering services in connection with the defense, whether or not such
application by the agent, attorney or other person is opposed by the
corporation.
Section 6. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by the corporation before the final disposition of
the proceeding on receipt of an undertaking by or on behalf of the agent to
repay the amount of the advance if it shall be determined ultimately that the
agent is not entitled to be indemnified as authorized in this Article.
Section 7. OTHER CONTRACTUAL RIGHTS. The indemnification provided by
this Article shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any agreement, vote of
stockholders or disinterested
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directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent such
additional rights to indemnification are authorized in the Articles of
Incorporation of the corporation. The rights to indemnity hereunder shall
continue as to a person who has ceased to be a director, officer, employee, or
agent and shall inure to the benefit of the heirs, executors, and administrators
of the person. Nothing contained in this Article shall affect any right to
indemnification to which persons other than directors and officers of this
corporation or any subsidiary hereof may be entitled by contract or otherwise.
Section 8. LIMITATIONS. No indemnification or advance shall be made
under this Article, except as provided in Section 4 or Section 5(c), in any
circumstances where it appears:
(a) That it would be inconsistent with a provision of the
Articles of Incorporation, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other amounts were paid, which
prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
Section 9. INSURANCE. The corporation shall, if so authorized by the
Board, purchase and maintain insurance on behalf of any agent of the corporation
or its subsidiaries selected by the Board in its authorization, or designated in
the policy of insurance so purchased, against such liabilities asserted against
or incurred by the agent (in his capacity as agent or arising out of his status
as such) as may be set forth in such authorization or in such policy of
insurance, in each case upon such terms and conditions, and subject to such
limitations, as the Board in its sole and absolute discretion determines to be
appropriate, its general authorization to purchase or maintain any policy of
insurance to conclusively establish that it has determined all of the terms,
conditions, and limitations set forth in the policy of insurance in the form so
purchased to be appropriate, and the power to purchase and maintain such
insurance shall exist regardless of whether the corporation would have the power
to indemnify the agent against the insured liabilities under the provision of
this Article. The fact that the corporation owns all or a portion of the shares
of the company issuing a policy of insurance shall not render this subdivision
inapplicable if either of the following conditions are satisfied:
(a) the purchase and maintenance of the policy is authorized
by the Articles of Incorporation of the association and is limited to the extent
provided in subdivision (d) of Section 204 of the General Corporation Law;
(b) (1) the company issuing the insurance policy is organized,
licensed and operated in a manner that complies with the insurance laws and
regulations applicable to its jurisdiction of organization, (2) the company
issuing the policy provides procedures for processing
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claims that do not permit the company to be subject to the direct control of the
corporation, and (3) the policy issued provides for some manner of risk sharing
between the issuer and purchaser of the policy, on one hand, and some
unaffiliated person or persons, on the other hand, such as by providing for more
than one unaffiliated owner of the company issuing the policy or by providing
that a portion of the coverage furnished will be obtained from some unaffiliated
insurer or reinsurer.
Section 10. FIDUCIARIES OF CORPORATE EMPLOYEE BENEFIT PLAN. The
provisions of this Article shall not apply to any proceeding against any
trustee, investment manager or other fiduciary of an employee benefit plan in
that person's capacity as such, even though that person may also be an agent of
the corporation as defined in Section 1 of this Article. Nothing contained in
this Article shall limit the power of the corporation, upon and in the event of
a determination of the Board to indemnify any trustee, investment manager or
other fiduciary of an employee benefit plan, and the corporation may thereupon
indemnify and purchase and maintain insurance on behalf of any such trustee,
investment manager or other fiduciary.
ARTICLE VI
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The
corporation shall keep at its principal executive office, or at the office of
its transfer agent or registrar, if either be appointed and as determined by
resolution of the Board, a record of its shareholders, giving the names and
addresses of all shareholders and the number and class of shares held by each
shareholder.
A shareholder or shareholders of the corporation holding at least 5%
in the aggregate of the outstanding voting shares of the corporation may (i)
inspect and copy the records of shareholders' names and addresses and
shareholdings during usual business hours on five business days' prior written
demand on the corporation, and (ii) obtain from the transfer agent, if any, for
the corporation, on written demand and on the tender of such transfer agent's
usual charges for such list, a list of the shareholders' names and addresses,
who are entitled to vote for the election of directors, and their shareholdings,
as of the most recent record date for which the list has been compiled or as of
a date specified by the shareholder after the date of demand. This list shall be
made available to any such shareholder by the transfer agent on or before the
later of 5 days after the demand is received or the date specified in the demand
as the date as of which the list is to be compiled. The record of shareholders
shall also be open to inspection on the written demand of any shareholder or
holder of a voting trust certificate, at any time during usual business hours,
for a purpose reasonably related to the holder'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
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person or by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation
shall keep at its principal executive office the original or a copy of the
Bylaws as amended to date, which shall be open to inspection by the shareholders
at all reasonable times during office hours. If the principal executive office
of the corporation is outside the State of California and the corporation has no
principal business office in this state, the Secretary shall, upon the written
request of any shareholder, furnish to that shareholder a copy of the Bylaws as
amended to date.
Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.
The accounting books and records and minutes of proceedings of the shareholders
and the Board and any committee or committees of the Board shall be kept at such
place or places designated by the Board or, in the absence of such designation,
at the principal executive office of the corporation. 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 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 the holder'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, and shall include the right to copy and make extracts. These rights of
inspection shall extend to the records of each subsidiary corporation of the
corporation.
Section 4. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect all books, records and
documents of every kind and the physical properties of the corporation and each
of its subsidiary corporations. This 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. Unless otherwise expressly
required by the General Corporation Law or by this Section 5, the annual report
to shareholders referred to in Section 1501 of the General Corporation Law is
hereby expressly waived and dispensed with; provided, that nothing herein set
forth shall be construed to prohibit or restrict the right of the Board to issue
such annual or other periodic reports to the shareholders of the corporation as
they may from time to time consider appropriate.
In the event that the corporation shall have 100 or more
shareholders of record (determined as provided in Section 605 of the General
Corporation Law) at the close of any fiscal year of the corporation, the Board
shall cause a report to be sent to the shareholders not later than 120 days
after the close of said fiscal year, and each fiscal year thereafter ensuing.
The report
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shall be sent at least 15 days (or 35 days if sent by third-class mail as
permitted by Section 4 of Article II) before the annual meeting of shareholders
to be held during the next fiscal year in the manner specified in Section 4 of
Article II of these Bylaws for reports to shareholders of the corporation. The
annual report shall contain a balance sheet as of the end of the fiscal year and
an income statement and statement of changes in financial position for the
fiscal year, accompanied by any report of independent accountants or, if there
is no such report, the certificate of an authorized officer of the corporation
that the statements were prepared without audit from the books and records of
the corporation. The annual report shall also contain a brief description, as
required by Section 1501(b) of the General Corporation Law, of (i) any
transaction with interested officers, directors or shareholders during the
previous fiscal year; and (ii) any indemnification or advance made during the
fiscal year to any officer or director of the corporation.
Section 6. FINANCIAL STATEMENTS. A copy of any annual financial
statement and any income statement of the corporation for each quarterly period
of each fiscal year, and any accompanying balance sheet of the corporation as of
the end of each such period, that has been prepared by the corporation shall be
kept on file in the principal executive office of the corporation for 12 months,
and each such statement shall be exhibited at all reasonable times to any
shareholder demanding an examination of any such statement or a copy shall be
mailed to any such shareholder.
If any shareholder or shareholders holding at least 5% of the
outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than 30 days before the date of the request, and a balance sheet of
the corporation as of the end of that period, the Chief Financial Officer shall
cause that statement to be prepared, and shall deliver personally or mail that
statement or statements to the person making the request within 30 days after
the receipt of the request. If the corporation has not sent to the shareholders
its annual report for the last fiscal year, this report shall likewise be
delivered or mailed to the requesting shareholder or shareholders within 30 days
after the request.
If the corporation has not sent to the shareholders its annual
report for the last fiscal year, upon the written request of any shareholder
made to the corporation for an income statement for the fiscal year ended more
than 120 days before the date of the request, the Chief Financial Officer shall
cause that statement to be prepared, together with a statement of change in
financial position and a balance sheet as of the end of that period and shall
deliver personally or mail all such statements to the person making the request
within 30 days after receipt of the request.
The corporation shall also, on the written request of any
shareholder, mail to the shareholder a copy of the last annual, semi-annual, or
quarterly income statement which it has prepared, and a balance sheet as of the
end of that period.
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The quarterly income statements and balance sheet referred to in
this Section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation
shall each year during the calendar month in which its Articles of Incorporation
were originally filed with the California Secretary of State, or at any time
during the immediately preceding 5 calendar months, file with the California
Secretary of State a statement on the prescribed form and in compliance with
Section 1502 of the General Corporation Law.
Section 8. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks,
drafts or other orders for payment of money, 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, from time to
time, shall be determined by resolution of the Board.
Section 9. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The
Board, except as otherwise provided in these Bylaw, 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 this authority may be
general or confined to specific instances; and, subject to the provisions of
Section 313 of the General Corporation Law, unless so authorized or ratified by
the Board 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 10. CERTIFICATES FOR SHARES. A certificate or certificates
for shares of the capital stock of the corporation shall be issued to each
shareholder when any of the shares are fully paid, and the Board may authorize
the issuance of certificates for shares as partly paid provided that
certificates representing such shares shall state the amount of the
consideration to be paid for them and the amount paid. All certificates shall be
signed in the name of the corporation by the Chairman of the Board or the
President or Vice President and by the Chief Financial Officer or an Assistant
Treasurer or the Secretary or any Assistant Secretary, certifying the number of
shares and the class or series of shares owned by the shareholder. Any or all of
the signatures on the certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed on a certificate shall have ceased to be that 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 11. LOST CERTIFICATES. Except as provided in this Section
11, no new certificate for shares shall be issued to replace an old certificate
unless the latter is
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surrendered to the corporation and cancelled at the same time. The Board may, in
case any share certificate or certificate for any other security is lost, stolen
or destroyed, authorize the issuance of a replacement certificate on such terms
and conditions as the Board 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, including
any expense or liability, on account of the alleged loss, theft or destruction
of the certificate or the issuance of the replacement certificate.
Section 12. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
Chairman of the Board, the President, any Vice President or any other person
authorized by resolution of the Board or by any of the foregoing designated
officers, is authorized to vote on behalf of the corporation any and all shares
of any other corporation or corporations, foreign or domestic, standing in the
name of the corporation. The authority granted to these officers to vote or
represent on behalf of the corporation any and all shares held by the
corporation in any other corporation or corporations may be exercised by any of
these officers in person or by any person authorized to do so by proxy duly
executed by these officers.
Section 13. STOCK PURCHASE PLANS. The corporation may adopt and
carry out a stock purchase plan or agreement or stock option plan or agreement
providing for the issue and sale for such consideration as may be fixed of its
unissued shares, or of issued shares acquired or to be acquired, to one or more
of the employees or directors of the corporation or of a subsidiary or to a
trustee on their behalf and for the payment for such shares in installments or
at one time, and may provide for aiding any such persons in paying for such
shares by compensation for services rendered, promissory notes, or otherwise.
Section 14. CONSTRUCTION AND DEFINITIONS. Unless the context
requires otherwise, the general provisions, rules of construction, and
definitions in the General Corporation Law shall govern the construction of
these Bylaws. Without limiting the generality of this provision, the singular
number includes the plural, the plural number includes the singular, and the
term "person" includes both a corporation and a natural person.
ARTICLE VII
AMENDMENT
These Bylaws may be amended or repealed either by approval of the
outstanding shares entitled to vote or by the approval of the Board; provided,
however, that after the issuance of shares, and subject to the provisions of
Section 2 of Article III of these Bylaws, a Bylaw specifying or changing a fixed
number of directors or the maximum or minimum number or changing from a fixed to
a variable Board or vice versa may be adopted only by approval of a majority of
the outstanding shares entitled to vote; and provided further that a Bylaw which
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authorizes the Board to fill any vacancy or vacancies occurring in the Board by
reason of the removal of directors may be adopted only by approval of a majority
of the outstanding shares entitled to vote.
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CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
(1) that I am the duly elected and acting Secretary of DVD
Express, Inc., a California corporation; and
(2) that the foregoing Bylaws, comprising 22 pages, constitute
the Bylaws of said Corporation as of December 29, 1998, as duly adopted by the
Board of Directors.
IN WITNESS WHEREOF, I have hereunto subscribed my name as of this
10th day of March, 1999.
/s/ Andrew Crist
---------------------------------
Andrew Crist, Secretary
<PAGE>
CERTIFICATE OF INCORPORATION
OF
DVD EXPRESS, INC.
FIRST: The name of this corporation is DVD Express, Inc. (the
"Corporation").
SECOND: The address of the registered office of the Corporation in
the State of Delaware is c/o National Registered Agents, Inc., 9 East Loockerman
Street, City of Dover, County of Kent, Delaware 19901. The name of its
registered agent at such address is National Registered Agents, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful
act or activity for which a corporation may now or hereafter be organized under
the General Corporation Law of the State of Delaware as set forth in Title 8 to
the Delaware Code (the "GCL").
FOURTH: (a) The total number of shares which the Corporation
shall have authority to issue is 50,000,000 shares of Common Stock, par value
$0.0001 per share (the "Common Stock") and 10,000,000 shares of Preferred Stock,
par value $0.0001 per share (the "Preferred Stock")
(b) The holders of the issued and outstanding shares of
Common Stock shall be entitled to one vote per share of Common Stock held by
them on all matters voted upon by stockholders of the Corporation, including,
but not limited to, the election of directors.
(c) The Preferred Stock may be divided into such number
of series as the Board of Directors of this Corporation may determine. The
Board of Directors of this Corporation is authorized to determine and alter the
rights, preferences, privileges and restrictions granted to and imposed upon the
Preferred Stock or any series thereof with respect to any wholly unissued class
or series of Preferred Stock, and to fix the number of shares of any series of
Preferred Stock and the designation of any such series of Preferred Stock. The
Board of Directors of this Corporation, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors of this
Corporation originally fixing the number of shares constituting any series, may
increase or decrease (but not below the number of shares of such series then
outstanding) the number of shares of any series subsequent to the issue of that
series.
FIFTH: Special meetings of the stockholders for any purpose or
purposes may be called at any time only by the Board of Directors, the Chairman
of the Board, the Chief Executive Officer or President of the Corporation.
SIXTH: (a) The directors of the Corporation shall be divided
into three classes, designated Class I, Class II and Class III. The term of the
initial Class I directors shall terminate on the date of the 2002 annual meeting
of stockholders; the term of the initial Class II directors shall terminate on
the date of the 2001 annual meeting of stockholders and the term of the initial
Class III directors shall terminate on the date of the 2000 annual meeting of
stockholders. At each annual meeting of stockholders beginning in 2000,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors
<PAGE>
is changed, any increase or decrease shall be apportioned among the classes so
as to maintain the number of directors in each class as nearly equal as
reasonably possible, and any additional directors of any class elected to fill a
vacancy resulting from a increase in such class shall hold office for a term
that shall coincide with the remaining term of that class, but in no case will a
decrease in the number of directors shorten the term of any incumbent directors.
A director shall hold office until the annual meeting for the year in which his
term expires and until his successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office. Any vacancy on the Board of Directors, howsoever
resulting, shall be filled only by a majority of the directors then in office,
even if less than a quorum, or by a sole remaining director and not by the
stockholders. Any director elected to fill a vacancy shall hold office for a
term that shall coincide with the terms of the class to which such director
shall have been elected.
(b) Subject to the rights, if any, of the holders of
shares of Preferred Stock then outstanding, any or all of the directors of the
Corporation may be removed from office at any time, for cause only, by the
affirmative vote of the holders of a majority of the outstanding shares of the
Corporation then entitled to vote generally in the election of directors,
considered for purposes of this Article SIXTH as one class.
(c) Notwithstanding the foregoing, whenever the holders
of any one or more classes or series of Preferred Stock issued by the
Corporation shall have the right, voting separately by class or series to elect
directors at an annual or special meeting of stockholders, the election, term of
office, filling of vacancies and other features of such directorships shall be
governed by the terms of this Certificate of Incorporation or the resolution or
resolutions adopted by the Board of Directors pursuant to paragraph (c) of
Article FOURTH applicable thereto, and such directors so elected shall not be
divided into classes pursuant to this Article SIXTH unless expressly provided by
such terms.
SEVENTH: (a) Elections of directors at an annual or special
meeting of stockholders need not be by written ballot unless the Bylaws of the
Corporation shall otherwise provide.
(b) Any action required or permitted to be taken at any
annual or special meeting of stockholders may be taken only upon the vote of the
stockholders at an annual or special meeting duly noticed and called, as
provided in the Bylaws of the Corporation, and may not be taken by written
consent of the stockholders pursuant to the GCL.
EIGHTH: The officers of the Corporation shall be chosen in such a
manner, shall hold their offices for such terms and shall carry out such duties
as are determined solely by the Board of Directors, subject to the right of the
Board of Directors to remove any officer or officers at any time with or without
cause.
NINTH: (a) The Corporation shall indemnify to the fullest extent
authorized or permitted by law (as now or hereafter in effect) any person made,
or threatened to be made, a defendant or witness to any action, suit or
proceeding (whether civil or criminal or otherwise) by reason of the fact that
he/she, his/her testator or intestate, is or was a director or officer of the
Corporation or by reason of the fact that such director or officer, at the
request of the Corporation, is or was serving any other Corporation,
partnership, joint venture, trust, employee
2
<PAGE>
benefit plan or enterprise, in any capacity. Nothing contained herein shall
affect any rights to indemnification to which employees other than directors and
officers may be entitled by law. No amendment or repeal of this Section (a) of
Article NINTH shall apply to or have any effect on any right to indemnification
provided hereunder with respect to any acts or omissions occurring prior to such
amendment or repeal.
(b) No director of the Corporation shall be personally
liable to the Corporation or its stockholders for monetary damages for any
breach of fiduciary duty by such a director as a director. Notwithstanding the
foregoing sentence, a director shall be liable to the extent provided by
applicable law (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the GCL, or (iv) for any transaction from which such
director derived an improper personal benefit. No amendment to repeal of this
Section (b) of Article NINTH shall apply to or have any effect on the liability
or alleged liability of any director of the Corporation for or with respect to
any acts or omissions of such director occurring prior to such amendment or
repeal.
(c) In furtherance and not in limitation of the powers
conferred by statute:
(i) The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is serving at the request of the 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 or her and incurred by him or her in any such capacity, or
arising out of his or her status as such, whether or not the Corporation would
have the power to indemnify against such liability under the provisions of law;
and
(ii) The 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 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.
TENTH: In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to adopt, repeal,
alter, amend or rescind the Bylaws of the Corporation.
ELEVENTH: The name and mailing address for the Incorporator of
the Corporation is as follows: Daniel F. Plucinski, c/o Troop Steuber Pasich
Reddick & Tobey, LLP, 2029 Century Park East, 24th Floor, Los Angeles,
California 90067.
TWELFTH: The Corporation reserves the right to repeal, alter,
amend or rescind any provision contained in this Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
on stockholders herein are granted subject to this reservation.
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IN WITNESS WHEREOF, the undersigned has executed the Certificate of
Incorporation this 6th day of April, 1999.
/s/ Daniel F. Plucinski
----------------------------------
Daniel F. Plucinski
Incorporator
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BYLAWS OF
DVD EXPRESS, INC.
A Delaware Corporation
<TABLE>
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PAGE
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<S> <C>
ARTICLE I - CORPORATE OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. Registered Office.. . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Principal Office. . . . . . . . . . . . . . . . . . . . . . . . 1
Section 3. Other Offices.. . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - STOCKHOLDERS MEETINGS . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. Place of Meeting. . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 3. Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . 1
Section 4. Notice of Meetings. . . . . . . . . . . . . . . . . . . . . . . 2
Section 5. Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 6. Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 7. Proxies.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 8. Stockholder List. . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9. Vote of Stockholders. . . . . . . . . . . . . . . . . . . . . . 4
Section 10. Inspectors of Election. . . . . . . . . . . . . . . . . . . . . 4
Section 11. Opening and Closing of Polls. . . . . . . . . . . . . . . . . . 4
Section 12. Record Date.. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 13. Procedures for Meetings.. . . . . . . . . . . . . . . . . . . . 5
ARTICLE III - BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . 5
Section 1. Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2. Number and Qualifications.. . . . . . . . . . . . . . . . . . . 6
Section 3. Election and Term of Office.. . . . . . . . . . . . . . . . . . 6
Section 4. Vacancies.. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 5. Place of Meeting. . . . . . . . . . . . . . . . . . . . . . . . 7
Section 6. Regular Meetings. . . . . . . . . . . . . . . . . . . . . . . . 7
Section 7. Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . 7
Section 8. Meetings by Communication Equipment.. . . . . . . . . . . . . . 8
Section 9. Quorum and Manner of Acting.. . . . . . . . . . . . . . . . . . 8
Section 10. Validation of Defectively Called or Noticed Meetings. . . . . . 8
Section 11. Action Without Meeting. . . . . . . . . . . . . . . . . . . . . 8
Section 12. Compensation of Directors.. . . . . . . . . . . . . . . . . . . 8
Section 13. Committees. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE IV - OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 1. Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2. Election of Officers. . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
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<TABLE>
<S> <C>
Section 3. Subordinate Officers. . . . . . . . . . . . . . . . . . . . . . 9
Section 4. Removal and Resignation of Officers.. . . . . . . . . . . . . . 9
Section 5. Vacancies in Offices. . . . . . . . . . . . . . . . . . . . . .10
Section 6. Chairman of the Board.. . . . . . . . . . . . . . . . . . . . .10
Section 7. Chief Executive Officer.. . . . . . . . . . . . . . . . . . . .10
Section 8. President.. . . . . . . . . . . . . . . . . . . . . . . . . . .10
Section 9. Vice Presidents.. . . . . . . . . . . . . . . . . . . . . . . .10
Section 10. Secretary.. . . . . . . . . . . . . . . . . . . . . . . . . . .10
Section 11. Chief Financial Officer.. . . . . . . . . . . . . . . . . . . .11
ARTICLE V - INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS . . . . . . . . . . . . . . . . . . . .11
Section 1. Agents, Proceedings and Expenses. . . . . . . . . . . . . . . .11
Section 2. Actions Other Than By The Corporation.. . . . . . . . . . . . .11
Section 3. Actions by the Corporation. . . . . . . . . . . . . . . . . . .12
Section 4. Successful Defense by Agent.. . . . . . . . . . . . . . . . . .12
Section 5. Required Approval.. . . . . . . . . . . . . . . . . . . . . . .12
Section 6. Advance of Expenses.. . . . . . . . . . . . . . . . . . . . . .12
Section 7. Contractual Rights. . . . . . . . . . . . . . . . . . . . . . .13
Section 8. Limitations.. . . . . . . . . . . . . . . . . . . . . . . . . .13
Section 9. Insurance and Similar Arrangements. . . . . . . . . . . . . . .13
Section 10. Constituent Corporations. . . . . . . . . . . . . . . . . . . .13
Section 11. Additional Definitions. . . . . . . . . . . . . . . . . . . . .14
ARTICLE VI - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . .14
Section 1. Inspection of Books and Records by Stockholders.. . . . . . . .14
Section 2. Inspection of Books and Records by Directors. . . . . . . . . .14
Section 3. Checks, Drafts, Evidences of Indebtedness.. . . . . . . . . . .14
Section 4. Corporate Contracts and Instruments: How Executed.. . . . . . .15
Section 5. Certificates for Shares.. . . . . . . . . . . . . . . . . . . .15
Section 6. Transfer of Shares. . . . . . . . . . . . . . . . . . . . . . .15
Section 7. Lost, Stolen or Destroyed Certificates. . . . . . . . . . . . .15
Section 8. Representation of Shares of Other Corporations. . . . . . . . .15
Section 9. Construction and Definitions. . . . . . . . . . . . . . . . . .16
Section 10. Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . .16
Section 11. Conformance to the Law. . . . . . . . . . . . . . . . . . . . .16
Section 12. Seal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Section 13. Fiscal Year.. . . . . . . . . . . . . . . . . . . . . . . . . .16
Section 14. Dividends; Surplus. . . . . . . . . . . . . . . . . . . . . . .16
</TABLE>
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BYLAWS OF
DVD EXPRESS, INC.
A Delaware Corporation
ARTICLE I
CORPORATE OFFICES
Section 1. REGISTERED OFFICE. The registered office of the
Corporation in the State of Delaware is located at 9 East Loockerman Street,
City of Dover, County of Kent, Delaware 19901.
Section 2. PRINCIPAL OFFICE. The principal office of the
Corporation is located at 7083 Hollywood Boulevard, Los Angeles, California
90028. The Board of Directors (herein referred to as the "Board") is hereby
granted the full power and authority, by a resolution of a majority of the
directors, to change the principal office from one location to another. Any
such change shall be noted in these Bylaws opposite this section, and this
section may be amended to state the new location.
Section 3. OTHER OFFICES. The Corporation may establish any
additional offices, at any place or places, as the Board may designate, or as
the business of the Corporation shall require.
ARTICLE II
STOCKHOLDERS MEETINGS
Section 1. PLACE OF MEETING. Meetings of the Stockholders of the
Corporation shall be held at such place, within or without the State of
Delaware, as may from time to time be designated for that purpose either by a
majority of the Board of Directors or by the Chairman of the Board.
Section 2. ANNUAL MEETING. The annual meeting of the Stockholders
shall be held on such date and at such time designated, from time to time, by
resolution of the Board. At each annual meeting of Stockholders, directors
shall be elected and any other proper business may be transacted.
Section 3. SPECIAL MEETINGS. Special meetings of the Stockholders
for the purpose of making any action which the Stockholders are permitted to
take under the General Corporation Law of the State of Delaware (herein, as the
same may from time to time be amended, referred to as the "General Corporation
Law") may be called at any time by a majority of the Board of Directors, the
Chairman of the Board, the Chief Executive Officer or President of the
Corporation.
<PAGE>
Section 4. NOTICE OF MEETINGS. Except as otherwise provided by
statute, written or printed notice of each meeting of the Stockholders of the
Corporation, whether annual or special, shall be given not less than 10 nor more
than 60 days prior to the date upon which the meeting is to be held to each
stockholder entitled to vote at such meeting by delivering such notice with him
personally at, or by transmitting such notice with confirmed delivery (including
telecopier, electronically or other form of recorded communication, provided
that delivery of such notice in written form is confirmed in a writing) to, his
residence or usual place of business. If mailed, such notice shall be deemed
delivered when deposited in the United States mail in a sealed envelope
addressed to the stockholder at his address as it appears on the stock records
of the Corporation, with postage thereon prepaid. Such notice shall state the
place, date and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called. If a meeting is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken and, at the adjourned meeting, such business may be transacted as might
properly have been transacted at the original meeting. If the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each Stockholder of record entitled to vote at the meeting.
Notice of a Stockholders' meeting or adjournment thereof is waived
upon the occurrence of the following:
(a) A Stockholders' meeting is adjourned and a time and place for
the adjourned meeting is announced at the meeting at which the adjournment is
taken, and the period of adjournment does not exceed 30 days from the date of
adjournment.
(b) Receipt by the Corporation of a written notice of waiver,
signed by the person entitled to notice before or after the time stated therein.
(c) Attendance by the person entitled to notice and failure of such
person to object to the transaction of any business because the meeting is not
lawfully called or convened.
Whenever notice is required to be given under any statute or the
Certificate of Incorporation or these Bylaws to any Stockholder to whom (a)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings or (b) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve month period, have been mailed addressed to such
person at his address as shown on the records of the Corporation and have been
returned undeliverable, the giving of notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the Corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
Corporation is such as to require the filing of a certificate under any of the
other sections of the General Corporation Law, the certificate need not state
that notice was not given to persons to whom notice was not required to be given
pursuant to this Section 4.
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Section 5. QUORUM. On all questions, the presence of the holders
of a majority of the shares entitled to vote, in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of the
Stockholders. On all questions, the Stockholders 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 Stockholders 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. In the absence
of a quorum, the Stockholders present in person or by proxy and entitled to vote
at the meeting may, by majority vote, or, in the absence of all Stockholders,
any officer entitled to preside at the meeting, shall have the power to adjourn
the meeting from time to time until Stockholders holding the requisite amount of
stock shall be present in person or by proxy.
Section 6. VOTING.
(a) The Stockholders entitled to notice of any meeting or to vote
at such meeting shall only be persons whose names stand on the stock records of
the Corporation on the record date determined in accordance with the provisions
of Section 12 of this Article.
(b) Voting shall in all cases be subject to the provisions of the
General Corporation Law relating to voting of shares.
(c) The common stock shall be entitled to one vote per share.
Unless otherwise provided in the Certificate of Incorporation or by statute, the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present shall be the act of the Stockholders.
The vote on any question need not be by written ballot.
(d) At a stockholders' meeting involving the election of
directors, no stockholder shall be entitled to cumulate (i.e. cast for any one
or more candidates a number of votes greater than the number of the
stockholder's shares). The candidates receiving the highest number of votes, up
to the number of directors to be elected, shall be elected.
Section 7. PROXIES. Each Stockholder entitled to vote at a
meeting of Stockholders or to express consent or dissent to corporate action in
writing without a meeting may authorize another person or persons to act for him
by proxy, but no such proxy shall be voted or acted upon after three years from
its date, unless the proxy provides for a longer period. Any such proxy shall
be delivered to the Secretary of such meeting, at or prior to the time
designated in the order of business for so delivering such proxies. A duly
executed proxy shall be irrevocable if it states that it is irrevocable and if,
and only so long as, it is coupled with an interest sufficient in law to support
an irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally.
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Section 8. STOCKHOLDER LIST. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten days before
every meeting of Stockholders, a complete list of the Stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each Stockholder and the number of shares registered in the name of each
Stockholder. Such list shall be open to the examination of any Stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any Stockholder
who is present.
Section 9. VOTE OF STOCKHOLDERS. Any action required or permitted
to be taken at any annual or special meeting of Stockholders may be taken only
upon the vote of the Stockholders at an annual or special meeting duly noticed
and called and may not be taken by written consent of the Stockholders pursuant
to the General Corporation Law.
Section 10. INSPECTORS OF ELECTION. In advance of any meeting of
the Stockholders, the Board shall appoint at least one person, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. The number of such inspectors of election shall be one or
three. In case any person appointed as inspector fails to appear or refuses to
act, the vacancy shall be filled by appointment by the Board in advance of the
meeting, or at the meeting by the chairman of the meeting.
The duties of such inspector shall include: determining the number of
shares outstanding and voting power of each; the shares represented at the
meeting; the existence of a quorum; the authenticity, validity and effect of
proxies as described by Section 231(d) of the General Corporation Law; receiving
votes, ballots or consents; hearing and determining all challenges and questions
in any way arising in connection with the right to vote; retaining for a
reasonable period the disposition of any challenges made to their
determinations; counting and tabulating all votes or consents; determining when
the polls shall close; determining the result; certifying their determination of
the number of shares represented at the meeting, and their count of all votes
and ballots; and performing such acts as may be proper to conduct the election
or vote with fairness to all Stockholders. 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.
Section 11. OPENING AND CLOSING OF POLLS. An announcement shall be
made at each meeting of the Stockholders of the date and time of the opening and
closing of polls for each matter upon which the Stockholders will vote at the
meeting. No ballot, proxies or votes, nor any revocations thereof or changes
thereto, shall be accepted by the inspectors after the closing of the polls
unless the Court of Chancery upon application by a Stockholder shall determine
otherwise.
Section 12. RECORD DATE. In order that the Corporation may
determine the Stockholders entitled to notice of or to vote at any meeting of
Stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any
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rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board
may fix, in advance, a record date, which shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to any
written consent or other action.
If no record date is fixed:
(a) the record date for determining Stockholders entitled to notice
of or to vote at a meeting of Stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held; and
(b) the record date for determining Stockholders for any other
purpose shall be at the close of business on the day on which the Board adopts
the resolution relating thereto.
A determination of Stockholders of record entitled to notice of or to
vote at a meeting of Stockholders shall apply to any adjournment of the meeting;
PROVIDED, HOWEVER, that the Board may fix a new record date for the adjourned
meeting.
Section 13. PROCEDURES FOR MEETINGS. All meetings of Stockholders
shall be conducted according to such rules and procedures as the Board of
Directors may establish by resolution from time to time as being in the best
interests of the Stockholders and as may be deemed appropriate for insuring that
such meetings are conducted in a fair and orderly manner and in accordance with
the Certificate of Incorporation and these Bylaws.
ARTICLE III
BOARD OF DIRECTORS
Section 1. POWERS. The business and affairs of the Corporation
shall be managed by, or under the direction of the Board, except as may be
otherwise provided by the General Corporation Law or in the Certificate of
Incorporation or these Bylaws. Without prejudice to such powers, but subject to
the same limitation, it is hereby expressly declared that the directors shall
have the following powers in addition to other powers enumerated in these
Bylaws:
(a) To select and remove all officers, agents and employees of the
Corporation; prescribe any powers and duties for them that are consistent with
law, with the Certificate of Incorporation, and with these Bylaws; fix their
compensation; and require from them security for faithful service;
(b) To conduct, manage and control the affairs and business of the
Corporation, and to make rules and regulations therefor consistent with law,
with the Certificate of Incorporation and with these Bylaws;
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(c) To change the offices of the Corporation from one location to
another; to fix and locate from time to time one or more other offices of the
Corporation within or without the State of Delaware; to cause the Corporation to
be qualified to do business and to conduct business in any other state,
territory, dependency or country; and to designate any place within or without
the State of Delaware for the holding of any Stockholders' meeting or meetings,
including annual meetings;
(d) To adopt, make and use a corporate seal; to prescribe the form
of the seal and certificates evidencing stock; and to alter the form of the seal
and certificates;
(e) To authorize the issuance of shares of stock of the Corporation
from time to time, upon such terms and for such consideration as may be lawful;
and
(f) To borrow money and incur indebtedness for the purposes of the
Corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations, and other evidences of debt and securities therefor.
Section 2. NUMBER AND QUALIFICATIONS. The number of directors of
the Corporation shall be six (6) until changed by a duly adopted amendment to
the Certificate of Incorporation or by a Bylaw amending this Section 2 approved
by the affirmative vote of a majority of the outstanding shares entitled to
vote; PROVIDED, HOWEVER, that no decrease in the number of directors shall
shorten the term of any incumbent directors. Directors need not be Stockholders
of the Corporation unless required by the Certificate of Incorporation.
Section 3. ELECTION AND TERM OF OFFICE. Members of the Board of
Directors shall hold office for the terms specified in the Certificate of
Incorporation and until their successors have been elected as provided in the
Certificate of Incorporation.
Section 4. VACANCIES.
(a) Any vacancy on the Board of Directors however resulting, shall
be filled only by a majority of the directors then in office, although less than
a quorum, or by a sole remaining director and not by the Stockholders. Any
director elected to fill a vacancy shall hold office for a term that shall
coincide with the term of the class to which such director shall have been
elected.
(b) If at any time, by reason of death or resignation or other
cause, the Corporation should have no directors in office, then any officer or
any Stockholder or an executor, administrator, trustee or guardian of a
Stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a Stockholder, may call a special meeting of Stockholders in
accordance with the provisions of the Certificate of Incorporation and the
Bylaws or may apply to
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the Delaware Court of Chancery for a decree summarily ordering an election as
provided by the General Corporation Law.
(c) When one or more directors shall resign from the Board,
effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or registration
or resignations shall become effective, and each director so chosen shall hold
office as provided in these Bylaws.
(d) Any director or the entire Board of Directors may be removed,
with cause only, by the affirmative vote of the holders of a majority of the
outstanding shares of the Corporation then entitled to vote generally in the
election of directors, considered as one class.
(e) Any director may resign effective upon giving written notice to
the Chairman of the Board, the President, the Secretary or the Board, unless the
notice specifies a later date for the effectiveness of such resignation.
Section 5. PLACE OF MEETING. Meetings, both regular and special,
of the Board shall be held at such place or places within or without the State
of Delaware, as the Board may from time to time determine.
Section 6. REGULAR MEETINGS. Immediately following each annual
meeting of the Stockholders the Board shall hold a regular meeting at the same
place at which such Stockholders' meeting is held, or any other place as may be
fixed from time to by the Board of Directors. Notice of such meeting need not
be given.
Other regular meetings of the Board shall be held without call at such
time and place as the Board may from time to time by resolution determine. If
any day fixed for a regular meeting shall be a legal holiday at the place where
the meeting is to be held, then the meeting which would otherwise be held on
that day shall be held at the same hour on the next succeeding business day not
a legal holiday. Notice of a regular meeting need not be given.
Section 7. SPECIAL MEETINGS. Except as otherwise provided in the
Certificate of Incorporation, special meetings of the Board for any purpose or
purposes may be called at any time by the Chairman of the Board, the President,
the Secretary or by any three directors.
Written notice of the time and place of special meetings shall be
delivered personally to each director or communicated to each director by
telephone or telecopier or electronically or mail or other form of recorded
communication, 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 that director's
residence or usual place of business. In case such notice is mailed, it shall
be deposited in the United States mail at least seven days prior to the
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time of the holding of the meeting. In case such notice is delivered personally
or by other form of written communication, it shall be delivered at least 48
hours before the time of the holding of the meeting. The notice shall state the
time of the meeting, but need not specify the place of the meeting if the
meeting is to be held at the principal executive office of the Corporation. The
notice need not state the purpose of the meeting unless expressly provided
otherwise by statute.
Section 8. MEETINGS BY COMMUNICATION EQUIPMENT. Members of the
Board, or any committee designated by the Board, may participate in a meeting of
the Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in a meeting pursuant to this
section shall constitute presence in person at such meeting.
Section 9. QUORUM AND MANNER OF ACTING. The presence of a
majority to the total number of directors shall constitute a quorum for the
transaction of business, and the act of a majority of the directors present at a
meeting duly held shall be the act of the Board. In the absence of a quorum, a
majority of the directors present may adjourn any meeting from time to time
until a quorum is present. Notice of an adjourned meeting need not be given.
Section 10. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS.
The transactions of any meeting of the Board, however called and noticed or
wherever held, shall be as valid as though made or performed at a meeting duly
held after regular call and notice, if, either before or after the meeting, each
of the directors not present or who, though present, has prior to the meeting or
at its commencement protested the lack of proper notice to such director, signs
a written waiver of notice or a consent to holding such meeting or approval of
the minutes thereof. All such waivers, consents or approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
Section 11. ACTION WITHOUT MEETING. Any action required or
permitted to be taken at any meeting of the Board, or of any committee thereof,
may be taken without a meeting if all members of the Board or committee, as the
case may be, consent thereto in writing and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
Section 12. COMPENSATION OF DIRECTORS. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement for expenses incurred by them, as may be fixed or determined by
resolution of the Board of Directors.
Section 13. COMMITTEES. The Board may, by resolution passed by a
majority of the directors, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Any
such committee, to the extent provided in the resolution of the Board, shall
have and may exercise all the powers and authority of the Board in the
management of the business and
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affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
Stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the Stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
Bylaws of the Corporation; and, unless the resolution expressly so provides, no
such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock or to adopt a certificate of ownership and
merger. Any director may be removed from a committee with or without cause by
the affirmative vote of a majority of the entire Board of Directors.
ARTICLE IV
OFFICERS
Section 1. OFFICERS. The officers of the Corporation shall be a
Chairman, a Chief Executive Officer and/or President, a Secretary and a Chief
Financial Officer. The Corporation may also have, at the discretion of the
Board, a Chief Operating Officer, Vice Chairman, one or more Vice Presidents and
one or more Assistant Secretaries, and such other officers as may be appointed
in accordance with the provisions of Section 3 of this Article. Any number of
offices may be held by the same person.
Section 2. ELECTION OF OFFICERS. 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, shall be chosen annually by the Board,
and each shall serve at the pleasure of the Board, subject to the rights, if
any, of an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The Board may appoint, and may
empower the Chief Executive Officer or President 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 or Chief Executive Officer or President may from
time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Without prejudice
to the rights, if any, of an officer under any contract of employment, any
officer may be removed, either with or without cause, by the Board, at any
regular or special meeting of the Board, or by any officer upon whom such power
of removal may be conferred by the Board. Any officer may resign at any time by
giving written notice to the Corporation. Any resignation shall take effect at
the date of the receipt of that notice or at any later time specified in that
notice; the acceptance of the resignation shall not be necessary to make it
effective. Any resignation is without prejudice to the rights, if any, of the
Corporation under any contract to which the officer is a party.
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Section 5. VACANCIES IN OFFICES. A vacancy in any office because
of death, resignation, removal, disqualification 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
such an officer be elected, shall, if present, preside at all meetings of the
Board and exercise and perform such other powers and duties as may be from time
to time assigned to him by the Board.
Section 7. CHIEF EXECUTIVE OFFICER. Subject to such supervisory
powers, if any, as may be given by the Board to the Chairman of the Board, the
Chief Executive Officer, if such an officer be elected, shall, subject to the
control of the Board and the Chairman, have general supervision, direction and
control over the business and the officers of the Corporation. The Chief
Executive Officer shall preside at all meetings of the Stockholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board. The Chief Executive Officer shall exercise and perform such other
powers and duties as may from time to time be assigned to him by the Board.
Section 8. PRESIDENT. Subject to such supervisory powers, if any,
as may be given by the Board to the Chairman of the Board and the Chief
Executive Officer, the President, if there be such an officer elected, shall be
the chief operating officer of the Corporation and shall, subject to the control
of the Board, have general supervision, direction, and control of the business
and the officers of the Corporation (other than the Chairman and Chief Executive
Officer). The President shall preside at all meetings of the Stockholders in
the absence of the Chairman and the Chief Executive Officer, and, in the absence
of the Chairman and the Chief Executive Officer, at all meetings of the Board.
The President shall have the general powers and duties of management usually
vested in the office of president and general manager of a Corporation, and
shall have other powers and duties as may be prescribed by the Board and the
Chief Executive Officer.
Section 9. VICE PRESIDENTS. In the absence or disability of the
Chairman, the Chief Executive Officer and the President, the Vice Presidents, if
any, in order of their rank as fixed by the Board, or, if not ranked, the Vice
President designated by the Board shall perform all the duties of such officer,
and when so acting shall have all the powers of, and be subject to all the
restrictions upon, such offices. 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, the Chairman, the Chief Executive Officer or the
President.
Section 10. SECRETARY. The Secretary shall keep, or cause to be
kept, at the principal executive office or such other place as the Board may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and Stockholders, 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 Stockholders' meetings, and the proceedings.
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
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registrar, as determined by resolution of the Board, a stock ledger, or a
duplicate stock ledger, showing the names of all Stockholders and their
addresses, the numbers and classes of shares held by each, the number and dates
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 Stockholders and of the Board required by the Bylaws or by law to be
given, and he shall keep the seal of the Corporation, if one be adopted, in safe
custody, and shall have such other powers and perform such other duties as may
be prescribed by the Board.
Section 11. 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, retained earnings and shares,
and shall send or cause to be sent to the Stockholders of the Corporation such
financial statements and reports as are by law or these Bylaws required to be
sent to them. The books of account shall at all reasonable times be open to
inspection by any director.
The Chief Financial Officer shall deposit all monies and other
valuables in the name or to the credit of the Corporation with such depositories
as may be designated by the Board. The Chief Financial Officer shall disburse
the funds of the Corporation as may be ordered by the Board, shall render to the
Chief Executive Officer, the President and directors, whenever they request it,
an account of all transactions undertaken 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.
ARTICLE V
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purposes of
this Article, "agent" means any person who is or was a director, officer,
employee or other agent of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, employee or agent of another foreign
or domestic corporation, partnership, joint venture, trust or other enterprise,
or was a director, officer, employee or agent of a foreign or domestic
corporation which was a predecessor corporation of the Corporation or of another
enterprise at the request of such predecessor corporation; "proceeding" means
any threatened, pending or complete action, suit or proceeding, whether civil,
criminal, administrative, or investigative; and "expenses" includes, without
limitation, attorneys' fees and any expenses of establishing a right to
indemnification under Section 2 or Section 3 of this Article.
Section 2. ACTIONS OTHER THAN BY THE CORPORATION. The Corporation
shall have power to indemnify any person who was or is a party or is threatened
to be made a party to any proceeding (other than an action by or in the right of
the Corporation) by reason of the fact that he is or was an agent, against
expenses, judgments, fines and amounts paid in settlement actually and
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reasonably incurred by him in connection with such proceeding if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal proceeding, had reasonable cause
to believe that his conduct was unlawful.
Section 3. ACTIONS BY THE CORPORATION. The Corporation shall have
power to indemnify any person who was or is a party or is threatened to be made
a party to any proceeding by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was an agent, against
expenses actually and reasonably incurred by him in connection with the defense
or settlement of such proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 4. SUCCESSFUL DEFENSE BY AGENT. To the extent that an
agent has been successful on the merits or otherwise in defense of any
proceeding referred to in Sections 2 and 3, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses actually and reasonably
incurred by him in connection therewith.
Section 5. REQUIRED APPROVAL. Any indemnification under Sections
2 and 3 (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in Sections 2 and 3. Such determination shall be made (a)
by the Board by a majority vote of a quorum consisting of directors who were not
parties to such proceeding, or (b) if such disinterested directors so direct, by
independent legal counsel in a written opinion, or (c) by the affirmative vote
of a majority of Stockholders.
Section 6. ADVANCE OF EXPENSES. Expenses incurred in defending a
proceeding may be paid by the Corporation in advance of the final disposition of
such proceeding upon receipt of an undertaking by or on behalf of the agent to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as authorized in this Article. Such
expenses incurred by other employees and agents may be so paid upon such terms
and conditions, if any, as the Board deems appropriate.
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Section 7. CONTRACTUAL RIGHTS. The indemnification and
advancement of expenses provided by this Article shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any agreement, vote of Stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be an agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Section 8. LIMITATIONS. No indemnification or advance shall be
made under this Article, except as provided in Section 4, in any circumstances
where it appears:
(a) That it would be inconsistent with a provision of the
Certificate of Incorporation, a resolution of the Stockholders or an agreement
in effect at the time of accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other amounts were paid, which
prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
Section 9. INSURANCE AND SIMILAR ARRANGEMENTS. The Corporation
shall have the power to purchase and maintain insurance on behalf of any person
who is or was an agent 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 the Corporation would have the power to indemnify him against such liability
under the provisions of this Article.
The 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 arrangements), as well as enter into contracts
pursuant to the provisions of Section 7 of this Article V of these Bylaws and
including as part thereof provisions with respect to any or all of the foregoing
to insure the payment of such amounts as may become necessary to effect
indemnification as provided for therein or elsewhere.
The provisions of this Article shall not apply to any proceedings
against any trustee, investment manager or other fiduciary of an employee
benefit plan in that person's capacity as such, even though that person may also
be an agent as defined in Section 1 of this Article. Nothing contained in this
Article shall limit the power of the Corporation, upon and in the event of a
determination of the Board to indemnify any trustee, investment manager or other
fiduciary of an employee benefit plan, and the Corporation may thereupon
indemnify and purchase and maintain insurance on behalf of any such trustee,
investment manager or other fiduciary.
Section 10. CONSTITUENT CORPORATIONS. For purposes of this
Article, references to "the Corporation" shall include, in addition to the
Corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its
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separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents, so that any person who
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, shall stand in the same position under
the provisions of this Article with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
Section 11. ADDITIONAL DEFINITIONS. For purposes of this Article,
references to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the request
of the Corporation" shall include any service as a director, officer, employee
or agent of the Corporation 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; and a person who acted in good faith
and in a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article.
ARTICLE VI
MISCELLANEOUS
Section 1. INSPECTION OF BOOKS AND RECORDS BY STOCKHOLDERS. Any
Stockholder of record, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof delivered to the
Corporation's principal place of business, have the right during the usual hours
for business to inspect for any proper purpose the Corporation's stock ledger, a
list of its Stockholders, and its other books and records, and to make copies or
extracts therefrom. A proper purpose shall mean a purpose reasonably related to
such person's interest as a Stockholder. In every instance where an attorney or
other agent shall be the person who seeks the right to inspection, the demand
under oath shall be accompanied by a power of attorney or such other writing
which authorizes the attorney or other agent to so act on behalf of the
Stockholder.
Section 2. INSPECTION OF BOOKS AND RECORDS BY DIRECTORS. Any
director shall have the right to examine the Corporation's stock ledger, a list
of its Stockholders and its other books and records for a purpose reasonably
related to his position as a director. Such right to examine the records and
books of the Corporation shall include the right to make copies and extract
therefrom.
Section 3. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks,
drafts, or other orders for payment of money, 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, from time to
time, shall be determined by resolution of the Board.
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Section 4. CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED. The
Board, except as otherwise provided in these Bylaws, may authorize any officer
or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Corporation, and this authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the Board 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 5. CERTIFICATES FOR SHARES. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by, or in the name of
the Corporation by the Chairman or the President or a Vice-President, and by the
Chief Financial Officer or the Secretary or an Assistant Secretary of the
Corporation representing the number of shares owned by him in the Corporation.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent, or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue.
Section 6. TRANSFER OF SHARES. Transfers of shares of the capital
stock of the Corporation shall be made only on the books of the Corporation by
the holder thereof, or by his attorney thereunto authorized by a power of
attorney duly executed and filed with the Secretary of the Corporation or a
transfer agent of the Corporation, if any, and on surrender of the certificate
or certificates for such shares properly endorsed. A person in whose name
shares of stock and on the books of the Corporation shall be deemed the owner
thereof as regards the Corporation, and upon any transfer of shares of stock the
person or persons into whose name or names such shares shall have been
transferred, with respect to all rights, privileges and obligations of holders
of stock of the Corporation and as against the Corporation or any other person
or persons. The term "person" or "persons" wherever used herein shall be deemed
to include any partnership, corporation, association or other entity. Whenever
any transfer of shares shall be made for collateral security, and not
absolutely, such fact, if known to the Secretary or to such transfer agent,
shall be so expressed in the entry of transfer.
Section 7. LOST, STOLEN OR DESTROYED CERTIFICATES. The
Corporation may issue a new certificate of stock in the place of any certificate
theretofore issued by it, alleged to have been lost, stolen or destroyed, and
the Corporation may require the owner of the lost, stolen or destroyed
certificate, or his legal representative, to give the Corporation a bond
sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate.
Section 8. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
Chairman of the Board, the Chief Executive Officer, the President, or any Vice
President or any person designated by any of such officers, is authorized, in
the absence of authorization by the Board, to vote on behalf of the Corporation
any and all shares of any other corporation or corporations, foreign or
domestic, for which the Corporation has the right to vote. The authority
granted to these
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officers to vote or represent on behalf of the Corporation any and all shares
held by the Corporation in any other corporation or corporations may be
exercised by any of these officers in person or by any person authorized to do
so by proxy duly executed by these officers.
Section 9. CONSTRUCTION AND DEFINITIONS. Unless the context
requires otherwise, the general provisions, rules of construction, and
definitions in the General Corporation Law shall govern the construction of
these Bylaws. Without limiting the generality of this provision, the singular
number includes the plural, the plural number includes the singular, and the
term "person" includes both a corporation and a natural person.
Section 10. AMENDMENTS. Unless otherwise provided in the
Certificate of Incorporation or the General Corporation Law, the power to adopt,
amend or repeal any Bylaws of the Corporation shall be vested in the Board of
Directors; provided, that the Board of Directors may delegate such power, in
whole or in part, to the Stockholders.
Section 11. CONFORMANCE TO THE LAW. In the event that it is
determined that these Bylaws, as now written or as amended, conflict with the
General Corporation Law, or any other applicable law, as now enforced or as
amended, these Bylaws shall be deemed amended, without action of the Board or
the Stockholders, to conform with such law, such amendment to be so interpreted
as to bring these Bylaws within minimum compliance. For purposes of this
section, "amendment" shall include a repeal of, or a change in interpretation
of, the relevant compendium.
Section 12. SEAL. The corporate seal shall be in such form as the
Board of Directors shall prescribe. Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
Section 13. FISCAL YEAR. The fiscal year of the Corporation shall
be fixed, and shall be subject to change, by the Board of Directors.
Section 14. DIVIDENDS; SURPLUS. Subject to the provisions of the
Certificate of Incorporation and any restrictions imposed by statute, the Board
of Directors may declare dividends out of the net assets of the Corporation in
excess of its capital or, in case there shall be no such excess, out of the net
profits of the Corporation for the fiscal year then current and/or the preceding
fiscal year, or out of any funds at the time legally available for the
declaration of dividends (hereinafter referred to as "surplus or net profits")
whenever, and in such amounts as, in its sole discretion, the conditions and
affairs of the Corporation shall render advisable. The Board of Directors in
its sole discretion may, in accordance with law, from time to time set aside
from surplus or net profits such sum or sums as it may think proper as a reserve
fund to meet contingencies, or for equalizing dividends, of for the purpose of
maintaining or increasing the property or business of the Corporation, or for
any other purpose as it may think conducive to the best interests of the
Corporation.
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CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting Secretary of DVD Express,
Inc., a Delaware corporation, and
(2) That the foregoing Bylaws comprising of 16 pages, constitute the
Bylaws of said Corporation as of April 6, 1999 duly adopted by the Board of
Directors of the Corporation.
IN WITNESS WHEREOF, I have hereunto subscribed my name as of this 6th day
of April, 1999.
/s/ Andrew Crist
----------------------------
Andrew Crist
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DVD EXPRESS, INC.
1998 STOCK INCENTIVE PLAN
ARTICLE 1
General Purpose of Plan
The name of this plan is the DVD Express, Inc. 1998 Stock Incentive Plan
(the "Plan"). The purpose of the Plan is to enable DVD Express, Inc., a
California corporation (the "Company") and any Parent or any Subsidiary to
obtain and retain the services of the types of employees, consultants, officers
and Directors who will contribute to the Company's long range success and to
provide incentives which are linked directly to increases in share value which
will inure to the benefit of all shareholders of the Company.
ARTICLE 2
Definitions
For purposes of the Plan, the following terms shall be defined as set
forth below:
"Administrator" shall have the meaning as set forth in Article 3.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor thereto.
"Committee" means a committee of the Board designated by the Board
to administer the Plan.
"Company" means DVD Express, Inc., a corporation organized under the
laws of the State of California (or any successor corporation).
"Date of Grant" means the date on which the Administrator adopts a
resolution expressly granting a Right to a Participant, or if a different date
is set forth in such resolution as the Date of Grant, then such date as is set
forth in such resolution.
"Director" means a member of the Board.
"Disability" means permanent and total disability as defined by the
Administrator.
"Election" shall have the meaning set forth in Section 11.3(d).
<PAGE>
"Eligible Person" means an employee, officer, consultant or Director
of the Company, any Parent or any Subsidiary.
"Fair Market Value" per share at any date means (i) if the Stock is
listed on an exchange or exchanges, or admitted for trading in a market system
which provides last sale data under Rule 11Aa3-1 of the General Rules and
Regulations of the Securities and Exchange Commission under the Securities and
Exchange Act of 1934, as amended (a "Market System"), the last reported sales
price per share on the last business day prior to such date on the principal
exchange on which it is traded, or in such a Market System, as applicable, or if
no sale was made on such day on such principal exchange or in such a Market
System, as applicable, the last reported sales price per share on the most
recent day prior to such date on which a sale was reported on such exchange or
such Market System, as applicable; or (ii) if the Common Stock is not then
traded on an exchange or in such a Market System, the average of the closing bid
and asked prices per share for the Common Stock in the over-the-counter market
as quoted on NASDAQ on the day prior to such date; or (iii) if the Common Stock
is not listed on an exchange or quoted on NASDAQ, an amount determined in good
faith by the Administrator, based on a price at which one could reasonably
expect such stock to be sold in an arm's length transaction, for cash, other
than on an installment basis, to a person not employed by, controlled by, in
control of or under common control with the issuer of such stock.
"First Refusal Right" shall have the meaning set forth in Section
8.1(c) of the Plan.
"Incentive Stock Option" means a Stock Option intended to qualify as
an "incentive stock option" as that term is defined in Section 422 of the Code.
"Non-Statutory Option" means a Stock Option intended to not qualify
as an Incentive Stock Option.
"Offeree" means a Participant who is granted a Purchase Right
pursuant to the Plan.
"Optionee" means a Participant who is granted a Stock Option
pursuant to the Plan.
"Parent" means any present or future corporation which would be a
"parent corporation" as that term is defined in Section 424 of the Code.
"Participant" means any Eligible Person selected by the
Administrator, pursuant to the Administrator's authority in Article 3, to
receive grants of Rights.
"Plan" means this DVD Express, Inc. 1998 Stock Incentive Plan, as
the same may be amended or supplemented from time to time.
"Purchase Price" shall have the meaning set forth in Section 7.2(b).
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"Purchase Right" means the right to purchase Stock granted pursuant
to Article 7.
"Rights" means Stock Options and Purchase Rights.
"Repurchase Right" shall have the meaning set forth in Section
8.1(a) of the Plan.
"Retirement" means retirement from active employment with the
Company or any Parent or Subsidiary as defined by the Administrator.
"Section 16(b) Person" means a person subject to Section 16(b) of
the Exchange Act.
"Special Terminating Event" with respect to a Participant shall mean
the death, Disability or Retirement of that Participant.
"Stock" means the Common Stock, no par value, of the Company.
"Stock Option" means an option to purchase shares of Stock granted
pursuant to Article 6.
"Stock Option Agreement" shall have the meaning set forth in Section
6.2.
"Stock Purchase Agreement" shall have the meaning set forth in
Section 7.2.
"Subsidiary" means any present or future corporation which would be
a "subsidiary corporation" as that term is defined in Section 424 of the Code.
"Tax Date" shall have the meaning set forth in Section 11.3(d) of
the Plan.
"Ten Percent Shareholder" means a person who on the Date of Grant
owns, either directly or through attribution as provided in Section 424(d) of
the Code, Stock possessing more than 10% of the total combined voting power of
all classes of stock of his or her employer corporation or of any Parent or
Subsidiary.
"Withholding Right" shall have the meaning set forth in Section
10.3(c) of the Plan.
ARTICLE 3
Administration
Section 3.1 Administrator. The Plan shall be administered by either (i)
the Board; or (ii) the Committee (the group that administers the Plan is
referred to as the "Administrator").
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Section 3.2 Powers in General. The Administrator shall have the power and
authority to grant to Eligible Persons, pursuant to the terms of the Plan: (i)
Stock Options; (ii) Purchase Rights; or (iii) any combination of the foregoing.
Section 3.3 Specific Powers. In particular, the Administrator shall have
the authority: (i) to construe and interpret the Plan and apply its provisions;
(ii) to promulgate, amend and rescind rules and regulations relating to the
administration of the Plan; (iii) to authorize any person to execute, on behalf
of the Company, any instrument required to carry out the purposes of the Plan;
(iv) to determine when Rights are to be granted under the Plan; (v) from time to
time to select, subject to the limitations set forth in this Plan, those
Eligible Persons to whom Rights shall be granted; (vi) to determine the number
of shares of Stock to be made subject to each Right; (vii) to prescribe the
terms and conditions of each Stock Option, including, without limitation, the
exercise price and medium of payment, to determine whether the Stock Option is
to be an Incentive Stock Option or a Non-Statutory Option and to specify the
provisions of the Stock Option agreement relating to such Stock Option; (viii)
to prescribe the terms and conditions of each Stock Option and Purchase Right,
including, without limitation, the purchase price and medium of payment, vesting
provisions and repurchase provisions, and to specify the provisions of the Stock
Option Agreement or Stock Purchase Agreement relating to such sale; (ix) to
amend any outstanding Rights for the purpose of modifying the time or manner of
vesting, the purchase price or exercise price, as the case may be, thereunder or
otherwise, subject to applicable legal restrictions and to the consent of the
other party to such agreement; (x) to determine when a consultant's relationship
with the Company is sufficient to constitute the equivalent of employment with
the Company for purposes of the Plan; (xi) to determine the duration and purpose
of leaves of absences which may be granted to a Participant without constituting
termination of their employment for purposes of the Plan; (xii) to make
decisions with respect to outstanding options that may become necessary upon a
change in corporate control or an event that triggers anti-dilution adjustments;
and (xiii) to make any and all other determinations which it determines to be
necessary or advisable for administration of the Plan.
Section 3.4 Decisions Final. All decisions made by the Administrator
pursuant to the provisions of the Plan shall be final and binding on the Company
and the Participants.
Section 3.5 The Committee. The Board may, in its sole and absolute
discretion, from time to time delegate any or all of its duties and authority
with respect to the Plan to the Committee whose members are to be appointed by
and to serve at the pleasure of the Board. Once appointed, the Committee shall
continue to serve until otherwise directed by the Board. From time to time, the
Board may increase or decrease the size of the Committee, add additional members
to, remove members (with or without cause) from, appoint new members in
substitution therefor, and fill vacancies, however caused, in the Committee. The
Committee shall act pursuant to a vote of the majority of its members or, in the
case of a committee comprised of only two members, the unanimous consent of its
members, whether present or not, or by the written consent of the majority of
its members or, in the case of a Committee comprised of only two
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members, the unanimous written consent of its members, and minutes shall be kept
of all of its meetings and copies thereof shall be provided to the Board.
Subject to the limitations prescribed by the Plan and the Board, the Committee
may establish and follow such rules and regulations for the conduct of its
business as it may determine to be advisable.
ARTICLE 4
Stock Subject to Plan
Section 4.1 Stock Subject to the Plan. Subject to adjustment as provided
in Article 9, the total number of shares of Stock reserved and available for
issuance under the Plan shall be 1,500,000 shares. Shares reserved hereunder may
consist, in whole or in part, of authorized and unissued shares or treasury
shares.
Section 4.2 Unexercised Rights; Reacquired Shares. To the extent that any
Rights expire or are otherwise terminated without being exercised, the shares
underlying such Rights (and shares related thereto) shall again be available for
issuance in connection with future Rights under the Plan. Shares acquired by the
Company upon exercise of Rights pursuant to Section 6.2(e) or Section 7.2(c) or
Section 11.3 shall not increase the shares available for issuance under the
Plan.
ARTICLE 5
Eligibility
Directors, officers, employees and consultants of the Company, any Parent
or any Subsidiary, who are responsible for or contribute to the management,
growth or profitability of the business of the Company, any Parent or any
Subsidiary, shall be eligible to be granted Rights hereunder subject to
limitations set forth in this Plan; provided, however, that only officers and
employees shall be eligible to be granted Incentive Stock Options hereunder.
ARTICLE 6
Stock Options
Section 6.1 General. Stock Options may be granted alone or in addition to
other Rights granted under the Plan. Each Stock Option granted under the Plan
shall be in such form and under such terms and conditions as the Administrator
may from time to time approve; provided, that such terms and conditions are not
inconsistent with the Plan. The provisions of Stock Option Agreements entered
into under the Plan need not be identical. Stock Options granted under the Plan
may be either Incentive Stock Options or Non-Statutory Options.
Section 6.2 Terms and Conditions of Stock Options. Each Stock Option
granted pursuant to the Plan shall be evidenced by a written option agreement
between the Company and the Optionee (the "Stock Option Agreement"), which shall
comply with and be subject to the following terms and conditions:
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(a) Number of Shares. Each Stock Option Agreement shall state the
number of shares of Stock to which the Stock Option relates.
(b) Type of Option. Each Stock Option Agreement shall identify the
portion (if any) of the Stock Option which constitutes an Incentive Stock
Option.
(c) Exercise Price. Each Stock Option Agreement shall state the
price at which shares subject to the Stock Option may be purchased (the
"Exercise Price"), which shall with respect to Incentive Stock Options be not
less than 100% of the Fair Market Value of the shares of Stock on the Date of
Grant. In the case of Non-Statutory Options, the Exercise Price shall be
determined in the sole discretion of the Administrator; provided, however, that
the Exercise Price shall be no less than 85% of the Fair Market Value of the
shares of Stock on the Date of Grant of the Non-Statutory Option. In the case of
either an Incentive Stock Option or a Non-Statutory Option granted to a Ten
Percent Shareholder, the Exercise Price shall not be less than 110% of such Fair
Market Value.
(d) Value of Shares. The Fair Market Value of the shares of Stock
(determined as of the Date of Grant) with respect to which Incentive Stock
Options are first exercisable by an Option Holder under this Plan and all other
incentive option plans of the Company and any Parent or Subsidiary in any
calendar year shall not, for such year, in the aggregate, exceed $100,000; but
this Section 6.2(d) shall not affect the right of the Administrator to
accelerate or otherwise alter the time of vesting of any Options granted as
Incentive Stock Options, even, if as a result thereof, some of such Options
cease being Incentive Stock Options.
(e) Medium and Time of Payment. The Exercise Price shall be paid in
full, at the time of exercise, in cash or cash equivalents or, with the approval
of the Administrator, in shares of Stock which have been held by the Optionee
for a period of at least six calendar months preceding the date of surrender and
which have a Fair Market Value equal to the Exercise Price, or in a combination
of cash and such shares, and may be effected in whole or in part (i) with monies
received from the Company at the time of exercise as a compensatory cash
payment; or (ii) to the extent that the Exercise Price exceeds the par value of
the shares so purchased, with monies borrowed from the Company in accordance
with Section 11.5.
(f) Term and Exercise of Stock Options. Stock Options shall be
exercisable over the exercise period at the times the Administrator may
determine, as reflected in the related Stock Option Agreements. The
Administrator shall have discretion as to the schedule pursuant to which the
Stock Option is initially exercisable; provided, however, that in no event shall
any option vest at a rate of less than 20% per year over 5 years from the Date
of Grant of such Stock Options. The exercise period of any Stock Option shall be
determined by the Administrator, but shall not exceed ten years from the Date of
Grant of the Stock Option. In the case of an Incentive Stock Option granted to a
Ten Percent Shareholder, the exercise period shall be determined by the
Administrator, but shall not exceed five years from the Date of Grant of the
Stock Option. The
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exercise period shall be subject to earlier termination upon the occurrence of
either a Special Terminating Event, as provided in Section 11.6, or the
Termination of Employment, as provided in Section 11.7. A Stock Option may be
exercised, as to any or all full shares of Stock as to which the Stock Option
has become exercisable, by giving written notice of such exercise to the
Company.
ARTICLE 7
Purchase Rights
Section 7.1 General. Purchase Rights may be granted alone or in addition
to other Rights under the Plan. Each sale of Stock under this Article 7 shall be
in such form and under such terms and conditions as the Administrator shall from
time to time approve; provided, that such terms and conditions are not
inconsistent with the Plan. The provisions of Stock Purchase Agreements entered
into under the Plan need not be identical.
Section 7.2 Terms and Conditions of Purchase Rights. Each Purchase Right
granted pursuant to the Plan shall be evidenced by a written stock purchase
agreement between the Company and the Offeree (the "Stock Purchase Agreement"),
which shall comply with and be subject to the following terms and conditions:
(a) Number of Shares. Each Stock Purchase Agreement shall state the
number of shares of Stock which may be purchased pursuant to such agreement.
(b) Purchase Price. Each Stock Purchase Agreement shall state the
price at which the Stock subject to such Stock Purchase Agreement may be
purchased (the "Purchase Price"), which, with respect to Stock Purchase Rights,
shall be determined in the sole discretion of the Administrator; provided,
however, that the Purchase Price shall be no less than 85% of the Fair Market
Value of the shares of Stock on either the Date of Grant or the Date of Purchase
of the Purchase Right. In the case of a Purchase Right granted to a Ten Percent
Shareholder, the Purchase Price shall not be less than 110% of the Fair Market
Value of the shares of Stock on either the Date of Grant or the Date of Purchase
of the Purchase Right.
(c) Medium and Time of Payment. The Purchase Price shall be paid in
full, at the time of exercise, in cash or cash equivalent or, with the approval
of the Administrator, in shares of Stock which have been held by the Offeree for
a period of at least six calendar months preceding the date of surrender and
which have a Fair Market Value equal to the Purchase Price or in a combination
of cash or cash equivalent and such shares, and may be effected in whole or in
part (i) with monies received from the Company at the time of exercise as a
compensatory cash payment; or (ii) to the extent the purchase price exceeds the
par value of the shares so purchased, with monies borrowed from the Company in
accordance with Section 11.5 of the Plan.
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ARTICLE 8
Reacquisition of Stock Options,
Purchase Rights and Stock;
Market Stand-Off
Section 8.1 Repurchase Rights; Right of First Refusal.
(a) Stock Option Repurchase Rights. Each Stock Option Agreement
shall provide that the Company, following a Special Terminating Event or a
Terminating Event, shall have the right to repurchase (the "Repurchase Right")
all or any portion of the Stock purchased by the Optionee upon the exercise of
the Optionee's Stock Option, as well as any Stock issuable upon exercise of any
unexercised Stock Options which the Optionee has the right to exercise at the
time of such Special Terminating Event or Terminating Event. Following the
occurrence of a Terminating Event (which does not result from the Company's
termination of Optionee's employment "for cause") or a Special Terminating
Event, the Repurchase Right shall be exercisable at a price equal to the Fair
Market Value of such Shares or, in the case of unexercised options, the Fair
Market Value of the Shares underlying such unexercised options less the exercise
price which would be payable upon the exercise of such unexercised options.
Following the occurrence of a Terminating Event which does result from the
Company's termination of Optionee's employment "for cause," the Repurchase Right
shall be exercisable as to all or any portion of the Shares purchased by
Optionee upon the exercise of the Option, as well as any unexercised Options
which Optionee has the right to exercise at the time of termination, at a price
equal to the initial exercise price of such Shares or, in the case of
unexercised options, the initial exercise price of the Shares underlying such
unexercised options less the exercise price which would be payable upon the
exercise of such unexercised options. Fair Market Value shall be determined by
the Administrator on the basis of the definition of Fair Market Value set forth
in Article 2 of the Plan. To the extent that the Repurchase Right is exercisable
at the initial exercise price of the Shares or the Shares underlying unexercised
options, the exercise price shall become Fair Market Value as to 20% of such
Shares which were originally subject to this Option Agreement on each of the
first five anniversaries of the date of this Option Agreement.
(b) Stock Purchase Agreement Repurchase Rights. Each Stock Purchase
Agreement shall provide that the Company, following a Special Terminating Event
or a Terminating Event, shall have a Repurchase Right (x) with respect to all of
the Stock purchased under the Stock Purchase Agreement which is unvested at the
time of such Special Terminating Event or Terminating Event, and (y) with
respect to all or any portion of the stock purchased under the Stock Purchase
Agreement which is vested at the time of the Special Terminating Event or
Terminating Event. Following the occurrence of a Terminating Event (which does
not result from the Company's termination of Optionee's employment "for cause")
or a Special Terminating Event, the Repurchase Right shall be exercisable at a
price equal to the Fair Market Value of such Shares or, in the case of
unexercised options, the Fair Market Value of the Shares underlying such
unexercised options less the exercise price which would be payable upon the
exercise of such
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unexercised options. Following the occurrence of a Terminating Event which does
result from the Company's termination of Optionee's employment "for cause," the
Repurchase Right shall be exercisable as to all or any portion of the Shares
purchased by Optionee upon the exercise of the Option, as well as any
unexercised Options which Optionee has the right to exercise at the time of
termination, at a price equal to the initial exercise price of such Shares or,
in the case of unexercised options, the initial exercise price of the Shares
underlying such unexercised options less the exercise price which would be
payable upon the exercise of such unexercised options. Fair Market Value shall
be determined by the Administrator on the basis of the definition of Fair Market
Value set forth in Article 2 of the Plan. To the extent that the Repurchase
Right is exercisable at the initial exercise price of the Shares or the Shares
underlying unexercised options, the exercise price shall become Fair Market
Value as to 20% of such Shares which were originally subject to this Option
Agreement on each of the first five anniversaries of the date of this Option
Agreement.
(c) First Refusal Right. Each Stock Option Agreement and Stock
Purchase Agreement shall 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 Stock purchased by the Optionee
or Offeree pursuant to a Stock Option Agreement or Stock Purchase Agreement; and
in the event the holder of such shares desires to accept a bona fide third-party
offer for any or all of such shares, the Stock shall first be offered to the
Company upon the same terms and conditions as are set forth in the bona fide
offer.
(d) Termination of Repurchase and First Refusal Rights. Each Stock
Option Agreement and Stock Purchase Agreement may provide, at the
Administrator's discretion, that the Repurchase Rights and First Refusal Rights
shall lapse and cease to have effect upon any of the following: (1) the first
date on which the Company's Stock is held of record by more than five hundred
(500) persons, (2) a determination by the Company's Board of Directors that a
public market exists for the outstanding shares of the 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
$15,000,000.
Section 8.2 Market Stand-Off.
Each Stock Option Agreement and Stock Purchase Agreement shall
provide that, 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, including the Company's initial
public offering, the Participant shall agree not to sell, make any short sale
of, loan, hypothecate, pledge, grant any option for the repurchase of, or
otherwise dispose or transfer for value or otherwise agree to engage in any of
the foregoing transactions with respect to any Stock 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
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requested by the Company or such underwriters (the "Market Stand-Off");
provided, however, that in no event shall such period exceed one hundred-eighty
(180) days.
ARTICLE 9
Adjustments
Section 9.1 Effect of Certain Changes.
(a) Stock Dividends, Splits, Etc.. If there is any change in the
number of outstanding shares of Stock through the declaration of Stock dividends
or through a recapitalization resulting in Stock splits, or combinations or
exchanges of the outstanding shares, (i) the number of shares of Stock available
for Rights, (ii) the number of shares covered by outstanding Rights and (iii)
the Exercise Price or Purchase Price of any Stock Option or Purchase Right, in
effect prior to such change, shall be proportionately adjusted by the
Administrator to reflect any increase or decrease in the number of issued shares
of Stock; provided, however, that any fractional shares resulting from the
adjustment shall be eliminated.
(b) Liquidation, Dissolution, Merger or Consolidation. In the event
of: (i) a dissolution or liquidation of the Company, or any corporate separation
or division, including, but not limited to, a split-up, a split-off or a
spin-off, or a sale of substantially all of the assets of the Company; (ii) a
merger or consolidation in which the Company is not the surviving corporation;
or (iii) a reverse merger in which the Company is the surviving corporation, but
the shares of 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 Administrator, and to the
extent permitted by applicable law: (i) any surviving corporation shall assume
any Rights outstanding under the Plan, or shall substitute similar Rights for
those outstanding under the Plan, or (ii) such Rights shall continue in full
force and effect; or (iii) such Rights, to the extent not then exercisable,
shall terminate and expire; provided, however, that not less than thirty days
written notice of any such event shall be given to each Rights holder and if
such notice is given, each Rights holder shall have the right, during the thirty
days preceding such event, to exercise the Right as to all or any part of the
shares of Stock covered thereby as to which such Right is then exercisable, on
the condition, however, that such event actually occurs; and if such event
actually occurs, such exercise shall be deemed effective (and, if applicable,
the Rights holder shall be deemed a shareholder with respect to the Rights
exercised) immediately preceding the occurrence of such event, or the date of
record for shareholders entitled to share in such event, if a record date is
set.
(c) Where Company Survives. Section 9.1(b) shall not apply to a
merger or consolidation in which the Company is the surviving corporation,
unless shares of Stock are converted into or exchanged for securities other than
publicly-traded common stock, cash (excluding cash in payment for fractional
shares) or any other thing of value. Notwithstanding the preceding sentence, in
case of any consolidation or merger of another corporation into the
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Company in which the Company is the surviving corporation and in which there is
a reclassification or change (including a change to the right to receive an
amount of money payable by cash or cash equivalent or other property) of the
shares of Stock (other than a change in par value, or from par value to no par
value, or as a result of a subdivision or combination, but including any change
in such shares into two or more classes or series of shares), the Administrator
may provide that the holder of each Right then exercisable shall have the right
to exercise such Right solely for the kind and amount of shares of Stock and
other securities (including those of any new direct or indirect Parent of the
Company), property, cash or any combination thereof receivable upon such
reclassification change, consolidation or merger by the holder of the number of
shares of Stock for which such Right might have been exercised.
(d) Surviving Corporation Defined. The determination as to which
party to a merger or consolidation is the "surviving corporation" shall be made
on the basis of the relative equity interests of the shareholders in the
corporation existing after the merger or consolidation, as follows: if
immediately following any merger or consolidation the holders of outstanding
voting securities of the Company immediately prior to the merger or
consolidation own equity securities possessing more than 50% of the voting power
of the corporation existing following the merger or consolidation, then for
purposes of this Plan, the Company shall be the surviving corporation. In all
other cases, the Company shall not be the surviving corporation. In making the
determination of ownership by the shareholders of a corporation immediately
after the merger or consolidation, of equity securities pursuant to this Section
9.1(d), equity securities which the shareholders owned immediately before the
merger or consolidation as shareholders of another party to the transaction
shall be disregarded. Further, for purposes of this Section 9.1(d) only,
outstanding voting securities of a corporation shall be calculated by assuming
the conversion of all equity securities convertible (immediately or at some
future time) into shares entitled to vote.
(e) Par Value Changes. In the event of a change in the Stock of the
Company as presently constituted which is limited to a change of all of its
authorized shares with par value, into the same number of shares without par
value, or a change in the par value, the shares resulting from any such change
shall be "Stock" within the meaning of the Plan.
Section 9.2 Decision of Administrator Final. To the extent that the
foregoing adjustments relate to stock or securities of the Company, such
adjustments shall be made by the Administrator, whose determination in that
respect shall be final, binding and conclusive; provided, however, that each
Incentive Stock Option granted pursuant to the Plan shall not be adjusted
without the prior consent of the Holder thereof in a manner that causes such
Stock Option to fail to continue to qualify as an Incentive Stock Option.
Section 9.3 No Other Rights. Except as hereinbefore expressly provided in
this Article 9, no Rights holder shall have any rights by reason of any
subdivision or consolidation of shares of Stock or the payment of any dividend
or any other increase or decrease in the number of shares of Stock of any class
or by reason of any of the events described in Section 9.1, above, or any
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other issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class; and except as provided in this
Article 9, none of the foregoing events shall affect, and no adjustment by
reason thereof shall be made with respect to, the number or price of shares of
Stock subject to Rights. The grant of a Right pursuant to the Plan shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structures or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or part of its business or assets.
Section 9.4 No Rights as Shareholder. Except as specifically provided in
this Article 9, a Rights holder or a transferee of a Right shall have no rights
as a shareholder with respect to any shares covered by the Rights until the date
of the issuance of a Stock certificate to him or her for such shares, and no
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions of other rights for which
the record date is prior to the date such Stock certificate is issued, except as
provided in Section 9.1(b).
Section 9.5 Term of Employment Unaffected. The receipt of an option does
not give the optionee any right to continued employment by the Company or a
subsidiary for any period, nor shall the granting of the option or the issuance
of the shares on exercise thereof give the Company or any subsidiary any right
to the continued services of the optionee for any period.
ARTICLE 10
Amendment and Termination
The Board may amend, alter or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would impair the rights of a
Participant under any Right theretofore granted without such Participant's
consent, or which without the approval of the shareholders would:
(a) except as provided in Article 9, materially increase the total
number of shares of Stock reserved for the purposes of the Plan;
(b) materially increase the benefits accruing to Participants or
Eligible Persons under the Plan; or
(c) materially modify the requirements for eligibility under the
Plan.
The Administrator may amend the terms of any award theretofore granted,
prospectively or retroactively, but, subject to Article 3, no such amendment
shall impair the rights of any holder without his or her consent.
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ARTICLE 11
General Provisions
Section 11.1 General Restrictions.
(a) No View to Distribute. The Administrator may require each person
acquiring shares of Stock pursuant to the Plan to represent to and agree with
the Company in writing that such person is acquiring the shares without a view
towards distribution thereof. The certificates for such shares may include any
legend which the Administrator deems appropriate to reflect any restrictions on
transfer.
(b) Legends. All certificates for shares of Stock delivered under
the Plan shall be subject to such stop transfer orders and other restrictions as
the Administrator may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed and any applicable federal or state securities
laws, and the Administrator may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
Section 11.2 Other Compensation Arrangements. Nothing contained in this
Plan shall prevent the Board from adopting other or additional compensation
arrangements, subject to shareholder approval if such approval is required; and
such arrangements may be either generally applicable or applicable only in
specific cases.
Section 11.3 Disqualifying Dispositions; Withholding Taxes.
(a) Disqualifying Disposition. Any Participant who shall make a
"disposition" (as defined in the Code) of all or any portion of an Incentive
Stock Option within two years from the date of grant of such Incentive Stock
Option or within one year after the issuance of the shares of Stock acquired
upon exercise of such Incentive Stock Option, shall be required to immediately
advise the Company in writing as to the occurrence of the sale and the price
realized upon the sale of such shares of Stock, and to maintain all such shares
of Stock in his or her name so long as he or she maintains beneficial ownership
of such shares of Stock.
(b) Withholding Required. Each Participant shall, no later than the
date as of which the value derived from a Right first becomes includable in the
gross income of the Participant for income tax purposes, pay to the Company, or
make arrangements satisfactory to the Administrator regarding payment of, any
federal, state or local taxes of any kind required by law to be withheld with
respect to the Right or its exercise. The obligations of the Company under the
Plan shall be conditioned upon such payment or arrangements and the Participant
shall, to the extent permitted by law, have the right to request that the
Company deduct any such taxes from any payment of any kind otherwise due to the
Participant.
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(c) Withholding Right. The Administrator may, in its discretion,
grant a Rights holder the right (a "Withholding Right") to elect to make such
payment by irrevocably requiring the Company to withhold from shares issuable
upon exercise of the Right that number of full shares of Common Stock having a
Fair Market Value on the Tax Date (as defined below) equal to the amount (or
portion of the amount) required to be withheld. The Withholding Right may be
granted with respect to all or any portion of the Right.
(d) Exercise of Withholding Right. To exercise a Withholding Right,
the Rights holder must follow the election procedures set forth below, together
with such additional procedures and conditions as may be set forth in the
related Rights agreement or otherwise adopted by the Administrator:
(i) The Rights holder must deliver to the Company his or
her written notice of election (the "Election") to have the Withholding
Right apply to all (or a designated portion) of his or her Right.
(ii) Unless disapproved by the Administrator as provided
in Subsection (iii) below, the Election once made will be irrevocable.
(iii) no Election is valid unless the Administrator
consents to the Election; the Administrator has the right and power, in
its sole discretion, with or without cause or reason therefor, to consent
to the Election, to refuse to consent to the Election, or to disapprove
the Election; and if the Administrator has not consented to the Election
on or prior to the date that the amount of tax to be withheld is, under
applicable federal income tax laws, fixed and determined by the Company
(the "Tax Date"), the Election will be deemed approved.
(iv) If the Rights holder on the date of delivery of the
Election to the Company is a Section 16(b) Person, the following
additional provisions will apply:
(A) the Election cannot be made during the six
calendar month period commencing with the date of the grant of the
Withholding Right (even if the Right to which such Withholding Right
relates has been granted prior to such date); provided, that this
Subsection (A) is not applicable to any Rights holder at any time
subsequent to the death, Disability or Retirement of the Rights
holder;
(B) the Election can only be made on a date which
is six calendar months or more prior to the Tax Date; and
(C) notwithstanding any other provision of this
Section 11.3(d)(iv), no Section 16(b) Person shall have the right to
make any Election prior
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to the time that the Company has been subject to the reporting
requirements of Section 13(a) of the Exchange Act for at least a
year and has filed all reports and statements required to be filed
pursuant to that Section for that year.
(e) Effect. If the Administrator consents to an Election of a
Withholding Right:
(i) Upon the exercise of the Right (or any portion
thereof) to which the Withholding Right relates, the Company will withhold
from the shares otherwise issuable that number of full shares of Stock
having an actual Fair Market Value equal to the amount (or portion of the
amount, as applicable) required to be withheld under applicable federal
and/or state income tax laws as a result of the exercise; and
(ii) if the Rights holder is then a Section 16(b) Person
who has made an Election, the related Right may not be exercised, nor may
any shares of Stock issued pursuant thereto be sold, exchanged or
otherwise transferred, if the result of such exercise, or such
transaction, would cause the Tax Date to be less than six full calendar
months following the date of the Election.
Section 11.4 Indemnification. In addition to such other rights of
indemnification as they may have as Directors or members of the Committee, and
to the extent allowed by applicable law, the Administrators shall be indemnified
by the Company against the reasonable expenses, including attorney's fees,
actually incurred in connection with any action, suit or proceeding or in
connection with any appeal therein, to which they or any one of them may be
party by reason of any action taken or failure to act under or in connection
with the Plan or any option granted under the Plan, and against all amounts paid
by them in settlement thereof (provided that the settlement has been approved by
the Company, which approval shall not be unreasonably withheld) or paid by them
in satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Administrator did not act in good faith and in a manner
which such person reasonably believed to be in the best interests of the
Company, and in the case of a criminal proceeding, had no reason to believe that
the conduct complained of was unlawful; provided, however, that within 60 days
after institution of any such action, suit or proceeding, such Administrator
shall, in writing, offer the Company the opportunity at its own expense to
handle and defend such action, suit or proceeding.
Section 11.5 Loans. The Company may make loans to Optionees and Offerees
as the Administrator, in its discretion, may determine in connection with the
exercise of outstanding Stock Options and Purchase Rights granted under the
Plan. Such loans shall (i) be evidenced by promissory notes entered into by the
holders in favor of the Company; (ii) be subject to the terms and conditions set
forth in this Section 11.5 and such other terms and conditions, not inconsistent
with the Plan, as the Administrator shall determine; and (iii) bear interest, if
any, at such rate as the Administrator shall determine. In no event may the
principal amount of any such loan exceed
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the Exercise Price or the Purchase Price less the par value of the shares of
Stock covered by the Stock Option or Purchase Right, or portion thereof,
exercised by the Optionee or Offeree. The initial term of the loan, the schedule
of payments of principal and interest under the loan, the extent to which the
loan is to be with or without recourse against the holder with respect to
principal and applicable interest and the conditions upon which the loan will
become payable in the event of the holder's termination of employment shall be
determined by the Administrator; provided, however, that the term of the loan,
including extensions, shall not exceed 10 years. Unless the Administrator
determines otherwise, when a loan shall have been made, shares of Stock having a
Fair Market Value at least equal to the principal amount of the loan shall be
pledged by the holder to the Company as security for payment of the unpaid
balance of the loan and such pledge shall be evidenced by a pledge agreement,
the terms of which shall be determined by the Administrator, in its discretion;
provided, however, that each loan shall comply with all applicable laws,
regulations and rules of the Board of Governors of the Federal Reserve System
and any other governmental agency having jurisdiction.
Section 11.6 Special Terminating Events. If a Special Terminating Event
occurs, all Rights theretofore granted to such Rights holder may, unless earlier
terminated in accordance with their terms, be exercised by the Rights holder or
by his or her estate or by a person who acquired the right to exercise such
Right by bequest or inheritance or otherwise by reason of the death or
Disability of the Rights holder, at any time within one year after the date of
the Special Terminating Event. Notwithstanding the foregoing, an Incentive Stock
Option shall only be exercisable at any time within three months after the date
of Retirement or termination of employment of an Optionee.
Section 11.7 Termination of Employment. Except as provided in this Section
11.7, no Right may be exercised unless the Right holder is then a Director of
the Company, or in the employ of the Company or any Parent or Subsidiary, or
rendering services as a consultant to the Company or any Parent or Subsidiary,
and unless he or she has remained continuously so employed or engaged since the
Date of Grant. If the employment or services of a Right holder shall terminate
(other than by reason of a Special Terminating Event), all Rights previously
granted to the Right holder which are exercisable at the time of such
termination may be exercised for the period ending 90 days after such
termination, unless otherwise provided in the Stock Option Agreement or Stock
Purchase Agreement; provided, however, that no Right may be exercised following
the date of its expiration. Nothing in the Plan or in any Right granted pursuant
to the Plan shall confer upon an employee any right to continue in the employ of
the Company or any Parent or Subsidiary or interfere in any way with the right
of the Company or any Parent or Subsidiary to terminate such employment at any
time.
Section 11.8 Non-Transferability of Rights. Each Stock Option Agreement
and Stock Purchase Agreement shall provide that the Rights granted under the
Plan shall not be transferable otherwise than by will or by the laws of descent
and distribution, and the Rights may be exercised,
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during the lifetime of the Rights holder, only by the Rights holder or by his or
her guardian or legal representative.
Section 11.9 Regulatory Matters. Each Stock Option Agreement and Stock
Purchase Agreement shall provide that no shares shall be purchased or sold
thereunder unless and until (i) any then applicable requirements of state or
federal laws and regulatory agencies shall have been fully complied with to the
satisfaction of the Company and its counsel; and (ii) if required to do so by
the Company, the Optionee or Offeree shall have executed and delivered to the
Company a letter of investment intent in such form and containing such
provisions as the Board or Committee may require.
Section 11.10 Recapitalizations. Each Stock Option Agreement and Stock
Purchase Agreement shall contain provisions required to reflect the provisions
of Article 8.
Section 11.11 Delivery. Upon exercise of a Right granted under this Plan,
the Company shall issue Stock or pay any amounts due within a reasonable period
of time thereafter. Subject to any statutory obligations the Company may
otherwise have, for purposes of this Plan, thirty days shall be considered a
reasonable period of time.
Section 11.12 Other Provisions. The Stock Option Agreements and Stock
Purchase Agreements authorized under the Plan may contain such other provisions
not inconsistent with this Plan, including, without limitation, restrictions
upon the exercise of the Rights, as the Administrator may deem advisable.
ARTICLE 12
Effective Date of Plan
The Plan shall become effective on the date on which the Plan is adopted
by the Board, subject to approval by the Company's shareholders, which approval
must be obtained within one year from the date the Plan is adopted by the Board.
ARTICLE 13
Term of Plan
No Right shall be granted pursuant to the Plan on or after December 31,
2007, but Rights theretofore granted may extend beyond that date.
ARTICLE 14
Information to Rights Holders
The Company will cause a report to be sent to each Rights holder not later
than 120 days after the end of each fiscal year. Such report shall consist of
the financial statements of the
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Company for such fiscal year and shall include such other information as is
provided by the Company to its shareholders.
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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 DVD Express, Inc., a California
corporation (the "Company"), and the officer, director, employee or consultant
("Optionee") named in the Certificate.
Pursuant to the DVD Express, 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, par value $.01 per share (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 Paragraphs 3(b), 5, 7(c) and
7(d) 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.
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:
(a) written notice of exercise in form and substance identical
to Exhibit "A" attached to this Option Agreement stating the number of shares of
Common Stock then being purchased (the "Purchased Shares"); and
(b) 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 Administrator
of the Plan, by transfer to the Company of issued and outstanding shares of
Common Stock, 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 of such shares shall be determined
as follows: (i) if the Stock is listed on an exchange or exchanges, or admitted
for trading in a market system which provides last sale data under Rule 11Aa3-1
of the General Rules and Regulations of the Securities and Exchange Commission
under the Securities and Exchange Act of 1934, as amended (a "Market System"),
the last reported sales price per share on the last business day prior to such
date on the principal exchange on which it is traded, or in such a Market
System, as applicable, or if no sale was made on such day on such principal
exchange or in such a Market System, as applicable, the last reported sales
price per share on the most recent day prior to such date on which a sale was
reported on such exchange or such Market System, as applicable; or (ii) if the
Common Stock is not then traded on an exchange or in such a Market System, the
average of the closing bid and asked prices per share for the Common Stock in
the over-the-counter market as quoted on NASDAQ on the day prior to such date;
or (iii) if the Common Stock is not listed on an exchange or quoted on NASDAQ,
an amount determined in good faith by the Administrator.
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 the preceding paragraph.
5. Termination of Employment.
(a) If Optionee shall cease to be an officer or employee of
the Company or, any Subsidiary or Parent of the Company for any reason other
than death or permanent disability (a "Terminating Event"), Optionee shall have
the right, subject to the provisions of Paragraph 5(c) and (d) below, to
exercise the Option at any time following such Terminating Event until the
earlier to occur of (x) 90 days following the date of such Terminating Event and
(y) the expiration of the term of this Option as set forth in Paragraph 2 of
this Option Agreement. The Option may be exercised following a Terminating Event
only to the extent exercisable as of the date of the Terminating Event. To the
extent unexercised at
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the end of the period referred to above, the Option shall terminate. The
Administrator, or a committee thereof, 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, by reason of death or permanent disability (a "Special
Terminating Event"), Optionee shall cease to be an officer, director, employee
or consultant of the Company or any Subsidiary or Parent of the Company, then
Optionee, Optionee's executors or administrators or any person or persons
acquiring the Option directly from Optionee by bequest or inheritance, shall,
subject to the provisions of Paragraph 5(c) below, have the right to exercise
the Option at any time following such Special Terminating Event until the
earlier to occur of (x) 12 months following the date of such Special Terminating
Event and (y) the expiration of the term of this Option as set forth in
Paragraph 2 of this Option Agreement. The Option may be exercised following a
Special Terminating Event only to the extent exercisable at the date of the
Special Terminating Event. To the extent unexercised at the end of the period
referred to above, the Option shall terminate.
(c) Notwithstanding any other provision of this Option
Agreement, following the occurrence of a Terminating Event or a Special
Terminating Event, the Company shall have the right to repurchase (the
"Repurchase Right") all or any portion of the Shares purchased by Optionee upon
the exercise of the Option, as well as any unexercised Options which Optionee
has the right to exercise at the time of termination. Following the occurrence
of a Terminating Event (which does not result from the Company's termination of
Optionee's employment "for cause") or a Special Terminating Event, the
Repurchase Right shall be exercisable at a price equal to the Fair Market Value
of such Shares or, in the case of unexercised options, the Fair Market Value of
the Shares underlying such unexercised options less the exercise price which
would be payable upon the exercise of such unexercised options. Following the
occurrence of a Terminating Event which does result from the Company's
termination of Optionee's employment "for cause," the Repurchase Right shall be
exercisable as to all or any portion of the Shares purchased by Optionee upon
the exercise of the Option, as well as any unexercised Options which Optionee
has the right to exercise at the time of termination, at a price equal to the
initial exercise price of such Shares or, in the case of unexercised options,
the initial exercise price of the Shares underlying such unexercised options
less the exercise price which would be payable upon the exercise of such
unexercised options. Fair Market Value shall be determined by the Administrator
on the basis of the definition of Fair Market Value set forth in Article 2 of
the Plan. To the extent that the Repurchase Right is exercisable at the initial
exercise price of the Shares or the Shares underlying unexercised options, the
exercise price shall become Fair Market Value as to 20% of such Shares which
were originally subject to this Option Agreement on each of the first five
anniversaries of the date of this Option Agreement.
(d) If Optionee shall be terminated "for cause" by the
Company, any Subsidiary or any Parent, Optionee shall have the right to exercise
the Option at any time within 30 days after such termination of employment and
prior to the date of termination of the Option under Paragraph 2 of this Option
Agreement with respect to all Shares with respect to
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which the Option was exercisable on the date his employment terminated as to
which the Option had not previously been exercised.
(e) For purposes of this Option Agreement, "cause" shall mean:
(i) with respect to Optionees of the Company:
(A) the failure or refusal by Optionee to perform
his duties to the Company; or
(B) Optionee's willful disobedience of any orders
or directives of the Board or any officers thereof acting under the authority
thereof or Optionee'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 Optionee 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 Optionee 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
(E) the committing by the Optionee of any fraud,
theft, embezzlement or other dishonest act against the Company; or
(F) the determination by the Board of Directors of
the Company, in good faith and in the exercise of reasonable discretion, that
Optionee is not competent to perform his duties of employment; and
(ii) with respect to consultants, any material breach of
their consulting agreement with the Company.
(A) For purposes of this Option Agreement,
"permanent disability" shall mean permanent and total disability for a period
longer than six months as defined by the Administrator. 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 Administrator of the Plan
may from time to time require.
6. Restrictions on Purchased Shares.
None of the Purchased Shares shall be transferred (with or
without consideration), sold, offered for sale, assigned, pledged, hypothecated
or otherwise disposed of (each a "Transfer") 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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(a) The Company has declined to exercise the right of first
refusal provided for in Paragraph 8 hereof;
(b) the Purchased Shares are Transferred pursuant to and in
conformity with (i) (x) an effective registration statement filed with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Act of 1933, as amended (the "Act"), and (y) an exemption from registration
under the Act; and (ii) the securities laws of any state of the United States;
and
(c) Optionee has, prior to the Transfer of such Purchased
Shares, 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 (i) (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 Act as then
in effect, and the Rules and Regulations of the Commission thereunder; and (ii)
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.
Any attempted Transfer which is not in full compliance with this
Paragraph 6 shall be null and void ab initio, and of no force or effect.
7. Adjustments upon Recapitalization.
Subject to any required action by the shareholders of the
Company:
(a) If the outstanding shares of the Common Stock shall be
subdivided into a greater number of shares of the Common Stock, or a dividend in
shares of Common Stock or other securities of the Company convertible into or
exchangeable for shares of the Common Stock (in which latter event the number of
shares of Common Stock issuable upon the conversion or exchange of such
securities shall be deemed to have been distributed) shall be paid in respect of
the shares of Common Stock, the Exercise Price in effect immediately prior to
such subdivision or at the record date of such dividend shall, simultaneously
with the effectiveness of such subdivision or immediately after the record date
of such dividend, be proportionately reduced, and conversely, if the outstanding
shares of Common Stock shall be combined into a smaller number of shares of
Common Stock, the Exercise Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased.
(b) When any adjustment is required to be made in the Exercise
Price, the number of Shares purchasable upon the exercise of the Option shall be
adjusted to that number of Shares determined by (i) multiplying an amount equal
to the number of Shares purchasable on the exercise of the Option immediately
prior to such adjustment by the Exercise Price in effect immediately prior to
such adjustment, and then (ii) dividing that product by the Exercise Price in
effect immediately after such adjustment.
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(c) In the event of: (1) a dissolution or liquidation of the
Company, or any corporate separation or division, including, but not limited to,
a split-up, a split-off or a spin-off, or a 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 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, the Optionee's rights under
this Option Agreement shall be expressly governed by the decisions made by the
Administrator pursuant to Section 9 of the Plan.
(d) To the extent that the foregoing adjustments relate to
stock or securities of the Company, such adjustments shall be made by the
Administrator of the Plan, and its determination shall be final, binding and
conclusive.
(e) The provisions of this Paragraph 7 are intended to be
exclusive, and Optionee shall have no other rights upon the occurrence of any of
the events described in this Paragraph 7.
(f) 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. Right of First Refusal.
Optionee agrees 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 Shares purchased by Optionee
pursuant to this Option Agreement; and in the event Optionee desires to accept a
bona fide third-party offer for any or all of such Shares, the Shares shall
first be offered to the Company upon the same terms and conditions as are set
forth in the bona fide offer.
9. 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 the shares of Common Stock subject to the Option and any
other right or option to purchase Common Stock which was previously granted in
writing to Optionee by the Board (or a committee thereof). By signing this
Option Agreement, except as provided in the immediately preceding sentence,
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.
10. Investment Intent.
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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 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.
11. 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 Securities and Exchange 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.
12. No Rights as Shareholder.
Except as provided in Section 8.1 of the Plan, 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 Paragraph 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.
13. 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 Section 422 of the Code or would alter or impair any rights of
the Optionee under the Option.
14. Withholding.
(a) The Company shall be entitled to require as a condition of
delivery of any Purchased Shares upon exercise of any 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 Administrator, and in accordance
with any rules and procedures from time to time adopted by the Administrator,
Optionee may elect
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to satisfy his or her obligations under Paragraph 13(a) above by (i) directing
the Company to withhold a portion of the Shares otherwise deliverable (or to
tender back to the Company a portion of the Shares issued where the Optionee (a
"Section 16(b) Recipient") is required to report the ownership of the Shares
pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended,
and has not made an election under Section 83(b) of the Code (a "Withholding
Right")); 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
(as determined in accordance with the provisions of Paragraph 4(b) hereof) 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.
(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 Administrator:
(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 Paragraph
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 Administrator as provided
in Subsection (iii) below, the Election once made will be irrevocable; and
(iii) no Election is valid unless the Administrator has
the right and power, in its sole discretion, with or without cause or reason
therefor, to consent to the Election, to refuse to consent to the Election, or
to disapprove the Election; and if the Administrator has not consented to the
Election on or prior to the Tax Date, the Election will be deemed approved.
(iv) if the Optionee on the date of delivery of the
Election to the Company is a Section 16(b) Recipient, the following additional
provisions will apply:
(A) the Election cannot be made during the six
calendar month period commencing with the date of grant of the Withholding Right
(even if the Option to which such Withholding Right relates has been granted
prior to such date); and
(B) the Election must be made any day six calendar
months or more prior to the Tax Date.
(d) To exercise a Withholding Right, the Rights holder must
follow the election procedures set forth below, together with such additional
procedures and conditions as may be set forth in the related Rights agreement or
otherwise adopted by the Administrator:
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(i) The Rights holder must deliver to the Company his or
her written notice of election (the "Election") to have the Withholding Right
apply to all (or a designated portion) of his or her Right.
(ii) Unless disapproved by the Administrator as provided
in Subsection (iii) below, the Election once made will be irrevocable.
(e) Any election under Paragraph 13(b) above must:
(i) be made in writing on or prior to the Tax Date and
specify whether all or a stated percentage of the applicable taxes will be paid
in accordance with Paragraph 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) be irrevocable, once made;
(iii) conform to all rules and procedures from time to
time adopted by the Administrator and be made subject to rejection by the
Administrator for any reason; and
(iv) in the case of a Section 16(b) Recipient:
(A) not be made within six months of the grant of
the Option; and
(B) be made not later than (x) six months less one
day prior to the Tax Date, or (y) in the ten day "window period" beginning on
the third day following the release of the Company's quarterly or annual summary
financial data as described in Rule 16b-3(e) of the Rules and Regulations of the
Securities and Exchange Commission promulgated under the Exchange Act.
15. 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.
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.
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(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:
DVD Express, Inc.
7083 Hollywood Blvd., Suite 307
Los Angeles, CA 90028
(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 such
party in writing to the other party hereto. Any such notice, request, demand or
other communication shall be effective (i) 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 (ii) if given by
any other means, when delivered at the address specified in this subparagraph
(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 stockholders, 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 Stock Options may be exercised during the lifetime of the
Option Holder only by the Option Holder or by his or her guardian or legal
representative.
(e) Market Stand-Off. In the event of an 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,
including the Company's initial public offering, Optionee shall not sell, make
any short sale of, loan, hypothecate, pledge, grant any option for the
repurchase of, or otherwise dispose or Transfer for value or otherwise agree to
engage in any of the foregoing transactions with respect to any shares of Common
Stock 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 (the "Market
Stand-Off"); provided, however, that in no event shall such period exceed one
hundred-eighty (180) days. The Market Stand-Off shall terminate following the
expiration of the two-year period immediately following the effective date of
the Company's initial public offering.
(f) Successors and Assigns. Except to the extent specifically
limited by the terms and provisions of this Option Agreement, this Option
Agreement shall be
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binding upon and inure to the benefit of the parties hereto and their respective
successors, assigns, heirs and personal representatives.
(g) Governing Law. THIS OPTION AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE LAWS OF THE STATE OF CALIFORNIA
APPLICABLE TO CONTRACTS MADE IN, AND TO BE PERFORMED WITHIN, THAT STATE.
(h) Severability. Should any paragraph or any part of a
paragraph within this Option Agreement be rendered void, invalid or
unenforceable by any court of law for any reason, such invalidity or
unenforceability shall not void nor render invalid or unenforceable any other
paragraph or part of a paragraph in this Option Agreement.
(i) Attorney's Fees. In the event that any action, suit or
proceeding is instituted upon any breach of this Option 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.
(j) 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.
(k) 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: DVD Express, Inc.
The undersigned, the holder of the enclosed Stock Option Agreement
(Non- Statutory Stock Option), hereby irrevocably elects to exercise the
purchase rights represented by the Option and to purchase thereunder _________ *
shares of Common Stock of DVD Express, 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>
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 DVD Express, Inc., a California
corporation (the "Company"), and the officer or employee ("Optionee") named
in the Certificate.
Pursuant to the DVD Express, 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, par value $.01 per share (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 Paragraphs 3(b), 5, 7(c) and
7(d) 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.
4. Exercise of Option.
<PAGE>
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:
(a) written notice of exercise in form and substance identical
to Exhibit "A" attached to this Option Agreement stating the number of shares of
Common Stock then being purchased (the "Purchased Shares"); and
(b) 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 Administrator
of the Plan, by transfer to the Company of issued and outstanding shares of
Common Stock, 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 of such shares shall be determined
as follows: (i) if the Stock is listed on an exchange or exchanges, or admitted
for trading in a market system which provides last sale data under Rule 11Aa3-1
of the General Rules and Regulations of the Securities and Exchange Commission
under the Securities and Exchange Act of 1934, as amended (a "Market System"),
the last reported sales price per share on the last business day prior to such
date on the principal exchange on which it is traded, or in such a Market
System, as applicable, or if no sale was made on such day on such principal
exchange or in such a Market System, as applicable, the last reported sales
price per share on the most recent day prior to such date on which a sale was
reported on such exchange or such Market System, as applicable; or (ii) if the
Common Stock is not then traded on an exchange or in such a Market System, the
average of the closing bid and asked prices per share for the Common Stock in
the over-the-counter market as quoted on NASDAQ on the day prior to such date;
or (iii) if the Common Stock is not listed on an exchange or quoted on NASDAQ,
an amount determined in good faith by the Administrator.
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 the preceding paragraph.
5. Termination of Employment.
(a) If Optionee shall cease to be an officer or employee of
the Company or, any Subsidiary or Parent of the Company for any reason other
than death or permanent disability (a "Terminating Event"), Optionee shall have
the right, subject to the provisions of Paragraph 5(c) and (d) below, to
exercise the Option at any time following such Terminating Event until the
earlier to occur of (x) 90 days following the date of such Terminating Event and
(y) the expiration of the term of this Option as set forth in Paragraph 2 of
this Option Agreement. The Option may be exercised following a Terminating Event
only to the extent exercisable as of the date of the Terminating Event. To the
extent unexercised at the end of the period referred to above, the Option shall
terminate. The Administrator, or a committee thereof, in its sole and absolute
discretion, shall determine whether or not
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<PAGE>
authorized leaves of absence shall constitute termination of employment for
purposes of this Option Agreement.
(b) If, by reason of death or permanent disability (a "Special
Terminating Event"), Optionee shall cease to be an officer, director, employee
or consultant of the Company or any Subsidiary or Parent of the Company, then
Optionee, Optionee's executors or administrators or any person or persons
acquiring the Option directly from Optionee by bequest or inheritance, shall,
subject to the provisions of Paragraph 5(c) below, have the right to exercise
the Option at any time following such Special Terminating Event until the
earlier to occur of (x) 12 months following the date of such Special Terminating
Event and (y) the expiration of the term of this Option as set forth in
Paragraph 2 of this Option Agreement. The Option may be exercised following a
Special Terminating Event only to the extent exercisable at the date of the
Special Terminating Event. To the extent unexercised at the end of the period
referred to above, the Option shall terminate.
(c) Notwithstanding any other provision of this Option
Agreement, following the occurrence of a Terminating Event or a Special
Terminating Event, the Company shall have the right to repurchase (the
"Repurchase Right") all or any portion of the Shares purchased by Optionee upon
the exercise of the Option, as well as any unexercised Options which Optionee
has the right to exercise at the time of termination. Following the occurrence
of a Terminating Event (which does not result from the Company's termination of
Optionee's employment "for cause") or a Special Terminating Event, the
Repurchase Right shall be exercisable at a price equal to the Fair Market Value
of such Shares or, in the case of unexercised options, the Fair Market Value of
the Shares underlying such unexercised options less the exercise price which
would be payable upon the exercise of such unexercised options. Following the
occurrence of a Terminating Event which does result from the Company's
termination of Optionee's employment "for cause," the Repurchase Right shall be
exercisable as to all or any portion of the Shares purchased by Optionee upon
the exercise of the Option, as well as any unexercised Options which Optionee
has the right to exercise at the time of termination, at a price equal to the
initial exercise price of such Shares or, in the case of unexercised options,
the initial exercise price of the Shares underlying such unexercised options
less the exercise price which would be payable upon the exercise of such
unexercised options. Fair Market Value shall be determined by the Administrator
on the basis of the definition of Fair Market Value set forth in Article 2 of
the Plan. To the extent that the Repurchase Right is exercisable at the initial
exercise price of the Shares or the Shares underlying unexercised options, the
exercise price shall become Fair Market Value as to 20% of such Shares which
were originally subject to this Option Agreement on each of the first five
anniversaries of the date of this Option Agreement.
(d) If Optionee shall be terminated "for cause" by the
Company, any Subsidiary or any Parent, Optionee shall have the right to exercise
the Option at any time within 30 days after such termination of employment and
prior to the date of termination of the Option under Paragraph 2 of this Option
Agreement with respect to all Shares with respect to which the Option was
exercisable on the date his employment terminated as to which the Option had not
previously been exercised.
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<PAGE>
(e) For purposes of this Option Agreement, "cause" shall mean
(i) the failure or refusal by Optionee to perform his
duties to the Company; or
(ii) Optionee's willful disobedience of any orders or
directives of the Board or any officers thereof acting under the authority
thereof or Optionee'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 Optionee 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 Optionee 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 the Optionee 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 Optionee is not competent to
perform his duties of employment.
(f) For purposes of this Option Agreement, "permanent
disability" shall mean permanent and total disability as defined by the
Administrator. 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 Administrator of the Plan may from time to time require.
6. Restrictions on Purchased Shares.
None of the Purchased Shares shall be transferred (with or
without consideration), sold, offered for sale, assigned, pledged, hypothecated
or otherwise disposed of (each a "Transfer") 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:
(a) the Company has declined to exercise the right of first
refusal provided for in Paragraph 8 hereof;
(b) the Purchased Shares are Transferred pursuant to and in
conformity with (i) (x) an effective registration statement filed with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Act of 1933, as
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<PAGE>
amended (the "Act"), or (y) an exemption from registration under the Act, and
(ii) the securities laws of any state of the United States; and
(c) 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 (i) (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 Act as then in effect, and the Rules and Regulations of
the Commission thereunder, and (ii) 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.
Any attempted Transfer which is not in full compliance with
this Paragraph 6 shall be null and void ab initio, and of no force or effect.
7. Adjustments upon Recapitalization.
Subject to any required action by the shareholders of the
Company:
(a) If the outstanding shares of the Common Stock shall be
subdivided into a greater number of shares of the Common Stock, or a dividend in
shares of Common Stock or other securities of the Company convertible into or
exchangeable for shares of the Common Stock (in which latter event the number of
shares of Common Stock issuable upon the conversion or exchange of such
securities shall be deemed to have been distributed) shall be paid in respect of
the shares of Common Stock, the Exercise Price in effect immediately prior to
such subdivision or at the record date of such dividend shall, simultaneously
with the effectiveness of such subdivision or immediately after the record date
of such dividend, be proportionately reduced, and conversely, if the outstanding
shares of Common Stock shall be combined into a smaller number of shares of
Common Stock, the Exercise Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased.
(b) When any adjustment is required to be made in the Exercise
Price, the number of Shares purchasable upon the exercise of the Option shall be
adjusted to that number of Shares determined by (i) multiplying an amount equal
to the number of Shares purchasable on the exercise of the Option immediately
prior to such adjustment by the Exercise Price in effect immediately prior to
such adjustment, and then (ii) dividing that product by the Exercise Price in
effect immediately after such adjustment.
(c) In the event of: (1) a dissolution or liquidation of the
Company, or any corporate separation or division, including, but not limited to,
a split-up, a split-off or a spin-off, or a 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 Stock outstanding immediately preceding
the merger are converted by virtue of the merger into other property,
5
<PAGE>
whether in the form of securities, cash or otherwise, then, the Optionee's
rights under this Option Agreement shall be expressly governed by the decisions
made by the Administrator pursuant to Section 9 of the Plan.
(d) To the extent that the foregoing adjustments relate to
stock or securities of the Company, such adjustments shall be made by the
Administrator of the Plan, and its determination shall be final, binding and
conclusive.
(e) The provisions of this Paragraph 7 are intended to be
exclusive, and Optionee shall have no other rights upon the occurrence of any of
the events described in this Paragraph 7.
(f) 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. Right of First Refusal.
Optionee agrees 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 Shares purchased by Optionee
pursuant to this Option Agreement; and in the event Optionee desires to accept a
bona fide third-party offer for any or all of such Shares, the Shares shall
first be offered to the Company upon the same terms and conditions as are set
forth in the bona fide offer.
9. 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 the shares of Common Stock subject to the Option and any
other right or option to purchase Common Stock which was previously granted in
writing to Optionee by the Board (or a committee thereof). By signing this
Option Agreement, except as provided in the immediately preceding sentence,
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.
10. 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 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.
11. Legend on Stock Certificates.
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<PAGE>
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.
12. No Rights as Shareholder.
Except as provided in Section 8.1 of the Plan, 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 Paragraph 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.
13. 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 Section 422 of the Code or would alter or impair any rights of
the Optionee under the Option.
14. Disqualifying Disposition; 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 any 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.
(c) With the consent of the Administrator, and in accordance
with any rules and procedures from time to time adopted by the Administrator,
Optionee may elect to satisfy his or her obligations under Paragraph 13(a) above
by (i) directing the Company to
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<PAGE>
withhold a portion of the Shares otherwise deliverable (or to tender back to the
Company a portion of the Shares issued where the Optionee (a "Section 16(b)
Recipient") is required to report the ownership of the Shares pursuant to
Section 16(a) of the Securities Exchange Act of 1934, as amended, and has not
made an election under Section 83(b) of the Code (a "Withholding Right")); 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 (as determined in
accordance with the provisions of Paragraph 4(b) hereof) 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.
(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 Administrator:
(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 Paragraph
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 Administrator as provided
in Subsection (iii) below, the Election once made will be irrevocable; and
(iii) no Election is valid unless the Administrator has
the right and power, in its sole discretion, with or without cause or reason
therefor, to consent to the Election, to refuse to consent to the Election, or
to disapprove the Election; and if the Administrator has not consented to the
Election on or prior to the Tax Date, the Election will be deemed approved.
(iv) If the Optionee on the date of delivery of the
Election to the Company is a Section 16(b) Recipient, the following additional
provisions will apply:
(A) the Election cannot be made during the six
calendar month period commencing with the date of grant of the Withholding Right
(even if the Option to which such Withholding Right relates has been granted
prior to such date); and
(B) the Election must be made any day six calendar
months or more prior to the Tax Date.
(e) To exercise a Withholding Right, the Rights holder must
follow the election procedures set forth below, together with such additional
procedures and conditions as may be set forth in the related Rights agreement or
otherwise adopted by the Administrator:
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<PAGE>
(i) The Rights holder must deliver to the Company his or
her written notice of election (the "Election") to have the Withholding Right
apply to all (or a designated portion) of his or her Right.
(ii) Unless disapproved by the Administrator as provided
in Subsection (iii) below, the Election once made will be irrevocable.
(f) Any election under Paragraph 13(b) above must:
(i) be made in writing on or prior to the Tax Date and
specify whether all or a stated percentage of the applicable taxes will be paid
in accordance with Paragraph 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) be irrevocable, once made;
(iii) conform to all rules and procedures from time to
time adopted by the Administrator and be made subject to rejection by the
Administrator for any reason; and
(iv) in the case of a Section 16(b) Recipient:
(A) not be made within six months of the grant of
the Option; and
(B) be made not later than (x) six months less one
day prior to the Tax Date, or (y) in the ten day "window period" beginning on
the third day following the release of the Company's quarterly or annual summary
financial data as described in Rule 16b-3(e) of the Rules and Regulations of the
Securities and Exchange Commission promulgated under the Exchange Act.
15. 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.
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:
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(i) If to the Company, to:
DVD Express, Inc.
7083 Hollywood Blvd., Suite 307
Los Angeles, CA 90028
(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 such
party in writing to the other party hereto. Any such notice, request, demand or
other communication shall be effective (i) 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 (ii) if given by
any other means, when delivered at the address specified in this subparagraph
(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 stockholders, with or without
consideration.
(d) Option Non-Transferable. Optionee may not sell, transfer,
assign or otherwise dispose of this Option except by will or the laws of descent
and distribution, and Stock Options may be exercised during the lifetime of the
Option Holder only by the Optionee or by his or her guardian or legal
representative.
(e) Market Stand-Off. In the event of an 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,
including the Company's initial public offering, Optionee shall not sell, make
any short sale of, loan, hypothecate, pledge, grant any option for the
repurchase of, or otherwise dispose or Transfer for value or otherwise agree to
engage in any of the foregoing transactions with respect to any shares of Common
Stock 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 (the "Market
Stand-Off"); provided, however, that in no event shall such period exceed one
hundred-eighty (180) days. The Market Stand-Off shall terminate following the
expiration of the two-year period immediately following the effective date of
the Company's initial public offering.
(f) Successors and Assigns. Except to the extent specifically
limited by the terms and provisions of this Option Agreement, this Option
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors, assigns, heirs and personal representatives.
(g) Governing Law. THIS OPTION AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
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STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE IN, AND TO BE PERFORMED WITHIN,
THAT STATE.
(h) Severability. Should any paragraph or any part of a
paragraph within this Option Security Agreement be rendered void, invalid or
unenforceable by any Court of law for any reason, such invalidity or
unenforceability shall not void or render invalid or unenforceable any other
paragraph or part of a paragraph in this Option Agreement.
(i) Attorney's Fees. In the event that any action, suit or
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.
(j) 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.
(k) 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.
11
<PAGE>
Exhibit "A"
NOTICE OF EXERCISE
(To be signed only upon exercise of the Option)
TO: DVD Express, 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 DVD Express, 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>
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this ______ day
of _________, 1999, by and between DVD EXPRESS, INC., a Delaware corporation
(the "Company"), and _________________ ("Indemnitee").
RECITALS
A. The Company and Indemnitee recognize the increasing difficulty in
obtaining liability insurance for directors, officers, employees and agents, the
significant increases in the cost of such insurance and the general reductions
in the coverage of such insurance.
B. The Company and Indemnitee further 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.
C. 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.
D. 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. 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 of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while a
director, officer, employee or agent, or by reason of 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), judgments, fines and amounts
paid in settlement (if such settlement is approved in advance by the Company)
actually and reasonably incurred by Indemnitee in connection with such
1
<PAGE>
action, suit or proceeding if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. 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 Indemnitee did not act in good faith and in a manner which
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that Indemnitee's conduct was unlawful.
(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 to
procure a judgment in its favor by reason of the fact that Indemnitee is or was
a director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while a
director, officer, employee or agent, or by reason of 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, to the fullest extent permitted by
law, amounts paid in settlement, in each case to the extent actually and
reasonably incurred by Indemnitee in connection with the defense or settlement
of such action or suit (i) if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company and its stockholders, except that no indemnification shall be made
in respect of any claim, issue or matter as to which Indemnitee shall have been
adjudged to be liable to the Company in the performance of Indemnitee's duty to
the Company and its stockholders unless and only to the extent that the court in
which such action or suit is or was pending shall determine upon application
that, in view of all the circumstances of the case, Indemnitee is fairly and
reasonably entitled to indemnity for expenses and then only to the extent that
the court shall determine; (ii) if Indemnitee is a director, to the extent that
the action or contemplated action seeks monetary damages for breach of
Indemnitee's duties to the Company and its stockholders in circumstances under
which Indmnitee's personal liability therefor has been eliminated as a result of
the provisions of Section 102(b)(7) of the Delaware General Corporation Law; or
(iii) if Indemnitee is an agent other than a director, to the extent that, were
Indemnitee a director, Indemnitee would have the right to be indemnified under
Section 1(b)(ii), above; and in the case of Section 1(b)(ii) and 1(b)(iii)
above, indemnification shall include, to the extent not prohibited by law,
indemnification against all judgments, fines and amounts paid in settlement
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding.
(c) MANDATORY PAYMENT OF EXPENSES. To the extent that
Indemnitee has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Subsection (a) or (b) of this Section
1 or the 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 and reasonably incurred by
Indemnitee in connection therewith.
2
<PAGE>
(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 and reasonably incurred by Indemnitee in
connection therewith.
2. EXPENSES; INDEMNIFICATION PROCEDURE.
(e) ADVANCEMENT OF EXPENSES. The Company shall advance all
reasonable 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 Section 1(a) or (b)
hereof (but not amounts actually paid in settlement of any such action, suit or
proceeding). 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
45 days following delivery of a written request therefor by Indemnitee to the
Company.
(f) 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 13 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. In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
(g) PROCEDURE. Any indemnification and advances provided
for in Section 1 and this Section 2 shall be made no later than 45 days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within 45 days after a written request for payment thereof 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 12 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. Indemnitee shall be entitled to receive
interim payments of expenses pursuant to Section 2(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, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) 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 applicable law, nor an actual
determination by the Company
3
<PAGE>
(including its Board of Directors, any committee or subgroup of the Board of
Directors, independent legal counsel, or its stockholders) that Indemnitee has
not met such applicable standard of conduct, shall create a presumption that
Indemnitee has or has not met the applicable standard of conduct.
(h) NOTICE TO INSURERS. If, at the time of the receipt of
a notice of a claim pursuant to Section 2(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.
(i) SELECTION OF COUNSEL. In the event the Company shall
be obligated under Section 2(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. 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.
3. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
(j) SCOPE. Notwithstanding any other provision of this
Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest
extent permitted by law, notwithstanding that such indemnification is not
specifically authorized by the other provisions of this Agreement, the Company's
Certificate of Incorporation, the Company's Bylaws or by statute. In the event
of any change in any applicable law, statute or rule which narrows the right of
a Delaware corporation to indemnify a member of its board of directors or its
officers, employees or agents, 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.
(k) NONEXCLUSIVITY. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which Indemnitee may be
entitled under the Company's Certificate of Incorporation, its Bylaws, any
agreement, any vote of stockholders or disinterested Directors, the Corporation
Law of the State of Delaware 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 for any action
4
<PAGE>
taken or not taken while serving in an indemnified capacity even though she may
have ceased to serve in such capacity at the time of any action, suit or other
covered proceeding.
4. 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 or reasonably
incurred by her 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.
5. MUTUAL ACKNOWLEDGEMENT. Both the Company and Indemnitee
acknowledge that in certain instances, Federal law or applicable public policy
may prohibit the Company from indemnifying its directors, officers, employees
and/or agents 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 public policy to indemnify Indemnitee.
6. 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.
7. 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 court
order, to perform its obligations under this Agreement shall not constitute a
breach of this Agreement. The provisions of this Agreement shall be severable
as provided in this Section 7. 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 Agreement that shall not
5
<PAGE>
have been invalidated, and the balance of this Agreement not so invalidated
shall be enforceable in accordance with its terms.
8. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(l) 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 as
required under Section 145 of the Delaware General Corporation Law, but such
indemnification or advancement of expenses may be provided by the Company in
specific cases if the Board of Directors has approved the initiation or bringing
of such suit;
(m) LACK OF GOOD FAITH. To indemnify Indemnitee for any
expenses incurred by the 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 proceeding was not made in good faith or was frivolous;
(n) INSURED CLAIMS. To indemnify Indemnitee for expenses
or liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance or other policy of insurance
maintained by the Company;
(o) 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;
(p) UNLAWFUL CLAIMS. To indemnify Indemnitee in any manner
which is contrary to public policy or which a court of competent jurisdiction
has finally determined to be unlawful;
(q) FAILURE TO SETTLE PROCEEDING. To indemnify Indemnitee
for liabilities in excess of the total amount at which settlement reasonably
could have been made, or for any cost and/or expenses incurred by Indemnitee
following the time such settlement reasonably could have been effected, if
Indemnitee shall have unreasonably delayed, refused or failed to enter into a
settlement of any action, suit or proceeding (or investigation or appeal
thereof) recommended in good faith, in writing, by the Company; or
(r) 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.
9. CONSTRUCTION OF CERTAIN PHRASES.
6
<PAGE>
(s) 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.
(t) 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; and if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interest of the
Company" as referred to in this Agreement.
10. COUNTERPARTS. This Agreement may be executed in one or more
counter-parts, each of which shall constitute an original.
11. 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.
12. 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 was not made in good faith or was 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 was made in bad faith or was frivolous.
13. 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
7
<PAGE>
certified or registered mail with postage prepaid, on the third business day
after the date postmarked. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
14. 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.
15. CHOICE OF LAW. This Agreement shall be governed by and its
provisions construed in accordance with the laws of the State of Delaware.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
DVD EXPRESS, INC.,
as the Company
----------------------------------
Name: Michael J. Dubelko
Title: President
Notice Address:
DVD Express, Inc.
7083 Hollywood Boulevard
Los Angeles, California 90028
AGREED TO AND ACCEPTED:
INDEMNITEE:
- ----------------------------
[Name]
Notice Address:
- ----------------------------
- ----------------------------
- ----------------------------
<PAGE>
OFFICE SPACE LEASE
BETWEEN
JAHRA INVESTMENTS, N.V.
AS LANDLORD
AND
DVD EXPRESS, INC.,
A CALIFORNIA CORPORATION
AS TENANT
LA REINA BUILDING
7083 HOLLYWOOD BOULEVARD
HOLLYWOOD, CALIFORNIA
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I. PREMISES....................................................... 3
SECTION 1.1 LEASED PREMISES................................................ 3
SECTION 1.2 ACCEPTANCE OF PREMISES......................................... 3
SECTION 1.3 USE RESERVATIONS............................................... 3
SECTION 1.4 BUILDING NAME AND ADDRESS...................................... 3
ARTICLE II. TERM........................................................... 3
SECTION 2.1 GENERAL........................................................ 3
SECTION 2.2 TENDER OF POSSESSION BY LANDLORD............................... 3
ARTICLE III. RENT AND SECURITY DEPOSIT...................................... 4
SECTION 3.1 BASIC ANNUAL RENT.............................................. 4
SECTION 3.2 SECURITY DEPOSIT............................................... 4
SECTION 3.3 OPERATING EXPENSES............................................. 4
ARTICLE IV. USES........................................................... 6
SECTION 4.1 USE............................................................ 6
SECTION 4.2 PROHIBITION AGAINST SOLICITATION AND OTHER ACTIVITIES WITHOUT
THE PERMISSION OF LANDLORD..................................... 7
SECTION 4.3 EXCLUSIVE CONTROL OVER COMMON AREA............................. 7
SECTION 4.4 SIGNS.......................................................... 7
ARTICLE V. SERVICES....................................................... 7
SECTION 5.1 UTILITIES AND SERVICES......................................... 7
SECTION 5.2 OPERATION AND MAINTENANCE OF COMMON FACILITIES................. 8
SECTION 5.3 USE OF COMMON FACILITIES....................................... 9
SECTION 5.4 PARKING........................................................ 9
SECTION 5.5 SECURITY CARDS................................................. 9
ARTICLE VI. MAINTENANCE OF THE PREMISES.................................... 10
SECTION 6.1 TENANT'S MAINTENANCE AND REPAIR................................ 10
SECTION 6.2 LANDLORD'S MAINTENANCE AND REPAIR.............................. 10
SECTION 6.3 ALTERATIONS BY LANDLORD........................................ 10
SECTION 6.4 TENANT'S ALTERATIONS........................................... 10
SECTION 6.5 MECHANIC'S LIENS............................................... 11
SECTION 6.6 ENTRY AND INSPECTION........................................... 11
ARTICLE VII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY..................... 11
SECTION 7.1 TAXES ON TENANT'S PROPERTY..................................... 11
ARTICLE VIII. ASSIGNMENT AND SUBLETTING...................................... 12
SECTION 8.1 PROHIBITION AND CONSENT........................................ 12
SECTION 8.2 TRANSFER FEE................................................... 13
ARTICLE IX. INSURANCE AND INDEMNITY........................................ 13
SECTION 9.1 TENANT'S INSURANCE............................................. 13
SECTION 9.2 TENANT'S INDEMNITY............................................. 14
SECTION 9.3 LANDLORD'S INDEMNITY........................................... 14
ARTICLE X. DAMAGE OR DESTRUCTION.......................................... 14
SECTION 10.1 RESTORATION.................................................... 14
SECTION 10.2 LANDLORD'S NON-LIABILITY....................................... 15
SECTION 10.3 TENANT'S WAIVER................................................ 15
ARTICLE XI. EMINENT DOMAIN................................................. 16
ARTICLE XII. SUBORDINATION; ESTOPPEL CERTIFICATE............................ 16
SECTION 12.1 SUBORDINATION.................................................. 16
SECTION 12.2 ESTOPPEL CERTIFICATE........................................... 16
ARTICLE XIII. DEFAULTS AND REMEDIES.......................................... 16
SECTION 13.1 TENANT'S DEFAULTS.............................................. 16
SECTION 13.2 LANDLORD'S REMEDIES............................................ 17
SECTION 13.3 INTEREST ON TENANT'S OBLIGATIONS; LATE PAYMENTS................ 18
SECTION 13.4 RIGHT OF LANDLORD TO PERFORM................................... 18
SECTION 13.5 DEFAULT BY LANDLORD............................................ 19
SECTION 13.6 EXPENSES AND LEGAL FEES........................................ 19
SECTION 13.7 REIMBURSEMENT OF CONCESSIONS................................... 19
</TABLE>
-i-
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<TABLE>
<S> <C> <C>
ARTICLE XIV. END OF TERM.................................................... 19
SECTION 14.1 HOLDING OVER................................................... 19
SECTION 14.2 SURRENDER OF PREMISES; REMOVAL OF PROPERTY..................... 19
SECTION 14.3 AFFIXED PROPERTY............................................... 20
ARTICLE XV. NOTICES........................................................ 20
ARTICLE XVI. RULES AND REGULATIONS.......................................... 20
ARTICLE XVII. BROKER'S COMMISSION............................................ 20
ARTICLE XVIII. TRANSFER OF LANDLORD'S INTEREST................................ 20
ARTICLE XIX. INTERPRETATION................................................. 20
SECTION 19.1 GENDER AND NUMBER.............................................. 20
SECTION 19.2 HEADINGS....................................................... 20
ARTICLE XX. EXECUTION AND RECORDING........................................ 21
SECTION 20.1 CORPORATE AUTHORITY............................................ 21
SECTION 20.2 RECORDING...................................................... 21
SECTION 20.3 AMENDMENTS..................................................... 21
ARTICLE XXI. MISCELLANEOUS.................................................. 21
SECTION 21.1 NONDISCLOSURE OF LEASE TERMS................................... 21
SECTION 21.2 FURNISHING OF FINANCIAL STATEMENTS............................. 21
SECTION 21.3 CHANGES REQUESTED BY LENDER.................................... 21
SECTION 21.4 GOVERNMENTAL REQUIREMENTS...................................... 21
SECTION 21.5 COVENANTS AND CONDITIONS....................................... 21
SECTION 21.6 WORK LETTER.................................................... 21
SECTION 21.7 JOINT AND SEVERAL LIABILITY.................................... 21
SECTION 21.8 SUCCESSORS..................................................... 21
SECTION 21.9 TIME OF ESSENCE................................................ 22
SECTION 21.10 CONTROLLING LAW................................................ 22
SECTION 21.11 SEVERABILITY................................................... 22
SECTION 21.12 RELATIONSHIP OF PARTIES........................................ 22
SECTION 21.13 INABILITY TO PERFORM........................................... 22
SECTION 21.14 QUIET ENJOYMENT................................................ 22
SECTION 21.15 HAZARDOUS WASTE AND MATERIALS.................................. 22
SECTION 21.16 ENTIRE AGREEMENT............................................... 22
</TABLE>
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<PAGE>
LA REINA OFFICE BUILDING LEASE
BASIC LEASE PROVISIONS. In the event of any conflict between any Basic Lease
Provision and the balance of this Lease, the latter shall control.
1. TENANT'S NAME: DVD EXPRESS, INC., A CALIFORNIA CORPORATION.
2. PREMISES, including FLOOR, SUITE NO. and RENTABLE AREA: 7083
HOLLYWOOD BOULEVARD, HOLLYWOOD, CALIFORNIA, SUITE 106, CONTAINING
APPROXIMATELY 8,541 RENTABLE SQUARE FEET AND 7,356 USABLE SQUARE FEET ON
THE FIRST (1ST) FLOOR.
3. ESTIMATED COMMENCEMENT: APRIL 1, 1998.
4. LEASE TERM: THREE (3) YEARS.
5. BASIC ANNUAL RENT: Initially $128,115.00 payable at $10,676.25 per month
increased annually by CPI per Section 3.1 below.
6. BASE YEAR: 1998.
7. SPACE PLAN APPROVAL DATE: FEBRUARY 7, 1998.
8. SECURITY DEPOSIT: $21,352.50; payable on execution of Lease.
9. PREPAID RENT: NOT APPLICABLE.
10. BROKER(S): LANDLORD'S BROKER, CB COMMERCIAL PER SEPARATE AGREEMENT:
TENANT'S BROKER: NONE.
11. ADDRESS FOR PAYMENTS AND NOTICES:
TO LANDLORD: Jahra Investments, N.V.
c/o MarGulf Management Co., Inc.
7083 Hollywood Blvd., Suite 304
Hollywood, CA 90028
Telephone No.: (213) 467-7232
TO TENANT: DVD Express, a California corporation
7083 Hollywood Blvd., Suite 100
Hollywood, CA 90028
Telephone No.: (213) 465-1183
12. MINIMUM COVERAGE FOR COMPREHENSIVE GENERAL LIABILITY POLICY:
$2,000,000.00 combined single limit.
13. NUMBER OF PARKING SPACES: UP TO TWENTY (20) UNRESERVED PARKING SPACES
(OPTIONAL).
14. RENT PER PARKING SPACE: $110.00 PER MONTH PER RESERVED SPACE: $77.00
PER MONTH PER UNRESERVED SPACE.
15. ADDENDUM: An Addendum consisting of three (3) numbered paragraphs is
attached to and forms a part of this Lease.
<PAGE>
16. LEASE EXECUTION: In witness whereof the parties hereto have executed
this Lease, consisting of the foregoing provisions and of the Additional
Lease Provisions and Exhibits which follow, as of January 16, 1998.
THIS LEASE SHALL NOT BECOME EFFECTIVE UNTIL EXECUTED BY LANDLORD AND
DELIVERED TO TENANT AND THE SUBMISSION OF THIS FORM OF LEASE BY LANDLORD, OR
LANDLORD'S AGENT, DOES NOT CONSTITUTE AN OFFER TO LEASE. NO EMPLOYEE OR
AGENT OF LANDLORD OR ANY PERSON WITH WHOM TENANT MAY HAVE NEGOTIATED THIS
LEASE HAS ANY AUTHORITY TO MODIFY THE TERMS HEREOF OR TO MAKE ANY AGREEMENTS,
REPRESENTATIONS OR PROMISES UNLESS THE SAME ARE CONTAINED HEREIN OR ADDED
HERETO IN WRITING.
JAHRA INVESTMENTS, N.V.
By: /s/ Ani Soghomonian
----------------------------------
Ani Soghomonian
Its: Treasurer
"Landlord"
DVD EXPRESS, INC.,
a California corporation
By: /s/ Michael Dubelko
----------------------------------
Its:
------------------------------
"Tenant"
- -------------------------------------------------------------------------------
MEMORANDUM OF ACTUAL COMMENCEMENT AND EXPIRATION DATES
Commencement Date: Expiration Date:
------------ -------------
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<PAGE>
ADDITIONAL LEASE PROVISIONS
ARTICLE I. PREMISES
SECTION 1.1 LEASED PREMISES - Landlord hereby leases to Tenant and
Tenant hereby hires from Landlord, subject to all the terms and conditions
hereinafter set forth, those certain premises identified in Item 2 of the
Basic Lease Provisions and shown in the drawing attached hereto as EXHIBIT
"A-1" (the "Premises"). The Premises are located on the designated floor(s)
of that certain office structure constructed on the real property legally
described in EXHIBIT "A-2" attached hereto. Said office structure is
hereinafter called the "Building". Said real property, the Building, the
adjoining parking structure and other related improvements as from time to
time constructed upon said real property are hereinafter referred to as the
"Project".
SECTION 1.2 ACCEPTANCE OF PREMISES. Tenant acknowledges that neither
Landlord nor any agent of Landlord has made any representation or warranty
with respect to the Premises, the Building and/or the Project, or the
suitability or fitness thereof for the conduct of Tenant's business or for
any other purpose, except as set forth in this Lease. The taking of
possession or use of the Premises by Tenant for any purpose other than
construction shall conclusively establish that the Premises, the Building and
the Project were at such time in satisfactory condition and in conformity with
the provisions of this Lease in all respects, except as to any items as to
which Tenant shall give Landlord written notice in reasonable detail, which
items shall be limited to any items required to be accomplished by Landlord
pursuant to its standard build out or under that certain Work Letter, if any,
being executed and delivered by Landlord and Tenant concurrently with this
Lease and attached hereto as Exhibit "B" (the "Work Letter"). Such written
notice shall be given within thirty (30) days after the term of this Lease
commences as provided in Article II below. Failure to submit such written
notice in the time provided shall constitute a waiver thereof. Landlord
shall promptly take such action as may be reasonably required to remedy an
actual defects and/or to complete any work of which it is notified as
provided above.
SECTION 1.3 USE RESERVATIONS. Tenant acknowledges that the exterior
demising walls of the Premises and the area between the finished ceiling of
the Premises and the slab of the Building floor or roof there-above and
between the finished floor of the Premises and the foundation or finished
ceiling of the portion of the Building there-below have not been leased to
Tenant. Landlord reserves the use thereof, together with the right to locate
or relocate (both vertically and horizontally), install, maintain, use,
repair and replace pipes, utility lines, ducts, conduits, flues, refrigerant
lines, drains, sprinkler mains and valves, access panels, wires and
appurtenant meters or equipment, and structural elements leading through,
under or above the Premises in locations which will not materially interfere
with Tenant's use of the Premises.
SECTION 1.4 BUILDING NAME AND ADDRESS. Landlord may adopt any name it
may select for the Building and/or the Project, and Landlord reserves the
right to change the name and/or address of the Building and/or the Project at
any time. Tenant shall not use the name of the Building, the Project or such
development for any purpose other than as the address of the business to be
conducted by Tenant in the Premises, and Tenant shall not acquire any
property right in or to any name which contains said word combination as a
part thereof.
ARTICLE II. TERM
SECTION 2.1 GENERAL. The term of this Lease shall be for the period
shown in Item 4 of the Basic Lease Provisions, commencing on the estimated
commencement date as shown in Item 3 of the Basic Lease Provisions, or such
later date as the Premises shall be tendered to Tenant ready for occupancy or
upon such earlier date as Tenant takes possession or commences use of the
Premises for any purpose other than construction (the "Commencement Date").
Within five (5) days following the Commencement Date, the parties shall
execute a supplement in the form attached hereto as Exhibit "A-3", stating
the Commencement Date and the expiration date of the term of this Lease. The
term "ready for occupancy" shall mean when Landlord (a) has put in operation
all Building services essential for the use of the Premises by Tenant; (b)
has provided reasonable access to the Premises for Tenant, its agents,
employees, licensees and invitees so that the same may be used without
unnecessary interference; and (c) subject to the provisions of the Work
Letter, if any, has "substantially completed" (as defined in the Work Letter)
the work required to be done by Landlord within the Premises pursuant to the
Work Letter.
SECTION 2.2 TENDER OF POSSESSION BY LANDLORD. Landlord may tender the
Premises to Tenant prior to, on or after the estimated commencement date
specified in Item 3 of the Basic Lease Provisions upon not less thant five
(5) days' written notice stating that the Premises will be ready for
occupancy on the date specified in such notice. If Landlord, for any reason
whatsoever, cannot deliver possession of the Premises to Tenant on or before
the estimated commencement date, this Lease shall not be void or voidable nor
shall Landlord by liable to Tenant for any loss or damage resulting therefrom.
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<PAGE>
ARTICLE III. RENT AND SECURITY DEPOSIT
SECTION 3.1 BASIC ANNUAL RENT.
(a) Tenant shall pay the basic annual rent for the Premises in the
total amount, but payable in the equal monthly installments, shown in Item 5
of the Basic Lease Provisions or in the Addendum, subject to the adjustment
as provided in the Addendum or in Section 3.1(c) hereof, due and payable on
the first day of each month in advance, commencing on the Commencement Date
and continuing throughout the term of this Lease, except that if the
Commencement Date occurs on a day other than the first day of a month, then
the rent payable hereunder shall be prorated on a daily basis and the rent
for the partial month following the Commencement Date shall be payable on the
first day of the term of this Lease. No demand, notice or invoice shall be
required. Tenant shall receive a credit against the first installment or
installments of minimum rental payable under this Section 3.1 in an amount
equal to the prepaid rent specified in Item 9 of the Basic Lease Provisions.
All rents and other sums payable by Tenant to Landlord under this Lease shall
be paid to Landlord, without offset or deduction, in lawful money of the
United States of America at the address for Landlord shown in Item 11 of the
Basic Lease Provisions, or to such other person or at such other place as
Landlord may from time to time designate in writing.
(b) As used herein "Lease Year" shall be a period of twelve (12)
consecutive months commencing on the first full calendar month during the
lease term; provided that the first Lease Year shall also include any partial
calendar month following the Commencement Date.
(c) Basic annual rent, as set forth in Item 5 of the Basic Lease
Provisions, shall be increased once per year if the Consumer Price Index, Los
Angeles-Anaheim-Riverside, All Urban Consumers, All Items (1982-1984=100),
published monthly by the Bureau of Labor Statistics of the U.S. Department of
Labor ("Bureau"), increases over the Base Index. The Base Index shall be the
Consumer Price Index for the calendar month in which the Commencement Date
occurs. The Base Index shall be compared with the Consumer Price Index for
the same calendar month for each subsequent year ("Comparison Month"). If
the Consumer Price Index for any Comparison Month is higher than the Base
Index, then the Minimum Rent for the annual period commencing on the first
day of the second calendar month following such Comparison Month shall be
increased above that payable pursuant to Item 5 of the Basic Lease Provisions
for the initial year of the term by the identical percentage. In no event
shall the Minimum Rent be reduced by reason of the operation of this Section
3.1(c).
(d) In the event that at any time during the term of this Lease, any
governmental law, rule or regulation prohibits or postpones in whole or in
part any increase in the rent or in the payment of other sums payable by
Tenant hereunder to be made pursuant to this Lease, then, and in either of
such events, such increase or payment shall be made to the maximum extent
permissible by law at the time provided in this Lease, and/or at any time or
times thereafter such increase or payment, or any portion thereof, may
lawfully be made and any such increase in rent, or any portion thereof, or
other sums payable hereunder, or portions thereof, the payment of which has
been so prohibited or postponed, shall thereafter become due and payable to
the maximum extent and at the earliest time or times permitted by law.
SECTION 3.2 SECURITY DEPOSIT. Tenant has deposited with Landlord the
sum stated in Item 8 of the Basic Lease Provisions, to be held by Landlord as
security for the full and faithful performance of every Lease provision to be
performed by Tenant. If Tenant defaults with respect to any provision of
this Lease, including, but not limited to, the provisions relating to the
payment of rent, Landlord may (but shall not be required to) use, apply or
retain all or any part of this security deposit for the payment of any rent
or other sum in default, or for the payment of any other amount which
Landlord may spend or become obligated to spend by reason of Tenant's default
or to compensate Landlord for any other loss or damage which Landlord may
suffer by reason of Tenant's default to the full extent permitted by law. If
any portion of said deposit is so used or applied, Tenant shall, within five
(5) days after written demand therefor, deposit cash with the Landlord in an
amount sufficient to restore the security deposit to its original amount.
Landlord shall not be required to keep this security deposit separate from
its general funds, but Landlord shall place the security deposit in an
interest-bearing account selected by Landlord, in its sole discretion, which
interest shall be added to the security deposit. If Tenant shall perform
every provision of this Lease to be performed by it, the security deposit,
together with the interest earned on the security deposit, or any balance
thereof, shall be returned to Tenant (or, at Landlord's option, to the last
assignee of Tenant's interest hereunder) within thirty (30) days after the
expiration of the Lease term, provided that Landlord may retain the security
deposit and interest until such time as any amount due from Tenant in
accordance with any provision hereof has been determined and paid in full.
SECTION 3.3 OPERATING EXPENSES
(a) In addition to paying basic annual rent, Tenant shall pay to
Landlord in installments, as provided in (b) below, the amount by which
Tenant's proportionate share of all "Operating Expenses" (as hereafter
defined) incurred by Landlord in the operation of the Project exceeds
Tenant's proportionate share of the Operating Expenses incurred during the
Base Year specified in Item 6 of the Basic Lease Provisions ("Increase
Operating Costs"). Such payments shall be deemed additional rent. Tenant's
obligation to pay its proportionate share of Increased Operating Costs shall
commence as of the beginning of the first full calendar year following the
Base Year. Tenant shall not be reimbursed or credited if the actual
Operating Expenses incurred during any year of the Lease Term are less than
the Operating Expenses for the Base Year. Tenant's proportionate share shall
be computed by dividing the "rentable area" of the Premises
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<PAGE>
identified in Item 2 of the Basic Lease Provisions by the total "rentable
area" of the Building. The term "rentable area" as used herein with respect
to the Premises and the Building shall be computed by measuring from the
inside surface of the permanent outer building walls.
Specifically included within the definition of rentable area shall be
all area within the outside walls, air conditioning shafts and ducts where a
central air conditioning system eliminates floor fan rooms, private stairs,
private elevators, toilets, air conditioning rooms, fan rooms, air ducts,
janitor's closets, slop sinks, electrical closets, telephone closets, and all
enclosing walls for the above items, all of which exclusively serve the floor
in which they are located, and columns and projections necessary to the
Building. The area of air conditioning and fan rooms located on a rental
floor serving more than the one floor in which located, together with their
enclosing walls, shall be apportioned and included as rentable area of the
floors which they serve.
Except as provided above, there shall be excluded from rentable area
building stairs, fire towers, elevator shafts, flues, vents, stacks, pipe
shafts and vertical ducts, with their enclosing walls serving more than one
floor, lobby, public vestibules, public telephone boots, ramps, loading docks
and other public areas on the first floor of the building. Rentable area for
divided floors shall include a proportionate share of public corridors,
public toilets, air conditioning rooms, fan rooms, air ducts, janitor's
closets, electrical closets, telephone equipment closets and their enclosing
walls. Notwithstanding the foregoing, one-half of the total floor area (as
measured by the inside surfaces of perimeter walls) of any exterior balconies
attached to a building shall be considered to be rentable area.
Prior to the Commencement Date, and from time to time thereafter, at
Landlord's option, Landlord's architect shall determine and certify in
writing to Tenant and Landlord the actual rentable area of the Building and
other buildings in the Project, which determination and certification shall
be binding upon Tenant.
(b) Prior to the start of each calendar year of the lease term
following the calendar year during which this Lease is executed, Landlord
shall furnish to Tenant a written estimate of the Operating Expenses and
Tenant's proportionate share of the Increased Operating Costs for the next
calendar year or portion thereof. In addition to tenant's basic annual rent
payments, Tenant shall pay to Landlord the amount by which its proportionate
share of Operation Expenses exceeds Tenant's proportionate share of the
Operating Expenses incurred during the Base Year identified in Item 6 of the
Basic Lease Provisions in equal monthly installments, in advance, together
with the monthly installments of basic annual rent.
Within one hundred twenty (120) days after the end of each calendar
year, including the calendar year during which the lease term commences,
Landlord shall furnish to Tenant a statement showing in reasonable detail the
actual Operating Expenses incurred by Landlord during the previous year and
Tenant's proportionate share thereof. The parties shall adjust Tenant's
estimated payment, if any, to Tenant's actual proportionate share as shown by
such annual statement. Any amount due Tenant shall be credited against
installments next coming due under this Section 3.3, and any deficiency shall
be paid by Tenant in the next such installment. Tenant agrees to accept as
final and determinative the amounts shown in such statement and hereby waives
all claims arising from such statement, except those for which a claim is
made by Tenant within six (6) months after Landlord has furnished such
statement to Tenant. Should there be any dispute with respect to either the
Landlord's written estimate of Tenant's share of Operating Expenses or the
year end statement showing actual Operating Expenses, Tenant shall
nevertheless pay its proportionate share of such expenses but may contest the
accuracy thereof in accordance with the terms set forth above, and any
failure to so pay shall constitute a default by Tenant under this Lease.
(c) Even though the Lease term has expired and Tenant has vacated the
Premises, when the final determination is made of Tenant's Increased
Operating Costs for the year in which the Lease terminates, Tenant shall
immediately pay to Landlord the amount by which such Increased Operating
Costs exceeds the estimated payments made by Tenant under (b) above. Any
overpayment made toward Tenant's Increased Operating Costs shall be promptly
rebated by Landlord to Tenant. Tenant's payment of Increased Operating Costs
shall be prorated for any partial calendar year on a per diem basis in any
reasonable manner selected by Landlord.
(d) Landlord may from time to time during any calendar year
re-estimate Operating Expenses and/or tenant's proportionate share thereof to
reflect changes in circumstances. In such event, Landlord shall notify
Tenant of the change and of the effect of such change on the amount of the
monthly installments to be paid by Tenant pursuant to (b) above. Commencing
on the date specified in such notice from Landlord, the monthly installment
payable by Tenant under (b) above shall be adjusted as specified in such
notice.
(e) The term "Operating Expenses" as used herein shall include all
costs of operation, maintenance, management and repair in a manner deemed
reasonable and appropriate by Landlord, and shall include the following costs
by way of illustration but not limitation; property taxes, including any taxes
described in paragraph (f) next below; general or special assessments; costs
and expenses in contesting the amount or validity of any property tax by
appropriate proceedings; cost of casualty, liability and other insurance and
Landlord's personal property used in connection therewith, including rental
loss, earthquake and/or other endorsements from time to time deemed
appropriate by Landlord; costs of all accounting and professional fees; water
and sewer charges; insurance premiums; license, permit, and inspection fees,
heat; light; power; steam; trash pick up, janitorial and security services
(provided Landlord shall not be required to provide any particular type of
security or liable for any failure of security); air conditioning; supplies,
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<PAGE>
materials; equipment; tools; cost of repayment of equipment and all
maintenance, service and warranty agreements on equipment, including alarm
service, building mechanical equipment, window cleaning and elevator
maintenance (provided that Landlord may elect to depreciate the cost of
personal property used in the maintenance, operation, and/or repair of the
Building on a straight line basis and treat such depreciation as an operating
expense, in which event replacement cost shall be reduced by the accumulated
depreciation of the item replaced); amortization of capital investments (such
costs to be amortized over such reasonable period as Landlord may determine
with a return on capital of ten percent (10%) per annum on the unamortized
balance or at such higher rate as may have been paid by Landlord on funds
borrowed for the purpose of constructing such capital improvements) required
by governmental authority or that produced a reduction in operating costs or
which result in energy conservation; labor, wages and salaries, fringe
benefits and payroll taxes for administrative and other personnel; a
management fee not to exceed current market rates, which may be payable to
Landlord; and any expense incurred pursuant to Sections 5.1, 5.2 and 6.2
below. The term "property taxes" as used herein shall include all real
estate taxes or personal property taxes and other taxes, charges and
assessments used in connection with the operation of the Building and/or the
Project and the land upon which they are situated, and any tax, surcharge or
assessment which shall be levied in addition to or in lieu of real estate of
personal property taxes, other than taxes covered by Article VII. The
Operating Expense shall be extrapolated, if necessary, to reflect a completed
Building with at least ninety percent (90%) occupancy of the rentable area
thereof, a full year of operating and a full year of occupancy by Tenant.
(f) Should the United States of America, the State of California or
any political subdivision thereof, or any governmental authority having
jurisdiction (by way of substitution for all or any part of the "taxes"
otherwise required to be paid in whole or in part by Tenant pursuant to this
Section 3.3 or Section 7.1, or in addition thereto) impose a capital levy or
a tax, assessment and/or surcharge of any kind or nature upon, against, in
connection with, measured by, or with respect to the rentals or other charges
payable to Landlord by Tenant or other tenants in or occupants of the
Building and/or the Project or on the income of Landlord derived from the
Building and/or the Project or on Building and/or Project revenue, on
Landlord's ownership of the Building and/or the Project, or any portion
thereof or interest therein, or otherwise, other than on the value of real
and personal property comprising the Building and/or the Project, but
expressly excluding any general net income, franchise, or inheritance tax
levied upon or payable by Landlord, then, in such case, such tax, assessment
and/or surcharge shall be deemed to constitute a tax and/or assessment against
the Building and/or the Project and shall be included in Operating Expenses.
(g) Notwithstanding the foregoing, Operating Expenses shall not
include expenses for which the Landlord is reimbursed (either by an insurer,
condemnor, tenant or otherwise); expenses incurred in leasing or procuring
tenants (including, without limitation, lease commissions, advertising
expenses, legal expenses, and expenses of renovating space for tenants);
legal expenses arising out of disputes with tenants or the enforcement of the
provisions of any lease of space in the Building; interest or amortization
payments on any mortgage or mortgages; wages, salaries or other compensation
paid to any executive employees above the grade of building manager; or the
cost of any work or service performed for or facilities furnished to a tenant
at the tenant's costs; and charges metered separately to other premises
within the Building. To the extent that any of the expenses described in the
preceding paragraph are partially excluded from Operating Expenses due to
reimbursement or payment of a portion thereof by a tenant of the Building, or
by tenants of other floors of the Building, Tenant's proportionate share of
the balance of such expense shall be appropriately adjusted by excluding the
rentable area leased to such tenant or tenants for purposes of the
computation required by Section 3.3.
(h) In the event that Tenant's obligations for the payment of basic
annual rent is abated, in whole or in part, under Article X or Article XI
below, Tenant's share of the Increased Operating Costs shall be reduced in
proportion to the reduction in basic annual rent during any applicable
calendar year and Landlord may make an appropriate adjustment to the
estimated payment required by (b) above for the period of any such rent
abatement.
ARTICLE IV. USES
SECTION 4.1 USE. Tenant shall use and occupy the Premises for general
office purposes only and for no other use or purpose without the prior
written consent of Landlord, which consent Landlord may withhold in it sole
and absolute discretion. Landlord agrees that Tenant may ship, receive and
store software and related items as an incident to its use of the Premises
for general office purposes upon compliance with applicable zoning and other
governmental requirements. Tenant acknowledges that pursuant to that certain
Lease by and between Landlord and Entertainment Industry Development
Corporation ("EIDC") dated April 26, 1996, Landlord has granted EIDC the
exclusive right within the Building to procuring for others, permits necessary
for motion picture and television filming within Los Angeles, Orange, Ventura,
San Bernardino and Riverside Counties. Tenant shall not use or occupy the
Premises in violation or in conflict with any "Governmental Requirement"
(defined below) but shall, at Tenant's expense, promptly comply with all
present and future laws, ordinances, statutes, including without limitation the
Americans with Disabilities Act, orders, rules, restrictions, regulations and
requirements of all governmental authorities having jurisdiction over the
Premises whether or not the same is substantial, foreseen or unforeseen,
ordinary or extraordinary, or whether the same shall necessitate Tenant
making structural changes or improvements to the Premises or interfere with
the use and enjoyment of the Premises (herein collectively, "Governmental
Requirements"). Tenant shall not do or permit anything to be done in or
about the Premises which will in any way obstruct or interfere with the
rights of other tenants or occupants of the Project or of property adjacent
to the Project,
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<PAGE>
or injure or annoy them, or use or allow the Premises to be used for any
improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause,
maintain or permit any nuisance or commit any waste in, on or about the
Premises or the Projet. Without limiting the generality of the foregoing,
Tenant shall not (i) obstruct or store anything in the common areas (including
service or exit corridors), (ii) place a load upon any floor of the Premises
which exceeds the floor load per square foot which such floor was designed to
carry, or (iii) permit any objectionable sound or odors to carry outside the
Premises. In particular, Tenant agrees that business machines and mechanical
equipment used by Tenant which cause vibration or noise that may be
transmitted to any other portion of the Building, to such a degree as to be
reasonably objectionable to Landlord or to any occupant, shall be placed and
maintained by Tenant at its expense in setting of cork, rubber or spring-type
vibration isolators sufficient to eliminate such vibrations or noise. Tenant
shall not do or permit to be done anything which will invalidate or increase
the cost of any insurance policy(ies) covering the Building, the Premises,
the Project and/or property located therein and shall comply with all
applicable insurance underwriters rules, orders regulations and requirements of
the Pacific Fire Rating Bureau or other applicable organization performing a
similar function. Tenant shall promptly upon demand reimburse Landlord for
any additional premium charged for such policy(ies) by reason of Tenant's
failure to comply with the provisions of this Section, but such reimbursement
shall not be construed as curing Tenant's default for failing to comply with
the provisions of this Section. Tenant shall not, under any circumstances,
allow alcoholic beverages to be served or consumed within any portion of the
Premises.
SECTION 4.2 PROHIBITION AGAINST SOLICITATION AND OTHER ACTIVITIES
WITHOUT THE PERMISSION OF LANDLORD. Tenant hereby delegates to Landlord full
power, authority and control to regulate, in accordance with the rules and
regulations attached hereto as Exhibit "C" and/or from time to time adopted
pursuant to Article XVI and/or to prohibit the entrance to the Premises, the
Building and/or the Projet of all vendors, suppliers, surveyors, petitioners
and others deemed objectionable by Landlord. In the event said persons are
guests or invitees of Tenant, Tenant shall notify Landlord of this fact. No
such person shall be permitted to enter upon the Project, the Building and/or
Premises unless and until such person shall have executed Landlord's standard
entry permit and Landlord shall have determined, in its sole and absolute
discretion and judgment, that such person's activities will not disturb other
tenants, their customers or invitees or distract from the use of the Building
and/or the Premises for their intended purposes. Tenant agrees that Landlord
may prohibit and exclude, in whole or in part, vendors of sandwiches and other
food items from the Building, as Landlord may elect, in Landlord's sole and
absolute discretion.
SECTION 4.3 EXCLUSIVE CONTROL OVER COMMON AREA. It is expressly agreed
and understood that control over all uses of the "Common Facilities" (defined
in Section 5.2 below) shall reside with and be solely exercisable by
Landlord in its sole and absolute discretion. Said areas shall not be
available for use by Tenant, except as herein expressly provided, nor by
vendors, surveyors, petitioners and others without the express written
consent of Landlord, which Landlord may withhold in its sole and absolute
discretion.
SECTION 4.4 SIGNS. Tenant may not affix a sign to the exterior surface
of the suite front or any other part of the exterior or interior surface of
the Building. Except with the prior written approval of Landlord, which
approval may be withheld in Landlord's sole but reasonable discretion, Tenant
shall not place or allow to be placed, erected or maintained any sign, decal,
placard, name, insignia, trade name, decoration, flashing, moving or hanging
lights, lettering, or any other descriptive words or advertising matter of
any kind or description (herein collectively, "sign" or "signs") on any
exterior door, wall, window, surface or roof of the Premises or of the
Building or on the glass of any window or door of the Building, or in any
deck or balcony area included within the Premises or on any sidewalk or other
location outside the Building, or within any entrance to the Premises. If
Tenant places or causes to be placed or maintained any of the foregoing without
Landlord's prior approval, the same may be removed by Landlord at Tenant's
expense without notice and without such removal constituting a breach of this
Lease or entitling Tenant to claim damages on account thereof. If Tenant
places or causes to be placed or maintained any of the foregoing with
Landlord's prior approval, Tenant shall maintain the same in good condition
and repair at Tenant's sole cost and expense.
ARTICLE V. SERVICES
SECTION 5.1 UTILITIES AND SERVICES. Subject to the provisions set
forth below, Landlord shall furnish to the Premises between the hours of 7:30
a.m. and 6:00 p.m. Monday through Friday, and between the hours of 9:00 a.m.
and 1:00 p.m. Saturday, except those legal holidays designated by Landlord,
such amounts of air conditioning, heating and ventilation as Landlord
furnishes for normal office purposes in other portions of the Building taking
into consideration at any given time the availability of energy resources and
prudent energy conservation practices. During other hours Landlord will
provide such air conditioning, heating and ventilation upon not less than 48
hours' advance written notice from Tenant to Landlord, and Tenant, upon
presentation of a bill therefor, shall pay Landlord for such service on an
hourly basis at the rate of Twenty-Five Dollars ($25.00) per hour. If such
service is not a continuation of that furnished during regular business
hours, Tenant shall pay for a minimum of two (2) hours of such service.
Subject to provisions set forth below, Landlord shall at times furnish the
Premises with elevator service, reasonable amounts of electric current for
normal lighting by Building Standard overhead fluorescent and incandescent
fixtures and for fractional horsepower office machines and water for
lavatory and drinking purposes. Landlord shall provide janitor service five
(5) days per week and window washing as reasonably required; provided,
however, that Tenant shall pay for any unusual janitorial services required
by reason of
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any non-Building Standard improvements in the Premises, including without
limitation wall coverings and floor coverings, installed by or for Tenant
under the Work Letter or otherwise. Such janitorial service shall include
the replacement of fluorescent fixtures as required. Tenant shall pay for
replacement of all other bulbs as required.
Tenant will not without the prior written consent of Landlord use any
apparatus or device in the Premises, including without limitation electronic
data processing machines, punch card machines and machines using current in
excess of 110 volts which will in any way increase the amount of electricity,
or water usually furnished or supplied for use of the Premises as general
office space; nor connect any apparatus, machine or device with water pipes
or electric current (except through existing electrical outlets in the
Premises), for the purposes of using electric current or water.
Landlord may impose a reasonable charge plus any surcharges charged for
excess use for any utilities or services, including, without limitation,
electric current, required to be provided by Landlord by reason of any
substantial recurrent use of the Premises at any time other than generally
recognized business hours of generally recognized business days. If Tenant
shall require electric current in excess of that which Landlord is obligated
to furnish under this Section 5.1, Tenant shall first obtain the consent of
Landlord, which Landlord may refuse, to the use thereof and Landlord may
cause an electric current meter to be installed in the Premises to measure
the amount of electric current consumed for any such other use. The cost of
any such meter and of installation, maintenance and repair thereof shall be
paid for by Tenant and Tenant shall reimburse Landlord promptly upon demand
by Landlord for all such electric current consumed for any such other use as
shown by said meter, at the rates charged for such services by the local
public utility furnishing the same, plus any additional expense incurred in
keeping account of the electric current so consumed.
If any lights, machines or equipment (including without limitation
electronic data processing machines) are used by Tenant in the Premises which
materially affect the temperature otherwise maintained by the air conditioning
system, or generate substantially more heat in the Premises than would be
generated by the Building Standard lights and usual fractional horsepower office
equipment, Landlord shall have the right (but shall not be obligated) to
install any machinery and equipment which Landlord reasonably deems necessary
to restore temperature balance, including without limitation, modifications
to the standard air conditioning equipment, and the cost thereof, including
the cost of installation and any additional cost of operation and maintenance
occasioned thereby, shall be paid by Tenant to Landlord upon demand by
Landlord.
Landlord shall furnish water for drinking, cleaning and lavatory
purposes only, but if Tenant requires, uses or consumes water for any purpose
in addition to ordinary drinking, cleaning and lavatory purposes, of which
fact Tenant constitutes Landlord to be the sole judge, Landlord may install a
water meter and thereby measure Tenant's water consumption for all purposes.
Tenant shall pay Landlord for the cost of the meter and the cost of the
installation thereof, and for consumption throughout the duration of Tenant's
occupancy. Tenant shall keep said meter and installed equipment in good
working order and repair at Tenant's own cost and expenses, in default of
which Landlord may cause such meter to be replaced, repaired and collect the
cost thereof from Tenant.
In the event that any such utility service to the Premises is separately
metered or billed to Tenant, Tenant shall pay all charges for such utility
service to the Premises. If any such charges are not paid when due, Landlord
may pay the same, and any amount so paid by Landlord shall thereupon become
due to Landlord from Tenant as additional rent. If Landlord shall elect to
furnish any utility services to the Premises, Tenant shall purchase its
requirements thereof from Landlord so long as the rates charged therefor by
Landlord do not exceed those which Tenant would be required to pay if such
services were furnished it directly by a public utility.
Landlord shall not be liable for any failure to furnish any of the
services or utilities described in this Section 5.1 when such failure is
caused by accidents, breakage, repairs, strikes, lockouts, other labor
troubles or disputes, governmental water, energy or other conservation
programs or any other governmental requirements, action or inaction,
moratorium or other cause beyond Landlord's reasonable control. Landlord may
take into consideration the availability of energy resources and prudent
energy conservation practices, including participation in any energy
conservation association or other arrangements for voluntary cut-back, load
shedding and the like. No failure to furnish any of such service or
utilities shall entitle Tenant to any damages, relieve Tenant of the
obligation to pay the full rent reserved herein or constitute or be construed
as a constructive or other eviction of Tenant. Tenant shall comply with all
rules and regulations which Landlord may reasonably establish for the proper
functioning and protection of the air conditioning, heating, elevator,
plumbing and electrical systems. Landlord shall at all reasonable times have
free access to all mechanical installations of Landlord, including, but not
limited to, the air conditioning equipment and vents, fans, ventilating and
machine rooms and electrical closets. If there is any failure, stoppage or
interruption in said utilities and/or services, Landlord shall use reasonable
diligence to correct the same, repairs and/or corrections that are the
responsibility of a public or private utility company, excepted.
SECTION 5.2 OPERATION AND MAINTENANCE OF COMMON FACILITIES. Landlord
shall operate and maintain during the term of this Lease all common
facilities within the Building and the Project. The term "Common Facilities"
shall mean all areas within the Project which are not held or designated by
Landlord to be held, for exclusive use by persons entitled to occupy space in
the Project. The Common Facilities shall include, without limiting the
generality of the foregoing, the adjoining parking
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structure, driveways, truckways, delivery passages, loading docks, sidewalks,
ramps, landscaped and planted areas, exterior stairways and balconies,
hallways and interior stairwells not located within the premises of any
tenant, common entrances and lobbies, mezzanines, elevators, bus stops,
retaining walls, restrooms not located within the premises of any tenant,
lighting fixtures, Building and/or Project identification signs, irrigation
systems and controllers, drains and sewers.
SECTION 5.3 USE OF COMMON FACILITIES. The use and occupancy by
Tenant of the Premises shall include the use of the Common Facilities in
common with Landlord and with all others for whose convenience and use the
Common Facilities have been or may hereafter be provided by Landlord,
subject, however, to rules and regulations for the use thereof as prescribed
from time to time by Landlord pursuant to Article XVI below. Landlord shall
operate, manage, equip, light, repair, clean and maintain the Common
Facilities in such manner as Landlord may in its sole discretion determine to
be appropriate. Landlord shall at all times during the term of this Lease
have the sole and exclusive control of all Common Facilities, and may at any
time and from time to time during the term hereof restrain any use or
occupancy thereof, except as authorized by such rules and regulations, as may
be changed from time to time. Tenant shall keep said Common Facilities free
and clear of any obstructions related to Tenant's operations. If, in the
opinion of Landlord, unauthorized persons are using any of said Common
Facilities by reason of the presence of Tenant in the Building, Tenant, upon
demand of Landlord, shall restrain such unauthorized use by appropriate
proceedings. Nothing herein shall affect the right of Landlord at any time
to remove any such unauthorized persons or obstructions. Landlord may
temporarily close any Common Facility for repairs or alterations as provided
in Section 6.2 below, to prevent a dedication thereof or the accrual of
prescriptive rights therein, or for any other reason deemed sufficient by
Landlord.
SECTION 5.4 PARKING
(a) Tenant shall be entitled to the non-exclusive use in common with
Landlord and others designated by Landlord of the adjoining parking structure
located in the Project; subject, however, to payment of such monthly rates
and other charges as may be established or allowed by Landlord, or by the
operator of such parking structure, at any time or from time to time during
the term of this Lease. The number of parking spaces to which Tenant is
entitled, and the amount of the initial rent payable for each parking space
("Parking Rent") are described in Paragraphs 13 and 14, respectively of the
Basic Lease Provisions. Parking Rent shall be payable monthly, in advance,
on the first day of each month at the address specified by Landlord from time
to time. Notwithstanding anything to the contrary stated above, the Parking
Rent shall be fixed at the rates described in Paragraph 14 of the Basic Lease
Provisions throughout the Lease term. Tenant agrees to comply with and to
cause its employees and invitees to comply with such reasonable rules and
regulations with respect thereto as Landlord may from time to time establish.
Such rules and regulations may include, but shall not be limited to the
restriction of designated areas for drive-through banking or other
drive-through facilities, or specific parking areas and/or areas for parking
by Tenant, other occupants of the building, or other third parties and their
respective employees and invitees. Landlord shall not be liable to Tenant by
the reason of the failure of any other occupant of the building and/or other
user of the parking facilities to comply with such rules and regulations.
(b) Tenant agrees to park and to cause its employees, subtenants and
the employees of its subtenants to park with parking spaces or areas within
the parking structure from time to time designated by Landlord for such
purpose. Tenant agrees to rent or to cause its officers, partners and/or
employees to rent a parking space for each such car within the parking
structure at the rates from time to time established by the operator of such
parking structure for monthly parking. If Tenant or its officers, directors
and/or employees fail to park their cars in designated parking areas,
Landlord may charge Tenant Thirty-Five Dollars ($35.00) per day for each day
or partial day per car parking in any areas other than those designated;
provided, however, Landlord agrees to give Tenant written notice of the first
violation of this provision and Tenant shall have two (2) days thereafter
within which to cause the violation to be discontinued; and if not
discontinued within said two (2) day period, then the $35.00 per day fine
shall commence. After notice of such first violation, no prior notice of any
subsequent violation shall be required. All amounts due under the provisions
of this Section shall be payable by Tenant within ten (10) days after demand
therefor as additional rent hereunder. Tenant hereby authorizes Landlord to
tow away from the Project any car or cars belonging to Tenant, Tenant's
officers, partners and/or employees and/or to attach violations stickers or
notices to such cars. References herein to cars shall be deemed to include
trucks, motorcycles and other motor vehicles.
(c) In the event that any parking surcharge or regulatory fee, however
designated, should be imposed upon or levied or assessed against the Project,
or any portion thereof, by any governmental agency or authority pursuant to
the "Clean Air Act", or any plan implemented pursuant to such Act or any
enactment amendatory or in substitution thereof, or pursuant to any other
governmental act or decree, Landlord may recover such fees as Operating
Expenses. The foregoing parking provisions are subject to any governmental
regulations which limit parking or otherwise seek to encourage the use of
carpools, public transit or other alternative transportation forms.
SECTION 5.5 SECURITY CARDS. During non-regular business hours,
entry to the Building and the parking structure is presently provided by a 24
hour security guard. Landlord may hereafter elect its agents and employees
for purposes of providing entry to the Building and/or parking structure
and/or to services within the Building (including without limitation elevator
service and HVAC systems) during non-regular business hours. In the event a
security card(s) issued to Tenant is lost or stolen, Tenant shall immediately
report such loss to Landlord. Tenant shall be solely responsible and
accountable to Landlord
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for each security card issued to Tenant and shall pay to Landlord a security
deposit for each security card issued to Tenant, in an amount not to exceed
$25.00 per card. Tenant shall pay for all charges, fees or expenses for
services provided by reason of the use of any security card issued to Tenant,
until the earlier of: (i) return of the security card to the Landlord; or
(b) twenty-four (24) hours after Tenant's written report to Landlord of the
loss of such card. Tenant shall further pay for and defend, indemnify and
hold Landlord harmless from and against any claim, liability, damage, loss,
cost or expense (including reasonable attorneys' fees) resulting by reason of
the actions of any person(s) who gains entry to the Building during
non-regular business hours by use of security card issued to Tenant which has
not been reported as lost or stolen.
The number of security cards provided by Landlord to Tenant shall be
determined by Landlord on a reasonable basis. Any additional or replacement
security cards shall be provided to Tenant at Tenant's expense.
ARTICLE VI. MAINTENANCE OF THE PREMISES
SECTION 6.1 TENANT'S MAINTENANCE AND REPAIR. Tenant at its sole cost
and expense shall make all repairs necessary to keep the Premises, any
components of the HVAC system for the Premises which are located within the
Premises and any utility facilities exclusively servicing the Premises and
located within the Premises in good order and repair and in a safe, clean,
sanitary, orderly and attractive condition. All repairs shall be at least
equal in quality to the original work, shall be made only by a licensed,
bonded contractor approved in advance by Landlord and shall be made only at
such time or times as shall be approved by Landlord. Landlord may impose
reasonable restrictions and requirements with respect to such repairs
including, without limitation, those applicable to Tenant's alterations as
set forth in Section 6.4.
SECTION 6.2 LANDLORD'S MAINTENANCE AND REPAIR.
(a) Landlord shall keep and maintain in good repair the roof (including
the structural integrity thereof), foundations, footings, the exterior
surfaces of the exterior walls and the electrical and mechanical systems in
the Building, reasonable wear and tear expected, except to the extent such
repair is Tenant's responsibility under Section 6.1 above or the
responsibility of a public or private utility company and except that Tenant
at its expense shall make any such repairs relating to the act or negligence
of Tenant, its agents, employees, invitees, licensees or contractors.
Landlord shall not be liable for any failure to make any repairs or to
perform any maintenance unless such failure shall persist for an unreasonable
time after written notice of the need for such repairs or maintenance is
given to Landlord by Tenant.
(b) Except as provided in Section 10.1 and Article XI below, there
shall be no abatement of rent and no liability of Landlord by reason of any
injury to or interference with Tenant's business arising from the making of
any repairs, alterations or improvements in or to any portion of the Project
or the Building, including the Premises, or in or to the fixtures,
appurtenances and equipment therein; provided, however, that in making such
repairs, alterations or improvements, Landlord shall interfere as little as
reasonably practicable with the conduct of Tenant's business in the Premises.
SECTION 6.3 ALTERATIONS BY LANDLORD.
(a) Landlord reserves the right at any time, and from time to time, to
make changes in or to the Building and the fixtures and equipment thereof, to
make alterations or additions to the parking structure, to construct other
buildings (including free standing buildings) and improvements within the
Project, to enlarge or reduce the Project and to make alterations therein or
additions thereto, or to any part thereof, to build additional stories on any
building or structure within the Project and to construct decks. Landlord
reserves the right at any time to change the size, configuration, shape,
number and extent of the Common Facilities, or any of them, all as Landlord
may deem necessary or desirable in its sole discretion. No such change
described in this Section 6.3(a) shall entitle Tenant to any abatement of
rent or other claim against Landlord; provided, however, such changes or
alterations shall not deprive Tenant of reasonable access to or use of the
Premises.
(b) As a material inducement to Landlord's entering into this Lease,
Tenant expressly waives and releases any rights it may have whether granted
by statute or otherwise, to make repairs at Landlord's expense, including,
but not limited to, its rights as contained in Sections 1941, 1941.1 and 1942
of the California Civil Code.
SECTION 6.4 TENANT'S ALTERATIONS. Tenant shall not make
alterations, additions or improvements to the Premises not any repairs,
replacements or restorations to the Premises in excess of TWO THOUSAND FIVE
HUNDRED DOLLARS ($2,500.00) without the prior written consent of Landlord.
Landlord may impose, as a condition to such consent, such requirements as
Landlord, in its sole discretion, may deem reasonable or desirable,
including, but not limited to, a requirement that all work be covered by a
surety bond in favor of Landlord, guaranteeing the completion of such work
free and clear of all subcontractors', mechanics' and materialmen's liens
(which bond shall be satisfactory to Landlord) and requirements as to the
manner, time and contractor or contractors as to or by which such work shall
be done. Notwithstanding the foregoing, no improvements may be made that
would diminish the value of the Premises and, in addition, no improvements
may be made to any mechanical or utility system, the exterior walls or the
roof of the Premises, nor may any improvements of a structural nature be made
without Landlord's
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approval, which approval may be withheld in Landlord's sole and absolute
discretion. In no event shall Tenant make or cause to be made any
penetration through the roof or the floor of the Premises without the prior
written approval of Landlord, which approval may be withheld in Landlord's
sole and absolute discretion. Any requirements of the Work Letter applicable
to any initial construction work performed by or under Tenant shall also be
applicable to any such alterations, additions and/or improvements. All
alterations made by Tenant shall be in accordance with all Governmental
Requirements and to the extent Tenant's alterations trigger alterations or
other modifications within the Building or Project, such alterations or other
modifications shall be performed by Landlord at the expense of Tenant. Any
request for Landlord's consent to such work shall be made in writing and
shall contain three (3) sets of architectural plans and specifications (with
square footages) describing such work in detail reasonably satisfactory to
Landlord. No such plans and specifications or any material change thereto
shall be submitted for approval to any federal, state, county or local
government or other governmental agency or association prior to Landlord's
review and approval of same. Failure of Landlord to respond to such request
within thirty (30) days shall be deemed a denial of such request. Plans and
specifications and governmental applications shall become the property of
Landlord upon the termination or expiration of this Lease and shall be turned
over to Landlord by Tenant upon Landlord's request therefor. Unless Landlord
otherwise agrees in writing, all such alterations, additions or improvements
affixed or built into the Premises (but excluding moveable trade fixtures and
furniture) shall become the property of Landlord as provided in Section 14.3
below, and shall be surrendered with the Premises, as a part thereof, at the
end of the Lease term, except that Landlord may, by written notice to Tenant
given at least thirty (30) days prior to the end of the Lease term, require
Tenant to remove all or any portion of any alterations, decorations,
additions, improvements and the like installed by Tenant, and to repair, or
at Landlord's option, to pay all costs relating to any damage to the Premises
arising from such removal.
SECTION 6.5 MECHANIC'S LIENS. Tenant shall keep the Premises free
from any liens arising out of any work performed, materials furnished, or
obligations incurred or alleged to have been incurred by, for or under
Tenant. In the event that Tenant shall not, within twenty (20) days
following the imposition of any such lien (but in any event before an action
is filed to foreclose such lien), cause the same to be released of record by
payment or posting of a proper bond, Landlord shall have, in addition to all
other remedies provided herein and by law, the right (but not the obligation)
to cause the same to be released by such means as it shall deem proper,
including payment of or defense against the claim giving rise to such lien.
All sums paid by Landlord and all expenses incurred by it in connection
therewith shall create automatically an obligation of Tenant to pay an
equivalent amount, together with interest thereon at the rate provided in
Section 13.3 below, from the date paid by Landlord as additional rent, which
additional rent shall be payable by Tenant on Landlord's demand. Tenant
shall give Landlord no less that twenty (20) days' prior notice in writing
before commencing the construction of any building, structure or other
improvement on the Premises or of any substantial repairs, alterations,
additions, replacements or restorations in and about the Premises so that
Landlord may post and maintain such notices of non-responsibility or other
notices on the Premises as Landlord deems necessary for protection from such
liens.
SECTION 6.6 ENTRY AND INSPECTION. Landlord shall at all times have
the right to enter the Premises to inspect the same, to post notices of
non-responsibility, to alter, improve or repair the Premises or any other
portion of the Building, as otherwise permitted hereunder, all without being
deemed to have evicted Tenant and without abatement of rent and may for that
purpose erect scaffolding and other necessary structures and store materials,
supplies and tools where reasonably required by the character of the work to
be performed, provided that the business of Tenant shall be interfered with
as little as is reasonably practicable. If during the last month of the term
hereof, Tenant shall have removed substantially all of Tenant's property and
personnel from the Premises, Landlord may enter the Premises and repair,
alter and redecorate the same, without abatement of rent and without
liability to Tenant, and such acts shall have no effect on this Lease.
Tenant hereby waives any claim for damages or abatement of rent for any
injury, inconvenience to or interference with Tenant's business, loss of
occupancy or quiet enjoyment of the Premises, and any other loss occasioned
thereby; provided, however, this provision shall not excuse Landlord for its
own gross negligence or willful misconduct. As used in this Lease, the term
"gross negligence" shall mean the failure to perform a manifest duty in
reckless disregard of the consequences as affecting the life or property of
another. Landlord shall have the right to use any and all means which
Landlord may deem proper to open said doors in an emergency in order to
obtain entry to the Premises, and any entry to the Premises obtained by
Landlord by any of said means shall not under any circumstances be construed
or deemed to be a forcible or unlawful entry into, or a detainer of, the
Premises, or any eviction of Tenant from the Premises or any portion thereof.
During the last one hundred eighty (180) days of the lease term, or when an
uncured default on the part of Tenant exists hereunder, Landlord may, at all
reasonable times, enter the Premises for the purpose of displaying the
Premises to prospective tenants.
ARTICLE VII. TAXES AND
ASSESSMENTS ON TENANT'S PROPERTY
SECTION 7.1 TAXES ON TENANT'S PROPERTY.
(a) Tenant shall be liable for and shall pay at least forty (40) days
before delinquency, all taxes and assessments levied against all fixtures,
furnishings, equipment and other personal property of Tenant located in or
about the Premises, and when possible, Tenant shall cause said fixtures,
furnishings, equipment and other personal property to be assessed and billed
separately from the real property of which the Premises form a part. If any
such taxes on Tenant's personal property or trade fixtures are levied against
Landlord
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or Landlord's property and if Landlord pays the same (which Landlord shall
have the right to do regardless of the validity of such levy), or if the
assessed value of Landlord's property is increased by the inclusion therein
of a value placed upon such personal property or trade fixtures of Tenant and
if Landlord pays the taxes based upon such increased assessment. Tenant
shall pay to Landlord the taxes so levied against Landlord or the proportion
of such taxes resulting from such increase in the assessment.
(b) If the tenant improvements in the Premises, whether installed
and/or paid for by Landlord or Tenant and whether or not affixed to the real
property so as to become a part thereof, are assessed for real property tax
purposes at a valuation higher than the valuation at which tenant
improvements conforming to Landlord's building standards in other space in
the Buildings are assessed, then the real property taxes and assessments
levied against Landlord or Landlord's property by reason of such excess
assessed valuation may, at Landlord's option, be deemed to be taxes levied
against personal property of Tenant and shall, under such circumstances, be
governed by the Provisions of Section 7.1(a) above.
(c) Upon request, Tenant agrees to provide receipts, cancelled checks
or other documents reasonably requested by Landlord to confirm Tenant's
payment of any taxes and/or assessments payable by Tenant directly to the
taxing authority under this Lease.
ARTICLE VIII. ASSIGNMENT AND SUBLETTING
SECTION 8.1 PROHIBITION AND CONSENT.
(a) Tenant shall not voluntarily assign or encumber its interest in this
Lease or in the Premises, or sublease all or any part of the Premises, or
allow any other person or entity to occupy or use all or any part of the
Premises, without first obtaining Landlord's prior written consent, which
consent will not be unreasonably withheld. Any assignment, encumbrance or
sublease without Landlord's prior written consent shall be voidable, at
Landlord's election, and shall constitute a default. For purposes hereof, in
the event Tenant is a partnership, a withdrawal or change of partners owning
more that a fifty percent (50%) interest in the partnership, or if Tenant is
a corporation, any transfer of fifty percent (50%) of its stock, shall
constitute a voluntary assignment and shall be subject to these provisions.
No consent to any assignment, encumbrance, or sublease shall constitute a
further waiver of the provisions of this paragraph.
(b) Tenant shall notify Landlord in writing of Tenant's intent to
assign, encumber, or sublease this Lease, the name of the proposed assignee
or sublessee, information concerning the financial responsibility of the
proposed assignee or sublessee and the terms of the proposed assignment or
subletting, and Landlord shall, within thirty (30) days of receipt of such
written notice, and additional information requested by Landlord concerning
the proposed assignee's or sublessee's financial responsibility, notify
Tenant, in writing, of whether Landlord consents to such proposed assignment,
encumbrance or sublease. As a condition to granting its consent to any
assignment, encumbrance or sublease, Landlord may require that the assignee
or sublessee remit directly to Landlord on a monthly basis, all monies due to
Tenant by said assignee or sublessee. Landlord shall not be acting
unreasonably in refusing to consent to any proposed assignment or sublet if
at the date such consent is sought Tenant is in default hereunder.
(c) Landlord's waiver or consent to any assignment or subletting shall
not relieve Tenant from any obligation under this Lease. Occupancy of all or
part of the Premises by parent, subsidiary, or affiliated companies of Tenant
shall not be deemed an assignment or subletting. In the event that Landlord
shall consent to an assignment or sublease under the provisions of this
Section 8.1(b). Tenant shall pay Landlord's processing costs and attorneys'
fees incurred in giving such consent. If for any proposed assignment or
sublease, Tenant receives rent or other consideration, either initially or
over the term of the assignment or sublease, in excess of the rent called for
hereunder, or, in case of the sublease of a portion of the Premises, in
excess of such rent fairly allocable to such portion, after appropriate
adjustments to assure hat all other payments called for hereunder are taken
into account, Tenant shall pay to Landlord as additional rent hereunder fifty
percent (50%) of the excess of each such payment of rent or other consideration
received by Tenant promptly after its receipt.
(d) Regardless of landlord's consent, the following terms and
conditions shall apply to any subletting by Tenant of all or any part of the
Premises and shall be included in all subleases:
(i) Tenant hereby irrevocably authorizes and directs any sublessee
of all or any portion of the Premises to pay to Landlord the rents due and
to become due under the sublease upon receipt of a written notice from
Landlord stating that a default exists in the performance of Tenant's
obligations under this Lease. Tenant agrees that such sublessee shall
have the right to rely upon any such statement and request from Landlord,
and that such sublessee shall pay such rents to Landlord without any
obligation or right to inquire as to whether such default exists and
notwithstanding any notice from or claim from Tenant to the contrary.
Tenant shall have no right or claim against such sublessee or Landlord
for any such rents so paid by said sublessee to Landlord.
(ii) No sublease entered into by Tenant shall be effective unless
and until it has been approved in writing by Landlord. In entering into
any sublease, Tenant shall use only such form of sublease as is
satisfactory to Landlord, and once approved by Landlord, such sublease
shall not be changed or modified without Landlord's prior written
consent. Any sublessee shall, by reason
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of entering into a sublease under this Lease, be deemed for the benefit
of Landlord to have assumed and agreed to conform and comply with each and
every obligation herein to be performed by Tenant other than such
obligations as are contrary to or inconsistent with provisions contained in
a sublease to which Landlord has expressly consented in writing.
(iii) In the event Tenant shall default in the performance of its
obligations under this Lease, Landlord, at its option, and without any
obligation to do so, may require any sublessee to attorn to Landlord, in
which event Landlord shall undertake the obligations of Tenant under such
sublease from the time of exercise of said option to the termination of
such sublease; provided, however, Landlord shall not be liable for any
prepaid rents or security deposit paid by such sublessee to Tenant or for
any other prior defaults of Tenant under such sublease.
(iv) Each and every consent required of Tenant under a sublease shall
also require the consent of Landlord.
(v) No sublessee shall further assign or sublet all or any part of
the Premises without Landlord's prior written consent.
(vi) Landlord's written consent to any subletting of the Premises by
Tenant shall not constitute an acknowledgement that no default then exists
under this Lease of the obligations to be performed by Tenant nor shall
such consent be deemed a waiver of any then existing default, except as may
be otherwise stated by Landlord at the time.
(e) If Tenant's obligations under this Lease have been guaranteed by
third parties, then any sublease or assignment, and Landlord's consent
thereto, shall not be effective unless said guarantors give their written
consent to such sublease or assignment and the terms thereof. In the event of
any default under this Lease, Landlord may proceed directly against Tenant,
any guarantors or anyone else responsible for the performance of this Lease,
including the sublessee or assignee, without first exhausting Landlord's
remedies against any other person or entity responsible therefor to
Landlord, or any security held by Landlord or Tenant.
SECTION 8.2 TRANSFER FEE. If Landlord consents to an assignment,
sublease or any other transfer by Tenant of all or a portion of Tenant's
interest under this Lease, Tenant shall pay, or cause to be paid, in each
case a transfer fee of FIVE HUNDRED DOLLARS ($500.00) in connection with the
processing, documentation and other administrative costs thereof, along with
Landlord's reasonable attorneys' fees incurred in connection therewith.
ARTICLE IX. INSURANCE AND INDEMNITY
SECTION 9.1 TENANT'S INSURANCE.
(a) Tenant hereby agrees to maintain in full force and effect at all
times during the term of this Lease, at its own expense, for the protection
of Tenant, Landlord and such other parties as Landlord may from time to time
designate, as their interests may appear, policies of insurance issued by a
carrier rated as B+VIII, or better, in the latest edition of Best's Insurance
Guide (or a comparable rating in a comparable guide selected by Landlord, if
Best's Insurance Guide is no longer published) which afford the following
coverages:
(i) Workers' Compensation -- Statutory
(including broad form all states)
(ii) Comprehensive General
Liability Insurance, -- Not less than
including Blanket amount stated
Contractual Liability, in Item 12 of
Broad Form Property Basic Lease
Damage, Personal Provisions.
Injury, Completed
Operations, Products
Liability, Fire
Legal Liability
(iii) So-called "All Risk-Insurance" including without
limitation Fire and Extended Coverage, Vandalism and
Malicious Mischief, and Sprinkler Leakage Insurance, in an
amount sufficient to cover the full cost of replacement of
all improvements and betterments to the Premises made by
or on behalf of Tenant (except to the extent installed by
Landlord, at Landlord's expense, pursuant to the Work Letter)
and all of Tenant's fixtures and other personal property.
(b) Tenant shall deliver to Landlord and to such other named insureds
designated by Landlord at least thirty (30) days prior to the time such
insurance is first required to be carried by Tenant, and thereafter at least
twenty (20) days prior to expiration of such policy, certificates of
insurance evidencing the
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above coverage with limits not less than those specified above. Such
certificates, with the exception of Worker's Compensation, shall name Landlord
and such other parties as Landlord may designate as additional insureds and
shall expressly provide that the interest of same therein shall not be
affected by any breach by Tenant of any policy provision for which such
certificates evidence coverage. Further, all certificates shall expressly
provide that 1) no less than thirty (30) days prior written notice shall be
given Landlord and such other named insureds in the event of material
alteration to or cancellation of the coverages evidenced by such certificates
and 2) such coverage evidenced by the certificate is primary and that any
coverage carried by Landlord and such other named insureds shall be excess
and non-contributory with respect to any policies carried by Tenant.
(c) Upon demand, Tenant shall provide Landlord, at Tenant's expense,
with such increased amount of existing insurance, and such other insurance in
such limits, as Landlord may require and such other hazard insurance as the
nature and condition of the Premises may require in the sole judgment of
Landlord, to afford Landlord and additional insureds designated by Landlord
adequate protection for said risks.
(d) Landlord makes no representation that the limits of liability
specified to be carried by Tenant under this Article IX, are adequate to
protect Tenant against Tenant's undertaking under this Lease, and in the event
Tenant believes that any such insurance coverage called for under this Lease
is insufficient, Tenant shall provide at its own expense, such additional
insurance as Tenant deems adequate.
(e) Landlord and Tenant hereby release the other from any and all
liability from or to the other party of every kind and nature which may
result form the perils of fire, lightning or extended coverage perils which
cause damage on or to the Premises, the Building and/or property within the
Building owned by it, such waiver to include situations where the negligence
of one of the parties hereto or his agent, servant or representative causes
or contributes to the occurrence or the result of damage.
(f) Insurance carried by Tenant against loss or damage by fire or other
casualty shall contain a clause whereby the insurer waives its right of
subrogation against Landlord. Tenant shall also obtain and furnish evidence to
Landlord of the waiver by Tenant's worker's compensation carrier of any right
of subrogation against Landlord.
(g) The policy of insurance required to be maintained by Tenant pursuant
to Section 9.1(a)(ii) shall include coverage of Tenant's indemnity in favor
of Landlord as provided in Section 9.2 below.
SECTION 9.2 TENANT'S INDEMNITY. Tenant shall defend, indemnify and hold
harmless Landlord, its agents, attorneys-in-fact and any and all affiliates
of Landlord, including, without limitation, any corporation or other entities
controlling, controlled by or under common control with Landlord, from and
against any and all claims or liabilities arising from Tenant's use or
occupancy of the Premises, and shall further defend, indemnify and hold
harmless Landlord, its agents and affiliates against and from any and all
claims or liabilities arising from any breach or default in the performance
of any obligations on Tenant's part to be performed hereunder, or arising
from any act or negligence of Tenant, or of its agents, employees, invitees
or licensees, and from and against all costs, attorneys' fees, expenses and
liabilities incurred in or about any such claims or liabilities or any
actions or proceedings brought thereon. Notwithstanding the foregoing, Tenant
shall not be liable for damage or injury occasioned by the gross negligence
or willful misconduct of Landlord or its designated agents, servants or
employees, unless covered by insurance Tenant is required to provide. This
obligation to indemnify shall include Tenant's payment of reasonable
attorneys' fees and investigation costs and all other reasonable costs,
expenses and liabilities incurred or suffered by Landlord from Landlord's
receipt of the first notice that any claim or demand is to be made or may be
made. Landlord may, at is options, require Tenant to assume Landlord's
defense in any action covered by this Section 9.2 through counsel
satisfactory to Landlord. As used in this Lease, the term "gross negligence"
shall mean the failure to perform a manifest duty in reckless disregard of
the consequences as affecting the life or property of another.
SECTION 9.3 LANDLORD'S INDEMNITY. Landlord shall defend, indemnify and
hold harmless Tenant, its agents, employees and any and all affiliates of
Tenant, including, without limitation, any corporation or other entities
controlling, controlled by or under common control with Tenant, from and
against any and all claims or liabilities arising from Landlord's negligence
in Landlord's use, operation and/or maintenance of the Building, the Project
or the Common Areas, and shall further defend, indemnify and hold harmless
Tenant, its agents and affiliates against and from any and all claims or
liabilities arising from any breach or default in the performance of any
obligation on Landlord's part to be performed under this Lease and from and
against all costs, attorneys' fees, expenses and liabilities incurred in
connection with any such claims or liabilities or any actions or proceedings
brought thereon.
ARTICLE X. DAMAGE OR DESTRUCTION
SECTION 10.1 RESTORATION.
(a) In the event the Building is damaged by fire or other perils
covered by extended coverage insurance to an extent not exceeding twenty-five
percent (25%) of the full insurable value thereof and if the damage thereto
is such that the Building may be repaired, reconstructed or restored within a
period of ninety (90) days from the date of the happening of such casualty
and Landlord will receive insurance proceeds
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sufficient to cover the cost of such repairs, Landlord shall commence and
proceed diligently with the work of repair, reconstruction and restoration and
the Lease shall continue in full force and effect. If such work of repair,
reconstruction and restoration is such as to require a period longer than
ninety (90) days or exceeds twenty-five percent (25%) of the full insurable
value thereof or if said insurance proceeds will not be sufficient to cover
the cost of such repairs, Landlord may either elect to so repair, reconstruct
or restore and this Lease shall continue in full force and effect, or
Landlord may elect not to repair, reconstruct or restore and the Lease shall
in such event terminate. Under any of said conditions, Landlord shall give
written notice to Tenant of its intention within ninety (90) days of the
occurrence of such damage. In the event Landlord elects not to restore the
Building, this Lease shall terminate on the date thirty (30) days following
the date Tenant receives Landlord's written notice indicating Landlord's
election to terminate.
(b) In the event the Premises or the Building is damaged or
destroyed to the extent of more than ten percent (10%) of its replacement
cost by a casualty not covered by a standard fire and extended coverage
policy of fire insurance, Landlord may elect to terminate this Lease on the
date thirty (30) days following Tenant's receipt of Landlord's written
notice of Landlord's election to terminate this Lease. If such damage or
destruction is not to such extent, or if Landlord does not elect to terminate
this Lease following such damage, Landlord shall commence and proceed
diligently with the work of repair, reconstruction and restoration and this
Lease shall continue in full force and effect.
(c) In the event of any casualty damage, the rental provided to be
paid under this Lease shall be abated proportionately in the ratio which the
Premises are rendered unusable from the date of destruction through the
period of such repair, reconstruction or restoration unless (i) the Premises
were unusable for a period of three (3) business days or less, or (ii) the
damage is due to the fault or neglect of Tenant, its agents or employees.
Tenant shall not be released from any of its obligations under this Lease
except to the extent and upon the conditions expressly stated in this
Section 10.1.
(d) If the then existing laws do not permit the restoration
described in this Section 10.1, Landlord may terminate this Lease by giving
written notice to Tenant, in which event this Lease shall terminate thirty
(30) days following Tenant's receipt of such notice.
(e) Notwithstanding anything to the contrary contained in this
Article, Landlord shall not have any obligation whatsoever to repair,
reconstruct or restore the Premises or any portion of the Building when the
damage occurs during the last twenty-four (24) months of the term of this
Lease or any extension thereof.
(f) No damages, compensation or claim shall be payable by Landlord
by reason of any injury to or interference with Tenant's business or property
arising from any damage or destruction or the making of any repairs,
alterations or improvements in or to any portion of the Building or the
Premises or in or to fixtures, appurtenances and equipment therein.
(g) Landlord's obligation to repair, reconstruct or restore
Tenant's leasehold improvements in the Premises shall be limited to those
leasehold improvements originally installed at Landlord's expense; the repair
and restoration of any other leasehold improvements shall be promptly
performed by Tenant, at Tenant's sole cost and expense, subject to the
requirements of Section 6.4 applicable to Tenant's alterations to the
Premises.
SECTION 10.2 LANDLORD'S NON-LIABILITY. Landlord shall not be liable to
Tenant, and Tenant hereby waives all claims against Landlord for any injury
or damage to any person or property in or about the Premises, the Building or
the Project from any cause whatsoever, except to the extent caused by the
gross negligence or willful misconduct by Landlord, its agents or employees.
Specifically, Landlord or its agents or employees shall not be liable for any
damage to property entrusted to Landlord's employees in the Building, nor for
loss of or damage to any property by theft or otherwise, nor for any injury
or damage to persons or property by loss or interruption of business or loss
of income resulting from the following causes, except to the extent caused by
the gross negligence or willful misconduct of Landlord, its agents, servants
or employees; fire, explosion, falling plaster, steam, gas, electricity,
water or rain which may leak or flow from or into any part of the Premises or
from the breakage, leakage, obstruction or other defects of the pipes,
sprinklers, wires, appliances or plumbing or air-conditioning or electrical
works therein, whether such damage or injury results from conditions arising
in the Premises or in other portions of the Building, or from other sources.
Neither Landlord nor its agents shall be liable for interference with the
light or other incorporeal hereditaments, nor shall Landlord be liable for
damages from any latent defect in the Premises, the Building or the Project.
Tenant shall give prompt notice to Landlord in case of fire or accidents in
the Premises or in the Building and of defects therein or in the fixtures or
equipment.
Tenant understands that Landlord will not carry insurance of any kind on
Tenant's furniture or furnishings, fixtures or equipment, and that Landlord
shall not be obligated to repair any damage thereto or replace the same.
SECTION 10.3 TENANT'S WAIVER. With respect to any damage which Landlord
is obligated to repair or elects to repair, Tenant, as a material inducement
to Landlord entering into this Lease, irrevocably waives and releases its
rights under the provisions of Section 1932(2) and 1933(4) of the California
Civil Code and all comparable statutes or rules of law now or hereafter in
effect.
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ARTICLE XI. EMINENT DOMAIN
If the whole of the Premises or so much thereof as to render the balance
unusable by Tenant shall be taken under power of eminent domain or if so much
of the Building or of the Common Facilities is/are taken under power of
eminent domain as, in Landlord's reasonable judgment, prevents or
substantially impairs the use of the Building for the uses and purposes then
being made or proposed to be made by Landlord of the Building, this Lease
shall automatically terminate as of the date of such condemnation, or as of
the date possession is taken by the condemning authority, whichever is
earlier. No award for any partial or entire taking shall be apportioned, and
Tenant hereby assigns to Landlord any award which may be made in any taking
or condemnation affecting the Premises or any portion of the Project,
together with any and all rights of Tenant now or hereafter arising in or to
the same or any part thereof, provided, however, that nothing contained
herein shall be deemed to give Landlord any interest in or to require Tenant
to assign to Landlord any award made to Tenant for the taking of personal
property and trade fixtures belonging to Tenant and/or for the interruption
of or damage to Tenant's business and/or for relocation expenses.
In the event of a partial taking of any portion of the Premises which
does not result in a termination of this Lease, the basic annual rent shall
be reduced in proportion to the part of the Premises taken, taking into
account any restoration and repair by Landlord.
No temporary taking of the Premises and/or of Tenant's rights therein or
under this Lease shall terminate this Lease or give Tenant any right to any
abatement of rent hereunder. Any award made by reason of any such temporary
taking shall belong entirely to Landlord and shall be applied by Landlord
against the rent and the other obligations of Tenant hereunder when such rent
and other obligations first accrue.
Except as provided above, any award or damages payable in connection
with a taking of the Building and/or the Project, or any portion thereof,
under the power of eminent domain shall belong entirely to Landlord and
Tenant shall have no right or interest therein.
ARTICLE XII. SUBORDINATION; ESTOPPEL CERTIFICATE
SECTION 12.1 SUBORDINATION. On request of Landlord, Tenant will in
writing subordinate its rights hereunder to the lien of any first mortgage or
first deed of trust now or hereafter in force against the Premises and to all
advances made or hereafter to be made upon the security thereof, in the form
required by the holder of such mortgage or deed of trust. In the event any
proceedings are brought for foreclosure, or in the event of the exercise of
any power of sale under any mortgage or deed of trust made by Landlord
covering the Premises, Tenant shall attorn to the purchaser upon any such
foreclosure or sale and recognize such purchaser as the Landlord under this
Lease.
SECTION 12.2 ESTOPPEL CERTIFICATE. Tenant shall, at any time and from
time to time, within ten (10) days' after notice from Landlord, execute,
acknowledge and deliver to Landlord a statement in writing (i) certifying
that this Lease is unmodified and in full force and effect (or, if modified,
stating the nature of such modification and certifying that this Lease, as so
modified, is in full force and effect) and the dates to which basic annual
rental, additional rent and other charges have been paid in advance, if any,
(ii) acknowledging that, to Tenant's knowledge, there are no uncured defaults
on the part of Landlord hereunder, or specifying such defaults if any are
claimed, (iii) certifying that Tenant has no existing offsets and no right of
offset against Landlord, and (iv) certifying that Tenant has accepted
possession of the Premises. Any such statement may be relied upon by any
prospective purchaser or encumbrancer of all or any portion of the Premises,
Building and/or Project.
ARTICLE XIII. DEFAULTS AND REMEDIES
SECTION 13.1 TENANT'S DEFAULTS. The occurrence of any one or more of
the following events shall constitute a default hereunder by Tenant:
(a) The abandonment or vacation of the Premises by Tenant.
(b) The failure by Tenant to make any payment of basic annual rent
or additional rent required to be made by Tenant hereunder, as and when due,
where such failure shall continue for a period of three (3) days after
written notice thereof from Landlord to Tenant; provided, however, that any
such notice shall be in lieu of, and not in addition to, any notice required
under California Code of Civil Procedure Section 1161 ET SEQ. For purposes
of these default and remedies provisions, the term "additional rent" shall be
deemed to include all amounts of any type whatsoever other than basic annual
rent to be paid by Tenant pursuant to the terms of this Lease.
(c) Use of the Premises for any purpose other than as authorized
in this Lease.
(d) Assignment or sublease of this Lease or of any interest
therein by Tenant, either voluntarily or by operation of law (including
transfer by testacy or intestacy), whether by judgment, execution, or other
means, without the prior written consent of Landlord.
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(e) The failure or inability by Tenant as may be determined by
Landlord to observe or perform any of the express or implied covenants or
provisions of this Lease to be observed or performed by Tenant, other than
those specified in (a) through (d) above, where such failure shall continue
for a period of fifteen (15) days after written notice thereof from Landlord
to Tenant; provided, however, that any such notice shall be in lieu of, and
not in addition to, any notice required under California Code of Civil
Procedure Section 1161 ET SEQ.
(f) (i) The making by Tenant of any general assignment for the
benefit of creditors; (ii) a case is commenced by or against Tenant under
Chapters 7, 11 or 13 of the Bankruptcy Code, Title 11 of the United States
Code as now in force or hereafter amended and if so commenced against Tenant,
the same is not dismissed within sixty (60) days; (iii) the appointment of a
trustee or receiver to take possession of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease, where
possession is not restored to Tenant within thirty (30) days; (iv) the
attachment, execution or other judicial seizure of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this
Lease, where such seizure is not discharged within thirty (30) days; or (v)
Tenant's convening of a meeting of its creditors or any class thereof for the
purpose of effecting a moratorium upon or composition of its debts.
SECTION 13.2 LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, then, in addition to
any other remedies available to Landlord at law or in equity, Landlord may
exercise the following remedies:
(i) Landlord may terminate this Lease and all rights of
Tenant hereunder by giving written notice of such termination to Tenant. In
the event that Landlord shall so elect to terminate the Lease, then Landlord
may recover from Tenant:
The worth at the time of award of the unpaid rent, charges,
and additional rent which had been earned as of the date of the termination
hereof;
The worth at the time of award of the amount by which the
unpaid rent and additional rent which would have been earned after the date of
the termination hereof until the time of award exceeds the amount of such
rental loss that Tenant proves could have been reasonably avoided;
The worth at the time of award of the amount by which the
unpaid rent, charges, and additional rent for the balance of the term hereof
after the time of award exceeds the amount of such rental loss that Tenant
proves could have been reasonably avoided;
Any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant'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 brokerage
commissions, necessary repair, renovation and alteration of the Premises,
reasonable attorneys' fees, expert witness costs, and any other reasonable
costs; and
Any other amount which Landlord may by law hereafter be
permitted to recover from Tenant to compensate Landlord for the detriment
caused by Tenant's default. As used in subparagraphs (i) and (ii) above, the
"worth at the time of award" shall be computed by allowing interest at the
maximum rate permitted by law.
As used in subparagraph (iii) above, the "worth at the time of award" 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%), but
not in excess of ten percent (10%) per annum.
(ii) Pursue the remedy described in California Civil Code
Section 1951.4 and continue this Lease in effect without terminating Tenant's
right to possession even though Tenant has breached this Lease and abandoned
the Premises and to enforce all of Landlord's rights and remedies under this
Lease, at law or in equity, including the right to recover the rent as it
becomes due under this Lease; provided, however, that Landlord may at any
time thereafter elect to terminate this Lease for such previous breach by
notifying Tenant in writing that Tenant's right to possession of the Premises
has been terminated.
(iii) Nothing in this Article XIII shall be deemed to affect
Tenant's indemnity of Landlord, for liability or liabilities based upon
occurrences prior to the termination of this Lease for personal injuries or
property damage under the indemnification clause or clauses contained in this
Lease. Such covenants of indemnification shall survive the termination of
this Lease.
(iv) In the event of default by reason of any of the events
stated in subparagraph (f) of Section 13.1 above, this Lease or any interest
in and to the Premises shall not become an asset in any of such proceedings
and, in any such event and in addition to any and all rights or remedies of
the Landlord hereunder or by law provided, it shall be lawful for the
Landlord to declare the term hereof ended and to re-enter the Premises and
take possession thereof and remove all persons therefrom, and Tenant and its
creditors (other than Landlord) shall have no further claim thereon or
hereunder.
(b) Landlord shall be under no obligation to observe or perform
any covenant of this Lease on its part to be observed or performed which
accrues after the date of any default by Tenant hereunder. In
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any action for unlawful detainer commenced by Landlord against Tenant by
reason of any default hereunder, the reasonable rental value of the Premises
for the period of the unlawful detainer shall be deemed to be the amount of
the basic annual rent and additional rent reserved in this Lease for such
period, unless Landlord or Tenant shall prove to the contrary by competent
evidence. The various rights, powers and remedies reserved to Landlord
herein, and those rights, powers and remedies of Landlord under any other
agreement now or hereafter in force between Landlord and Tenant, including
those not specifically described herein, shall be cumulative, and, except as
otherwise provided by California statutory law in effect at the time,
Landlord may pursue any or all of such rights and remedies, at the same time,
or otherwise.
(c) No delay or omission of Landlord to exercise any right or remedy
shall be construed as a waiver of any such right or remedy or of any default
by Tenant hereunder. The acceptance by Landlord of rent or any additional
rent hereunder shall not be (i) a waiver of any preceding breach or default
by Tenant of any provision thereof, other than the failure of Tenant to pay
the particular rent or any additional rent accepted, regardless of Landlord's
knowledge of such preceding breach or default at the time of acceptance of
such rent or additional rent, or (ii) a waiver of Landlord's right to
exercise any remedy available to Landlord by virtue of such breach or
default. No payment by Tenant or receipt by Landlord of a lesser amount than
the rent herein stipulated shall be deemed to be other than on account of the
earliest due stipulated rent, nor shall any endorsement or statement on any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Landlord shall accept such check or payment
without prejudice to Landlord's right to recover the balance of such rent or
pursue any other remedy in this Lease provided. Tenant hereby waives any
right of redemption or relief from forfeiture under California Code of Civil
Procedure Sections 1174 or 1179, or under any other present or future law, in
the event Tenant is evicted or Landlord takes possession of the Premises by
reason of any default by Tenant hereunder. No act or thing done by Landlord
or Landlord's agents during the term of this Lease shall be deemed an
acceptance of a surrender of the Premises, and no agreement to accept a
surrender shall be valid unless in writing and signed by Landlord. No
employee of Landlord or of Landlord's agents shall have any power to accept
the keys to the Premises prior to the termination of this Lease, and the
delivery of the keys to any such employee shall not operate a termination of
this Lease or a surrender of the Premises.
SECTION 13.3 INTEREST ON TENANT'S OBLIGATIONS; LATE PAYMENTS.
(a) Any installment of rent due under this Lease or any other sum
not paid to Landlord when due (other than interest) shall bear interest at
the maximum rate allowed by law from the date such payment is due until paid,
provided, however, that the payment of such interest shall not excuse or cure
the default.
(b) Tenant hereby acknowledges that the late payment by Tenant to
Landlord of rent and other sums due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs may include, but are not limited
to, administrative, processing and accounting charges, and late charges which
may be imposed on Landlord by the terms of any mortgage or trust deed
covering the premises. Accordingly, if any installment of rent or any other
sum due from Tenant shall not be received by Landlord or Landlord's designee
within five (5) business days after the date due, then Tenant shall pay to
Landlord, in addition to the interest provided above, a late charge in the
amount of five percent (5%) of the delinquent installment of rent. The
parties agree that such late charge represents a fair and reasonable estimate
of the cost Landlord will incur by reason of late payment by Tenant.
Acceptance of such late charge by Landlord shall in no event constitute a
waiver of Tenant's default with respect to such overdue amount, nor prevent
Landlord from exercising any of the other rights and remedies granted
hereunder.
(c) Following each third consecutive late payment of rent, Landlord
shall have the option (i) to require that beginning with the first payment of
rent next due, rent shall no longer be paid in monthly installments but shall
be payable quarterly three (3) months in advance and/or (ii) to require that
Tenant increase the amount, if any, of the security deposit required under
Section 3.2 as listed in Item 9 of the Basic Lease Provisions by one hundred
percent (100%), which additional security deposit shall be retained by
Landlord, and may be applied by Landlord, in the manner provided in Section
3.2.
SECTION 13.4 RIGHT OF LANDLORD TO PERFORM. All covenants and
agreements to be performed by Tenant under any of the terms of this Lease
shall be performed by Tenant at Tenant's sole cost and expense and without
any abatement of rent. If Tenant shall fail to pay any sum of money, other
than rent, required to be paid by it hereunder or shall fail to perform any
other act on its part to be performed hereunder, or to provide any insurance
or evidence of insurance to be provided by Tenant, and such failure shall
continue beyond any applicable grace period set forth in Section 13.1, then
in addition to any other remedies provided herein, Landlord may, but shall
not be obligated so to do, and without waiving or releasing Tenant from any
obligations of Tenant, make any such payment or perform any such act on
Tenant's part to be made or performed as provided in this Lease or to provide
such insurance. Any payment or performance of any act or the provision of any
such insurance by Landlord on Tenant's behalf shall not give rise to any
responsibility of Landlord to continue making the same or similar payments or
performing the same or similar acts. All costs, expenses and other sums
incurred or paid by Landlord in connection therewith, together with interest
at the maximum rate permitted by law from the date incurred or paid by
Landlord shall be deemed to be additional rent hereunder and shall be paid by
Tenant with and at the same time as the next monthly installment of basic
annual rent hereunder, and any default therein shall constitute a breach of
the covenants and conditions of this Lease.
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SECTION 13.5 DEFAULT BY LANDLORD. Landlord shall not be deemed to be
in default in the performance of any obligation required to be performed by
it under this Lease unless and until it has failed to perform such obligation
within thirty (30) days after written notice by Tenant to Landlord, and to
any mortgagee or beneficiary of a deed of trust with an interest in any
encumbrance affecting Landlord's interest in the Premises, specifying in
reasonable detail the nature and extent of any such failure; provided,
however, that if the nature of Landlord's obligation is such that more than
thirty (30) days are required for its performance, then Landlord shall not be
deemed to be in default if it commences such performance within such thirty
(30) day period and thereafter diligently prosecutes the same to completion.
If, after notice to Landlord of default, Landlord fails to cure such default
as provided herein, then Tenant shall have the right to cure such default at
Landlord's expense. Tenant shall not have the right to terminate this Lease
or to withhold, reduce or offset any amount against any payments of basic
annual rent or any other charges due and payable hereunder, and Tenant's
remedy shall be limited to damages and/or an injunction. It is expressly
understood and agreed to that any money judgment resulting from any default
or other claim arising under this Lease shall be satisfied only out of the
rents, issues, profits or other income ("Income") actually received from the
operation of the Building and no other real, personal or mixed property of
Landlord (the term "Landlord" for purposes of this Section only shall mean
any and all investors, owners, managers and agents, if any, of Landlord),
wherever situated, shall be subject to levy on any such judgment obtained
against Landlord and whether or not such Income is sufficient for the payment
of such judgment, Tenant will not institute any further action, suit, claim
or demand, in law or in equity, against Landlord for or on the account of
such deficiency. Tenant hereby waives, to the extent waivable under law, any
right to satisfy said money judgment against Landlord except from Income
received by Landlord for the operation of the Building.
SECTION 13.6 EXPENSES AND LEGAL FEES. If Tenant or Landlord shall
bring any action for any relief against the other, declaratory or otherwise,
arising out of or under this Lease, including any suit by Landlord for the
recovery of rent or possession of the Premises, the prevailing party shall be
entitled to recover its attorney's fees and costs, including without
limitation, expert witness fees, photocopying, facsimile and delivery costs,
in such suit, and such attorney's fees and costs shall be deemed to have
accrued on the commencement of such action and shall be paid whether or not
such action is prosecuted to judgment.
SECTION 13.7 REIMBURSEMENT OF CONCESSIONS. Any agreement by Landlord
contained in this Lease for free or abated rent, tenant improvement
allowances, above-standard tenant improvements or other charges applicable to
the Premises, or for the giving or paying by Landlord to or for Tenant of any
cash or other bonus, or consideration for Tenant's entering into this Lease
(hereinafter collectively "Concessions") shall be deemed conditioned upon
Tenant's full and faithful performance of all of the terms, covenants and
conditions of this Lease to be performed and observed by Tenant during the
term hereof. Upon the occurrence of a default or breach of this Lease, as
defined in Section 13.1, by Tenant and the filing of an action by Landlord
for recovery of amounts owed to Landlord and/or recovery of possession of the
Premises, then any such Concessions shall automatically be deemed deleted from
this Lease and of no further force or effect and any free rent, abated rent,
tenant allowance, above-standard tenant improvement, signing bonus, abated,
given or paid by Landlord under such Concessions, shall be immediately due
and payable by Tenant to Landlord and recoverable by Landlord as additional
rent under this Lease whether or not the action proceeds to judgment,
notwithstanding any subsequent cure of said breach by Tenant. The acceptance
by Landlord of rent or the cure of a breach which initiated operation of this
Section shall not be deemed a waiver by Landlord of the provisions of this
Section 13.7 unless specifically stated in writing by Landlord at the time of
such acceptance.
ARTICLE XIV. END OF TERM
SECTION 14.1 HOLDING OVER. This Lease shall terminate and become null
and void without further notice upon the expiration of the term herein
specified, and any holding over by Tenant after such expiration shall not
constitute a renewal or extension hereof or give Tenant any rights under this
Lease, except when in writing signed by both parties hereto or as otherwise
herein provided. If Tenant shall hold over for any period after the
expiration of the Lease term, Landlord may, at its option, treat Tenant as a
tenant at sufferance only commencing on the first (1st) day following the
expiration of this Lease and subject to all of the terms and conditions
herein contained, except that the basic annual rent, and monthly installments
thereof, shall be one hundred fifty percent (150%) of that payable at the
date of expiration.
SECTION 14.2 SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the
expiration of the term of this Lease, or upon any earlier termination of this
Lease, Tenant shall quit and surrender possession of the Premises to Landlord
in as good order, condition and repair as when received or as hereafter may be
improved by Landlord or Tenant, reasonable wear and tear and repairs which
are Landlord's obligation excepted, and shall, without expense to Landlord,
remove or cause to be removed from the Premises all debris and rubbish, all
furniture, equipment, and trade fixtures, free-standing cabinet work and other
articles of any other persons claiming under Tenant unless Landlord exercises
its option to have any subleases or subtenancies assigned to it. Tenant shall
repair all damage to the Premises resulting from such removal, which repair
shall include the patching and filling of holes and repair of structural
damage. In the event that Tenant shall fail to comply with the provisions of
this Section 14.2, Landlord may make such repairs and the cost thereof shall
be additional rent payable by Tenant upon demand. If requested by Landlord,
Tenant shall execute, acknowledge and deliver to Landlord an instrument in
writing releasing and quitclaiming to Landlord all right, title and interest
of Tenant in and to the Premises by reason of this Lease or otherwise.
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SECTION 14.3 AFFIXED PROPERTY. All fixtures, equipment, alterations,
additions, improvements and/or appurtenances attached to or built into the
Premises prior to or during the term hereof, whether by Landlord at its
expense or at the expense of Tenant or both, shall be and remain part of the
Premises and shall belong to Landlord unless otherwise expressly provided for
in this Lease or unless such removal is required by Landlord pursuant to the
provisions of Section 6.4 hereof. Such fixtures, equipment, alterations,
additions, improvements and/or appurtenances shall include, without
limitation, floor coverings, drapes, paneling, molding, built-in cabinets,
doors, vaults, (exclusive of vault doors), plumbing, electrical
communications and lighting systems, silencing equipment, all fixtures and
outlets for the systems mentioned above and for all telephone, radio,
telegraph and television purposes, and any special flooring or ceiling
installations.
ARTICLE XV. NOTICES
Any notice, election, demand, consent, approval or other communication
to be given or other document to be delivered by either party to the other
hereunder may be delivered in person to an officer or duly authorized
representative of the other party, or may be deposited in the United States
mail, duly registered or certified, postage prepaid, return receipt
requested, and addressed to the other party at the address set forth in Item
12 of the Basic Lease Provisions hereof, or if to Tenant, at such address or,
from and after the Commencement Date, at the Premises (whether or not Tenant
has departed from, abandoned or vacated the Premises). Either party may from
time to time, by written notice to the other, served in the manner herein
provided, designate a different address. If any notice or other documents is
sent by mail as aforesaid, the same shall be deemed served or delivered
twenty-four (24) hours after the mailing thereof. If more than one Tenant is
named under this Lease, service of any notice upon any one of said Tenants
shall be deemed as service upon all of them.
ARTICLE XVI. RULES AND REGULATIONS
The Rules and Regulations attached hereto as Exhibit "C" by this
reference are hereby incorporated herein and made a part hereof. Tenant
agrees to observe faithfully and comply strictly with such Rules and
Regulations, and any reasonable amendments, modifications and/or additions
thereto as may hereafter be adopted and published by written notice to
tenants by Landlord for the safety, care, security (including restrictions on
hours and manner of access to the Building) good order, cleanliness of the
Premises, Building and/or the Project, or portions thereof. Landlord shall
not be liable to Tenant for any violation of such Rules and Regulations or
the breach of any covenant or condition in any lease by any other tenant. One
or more waivers by Landlord of any breach of such Rules and Regulations by
Tenant or by any other tenant(s) shall not be a waiver of any subsequent
breach of that rule or any other. In the case of any conflict between such
Rules and Regulations and this Lease, this Lease shall control.
ARTICLE XVII. BROKER'S COMMISSION
The parties recognize as the broker(s) who procured this Lease the
firm(s), if any, stated in Item 10 of the Basic Lease Provisions, and agree
that Landlord shall be solely responsible for the payment of brokerage
commissions to said broker(s), and that Tenant shall have no responsibility
therefor unless otherwise provided in this Lease. Tenant warrants that it has
had no dealings with any other real estate broker or agent in connection with
the negotiation of this Lease, and agrees to indemnify, defend and hold
Landlord harmless from any cost, expense or liability (including reasonable
attorneys' fees in connection therewith) for any compensation, commissions or
charges claimed by any other real estate broker or agent employed or claiming
to represent or to have been employed by Tenant in connection with the
negotiation of this Lease. The foregoing agreement shall survive the
termination of this Lease.
ARTICLE XVIII. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer or transfers of Landlord's interest in the
Premises, including a so-called sale-leaseback, the transferor shall be
automatically relieved of any and all obligations on the part of Landlord
accruing under this Lease from and after the date of such transfer. It is
intended hereby that the covenants and obligations contained in this Lease on
the part of Landlord shall, subject to the foregoing, be binding on Landlord,
its successors and assigns, only during and in respect of their respective
periods of ownership.
ARTICLE XIX. INTERPRETATION
SECTION 19.1 GENDER AND NUMBER. Whenever the context of this Lease
requires, the words "Landlord" and Tenant", as used herein, shall include the
plural as well as the singular and words used in neuter, masculine or feminine
genders shall include the others.
SECTION 19.2 HEADINGS. The captions, headings, title, numbering and
indexing of the Articles and Sections of this Lease are for convenience only,
are not a part of this Lease and shall have no effect upon the construction
or interpretation of any part hereof.
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ARTICLE XX. EXECUTION AND RECORDING
SECTION 20.1 CORPORATE AUTHORITY. If Tenant is a corporation, each
individual executing this Lease on behalf of said corporation represents and
warrants that he is duly authorized to execute and deliver this Lease on
behalf of said corporation in accordance with said corporation's by-laws or a
duly adopted resolution of its board of directors, and that this Lease is
binding upon said corporation in accordance with its terms. Tenant shall, at
Landlord's request, deliver a certified copy of its board of directors'
resolution authorizing or ratifying such execution.
SECTION 20.2 RECORDING. Tenant shall not record this Lease without the
prior written consent of Landlord. Tenant, upon the request of Landlord,
shall execute and acknowledge a "short form" memorandum of this Lease for
recording purposes.
SECTION 20.3 AMENDMENTS. No amendment, addition, revocation or
ratification of this Lease shall be effective unless in writing signed by the
parties hereto. No actions, policies, oral or informal arrangements,
business dealings or other course of conduct by or between the parties shall
be deemed to amend this Lease or revise this Lease in any respect.
ARTICLE XXI. MISCELLANEOUS
SECTION 21.1 NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and
agrees that the terms of this Lease are confidential and constitute
proprietary information of Landlord. Disclosure of the terms hereof could
adversely affect the ability of Landlord to negotiate other leases with
respect to the Project. Tenant agrees that it, and its partners, officers,
directors, employees and attorneys shall not disclose the terms and
conditions of this Lease to any other person without the prior written
consent of Landlord, provided, however, that Tenant may disclose the terms
hereof to the independent accountants who audit its financial statements. It
is understood and agreed that damages would be an inadequate remedy for the
breach of this provision by Tenant, and Landlord shall have the right to
specific performance of this provision and to injunctive relief to prevent its
breach or continued breach.
SECTION 21.2 FURNISHING OF FINANCIAL STATEMENTS. Landlord has reviewed
financial statements and tax returns if so requested of the Tenant and has
relied upon the truth and accuracy thereof with Tenant's knowledge and
representations of the truth and accuracy of same and that said statements
accurately and fairly depict the financial condition of Tenant. Said
statements are an inducing factor and consideration for the Tenant. Tenant
and/or guarantors shall promptly furnish Landlord, upon request, with annual
financial statements reflecting the then current financial condition of
Tenant and/or guarantors throughout the term of this Lease.
SECTION 21.3 CHANGES REQUESTED BY LENDER. If, in connection with
obtaining financing for the Building, any lender shall request reasonable
modifications in this Lease as a condition to such financing, Tenant will not
unreasonably withhold, delay or defer its consent thereto, provided that such
modifications do not materially increase the obligations of Tenant hereunder
or materially and adversely affect the leasehold interest hereby created.
SECTION 21.4 GOVERNMENTAL REQUIREMENTS. Tenant covenants at all
times during the term of this Lease to comply with the requirements of the
Occupational Safety and Health Act of 1970, 29 U.S.C., Section 651 et seq.,
and any analogous legislation in California (collectively, the "Act"), to the
extent that the Act applies to the Premises and any activities therein, and
to comply with all other Governmental Requirements, including, but not
limited to, all laws prohibiting discrimination against any person or group of
persons on account of race, color, creed, sex, national origin or ancestry
and all laws described in Section 4.1 above. Without limiting the generality
of the foregoing, Tenant covenants to maintain all working areas, all
machinery, equipment, appliances, structures, electrical facilities and the
like upon the Premises in a condition that full complies with the
requirements of the Act, including such requirements as would be applicable
with respect to agents, employees or contractors of Landlord who may from
time to time be present upon the Premises.
SECTION 21.5 COVENANTS AND CONDITIONS. All of the provisions of this
Lease shall be construed to be "conditions" as well as "covenants" as though
the words specifically expressing or imparting covenants and conditions were
used in each separate provision.
SECTION 21.6 WORK LETTER. Landlord and Tenant each agree to fully
perform their obligations under the Work Letter, if any. Any default by
either party in the performance of its obligations under the Work Letter shall
constitute a default by such party under this Lease.
SECTION 21.7 JOINT AND SEVERAL LIABILITY. If there be more than one
Tenant, the obligations hereunder imposed upon Tenant shall be joint and
several and the act of or notice from, or notice or refund to, or the signature
of, any one or more of such persons, with respect to the tenancy of this Lease,
shall be binding upon each and all of the persons executing this Lease as
Tenant with the same force and effect as if each and all of them had so acted
or so given or received such notice or refund or so signed.
SECTION 21.8 SUCCESSORS. Subject to Articles VIII and XVIII above, all
rights and liabilities herein given to, or imposed upon, the respective
parties hereto shall extend to and bind the several respective
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heirs, executors, administrators, successors, and assigns of the parties.
Nothing contained herein is intended, or shall be construed, to confer upon
or grant to any person other than Landlord and Tenant any rights or remedies
under this Lease.
SECTION 21.9 TIME OF ESSENCE. Time is of the essence with respect to
the performance of every provision of this Lease in which time of performance
is a factor.
SECTION 21.10 CONTROLLING LAW. This Lease shall be governed by and
interpreted in accordance with the laws of the State of California.
SECTION 21.11 SEVERABILITY. If any term or provision of this Lease
shall be held invalid or unenforceable to any extent, the remainder of this
Lease shall not be affected thereby and for each term and provision of this
Lease shall be valid and enforceable to the fullest extent permitted by law.
SECTION 21.12 RELATIONSHIP OF PARTIES. Nothing contained herein shall
be deemed or construed by the parties hereto, or by any third party, as
creating the relationship of principal and agent or of partnership or joint
venture between the parties hereto, it being understood and agreed that
neither the method of computation of rent, nor any other provision contained
herein, nor any acts of the parties herein, shall be deemed to create any
relationship between the parties hereto other than the relationship of Tenant
and Landlord.
SECTION 21.13 INABILITY TO PERFORM. In the event that Landlord shall
be delayed or hindered in or prevented from the performance of any work or in
performing any act required hereunder by reason of: strikes; lockouts; labor
troubles; inability to procure materials, labor or energy; failure of power;
disruption, reduction, interruption, curtailment or failure of utility, solid
waste disposal or other services; restrictive Governmental Requirements;
voluntary or involuntary participation, at the request of a governmental
agency or otherwise, in any plan or program involving allocations, priorities,
limitations or restraints regarding water, fuel or other energy, or otherwise;
other governmental action or inaction; riots, insurrection; war, fires;
floods; earthquakes; storms; droughts, other Acts of God; or any other reason
of a similar or dissimilar nature not the fault of Landlord in performing
work or doing acts required under the terms of this Lease, then the
performance of such work or the doing of such act shall be excused for the
period of the delay, and the period for the performance of any work or the
doing of such act shall be extended for a period equivalent to the period of
such delay. The occurence of any event constituting a cause for excusable
delay shall not relieve Tenant from any obligations, including payment of
rent, under this Lease.
SECTION 21.14 QUIET ENJOYMENT. Upon payment by Tenant of the basic
annual rent, additional rent and all the charges herein provided, and upon
the observance and performance of all the covenants, terms and conditions of
this Lease on Tenant's part to be observed and performed, Tenant shall
peaceably and quietly hold and enjoy the Premises for the term hereby
demised without hindrance or interruption by Landlord or any other person or
persons lawfully or equitably claiming by, through or under Landlord.
SECTION 21.15 HAZARDOUS WASTE AND MATERIALS. Tenant shall not engage
in any activity on or about the Premises or the Project that violates any
Environmental Law, and shall promptly, at Tenant's sole cost and expense,
take all investigatory and/or remedial action required or ordered by any
governmental agency or Environmental Law for clean-up and removal of any
contamination involving any Hazardous Material created or caused directly or
indirectly by Tenant. The term "Environmental Law" shall mean any federal,
state or local law, statute, ordinance or regulation pertaining to health,
industrial hygiene or the environmental conditions on, under or about the
Premises, including, without limitation, (i) the Comprehensive Environmental
Response, Compensation and Liability of 1980 ("CERCLA"), 42 U.S.C. Sections
9601 ET SEQ.; (ii) the Resource Conservation and Recovery Act of 1976
("RCRA"), 42 U.S.C. Sections 6901 ET SEQ.; (iii) California Health and Safety
Code Sections 25100 ET SEQ.; (iv) the Safe Drinking Water and Toxic
Enforcement Act of 1986, California Health and Safety Code Section 25249.5 ET
SEQ.; (v) the Federal Water Pollution Control Act, 33 U.S.C. Sections 1317 ET
SEQ.; (vi) California Water Code Section 1300 ET SEQ.; and (vii) California
Civil Code Section 3479 ET SEQ., as such laws are amended and the regulations
and administrative codes applicable thereto. The term "Hazardous Material"
includes, without limitation, any material or substance which is (i) defined
or listed as a "hazardous waste", "extremely hazardous waste", "restrictive
hazardous waste" or "hazardous substance" or considered a waste, condition of
pollution or nuisance under the Environmental Laws; (ii) petroleum or a
petroleum product or fraction thereof; (iii) asbestos; and/or (iv) substances
known by the State of California to cause cancer and/or reproductive
toxicity. It is the intent of the parties hereto to construe the term
"Hazardous Materials" and "Environmental Laws" in its broadest sense. Tenant
shall provide all notices required pursuant to the Safe Drinking Water and
Toxic Enforcement Act of 1986, California Health and Safety Code Section
25249.5 ET SEQ. Tenant shall provide prompt written notice to Landlord of
the existence of Hazardous Substances on the Premises and all notices of
violation of the Environmental Laws received by Tenant. Tenant's obligations
pursuant to this Section 21.15 shall be referred to in this Lease as
"Environmental Compliance".
SECTION 21.16 ENTIRE AGREEMENT. This Lease and the Exhibits and other
attachments hereto cover in full each and every agreement of every kind or
nature whatsoever between the parties hereto concerning the Premises and the
Building or Project, and all preliminary negotiations, oral agreements,
understandings and/or practices of whatsoever kind with respect to the
Premises or the Building or Project, except those contained herein or
therein, are superseded and of no further force or effect; no person, firm or
corporation has at any time had an authority from Landlord to make any
representations or promises on
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<PAGE>
behalf of Landlord, and Tenant agrees that if any such representations or
promises have been made by Landlord or others, Tenant hereby waives all
rights to rely thereon. No verbal agreement or implied covenant shall be
held to vary the provisions hereof, any statute, law, or custom to the
contrary notwithstanding.
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EXHIBIT "A-1"
Prior to the execution of the Lease to which this Exhibit A-1 is attached,
attach a floor plan(s) of the Building designating the location of the Premises.
[FLOOR PLAN]
EXHIBIT "A-1"
TO OFFICE SPACE LEASE
<PAGE>
EXHIBIT "A-2"
LEGAL DESCRIPTION OF THE PROJECT
All that certain real property located in the State of California, County
of Los Angeles, more particularly described as follows:
PARCEL A:
THAT PART OF LOT 30 OF THE HOLLYWOOD VISTA TRACT, IN THE CITY OF LOS
ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 2 PAGE 80 OF
MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
BEGINNING AT A POINT IN THE WESTERLY LINE OF SAID LOT 30, DISTANT 50 FEET
NORTH OF THE SOUTHWESTERLY CORNER OF SAID LOT; THENCE NORTHERLY ALONG THE
WESTERLY LINE OF SAID LOT, 64.60 FEET; THENCE EASTERLY PARALLEL WITH THE
SOUTHERLY LINE OF SAID LOT TO THE EASTERLY LINE THEREOF; THENCE WESTERLY
PARALLEL WITH THE SOUTHERLY LINE OF SAID LOT TO THE POINT OF BEGINNING.
PARCEL B:
THE SOUTH 50 FEET OF LOT 30 OF HOLLYWOOD VISTA TRACT, IN THE CITY OF LOS
ANGELES, IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP
RECORDED IN BOOK 2 PAGE 80 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF
SAID COUNTY.
PARCEL C:
LOT 31 OF HOLLYWOOD VISTA TRACT, IN THE CITY OF LOS ANGELES, IN THE COUNTY
OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 2 PAGE 80
OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
EXHIBIT "A-2"
TO OFFICE SPACE LEASE
<PAGE>
EXHIBIT "A-3"
CONFIRMATION OF TERM
The undersigned as the Landlord and Tenant under that certain Office Space
Lease dated _________, for space within 7083 Hollywood Boulevard, Los Angeles,
California, hereby confirm that the term of said Lease has commenced __________,
and that the expiration date of the term of said Lease is ______________.
JAHRA INVESTMENTS, N.V.
By:
------------------------------------
Ani Soghomonian
Its: Treasurer
"Landlord"
DVD EXPRESS, INC.,
a California corporation
By:
------------------------------------
Its:
--------------------------------
"Tenant"
EXHIBIT "A-3"
TO OFFICE SPACE LEASE
<PAGE>
EXHIBIT "B"
THE WORK LETTER
In addition to the mutual covenants contained in the Lease to which this
Work Letter is attached, Landlord and Tenant further mutually agree as follows:
1. PLANS AND SPECIFICATIONS FOR THE PREMISES; TIMING AND PAYMENT OF
CONSTRUCTION
(a) Tenant agrees to cooperate with Landlord's architects and
engineers, who shall prepare, within fifteen (15) days of the execution
of this Lease, detailed space plans and specifications ("Plans") for the
tenant improvement work to be conducted on the Premises ("Work"). The
Plans shall include, but shall not be limited to, locations of doors,
partitioning, reflected ceiling, electrical fixtures, outlets and
switches, telephone outlets, plumbing fixtures, extraordinary floor
loads, and the other special requirements, and Tenant shall approve the
Plans in writing on or before the Space Plan Approval Date set forth in
Item 7 of the Basic Lease Provisions.
(b) Upon approval of the Plans by Tenant, Landlord shall cause
Steiner Construction and at least two (2) other responsible licensed
general contractors acceptable to Landlord to submit a fixed sum bid
detailing the construction costs of the Work (the "Contract Sum"). Upon
receipt of the Contract Sum, Tenant shall have three (3) business days
to approve the lowest responsible Contract Sum in writing, or
alternatively, to modify the Plans. In the event Tenant modifies the
Plans, the revised plans shall be submitted to the contractor
("Contractor") submitting the lowest responsible bid. Tenant shall have
three (3) business days from its receipt of the revised Contract Sum to
approve the same in writing. Any revisions to the Plans and the Contract
Sum must also be approved by Landlord, which approval shall not be
unreasonably withheld or delayed. Immediately following Tenant's written
approval of the Contract Sum, Landlord shall cause Contractor to prepare
a construction contract in a form acceptable to Landlord (the
"Construction Contract") for construction of the Work for the Contract
Sum. Landlord shall be responsible for payment of amounts owing to
Contractor under the Construction Contract and shall be reimbursed by
Tenant in accordance with the terms set forth herein. Contractor shall
construct the Work in accordance with the Plans.
(c) Following approval of the Contract Sum by Tenant and
Landlord, and the Construction Contract by Landlord, and the acquisition
of all necessary governmental permits, including building permits,
Landlord shall instruct the Contractor to proceed and to complete the
Work no later than eight (8) weeks following the commencement of the
Work.
(d) The term "Costs" shall include, (i) amounts incurred by
Landlord to design the Work; (ii) amounts payable to Contractor pursuant
to the Construction Contract; (iii) the cost of permits, licenses,
inspections and certificates, including without limitation, plan check
fees, structural, mechanical and other engineering, consulting fees for
ADA and fire hazard compliance, architectural and space planning fees
incurred by Landlord and/or Tenant in compliance with this Work Letter;
and (iv) any additional cost or expense incurred in connection with any
Change Orders. Costs shall only include costs and expenses incurred in
connection with the design and construction of permanent improvements to
the Premises, and shall not include the cost or expense of any
cabinetry, shelving, furniture, fixtures or equipment to be located on
or about the Premises which Tenant may remove from the Premises.
(e) All Costs of the Work shall be paid for by Tenant. The Cost
of the Work, up to a maximum of One Hundred Ten Thousand Three Hundred
Forty Dollars ($110,340.30)(based on a calculation of Fifteen Dollars
($15.00) per usable square foot) together with interest at the rate of
nine percent (9%) per annum, shall be fully amortized over the term of
the Lease in equal monthly installments, such sum to be added to and
paid by Tenant monthly as Basic Rent. For example, assuming the cost of
the Work equals One Hundred Ten Thousand Three Hundred Forty Dollars
($110,340.00), Tenant shall pay Landlord Three Thousand Five Hundred
Eight and 81/100 Dollars ($3,508.81) during each month of the Lease
Term. If the cost of the Work exceeds One Hundred Ten Thousand Three
Hundred Forty Dollars ($110,340), Tenant shall pay to Landlord such
excess prior to the Commencement Date of the Lease.
2. BUILDING STANDARD WORK
All improvements installed by Landlord shall be to Landlord's
Building Standard identified in EXHIBIT "B-1" attached hereto, unless
otherwise specified on the plans or approved by Landlord and Tenant, and
only in the quantities specified by Landlord as indicated on the plans.
EXHIBIT "B"
TO OFFICE SPACE LEASE
Page 1
<PAGE>
3. SUBSTANTIAL COMPLETION
The Work shall be deemed to be substantially complete for purposes
of this Lease upon (a) completion of the Work in substantial conformance
with the Plans; and (b) if required for Tenant to legally occupy the
Premises, issuance of a certificate of occupancy. Typical "punchlist"
items need not be completed prior or as a condition to substantial
completion of the Work, provided, however, that none of such punchlist
items shall adversely affect Tenant's occupancy of the Premises in any
material respect. Tenant shall be given the opportunity to inspect and
approve the Work within two (2) days following substantial completion of
same. Typical punchlist items shall not be grounds to withhold approval
of the Work, provided, however, that Tenant may notify Landlord of
typical punchlist items after commencement of this Lease as prescribed
in Section 1.2 of the Lease, and Landlord shall endeavor to remedy any
such items in accordance with said Section 1.2 within thirty (30) days
following delivery of such notice.
5. CHANGES IN THE WORK
Once the Plans are approved, Tenant shall have the right to request
of Landlord that changes be made to the Work, but only as provided in
this Section 6. Landlord agrees not to withhold its approval to any such
changes. Tenant shall be responsible for the cost of any such changes
together with Landlord's fee of fifteen percent (15%) for Landlord's
overhead and coordination of the Work. Prior to commencing any such
changes, Landlord shall submit to Tenant a written estimate of the cost
thereof. If Tenant approves such estimate, it shall notify Landlord in
writing within three (3) business days following the date Landlord
submits the written cost estimate to Tenant and, at the same time, pay
Landlord in full the amount of such estimate, and the Contractor shall
proceed with such work. If Tenant shall fail to approve any such
estimate in writing within the three (3) business day period, such
failure shall be deemed a disapproval thereof, and the Contractor shall
not proceed with any such changes but shall continue with the Work as
though the changes had not been requested. Tenant may at its election
waive the requirement that Landlord provide the cost estimate. If Tenant
shall request any change without notifying Landlord or if Tenant waives
the requirement that Landlord provide the cost estimate, Tenant shall
pay for the actual cost of the changes together with Landlord's fee.
Nothing herein shall be deemed to excuse Tenant from the consequences of
its default in failing to notify Landlord of the requested changes.
6. DELAYS
Tenant and Landlord both acknowledge that time is of the essence.
If Tenant, or persons within Tenant's control, delay the progress of
completion of Work required to be performed by Landlord hereunder or
pursuant to any separate agreement by interfering with, or delaying,
Landlord's completion of the Premises, then the date of substantial
completion of the Premises for purposes of this Lease, shall be deemed
to be the date upon which the Premises would have been substantially
completed but for the acts or omissions of Tenant or persons within
Tenant's control. In addition, Landlord's performance within the time
periods provided herein shall be extended for a period of time equal to
any period of delay caused by strikes, lockouts, fire or other casualty,
the elements or acts of God, or governmental action or other cause,
other than financial, beyond the reasonable control of Landlord.
EXHIBIT "B"
TO OFFICE SPACE LEASE
Page 2
<PAGE>
EXHIBIT "B-1"
BUILDING STANDARDS APPLICABLE TO THE PREMISES
A. HEATING, VENTILATION AND AIR CONDITIONING:
Interior spaces shall be provided with a minimum of one
thermostatically controlled zone per 1,000 square feet of usable floor area.
Air conditioning shall be provided at a rate not to exceed one ton per 400
square feet, or as required by the building's mechanical engineer.
B. PARTITIONS, DOOR FRAMES AND HARDWARE:
As indicated on the approved preliminary floor plan, or a maximum of
one lineal foot of interior drywall partitioning per 10 feet of usable floor
area (which includes fifty percent of demising wall) and one building
standard door, frame and hardware for every 250 square feet of usable floor
area, including the public corridor entrance door, (corridor door allowance
shall be required by code). Said hardware shall include mortise locksets on
all public corridor and entrance doors and rim type latchsets on all interior
doors. Doors are flush type, solid core, 3 feet wide, 8 feet high,
stain-grade, vertical grain Douglas fir veneer, with clear lacquer finish.
Latchsets are Schalge AL series with "Neptune" levers. Frames are extruded
aluminum (Western Integrated 300 series or equal) with commercial clear
anodized finish.
C. PAINTING:
Initial painting (egg shell sheen) throughout the Premises in
Building Standard manner, with colors to be selected by Tenant from
Landlord's Building Standard color chart, but not more than two colors in any
suite, and no more than one color in any room.
D. CEILINGS:
Suspended acoustical ceiling (2'X 2' tegular (OK?) tiles Armstrong
704A or equal) and 15/16" standard exposed 1-grid throughout the Premises.
E. LIGHTING:
Recessed fluorescent light fixtures (2'X 4' 3-tube with 18 cell
parabolic diffuser) not to exceed one fixture for each 100 square feet of
usable floor area, including switches for said fixtures as required by code.
All lamps shall be T-8 with energy-saving ballasts.
F. ELECTRIC OUTLETS:
One wall mounted duplex electric convenience outlet for each 100
square feet of usable floor area.
G. TELEPHONE OUTLETS/TELEPHONE BACKBOARD:
One roughed in telephone outlet location consisting of 3/4" conduit
to 6" above the ceiling and plaster ring at +15 inches for each 150 square
feet of usable floor area. One 4' X 4' plywood backboard shall be provided for
the Tenant's installation of telephone equipment.
H. FLOOR COVERINGS:
Tenant's carpet allowance shall consist of approximately 80% of
Tenant's usable floor are and shall be Atlas Carpet Mills, "Oxford" or
"Mayfair" glued directly to the slab, color to be selected by Tenant from the
manufacturer's standard colors. The remaining 20% of Tenant's usable floor
area to be covered with 1/8" thick vinyl composition tile (Armstrong Standard
Excelon) or equal. All carpeted areas shall receive a 4" wall/carpet base;
all tiled areas shall receive a 4" coved rubber base.
I. WINDOW TREATMENTS:
Three inch vertical blinds (Levelor or equal) ceiling to window sill
on all exterior windows shall be provided in color and style as selected by
the Landlord. Window coverings on interior windows are at the Tenant's option
and sole expense.
J. PERIMETER BEAM AND COLUMN FINISHES:
The concrete beams at the perimeter wall shall be covered with a
black plastic laminate top and painted drywall front. All concrete columns
are covered with drywall.
EXHIBIT "B-1"
TO OFFICE SPACE LEASE
PAGE 1
<PAGE>
K. PREMISES IDENTIFICATION:
One building standard suite sign, with suit number and a maximum of
four lines of copy as approved by the Landlord's representative, adjacent to
the primary entrance door to the Premises.
EXHIBIT "B-1"
TO OFFICE SPACE LEASE
PAGE 2
<PAGE>
EXHIBIT "C"
RULES AND REGULATIONS
ATTACHED TO AND WHICH CONSTITUTE
A PART OF OFFICE SPACE LEASE
The following Rules and Regulations shall be in effect at the Project.
Landlord reserves the right to adopt reasonable modifications and additions
hereto.
(1) The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors or halls of the Building shall not be obstructed by any
tenant or used for any purpose other than ingress and egress from the
respective premises. The halls, passages, entrances, elevators, stairways,
balconies and roof are not for the use of the general public, and Landlord
shall in all cases retain the right to control and prevent access thereto of
all persons whose presence in the judgment of Landlord shall be prejudicial
to the safety, character, reputation and interests of the Building and its
tenants, provided that nothing herein contained shall be construed to prevent
such access to persons with whom Tenant normally deals only for the purpose
of conducting its business on the Premises (such as clients, customers,
office suppliers and equipment vendors, and the like) unless such persons are
engaged in illegal activities. No tenant and no employees of any tenant shall
go upon the roof of the Building without the written consent of Landlord.
(2) No awnings or other projection shall be attached to the outside
walls of the Building or to balconies without the prior written consent of
Landlord. No hanging planters, television sets or other objects shall be
attached to or suspended from ceilings without the prior written consent of
Landlord. No curtains, blinds, shades or screens shall be attached to or hung
in, or used in connection with, any window or door of the Premises without
the prior written consent of Landlord. All electrical ceiling fixtures hung
in offices or spaces along the perimeter of the Building must be fluorescent
and/or of a quality, type, design and bulb color approved by Landlord. No
awnings, furniture, trees or plants or other personal property shall be
placed upon any balcony or patio, without Landlord's prior written approval.
(3) No sign, advertisement or notice shall be exhibited, painted or
affixed by any tenant on any part of, or so as to be seen from the outside
of, the Premises or the Building without the prior written consent of
Landlord. In the event of the violation of the foregoing by any tenant,
Landlord may remove such sign, advertisement or notice without any liability
and may charge the expense incurred in such removal to the tenant violating
this rule. Interior signs on doors and director tablet shall be inscribed,
painted or affixed for each tenant by Landlord at the expense of such tenant,
and shall be of a size, color and style acceptable to Landlord.
(4) The sashes, sash doors, skylights, windows and doors that
reflect or admit light and air into the halls, passageways or other public
places in the Building shall not be covered or obstructed by any tenant, nor
shall any bottles, parcels or other articles be placed on the windowsills,
balcony or patio railings.
(5) The water and wash closets and other plumbing fixtures shall not
be used for any purpose other than those for which they were constructed, and
no foreign substance of any kind shall be thrown herein. All damages
resulting from any misuse of the fixtures shall be borne by the tenant who,
or whose servants, employees, agents, visitors or licensees shall have caused
the same.
(6) No tenant shall mark, paint, drill into, or in any way deface
any part of the Premises or the Building. No boring, curring or stringing of
wires or laying of linoleum or other floor coverings shall be permitted,
except with the prior written consent of Landlord, and as Landlord may
direct. Any tenant permitted by Landlord to lay linoleum or other similar
floor covering shall not affix the same to the floor of the Premises in any
manner except by a paste, or other material which may easily be removed with
water, the use of cement or other similar adhesive materials being expressly
prohibited. The method of affixing any such linoleum or other similar floor
covering to the floor, as well as the method of affixing carpets or rugs to
the Premises, shall be subject to approval by Landlord. The expense of
repairing any damage resulting from a violation of this rule shall be borne
by the tenant by whom, or by those agents, clerks, employees or visitors, the
damage shall have been caused.
(7) If Tenant desires telephone or telegraph connections, Landlord
will direct electricians as to where and how the wires are to be introduced.
(8) No bicycles, vehicles or animals of any kind shall be brought
into or kept in or about the Premises, and no cooking shall be done or
permitted by any tenant in the Premises, except that the preparation of
coffee, tea, hot chocolate and similar items for tenants, their employees and
visitors shall be permitted. No tenant shall cause or permit any unusual or
objectionable odors to be produced in or permeate from or throughout the
Premises.
(9) No portion of the Building shall be used for manufacturing or
for the storage of merchandise except as such storage may be incidental to
the use of the Premises for general office purposes without Landlord's prior
written approval. No tenant shall, without the prior written consent of the
Landlord, occupy or permit any portion of his premises to be occupied or used
for the manufacture or sale of liquor,
EXHIBIT "C"
TO OFFICE SPACE LEASE
Page 1
<PAGE>
narcotics, or tobacco in any form, as a medical office, chiropractor's
office, as a barber or manicure shop, or as an employment bureau or any
business other than that specifically provided for in the Lease. No tenant
shall engage or pay any employees on its premises except those actually
working for such tenant on its premises nor advertise for laborers giving an
address at its premises. The Building shall not be used for lodging or
sleeping or for any immoral or illegal purposes.
(10) Except with the prior written consent of the Landlord, no tenant
shall sell, or permit the sale at retail, of newspapers, magazines,
periodicals, or theater tickets, in or from the Building, nor shall any
tenant carry on, or permit or allow any employee or other person to carry on,
the business of stenography, typewriting or any similar business in or from
the Building for the service or accommodation of occupants of any other
portion of the Building.
(11) Landlord reserves the right to prohibit personal goods and
services vendors (as such term is defined below) from access to the Building.
To the extent that Landlord permits such vendors access to the Building, such
access shall be upon such reasonable terms and conditions, including but not
limited to the payment of a reasonable fee and provision for insurance
coverage, as are related to the safety, care and cleanliness of the Building,
the preservation of good order thereon, and the relief of any financial or
other burden on Landlord occasioned by the presence of such vendors or the
sale by them of personal goods or services (as such term is defined below) to
a tenant or its employees. If reasonably necessary for the accomplishment of
the aforementioned purposes, Landlord may exclude a particular vendor
entirely or limit the number of vendors who may be present at any one time in
the Building. The term "personal goods or services vendors" means persons
who periodically enter the Building for the purpose of selling goods or
services to a tenant, other than goods or services which are used by a tenant
only for the purpose of conducting its business on its premises. "Personal
goods or services" include, but are not limited to, drinking water and other
beverages, food, barbering services, and shoe shining services.
(12) No tenant shall make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of this or
neighboring buildings or premises or those having business with them by the
use of any musical instrument, radio, phonograph or unusual noise, or in any
other way.
(13) No tenant shall throw anything out of doors, windows or
skylights or down the passageways.
(14) No tenant, nor any of a tenant' servants, employees, agents,
visitors or licensees, shall at any time bring, keep or use on the Building
any kerosene, gasoline, or inflammable, combustible, explosive, or corrosive
fluid, or any other illuminating material, or use any method of heating other
than that supplied by Landlord.
(15) No tenant shall sweep or throw or permit to be swept or thrown
from the Premises any dirt or other substance into any of the corridors or
halls or elevators, or out of the doors, windows, stairways, patios or
balconies of the Building, and Tenant shall not use, keep or permit to be
used or kept any foul or noxious gas or substance in the Premises, or permit
or suffer the Premises to be occupied or used in a manner offensive or
objectionable to Landlord or other occupants of the Building by reason of
noise, odors and/or vibrations, or interfere in any way with other tenants or
those having business therein, nor shall any animals or birds be kept in or
about the Building. Smoking or carrying lighted cigars, cigarettes, pipes, or
other lighted smoking materials, in the elevators and all other common and/or
public areas of the Building is prohibited.
(16) No additional locks or bolts or any kind shall be placed upon
any of the doors or windows by any tenant, nor shall any changes be made in
existing locks or the mechanisms thereof unless Landlord is first notified
thereof and gives written approval. Each tenant must, upon termination of his
tenancy, give to Landlord all keys of stores, offices, or toilets and toilet
rooms, either furnished to, or otherwise procured by, such tenant, and in the
event of the loss of any keys so furnished, such tenant shall pay Landlord
the cost of replacing the same or of changing the lock or locks opened by
such lost key if Landlord shall deem it necessary to make such change.
(17) All removals, or the carrying in or out of any safes, freight,
furniture, or bulky matter of any description must take place during the hours
which Landlord may determine from time to time. The moving of safes or other
fixtures or bulky matter of any kind must be made upon previous notice to the
manager of the Building and under his/her supervision, and the persons
employed by any tenant for such work must be acceptable to Landlord. Landlord
reserves the right to inspect all safes, freight or other bulky articles to
be brought into the Building and to exclude from the Building and all such
bulky articles which violate any of the Rules and Regulations or the Lease of
which these Rules and Regulations are a part. Landlord reserves the right to
prescribe the weight and position of all safes, which must be placed upon
supports approved by Landlord to distributed the weight.
(18) No tenant shall purchase janitorial, maintenance or other
services from any company or persons not approved by Landlord. Any person
employed by any tenant to do janitorial work shall, while in the Building and
outside of the Premises, be subject to and under the control and direction of
the office or management of the Building (but not as an agent or servant of
Landlord, and the tenant shall be responsible for all acts of such persons).
Except with Landlord's prior written approval, not tenant shall
EXHIBIT "C"
TO OFFICE SPACE LEASE
Page 2
<PAGE>
permit janitorial services to be performed during the hours of 7:00 a.m. to
6:00 p.m., Monday through Friday.
(19) Landlord shall have the right to prohibit any advertising by any
tenant which, in Landlord's opinion, tends to impair the reputation of the
Building or its desirability as an office/retail building and upon written
notice from Landlord any tenant shall refrain from and discontinue such
advertising.
(20) On Saturdays from 12:00 p.m. to 8:00 a.m., Sundays, those legal
holidays designated by Landlord, and on other days between the hours of 6:00
p.m. and 7:00 a.m., access to the Building or to the halls, corridors,
elevators or stairways in the Building, or to the Premises may be refused
unless the person seeking access is known to the building watchman, if any,
in charge and has a pass or is properly identified. Landlord shall in no case
be liable for damages for the admission to or exclusion from the Building of
any person whom Landlord has the right to exclude. Each tenant shall be
responsible for all persons for whom he requests after hours access and shall
be liable to Landlord for all acts of such persons. In case of invasion, mob
riot, public excitement, or other commotion, Landlord reserves the right but
shall not be obligated to prevent access to the Building during the
continuance of the same by closing the doors or otherwise, for the safety of
the tenants and protection of property in the Building.
(21) All doors opening into public corridors shall be kept closed,
except when in use for ingress and egress. Tenants shall see that the window,
transoms and doors of their premises are closed and securely locked before
leaving the Building.
(22) The requirements of tenants will be attended to only upon
application to the manager of the Building.
(23) Canvassing, soliciting and peddling in the Building are
prohibited and each tenant shall cooperate to prevent the same.
(24) There shall not be used in any space, or in the public halls of
the Building, either by any tenant or others, any hand trucks except those
equipped with rubber tires and side guards.
(25) No vending or coin operated machines shall be placed by any
tenant within his premises without the prior consent of Landlord.
EXHIBIT "C"
TO OFFICE SPACE LEASE
Page 3
<PAGE>
EXHIBIT "D"
GUARANTY
WHEREAS, JAHRA INVESTMENTS, N.V. ("Landlord") and DVD EXPRESS, INC., a
California corporation (Tenant"), are about to execute a document entitled
Office Space Lease ("Lease") dated January 16, 1998 concerning the premises
delineated on EXHIBIT "A-1" to the Lease (the "Premises") wherein Landlord
will lease the Premises to Tenant, and
WHEREAS, MICHAEL DUBELKO, hereinafter referred to as "Guarantor," has a
financial interest in Tenant, and
WHEREAS, Landlord would not execute the Lease if Guarantor did not
execute and deliver to Landlord this Guaranty of Lease.
NOW THEREFORE, for and in consideration of the execution of the Lease
by Landlord and as a material inducement to Landlord to execute the Lease,
Guarantor hereby jointly, severally, unconditionally and irrevocably
guarantees the prompt payment by Tenant of all rentals and all other sums
payable by Tenant under the Lease and the faithful and prompt performance by
Tenant of each and every one of the terms, conditions and covenants of the
Lease to be kept and performed by Tenant, but only such sums and performances
required to be performed by Tenant during the period commencing upon
execution of the Lease and terminating one (1) year following the
Commencement Date of the Lease ("Effective Period").
It is specifically agreed and understood that the terms of the Lease may
be altered, affected, modified or changed by agreement between Landlord and
Tenant, or by a course of conduct, and the Lease may be assigned by Landlord
or any assignee of Landlord without consent or notice to Guarantor and that
this Guaranty shall thereupon and thereafter guarantee the performance of the
Lease as so changed, modified altered or assigned.
This Guaranty shall not be released, modified or affected by failure or
delay on the part of Landlord to enforce any of the rights or remedies of the
Landlord under the Lease, whether pursuant to the terms thereof or at law or
in equity.
No notice of default need be given to Guarantor, it being specifically
agreed and understood that the guarantee of the undersigned is a continuing
guarantee under which Landlord may proceed forthwith and immediately against
Tenant or against Guarantor following any breach or default by Tenant or for
the enforcement of any rights which Landlord may have as against Tenant
pursuant to or under the terms of the Lease or at law or in equity.
Landlord shall have the right to proceed against Guarantor hereunder
following any breach or default by Tenant without first proceeding against
Tenant and without previous notice to or demand upon either Tenant or
Guarantor.
Guarantor hereby waives (a) notice of acceptance of this Guaranty, (b)
demand of payment, presentation and protest, (c) all right to assert or plead
any statute of limitations as to or relating to this Guaranty and the Lease,
(d) any right to require the Landlord to proceed against the Tenant or any
other Guarantor or any other person or entity liable to Landlord, (e) any
right to require Landlord to apply to any default any security deposit or
other security it may hold under the Lease, (f) any right to require Landlord
to proceed under any other remedy Landlord may have before proceeding against
Guarantor, [and?] (g) any right of subrogation.
Guarantor does hereby subrogate all existing or future indebtedness of
Tenant to Guarantor to the obligations owed to Landlord under the Lease and
this Guaranty.
The term "Landlord" whenever hereinabove used refers to and means the
Landlord in the Lease specifically named and also any assignee of said
Landlord, whether by outright assignment or by assignment for security, and
also any successor to the interest of said Landlord or of any assignee in the
Lease or any part thereof, whether by assignment or otherwise. So long as the
Landlord's interest in or to the premises or the rents, issues and profits
therefrom, or in, to or under the Lease, are subject to any mortgage or deed
of trust or assignment for security, no acquisition by Guarantor of the
Landlord's interest in the premises or under the Lease shall affect the
continuing obligation of Guarantor under this Guaranty which shall
nevertheless continue in full force and effect for the benefit of the
mortgagee, beneficiary, trustee or assignee under such mortgage, deed of
trust or assignment, of any purchase at sale by judicial foreclosure or under
private power of sale, and the successors and assigns of any such mortgagee,
beneficiary, trustee, assignee or purchaser.
The term "Tenant" whenever hereinabove used refers to and means the
Tenant in the Lease specifically named and also any assignee or sublessee of
the Lease and also any successor to the interests of
EXHIBIT "D"
TO OFFICE SPACE LEASE
Page 1
<PAGE>
said Tenant, assignee or sublessee of such Lease or any part thereof, whether
by assignment, sublease or otherwise.
Neither the Guarantor's obligations hereunder nor any remedy for the
enforcement thereof shall be impaired, modified, changed, released or limited
in any manner whatsoever by the impairment, modification change, release or
limitation of the liability of the Tenant under the Lease, or its estate in
bankruptcy or any remedy for the enforcement thereof, resulting from the
operation of any present or future provision of the National Bankruptcy Act
or any statute, or from the decision of any court.
In the event any action be brought by said Landlord against Guarantor
hereunder to enforce the obligation of guarantor hereunder, the
unsuccessful party in such action shall pay to the prevailing party therein
reasonable attorneys' fees.
This Guaranty shall terminate and be of no further force or effect from
and after the date that Tenant has paid all sums and performed all other
obligations to have been paid or performed by Tenant under the Lease during the
Effective Period.
Executed at Hollywood, California
on January 16, 1998
/s/ Michael Dubelko
--------------------------------------
MICHAEL DUBELKO
"GUARANTOR"
EXHIBIT "D"
TO OFFICE SPACE LEASE
Page 2
<PAGE>
LEASE ADDENDUM
This Addendum is attached to and made a part of that certain La
Reina Office Building Lease dated January 16, 1998, between JAHRA INVESTMENTS,
N.V., as Landlord, and DVD EXPRESS, INC., a California corporation, as Tenant.
In the event of conflict between the provisions of this Addendum and the
provisions of the foregoing Lease, the provisions of this Addendum shall
control.
The following are additional provisions.
1. BASIC RENT INCREASE. Tenant acknowledges that the Basic Rent shall be
increased to include the amounts described in Section 1(d) of the Work Letter
attached to the Lease as EXHIBIT "B". Such increased portion of the Basic Rent
shall not be subject to the annual cost of living increase provided for in
Section 3.1.
2. EARLY TERMINATION RIGHT. Tenant shall have the right to terminate the
Lease prior to expiration of the Lease term by delivering to Landlord at any
time after the twenty-fourth (24th) month of the Lease term written notice
specifying an early termination date, which early termination date shall be the
last day of a calendar month occurring not earlier than ninety (90) days after
Landlord's receipt of Tenant's notice. Thus, the earliest date Tenant shall be
able to terminate the Lease pursuant to this paragraph 2 shall be at the
conclusion of the twenty-seventh (27th) month. Tenant's right to terminate the
Lease prior to expiration of the original three (3) year lease term shall be
conditioned on paying to Landlord, prior to the early termination date, an
amount ("Termination Amount") equal to the sum of the following: (a) the
unamortized portion of the broker commissions and other leasing costs incurred
by Landlord upon entering into the Lease; (b) two (2) monthly installments of
Basic Rent (in addition to the Basic Rent payable through the early termination
date specified by Tenant); and (c) the unamortized portion of the Costs for the
Work defined in Section 1 of the Work Letter. The unamortized portion of the
broker and other leasing costs and the costs of the Work shall be a percentage
of the original costs so incurred, which percentage shall be determined by
dividing the total number of months for which Tenant has paid Basic Rent under
the Lease by 36. Tenant's failure to pay the Termination Amount or any other
amounts then owing to Landlord under the Lease prior to the early termination
date specified by Tenant shall automatically revoke the early termination of the
Lease.
3. CURRENT OCCUPANCY OF PREMISES. Tenant acknowledges that Klasky-Csupo
("Current Tenant") currently occupies the Premises and that Landlord has
provided Current Tenant written notice to relocate to another space in the
Building as of February 5, 1998. The date that Current Tenant actually vacates
the Premise shall be referred to herein as the "Relocation Date". All the terms
and conditions contained herein are contingent on the Current Tenant's vacation
of the Premises.
4. TERMINATION OF EXISTING LEASE. Tenant currently occupies other space on
the third floor of the Building ("Existing Premises") pursuant to Lease dated
September 1, 1997 as amended by Amendment No. 1 to La Reina Office Building
Lease dated as of November 1, 1997 ("Existing Lease"). Tenant agrees to fully
vacate the Existing Premises and return the Existing Premises to Landlord in the
condition required by the terms of the Existing Lease within three (3) business
days following the Commencement Date under this Lease. The Existing Lease shall
terminate and Landlord and Tenant shall each be relieved from all obligations to
be performed under the Existing Lease arising after such termination, provided
that Tenant shall remain responsible for performing any obligations to have been
performed by Tenant under the Existing Lease prior to the Commencement Date and
any prepaid rent or security deposit held by Landlord under the Existing Lease
shall be applied to the rent or security deposit to be paid by Tenant to
Landlord under this Lease.
<PAGE>
FIRST AMENDMENT TO OFFICE BUILDING LEASE
THIS FIRST AMENDMENT TO THE OFFICE SPACE LEASE ("Amendment") is dated for
reference purposes on August 5, 1998, by and between JAHRA INVESTMENTS, N.V.
("Landlord"), as Landlord and DVD EXPRESS, INC., a California corporation
("Tenant"), as Tenant, with reference to the following recitals.
R E C I T A L S
A. Landlord and Tenant previously entered into that certain Office Space
Lease dated as of January 16, 1998 (the "Original Lease"). Pursuant to the
Original Lease, Landlord is leasing to Tenant certain premises consisting of
approximately eight thousand five hundred forty-one (8,541) rentable square feet
of space on the first (1st) floor ("Existing Premises") in the office building
located at 7083 Hollywood Boulevard, Hollywood, California, as more particularly
described in the Original Lease. Terms defined in the Original Lease shall have
the above meaning when used in this Amendment.
B. Landlord and Tenant desire to amend the Original Lease to expand the
Existing Premises to include an additional approximately ten thousand two
hundred fifty-nine (10,259) rentable square feet of space on the fourth (4th)
floor of the Building as shown on the floor plan of the fourth floor attached
hereto as EXHIBIT "A" and incorporated herein by this reference ("Expansion
Premises") in accordance with the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the foregoing, Landlord and Tenant hereby
agree as follows:
1. EXPANSION OF PREMISES. Effective upon the Delivery Date (as hereinafter
defined), the Premises shall be expanded to include the Expansion Premises.
Unless specified to the contrary herein, from and after the Delivery date, all
references in the Lease to the "Premises" shall mean and refer to the entirety
of the space in the Existing Premises and the Expansion Premises.
2. OCCUPANCY OF EXPANSION PREMISES. Tenant shall occupy only seven
thousand (7,000) rentable square feet of space in the Expansion Premises during
months one (1), two (2), and three (3) of the "Expansion Premises Term" (as
hereafter defined), and Tenant shall occupy the entire Expansion Premises during
the remainder of the Expansion Premises Term.
3. BASIC RENT. Commencing on the Delivery Date, the monthly installments
of the annual basic rent for the Expansion Premises shall be the product of
rentable square feet of the Expansion Premises, multiplied by One Dollar and
Sixty Cents ($1.60). Notwithstanding the foregoing, due to Tenant's partial
occupancy of the Expansion Premises pursuant to Section 2, the basic rent for
<PAGE>
the Expansion Premises for months one (1), two (2) and three (3) of the
Expansion Premises Term shall be Eleven Thousand Two Hundred Dollars
($11,200.00) per month. The basic rent for the Expansion Premises for months 4
through 12 shall be Sixteen Thousand Four Hundred Fourteen and 40/100 Dollars
($16,414.40) per month. The basic annual rent for the Expansion Premises shall
be increased on the first anniversary of the Delivery Date to One Dollar and
Sixty-Five Cents ($1.65) per rentable square foot and shall increase by an
additional Five Cents ($.05) per rentable square foot on such anniversary date
each year thereafter.
4. SECURITY DEPOSIT. The Security Deposit is hereby increased by the sum
of Thirty-Two Thousand Eight Hundred Twenty-Eight and 80/100 Dollars
($32,828.80) to a total of Fifty-Four Thousand One Hundred Eight-One and 30/100
Dollars ($54,181.30). Such increase in the Security Deposit shall be paid by
Tenant to Landlord concurrently with the execution of this Amendment.
5. LEASEHOLD IMPROVEMENTS. With respect to the Landlord's improvement of
the Expansion Premises, Landlord and Tenant each agree to abide by the terms of
the Expansion Work Letter attached hereto as EXHIBIT "B".
6. EXPANSION PREMISES TERM. The term of the Lease with respect to the
Expansion Premises shall commence on the Delivery Date and shall terminate five
(5) years thereafter ("Expansion Premises Term"). The Delivery Date shall be the
date that Landlord substantially completes the leasehold improvements required
by Section 5 above ("Leasehold Improvements") and delivers possession of the
Expansion Premises to Tenant. The parties acknowledge and agree that Landlord
anticipates that the Delivery Date of the Expansion Premises will be November 1,
1998. Landlord shall use commercially reasonable efforts to delivery the
Expansion Premises to Tenant by such date, but Landlord shall have no liability
for any failure to delivery the Expansion Premises to Tenant by such date.
Commencing on the Delivery Date and continuing until the expiration or earlier
termination of the Expansion Premises Term, in addition to Tenant's obligation
under the Lease with respect to the Existing Premises, Tenant agrees, with
respect to the Expansion Premises, that Tenant shall observe and perform all of
the terms, covenants and provisions set forth in the Lease.
7. EARLY TERMINATION RIGHT FOR EXPANSION PREMISES. The early termination
right in Paragraph 2 of the Lease Addendum shall apply only to the Existing
Premises and if exercised, the Lease shall continue as to the Expansion
Premises. Tenant shall have the right to terminate the Lease as to the Expansion
Premises, prior to expiration expiration of the Expansion Premises Term, by
delivering to Landlord at any time after the thirty-third (33rd) month of the
Expansion Premises Term written notice specifying an early termination date,
which early termination date shall be the last day of a calendar month occurring
not earlier than ninety (90) days after Landlord's receipt of Tenant's notice.
Thus, the earliest date Tenant shall be able to terminate the Expansion Premises
Term
-2-
<PAGE>
pursuant to this Section 7 shall be at the conclusion of the thirty-sixth (36th)
month of the Expiration Premises Term. Tenant's right to terminate the Lease as
to the Expansion Premises prior to the expiration of the Expansion Premises Term
shall be conditioned on paying to Landlord, prior to the early termination date,
an amount ("Termination Amount") equal to the sum of the following: (a) the
unamortized portion of the broker commission incurred by Landlord in leasing the
Expansion Premises to Tenant; (b) two (2) monthly installments of Basic Rent for
the Expansion Premises (in addition to the Basic Rent payable for the Expansion
Premises though the early termination date specified by Tenant) for the
Premises; and (c) the unamortized portion of the Tenant Allowance paid by
Landlord for the Work defined in Section 1 of the Expansion Work Letter. The
unamortized portion of the broker commissions and the Tenant Allowance shall be
a percentage of the original costs so incurred, which percentage shall be
determined by subtracting from 100% the percentage obtained by dividing the
total number of months for which Tenant has paid Basic Rent under the Lease by
sixty (60). Tenant's failure to pay the Termination Amount or any other amounts
then owing to Landlord under the Lease prior to the early termination date
specified by Tenant shall automatically revoke the early termination of the
Lease as to the Expansion Premises.
8. OPTION TO EXTEND EXISTING PREMISES LEASE TERM. Landlord and Tenant
acknowledge the term of the Lease with respect to the Existing Premises
expires on April 20, 2001 ("Existing Premises Term"). Tenant shall have one
(1) option ("Extension Option") to extend the Existing Premises Term with
respect to the Existing Premises for an additional term ("Extension Term")
ending concurrently with the Expansion Premises Term. The Extension Option is
personal to Tenant and may not be assigned or exercised by an assignee or
sublessee. The Extension Option may be exercised by Tenant by delivery of
written notice ("Option Notice") to Landlord not later than October 20, 2000.
The Option Notice shall state Tenant's irrevocable and unconditional election
to extend the Lease as to the Existing Premises for the Extension Term. If
Tenant fails to timely deliver the Option Notice in the manner herein
provided, the Extension Option shall automatically terminate, without notice,
and be of no further force or effect and the Lease shall terminate as to the
Existing Premises upon expiration of the Existing Premises Term. If Tenant
timely delivers the Extension Notice, (a) all references to the termination
or to the end of the term as to all of the Premises shall be considered to
mean the termination of the Expansion Premises Term; and (b) the Early
Termination Right provided for in Section 2 of the Lease Addendum to the
Original Lease shall automatically terminate and be of no force or effect.
Notwithstanding the foregoing, the Basic Rent payable during the Extended
Term with respect to the Existing Premises shall be adjusted upon
commencement of the Extended Term to the then-existing "market rate",
provided that, in no event will the Basic Rent with respect to the Existing
Premises be less than that payable immediately prior to commencement of the
Extension Term, exclusive of that portion of the prior Basic Rent payable
under Paragraph 1(d) of the Work Letter for the Existing Premises.
-3-
<PAGE>
The "market rate" shall be the then current rent charged by Landlord for the
lease of office space then available for lease in the Building ("Building
Rate"), or if none then available for lease, the then prevailing rent charged
in comparable Class A buildings in Hollywood within a one-half (1/2) mile
radius of the Building ("Comparable Rate"). To determine the Building Rate,
Tenant may request Landlord during the final year of the Existing Premises
Term to provide to Tenant the following: (a) the average per square foot rent
at which any vacate space then located in the Building is being offered for
lease by Landlord; and (b) the average per square foot rental rate charged
for any lease(s) entered into by landlord in the Building with a term which
commences or is scheduled to commence within the last year of the Existing
Premises Term. If there is no vacant or newly leased space within the
Building during the last year of the Existing Premises Term, then the
Comparable Rate shall be determined by three (3) commercial real estate
brokers each of whom has devoted during the immediately prior five (5) year
period a predominant portion of his or her time to the leasing of office
space located in Hollywood and the surrounding areas of Los Angeles
("Qualified Broker"). Either Landlord or Tenant shall appoint in writing a
Qualified Broker and give written notice and a copy of the resume of the
Qualified Broker to the other. Within fifteen (15) days after delivery by
such party of such notice, the other party shall, in a like manner, designate
a Qualified Broker and give written notice along with the resume of its
designated Qualified Broker to the other party. The Qualified Brokers
designated by Landlord and Tenant shall be requested to jointly designate a
third Qualified Broker and provide Landlord and Tenant with the name and
resume of the third Qualified Broker within ten (10) business days after
delivery of notice identifying the second Qualified Broker. The three (3)
Qualified Brokers so selected shall promptly fix a time for completion of
determination of the Comparable Rate as defined above, which time shall be no
later than forty-five (45) days from the date of the appointment of the last
Qualified Broker. The three (3) Qualified Brokers shall notify Landlord and
Tenant as to the date fixed for such completion. On that date, the three (3)
Qualified Brokers shall submit their determination of the Comparable Rate in
writing to Landlord and Tenant which writing shall identify the Comparable
Buildings and rates used in reaching the Comparable Rate. The parties agree
that for the purpose of calculating the comparable Rate, the Comparable Rate
shall be deemed to be that amount which is determined by taking the average
of the two (2) rates identified by the two (2) Qualified Brokers which are
closest to each other. Each of the parties hereto shall pay for the services
of its appointed Qualified Broker and one-half (1/2) of the costs of the
services for the third Qualified Broker. Notwithstanding anything to the
contrary above-stated, if either party fails to designate a second Qualified
Broker in the time and manner specified above, the Comparable Rate shall be
determined by the Qualified Broker first designated, which determination
shall be conclusive on the parties.
-4-
<PAGE>
The Base Rent established for the Extended Term for the Existing Premises
shall be adjusted annually in the same manner as the annual increases applied
during the initial term.
THE EXTENSION OPTION SHALL AUTOMATICALLY TERMINATE FOLLOWING A DEFAULT OR
BREACH OF THE LEASE BY TENANT.
9. CURRENT OCCUPANCY OF THE EXPANSION PREMISES. Tenant acknowledges
that 7.23 Productions ("Current Tenant") currently occupies the Expansion
Premises, that the Lease with the current Tenant expires September 14, 1998
and that Landlord has delivered written notice to Current Tenant to vacate
the Expansion Premises no later than September 15, 1998. Landlord shall use
reasonable efforts to recover possession of the Expansion Premises by
September 15, 1998 but shall not be liable to Tenant for delays resulting
from the failure of the Current Tenant to timely vacate the Expansion
Premises.
10. GUARANTY. Tenant agrees to cause the Guaranty attached hereto as
EXHIBIT "C" and incorporated herein by this reference to be executed by
Michael Dubelko and delivered to Landlord concurrently with and as a
condition to the effectiveness of this Amendment.
11. PARKING. In connection with the Expansion Premises, Tenant shall be
entitled to twenty-four (24) parking spaces at the initial rent of
Seventy-Seven Dollars ($77.00) per month per unreserved space and One Hundred
Ten Dollars ($110.00) per month per reserved space. Notwithstanding the
provisions of Section 5.4(a) of the Original Lease, the rent payable for the
parking spaces granted under this Section may be adjusted by Landlord from
time to time during the Expanded Premises Term.
12. OPERATING EXPENSES. Commencing January 1, 2000, Tenant shall pay
its pro rata share of increased Operating Costs attributable to the Expansion
Premises in accordance with Section 3.3 of the Lease. Tenant's proportionate
share of the Increased Operating Costs shall be computed separately for the
Expansion Premises based on a 1999 Base Year.
13. RATIFICATION AND CONFIRMATION OF LEASE. Except as expressly amended
by this Amendment, all of the terms, covenants, conditions, provisions and
agreements of the Lease shall remain in full force and effect. This Amendment
shall be construed to be part of the Lease and shall be deemed incorporated
into the Lease by this reference. In the event of any conflict between the
Lease and the Amendment, this Amendment shall control.
14. MISCELLANEOUS PROVISIONS.
(a) This Amendment may be executed in any number of counterparts, each
of which shall constitute an original and all of which together shall
constitute one and the same instrument.
-5-
<PAGE>
(b) Each individual and entity executing this Amendment hereby
represents and warrants that he, she or it has the capacity set forth on the
signature pages hereof with full power and authority to bind the party on
whose behalf he, she or it is executing this Amendment to the terms hereof.
The parties have read and understood this Amendment and have had the
opportunity to consult with counsel with respect hereto.
IN WITNESS WHEREOF, Landlord and Tenant have caused their duly authorized
representatives to execute this Amendment as of the date first above written.
JAHRA INVESTMENTS, N.V.
By: /s/ Ari Soghomonian
----------------------------------
Its: Treasurer
-------------------------------
"Landlord"
DVD EXPRESS, INC.,
a California corporation
By: /s/ Michael Dubelko
----------------------------------
Its: President
-------------------------------
"Tenant"
-6-
<PAGE>
EXHIBIT "A"
FLOOR PLAN OF FOURTH FLOOR ON WHICH LOCATION OF EXPANSION
PREMISES IS DESIGNATED
[FLOOR PLAN]
EXHIBIT "A"
to First Amendment to Office Space Lease
<PAGE>
EXHIBIT "B"
THE WORK LETTER
In addition to the mutual covenants contained in the Lease to which
this Work Letter is attached, Landlord and Tenant further mutually agree as
follows:
1. PLANS AND SPECIFICATIONS FOR THE EXPANDED PREMISES; TIMING AND
PAYMENT OF CONSTRUCTION
(a) Tenant agrees to cooperate with Landlord's architects
and engineers, who shall prepare, within ten (10) days of the
execution of this Lease, detailed space plans and specifications
("Plans") for the tenant improvement work to be conducted on the
Expanded Premises ("Work"). The Plans shall include, but shall not be
limited to, locations of doors, partitioning, reflected ceiling,
electrical fixtures, outlets and switches, telephone outlets,
plumbing fixtures, extraordinary floor loads, and the other special
requirements, and Tenant shall approve the Plans in writing on or
before three (3) days following receipt.
(b) Upon approval of the Plans by Tenant, Landlord shall
cause Steiner Construction and, if requested by Tenant, at least two
(2) other responsible licensed general contractors acceptable to
Landlord to submit a fixed sum bid detailing the construction costs of
the Work (the "Contract Sum"). Upon receipt of the Contract Sum,
Tenant shall have three (3) business days to approve the lowest
responsible Contract Sum in writing, or alternatively, to modify the
Plans. In the event Tenant modifies the Plans, the revised plans
shall be submitted to the contractor ("Contractor") submitting the
lowest responsible bid. Tenant shall have three (3) business days
from its receipt of the revised Contract Sum to approve the same in
writing. Any revisions to the Plans and the Contract Sum must also be
approved by Landlord, which approval shall not be unreasonably
withheld or delayed. Immediately following Tenant's written approval
of the Contract Sum, Landlord shall cause Contractor to prepare a
construction contract in a form acceptable to Landlord (the
"Construction Contract") for construction of the Work for the
Contract Sum. Landlord shall be responsible for payment of amounts
owing to Contractor under the Construction Contract and shall be
reimbursed by Tenant in accordance with the terms set forth herein.
Contractor shall construct the Work in accordance with the Plans.
(c) Following approval of the Contract Sum by Tenant and
Landlord, and the Construction Contract by Landlord, the acquisition
of all necessary governmental permits, including
EXHIBIT "B"
to First Amendment to Office Space Lease
Page 1 of 2
<PAGE>
building permits, and Tenant's deposit with Landlord of any excess
costs referred to in Section 1(f) below, Landlord shall instruct the
Contractor to proceed and to complete the Work no later than eight
(8) weeks following the commencement of the Work.
(d) The term "Costs" shall include, (i) amounts incurred by
Landlord to design the Work; (ii) amounts payable to Contractor
pursuant to the Construction Contract; (iii) the cost of permits,
licenses, inspections and certificates, including without limitation,
plan check fees, structural, mechanical and other engineering,
consulting fees for ADA and fire hazard compliance, architectural and
space planning fees incurred by Landlord and/or Tenant in compliance
with this Work Letter; and (iv) any additional cost or expense
incurred in connection with any Change Orders. Costs shall only
include costs and expenses incurred in connection with the design and
construction of permanent improvements to the Expanded Premises, and
shall not include the cost or expense of any cabinetry, shelving,
furniture, fixtures or equipment to be located on or about the
Expanded Premises which Tenant may remove from the Expanded Premises.
(e) Landlord shall pay and be responsible for the Costs up to
an amount equal to ONE HUNDRED SEVENTY-EIGHT THOUSAND FOUR HUNDRED
TWENTY DOLLARS ($178,420.00). The above-described amount to be paid
by Landlord is herein sometimes referred to as "the Tenant Allowance."
(f) Tenant shall be responsible for all Costs in excess of
the Tenant Allowance. Landlord shall determine all Costs incurred in
connection with the Work, and shall notify Tenant in writing if any
additional sums are owing by Tenant pursuant to this Work Letter
after deduction of the Tenant Allowance. Tenant shall pay Landlord
any such additional amounts within five (5) business days following
the later (a) receipt of Landlord's demand for payment; or (b) the
Commencement Date. In the event Tenant has overpaid its share of the
Costs, Tenant may credit such overpayment against the first
installment(s) of Basic Annual Rent due under the Lease, and Landlord
shall have no obligation to make a cash payment to Tenant for any
such overpayment. Landlord shall apply all funds received from
Tenant to the Costs, as incurred, and shall provide Tenant, on request,
with copies of all payment requests or vouchers paid by Landlord in
constructing the Work.
2. BUILDING STANDARD WORK
All improvements installed by Landlord shall be to Landlord's
Building Standard unless otherwise specified on the plans or approved
by Landlord and Tenant, and only in the quantities specified by
Landlord as indicated on the plans.
EXHIBIT "B"
TO OFFICE SPACE LEASE
Page 2
<PAGE>
3. SUBSTANTIAL COMPLETION
The Work shall be deemed to be substantially complete for purposes of
this Lease upon (a) completion of the Work in substantial conformance with
the Plans; and (b) if required for Tenant to legally occupy the Expanded
Premises, issuance of a certificate of occupancy. Typical "punchlist" items
need not be completed prior or as a condition to substantial completion of
the Work, provided, however, that none of such punchlist items shall
adversely affect Tenant's occupancy of the Expanded Premises in any material
respect. Tenant shall be given the opportunity to inspect and approve the
Work within two (2) days following substantial completion of same. Typical
punchlist items shall not be grounds to withhold approval of the Work,
provided, however, that Tenant may notify Landlord of typical punchlist items
after commencement of this Lease as prescribed in Section 1.2 of the Lease,
and Landlord shall endeavor to remedy any such items in accordance with said
Section 1.2 within thirty (30) days following delivery of such notice.
4. CHANGES IN THE WORK
Once the Plans are approved, Tenant shall have the right to request
of Landlord that changes be made to the Work, but only as provided in this
Section 5. Landlord agrees not to unreasonably withhold its approval to any
such changes. Tenant shall be responsible for the cost of any such changes.
Prior to commencing any such changes, Landlord shall submit to Tenant a
written estimate of the cost thereof. If Tenant approves such estimate, it
shall notify Landlord in writing within three (3) business days following the
date Landlord submits the written cost estimate to Tenant and, at the same
time, pay Landlord in full the amount of such estimate, and the Contractor
shall proceed with such work. If Tenant shall fail to approve any such
estimate in writing within the three (3) business day period, such failure
shall be deemed a disapproval thereof, and the Contractor shall not proceed
with any such changes but shall continue with the Work as though the changes
had not been requested. Tenant may at its election waive the requirement that
Landlord provide the cost estimate. If Tenant shall request any change
without notifying Landlord or if Tenant waives the requirement that Landlord
provide the cost estimate, Tenant shall pay for the actual cost of the
changes together with Landlord's fee. Nothing herein shall be deemed to
excuse Tenant from the consequences of its default in failing to notify
Landlord of the requested changes.
5. DELAYS
Tenant and Landlord both acknowledge that time is of the essence. If
Tenant, or persons within Tenant's control, delay
EXHIBIT "B"
-----------
TO OFFICE SPACE LEASE
Page 3
<PAGE>
the progress of completion of Work required to be performed by Landlord
hereunder or pursuant to any separate agreement by interfering with, or
delaying, Landlord's completion of the Expanded Premises, then the date of
substantial completion of the Expanded Premises for purposes of this Lease,
shall be deemed to be the date upon which the Expanded Premises would have
been substantially completed but for the acts or omissions of Tenant or
persons within Tenant's control. In addition, Landlord's performance within
the time periods provided herein shall be extended for a period of time equal
to any period of delay caused by strikes, lockouts, fire or other casualty,
the elements or acts of God, or governmental action or other cause, other
than financial, beyond the reasonable control of Landlord.
EXHIBIT "B"
-----------
TO OFFICE SPACE LEASE
Page 4
<PAGE>
EXHIBIT "C"
GUARANTY
WHEREAS, JAHRA INVESTMENTS, N.V. ("Landlord") and DVD EXPRESS, INC.,
a California corporation ("Tenant"), have executed an Office Space Lease
dated January 16, 1998 and are about to execute an amendment to such Lease
(the "Amendment") entitled First Amendment to Office Space Lease dated August
5, 1998, which lease, as amended by the Amendment is hereinafter referred to
as the "Lease", and
WHEREAS, Michael Dubelko, hereinafter referred to as "Guarantor," has
a financial interest in Tenant, and
WHEREAS, Landlord would not execute the Amendment to the Lease if
Guarantor did not execute and deliver to Landlord this Guaranty of Lease.
NOW THEREFORE, for and in consideration of the execution of the
Amendment by Landlord and as a material inducement to Landlord to execute the
Amendment, Guarantor hereby jointly, severally, unconditionally and
irrevocably guarantees the prompt payment by Tenant of all rent and all other
sums payable by Tenant under the Lease. Notwithstanding the foregoing,
Guarantor's liability under this Guaranty shall not exceed an amount
("Maximum Amount") equal to the sum of the unamortized Tenant Allowance and
broker's commission paid in connection with the Expansion Premises. The
Maximum Amount shall be computed as of the first date that Tenant has failed
to correct any default under the Lease within the applicable grace period, if
any. The Maximum Amount shall be computed in the same manner and with the
same interest rate (i.e. 9%), as the Termination Amount under Section 7 of
the Amendment.
It is specifically agreed and understood that the terms of the Lease
may be altered, affected, modified or changed by agreement between Landlord
and Tenant, or by a course of conduct, and the Lease may be assigned by
Landlord or any assignee of Landlord without consent or notice to Guarantor
and that this Guaranty shall thereupon and thereafter guarantee the
performance of the Lease as so changed, modified, altered or assigned.
This Guaranty shall not be released, modified or affected by failure
or delay on the part of Landlord to enforce any of the rights or remedies of
the Landlord under the Lease, whether pursuant to the terms thereof or at law
or in equity.
No notice of default need be given to Guarantor, it being
specifically agreed and understood that the guarantee of the undersigned is a
continuing guarantee under which Landlord may proceed forthwith and
immediately against Tenant or against Guarantor following any breach or
default by Tenant or for the
EXHIBIT "C"
-----------
TO FIRST AMENDMENT
<PAGE>
enforcement of any rights which Landlord may have as against Tenant pursuant
to or under the terms of the Lease or at law or in equity.
Landlord shall have the right to proceed against Guarantor hereunder
following any breach or default by Tenant without first proceeding against
Tenant and without previous notice to or demand upon either Tenant or
Guarantor.
Guarantor hereby waives (a) notice of acceptance of this Guaranty,
(b) demand of payment, presentation and protest, (c) all right to assert or
plead any statute of limitations as to or relating to this Guaranty and the
Lease, (d) any right to require the Landlord to proceed against the Tenant or
any other Guarantor or any other person or entity liable to Landlord, (e) any
right to require Landlord to apply to any default any security deposit or
other security it may hold under the Lease, (f) any right to require Landlord
to proceed under any other remedy Landlord may have before proceeding against
Guarantor, and (g) any right of subrogation.
Guarantor does hereby subrogate all existing or future indebtedness
of Tenant to Guarantor to the obligations owed to Landlord under the Lease
and this Guaranty.
The term "Landlord" whenever hereinabove used refers to and means the
Landlord in the Lease specifically named and also any assignee of said
Landlord, whether by outright assignment or by assignment for security, and
also any successor to the interest of said Landlord or of any assignee in the
Lease or any part thereof, whether by assignment or otherwise. So long as the
Landlord's interest in or to the premises or the rents, issues and profits
therefrom, or in, to or under the Lease, are subject to any mortgage or deed
of trust or assignment for security, no acquisition by Guarantor of the
Landlord's interest in the premises or under the Lease shall affect the
continuing obligation of Guarantor under this Guaranty which shall
nevertheless continue in full force and effect for the benefit of the
mortgagee, beneficiary, trustee or assignee under such mortgage, deed of
trust or assignment, of any purchase at sale by judicial foreclosure or under
private power of sale, and the successors and assigns of any such mortgagee,
beneficiary, trustee, assignee or purchaser.
The term "Tenant" whenever hereinabove used refers to and means the
Tenant in the Lease specifically named and also any assignee or sublessee of
the Lease and also any successor to the interests of said Tenant, assignee or
sublessee of such Lease or any part thereof, whether by assignment, sublease
or otherwise.
Neither the Guarantor's obligations hereunder nor any remedy for the
enforcement thereof shall be impaired, modified, changed, released or limited
in any manner whatsoever by the impairment, modification, change, release or
limitation of the liability of the Tenant under the Lease, or its estate in
bankruptcy or any remedy for the enforcement thereof, resulting from the
operation of any
EXHIBIT "C"
------------------
TO FIRST AMENDMENT
<PAGE>
present or future provision of the National Bankruptcy Act or any statute, or
from the decision of any court.
In the event any action be brought by said Landlord against Guarantor
hereunder to enforce the obligation of Guarantor hereunder, the unsuccessful
party in such action shall pay to the prevailing party therein reasonable
attorneys' fees.
This Guaranty shall terminate and be of no further force or effect
from and after the date that Tenant has paid all sums and preformed all other
obligations to have been paid or performed by Tenant for which this Guaranty
was entered into.
Executed at Hollywood, California, on _____________________________, 1998.
_________________________________
MICHAEL DUBELKO
"GUARANTOR"
EXHIBIT "C"
------------------
TO FIRST AMENDMENT
<PAGE>
CONFIDENTIAL
INTERACTIVE MARKETING AGREEMENT
This Interactive Marketing Agreement (the "Agreement"), dated as of
August 1, 1998 (the "Effective Date"), is between America Online, Inc.
("AOL"), a Delaware corporation, with offices at 22000 AOL Way, Dulles,
Virginia 20166, and DVD Express, Inc. ("MP"), a California corporation, with
offices at 7083 Hollywood Boulevard, Suite 100, Los Angeles, CA 90028. AOL
and MP may be referred to individually as a "Party" and collectively as the
"Parties."
INTRODUCTION
AOL and MP each desires to enter into an interactive marketing
relationship whereby AOL will promote and distribute an interactive site
referred to (and further defined) herein as the Affiliated MP Site. This
relationship is further described below and is subject to the terms and
conditions set forth in this Agreement. Defined terms used but not defined in
the body of the Agreement will be as defined on Exhibit B attached hereto.
TERMS
1. PROMOTION, DISTRIBUTION AND MARKETING.
1.1 AOL PROMOTION OF AFFILIATED MP SITE. Provided that MP is in
compliance with all material terms of this Agreement, AOL shall be
obligated to provide MP with the promotions for the Affiliated MP
Site described on Exhibit A attached hereto. Subject to MP's
reasonable approval, AOL will have the right to fulfill its
promotional commitments with respect to any of the foregoing by
providing MP comparable promotional placements in appropriate
alternative areas of the AOL Network. In addition, if AOL is unable
to deliver any particular Promotion, AOL will work with MP to
provide MP, as its sole remedy, a comparable promotional placement.
AOL reserves the right to redesign or modify the organization,
structure, "look and feel," navigation and other elements of the AOL
Network at any time. In the event such modifications materially and
adversely affect any specific Promotion, AOL will work with MP to
provide MP, as its sole remedy, a comparable promotional placement.
The promotions described on Exhibit A and any comparable promotions
provided herein shall be referred to as the "Promotions."
1.2 IMPRESSIONS COMMITMENT. During the Term, AOL shall deliver up to [***]
Impressions to MP through the Promotions (the "Impressions
Commitment"). With respect to the Impressions Commitment, AOL will
not be obligated to provide in excess of any Impressions target
amounts (as specified on Exhibit A) in any year. In the event AOL
provides an excess of Impressions in any year, the annual Impressions
target for the subsequent year will be reduced by the amount of such
windfall. Any shortfall in Impressions at the end of a year will not
be deemed a breach of the Agreement by AOL; instead such shortfall
will be added to the Impressions target for the subsequent year. In
the event there is (or will be in AOL's reasonable judgment) a
shortfall in Impressions as of the end of the Initial Term (a "Final
Shortfall"), as MP's sole remedy, AOL will either (i) continue to
provide MP with Integrated Promotions until such time as the
Impressions which comprise the Final Shortfall are delivered or (ii)
provide MP with targeted advertising placements on the AOL Network
which have a total value, based on AOL's then-current advertising
rate card, equal to the value of the Final Shortfall (determined by
multiplying the percentage of Impressions that were not delivered by
the total guaranteed payment provided for below). In the event that
at any point during the Term, Site Revenues generated by MP
hereunder shall exceed the Aggregate Revenue Threshold, the entire
Impressions Commitment will be deemed satisfied; provided, however,
that AOL shall continue to provide MP with all integrated Promotions
as provided on Exhibit A until the expiration of the Initial Term.
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1.3 CONTENT OF PROMOTIONS. Promotions for MP will link only to the
Affiliated MP Site and will promote only the Premier Product. The
specific MP Content to be contained within the Promotions
(including, without limitation, advertising banners and contextual
promotions) (the "Promo Content") will be determined by MP, subject
to AOL's technical limitations, the terms of this Agreement and
AOL's then-applicable policies relating to advertising and
promotions. MP will submit in advance to AOL for its review a
quarterly online marketing plan with respect to the Affiliated MP
Site. The Parties will meet in person or by telephone at least
monthly to review operations and performance hereunder, including a
review of the Promo Content to ensure that it is designed to
maximize performance. MP will consistently update the Promo Content
no less than twice per week. Except to the extent expressly
described herein, the specific form, placement, duration and nature
of the Promotions will be as determined by AOL in its reasonable
editorial discretion (consistent with the editorial composition of
the applicable screens).
1.4. MP PROMOTION OF AFFILIATED MP SITE AND AOL. As set forth in fuller
detail in Exhibit C, MP will promote AOL as its preferred
Interactive Service and will promote the availability of the
Affiliated MP Site through the AOL Network. MP will not implement or
authorize any promotion similar in any respect (including, without
limitation, in scope, purpose, amount, prominence or regularity) to
the promotion required or provided pursuant to Exhibit C for any
other Interactive Service.
2. AFFILIATED MP SITE.
2.1 CONTENT. MP will make available through the Affiliated MP Site the
comprehensive offering of Products and other related Content
described on Exhibit D. Except as mutually agreed in writing by the
Parties, the Affiliated MP Site will contain only Content that is
directly related to the Products listed on Exhibit D and will not
contain any third-party products, services, programming or other
Content. All sales of Products through the Affiliated MP Site will
be conducted through a direct sales format; MP will not promote,
sell, offer or otherwise distribute any products through any format
other than a direct sales format (e.g., through an auction or club
format) without the prior written consent of AOL. Notwithstanding
the foregoing, MP shall have the right to offer or distribute
products through an auction format so long as the availability of
an auction format for the purchase of products on the Affiliated MP
Site is promoted by MP at least two (2) clicks away from the AOL
Service and the products made available through an auction format
shall be subject to the prior written approval of AOL. MP will
review, delete, edit, create, update and otherwise manage all
Content available on or through the Affiliated MP Site in
accordance with the terms of this Agreement. MP will ensure that
the Affiliated MP Site does not in any respect promote, advertise,
market or distribute the products, services or content of any other
Interactive Service or any entity reasonably construed to be in
competition with AOL or any third party with which AOL has an
exclusivity or premier arrangement.
2.2 PRODUCTION WORK. Except as agreed to in writing by the Parties
pursuant to the "Production Work" section of the Standard Online
Commerce Terms & Conditions attached hereto as Exhibit F, MP will
be responsible for all production work associated with the
Affiliated MP Site, including all related costs and expenses.
2.3 TECHNOLOGY. MP will take all reasonable steps necessary to conform
its promotion and sale of Products through the Affiliated MP Site
to the then-existing technologies identified by AOL which are
optimized for the AOL Service. Additionally, MP shall have the
right to make available to AOL users (i) "streaming audio or video"
or any comparable audio or video delivery technology and (ii) "wav"
files, "mpeg" files or other downloadable, nonstreamed audio or
video files through any linked pages of the Affiliated MP Site;
provided that, MP shall not make available any full length Video
Products or any substantial portion thereof on the AOL Network,
through the products described in either clause (i) or (ii)
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above, and (b) if MP's provision of the foregoing products result
in an increase in AOL's network costs, AOL shall have the right to
restrict MP's offering of the foregoing and the Parties shall
renegotiate the economic terms of this Agreement. AOL will be
entitled to require reasonable changes to the Content (including,
without limitation, the features or functionality) within any linked
pages of the Affiliated MP Site to the extent such Content will, in
AOL's good faith judgment, adversely affect any operational aspect of
the AOL Network. AOL reserves the right to review and test the
Affiliated MP Site from time to time to determine whether the site is
compatible with AOL's then-available client and host software and the
AOL Network.
2.4 PRODUCT OFFERING. MP will ensure that the Affiliated MP Site
includes all of the Products and other Content (including, without
limitation, any features, offers, contests, functionality or
technology) that are then made available by or on behalf of MP through
any Additional MP Channel; provided, however, that (i) such inclusion
will not be required where it is commercially or technically
impractical to either Party (i.e., inclusion would cause either Party
to incur substantial incremental costs); and (ii) the specific changes
in scope, nature and/or offerings required by such inclusion will be
subject to AOL's review and approval and the terms of this Agreement.
2.5 PRICING AND TERMS. MP will ensure that: (i) the prices (and any other
required consideration) for Products in the Affiliated MP Site do
not exceed the prices for the Products or substantially similar
Products offered by or on behalf of MP through any Additional MP
Channel; (ii) the terms and conditions related to Products in the
Affiliated MP Site are no less favorable in any respect to the
terms and conditions for the Products or substantially similar
Products offered by or on behalf of MP through any Additional MP
Channel; and (iii) both the prices and the terms and conditions
related to Products in the Affiliated MP Site are reasonably
competitive in all material respects with the prices and terms and
conditions for the Products or substantially similar Products
offered by any MP Competitor through any Interactive Site.
2.6 SPECIAL OFFERS. MP will (i) use best efforts to promote through the
Affiliated MP Site any special or promotional offers made available
by or on behalf of MP through any Additional MP Channel and (ii)
promote through the Affiliated MP Site on a regular and consistent
basis special offers exclusively available to AOL Members and/or
AOL Users ((i) and (ii) collectively, the "Special Offers"). MP
will provide AOL with reasonable prior notice of Special Offers so
that AOL can market the availability of such Special Offers in the
manner AOL deems appropriate in its editorial discretion, subject
to the terms and conditions hereof.
2.7 OPERATING STANDARDS. MP will ensure that the Affiliated MP Site
complies at all times with the standards set forth in Exhibit E. To
the extent site standards are not established in Exhibit E with
respect to any aspect or portion of the Affiliated MP Site (or the
Products or other Content contained therein), MP will provide such
aspect of portion at a level of accuracy, quality, completeness,
and timeliness which meets or exceeds prevailing standards in the
video sale and rental industry. In the event MP fails to comply
with any material terms of this Agreement or any Exhibit attached
hereto, AOL will have the right (in addition to any other remedies
available to AOL hereunder) to decrease the promotion it provides
to MP hereunder (and to decrease or cease any other contractual
obligation hereunder) until such time as MP corrects its
non-compliance (and in such event, AOL will be relieved of the
proportionate amount of any promotional commitment made to MP by
AOL hereunder corresponding to such decrease in promotion) and (b)
any revenue threshold(s) set forth in Section 4 will each be
adjusted proportionately to correspond to such decrease in
promotion and other obligations during the period of
non-compliance. In the event that AOL decreases the promotions it
provides to MP hereunder, AOL shall promptly provide MP with notice
thereof.
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2.8 ADVERTISING SALES. MP shall have the right to sell promotions,
advertisements, links, pointers or similar services or rights
through the Affiliated MP Site ("Advertisements"). The specific
advertising inventory within the Affiliated MP Site will be as
reasonably determined by MP. Notwithstanding the foregoing, in the
event that MP desires to retain a third party to sell advertising
in the Affiliated MP Site on behalf of MP, MP shall first offer to
AOL the right to sell such Advertisements on behalf of MP on terms
and conditions that are no less favorable than those offered to any
third party. MP and AOL shall share the revenues derived from the
sale of Advertisements in the Affiliated MP Site pursuant to Section
4.3 hereof. All Advertisements in the Affiliated MP Site shall be
subject to AOL's then-applicable advertising policies,
exclusivities and prior approval.
2.9 TRAFFIC FLOW. MP will take reasonable efforts to ensure that AOL
traffic is either kept within the Affiliated MP Site or channeled
back into the AOL Network (with the exception of advertising links
sold and implemented pursuant to the Agreement). The Parties will
work together on implementing mutually acceptable links from the
Affiliated MP Site back to the AOL Service.
3. PREMIER STATUS.
3.1 PREMIER PRODUCT. Provided MP is in compliance with all material terms
of this Agreement, during the Initial Term, MP will be one of only
two third-party resellers of Premier Products (each a "Premier
Video Partner") expressly promoted by AOL in the specific manner
and on the specific screens of the AOL Service designated as
"Premier Screens" as provided on Exhibit A attached hereto.
3.2 EXCEPTIONS. Notwithstanding anything to the contrary contained in
this Section 3 (and without limiting any actions which may be taken
by AOL without violation of MP's rights hereunder), no provision of
this Agreement will limit AOL's ability (on or off the AOL Network)
to: (i) undertake activities or perform duties pursuant to existing
arrangements with third parties (or pursuant to any agreements to
which AOL becomes a party subsequent to the Effective Date as a
result of a Change of Control, assignment, merger, acquisition or
other similar transaction); (ii) sell advertisement placements
(e.g. banners, buttons, links, sponsorships), including standard
placements in any shopping area or channel; (iii) sell
advertisement placements to any video club, motion picture,
television or film studio or any entity which creates films,
television programs, or motion picture theatrical productions; (iv)
sell advertisement placements to any reseller of Video Products,
provided that, except for the other Premier Video Partner, such
promotions or advertisements cannot promote any online transactions
in connection with Video Products or link to a web site which
offers online transactions in connection with Video Products; (v)
enter into an arrangement with any third party for the primary
purpose of acquiring AOL Members whereby such party is allowed to
promote or market products or services to AOL Members that are
acquired as a result of such agreement; (vi) create contextual
links or editorial commentary relating to any third party marketer
of the Premier Product; or (vii) promote, advertise or distribute
the products of any third party which is an aggregator of products
(i.e., it is primarily engaged in activities other than marketing
Video Products) (each an "Aggregator"); provided that such
promotions do not expressly promote an Aggregator's Premier Product
within the Premier Screens.
3.3 PRODUCT OFFER RIGHT. In the event that MP does not offer certain Video
Products through the Affiliated MP Site, and if AOL, in its
reasonable judgment, determines that the offering of such Video
Products is important to a good AOL User experience, MP shall have
thirty (30) days after notice from AOL to provide such Video
Products in the MP Affiliated Site, and if within such thirty (30)
day period MP is unable to provide such Video Products, AOL shall
have the right to engage other third parties to provide such Video
Products.
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4. PAYMENTS.
4.1. GUARANTEED AOL SERVICE PAYMENTS. Subject to the
provisions of Section 4.2 hereof, MP will pay AOL a
non-refundable guaranteed payment of Fifteen Million
Dollars (US $15,000,000) as follows:
(i) [***]
(ii) [***]
(iii) [***]
(iv) [***]
4.2. ACCELERATION OF PAYMENTS. (i) If a Financing Event shall
occur at any time prior to the [***] any payments due to
AOL pursuant to Section 4.1(i) or (ii) which have not yet
been paid shall immediately accelerate and shall be due
and payable within five (5) days of the occurrence of the
Financing Event, provided, however, that if the Financing
Event results in proceeds to MP of less than [***] (a
"Minor Financing Event"), then the portion of the
payments due pursuant to Section 4.1(i) or (ii) which
shall be accelerated, shall be equal to [***] of the
proceeds received in the Minor Financing Event, and the
remainder of the payments due pursuant to Section 4.1(i)
or (ii) (to the extent any shall remain) shall be paid on
the date(s) specified in Section 4.1(i) and (ii), or (ii)
if a Major Financing Event shall occur, and such Major
Financing Event occurs (a) prior to the [***] then
(x) any payments due to AOL pursuant to Section 4.1(i) or
(ii) which have not yet been paid shall immediately
accelerate and shall be due and payable within five (5)
days of the occurrence of the Major Financing Event and
(y), the payments provided for in Section 4.1(iii)(b)
shall immediately accelerate and MP shall pay AOL a total
of [***] on the [***] or (b) after the [***] but prior to
the [***] then the payments required pursuant to Section
4.1(iii)(b) shall immediately accelerate and MP shall
make such payments to AOL within five (5) days of the
occurrence of the Major Financing Event.
4.3. SHARING OF TRANSACTION REVENUES. If at any time during
the Term, (i) quarterly Site Revenues shall exceed [***]
(the "First Quarterly Hurdle") but is less than [***]
(the "Second Quarterly Hurdle"), MP shall pay to AOL an
amount equal to [***] of the Transaction Revenues derived
by MP between the First Quarterly Hurdle and the Second
Quarterly Hurdle or (ii) quarterly Site Revenues shall
exceed the Second Quarterly Hurdle, MP shall pay to AOL
an amount equal to [***] of Transaction Revenues derived
by MP after the Second Quarterly Hurdle has been met.
Notwithstanding the foregoing, if aggregate annual Site
Revenues shall exceed (a) [***] (the "First Annual
Hurdle") but is less than [***] (the "Second Annual
Hurdle"), MP shall pay AOL an amount equal to [***] of
the Transaction Revenues derived by MP between the First
Annual Hurdle and the Second Annual Hurdle or (b) the
Second Annual Hurdle, MP shall pay to AOL an amount equal
to [***] of the Transaction Revenues derived by MP after
the Second Annual Hurdle is met. MP will pay all of the
foregoing amounts to AOL within thirty (30) days
following the end of the quarter in which the applicable
Transaction Revenues were generated.
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4.4. SHARING OF ADVERTISING REVENUES. MP shall pay AOL an
amount equal to [***] of all Advertising Revenues
generated hereunder. MP shall make the foregoing payments
to AOL on a quarterly basis within thirty (30) days
following the end of the quarter in which such amounts
were generated by MP.
4.5. PAYMENTS ON RENEWAL/EXPIRATION. Pursuant to Section 6.2
hereof, upon renewal or expiration of this Agreement (as
the case may be), MP will pay to AOL either (i) a
percentage of Transaction Revenues that is equal to the
most favorable percentage of Transaction Revenues paid by
MP to any other third party that enters into a similar
marketing arrangement with MP (provided that such amount
does not exceed, in any given year, twenty five percent
(25%) of MP's gross margins as reported by MP from time
in MP's audited financial statements) and an amount equal
to [***] of Advertising Revenues (the "Renewal Revenue
Share") or (ii) the Renewal Revenue Share less amounts
derived by MP from AOL Purchasers acquired during the
Initial Term.
4.6. ALTERNATIVE REVENUE STREAMS. In the event MP or any of
its affiliates (a) receives or desires to receive,
directly or indirectly, any compensation in connection
with the Affiliated MP Site other than Site Revenues (an
"Alternative Revenue Stream"), MP will promptly inform
AOL in writing, and the Parties will negotiate in good
faith regarding whether MP will be allowed to market
Products producing such Alternative Revenue Stream
through the Affiliated MP Site, and if so, the equitable
portion of revenues from such Alternative Revenue Stream
(if applicable) that will be shared with AOL (in no event
less than the percentage of Transaction Revenues to be
paid to AOL pursuant to this Section 4).
4.7. LATE PAYMENTS; WIRED PAYMENTS. All amounts owed hereunder
not paid when due and payable will bear interest from the
date such amounts are due and payable at the prime rate
in effect at such time. All payments required hereunder
will be paid in immediately available, non-refundable US
funds wired to the "America Online" account, Account
Number 323070752 at The Chase Manhattan Bank, 1 Chase
Manhattan Plaza, New York, NY 10081 (ABA: 021000021).
4.8. AUDITING RIGHTS. MP will maintain complete, clear and
accurate records of all expenses, revenues and fees in
connection with the performance of this Agreement. For
the sole purpose of ensuring compliance with this
Agreement, AOL will have the right, at its expense, to
direct an independent certified public accounting firm to
conduct a reasonable and necessary inspection of portions
of the books and records of MP which are relevant to MP's
performance pursuant to this Agreement. Any such audit
may be conducted after twenty (20) business days prior
written notice only once during any twelve (12) month
period.
4.9. TAXES. MP will collect and pay and indemnify and hold AOL
harmless from, any sales, use, excise, import or export
value added or similar tax or duty not based on AOL's net
income, including any penalties and interest, as well as
any costs associated with the collection or withholding
thereof, including attorneys' fees.
4.10. REPORTS.
4.10.1. SALES REPORTS. MP will provide AOL in an
automated manner with a monthly report in an
AOL-designated format, detailing the following
activity in such period (and any other
information mutually agreed upon by the Parties
or reasonably required for measuring revenue
activity by MP through the Affiliated MP Site):
(i) summary sales information by day (date,
number of Products, number of orders, total
Transaction Revenues); and (ii) detailed sales
information (order data/timestamp (if
technically feasible), purchaser name and
screenname, SKU or Product description) (in
information in clauses (i) and (ii), "Sales
Reports"). AOL will be entitled to use the
Sales Reports in its business operations,
subject to
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the terms of this Agreement. More generally,
each payment to be made by MP pursuant to this
Section 4 will be accompanied by a report
containing information which supports the
payment, including information identifying (i)
gross Transaction Revenues and all items
deducted or excluded from gross Transaction
Revenues to produce Transaction Revenues,
including, without limitation, chargebacks and
credits for returned or canceled goods or
services (and, where possible, an explanation
of the type of reason therefor, e.g., bad
credit card information, poor customer service,
etc.) and (ii) any applicable Advertising
Revenues. AOL shall provide MP with standard
monthly usage information related to the
Promotions (e.g. a schedule of the Impressions
delivered by AOL at such time) which are similar
in substance and form to the reports provided
by AOL to other interactive marketing partners
similar to MP.
4.10.2. FRAUDULENT TRANSACTIONS. To the extent
permitted by applicable laws, MP will provide
AOL with an prompt report of any fraudulent
order, including the date, screenname or email
address and amount associated with such order,
promptly following MP obtaining knowledge that
the order is, in fact, fraudulent.
5. WARRANTS. In connection with the obligations of the Parties
hereunder, and subject to the provisions hereof, MP shall enter
into the Common Stock Subscription Warrant Agreement substantially
in the form of Exhibit H attached hereto (the "Warrant Agreement").
Provided, however, that in the event MP shall not have entered into
the Warrant Agreement within sixty (60) days after the execution
date hereof, AOL shall not be required to perform its obligations
hereunder.
6. TERM; RENEWAL; TERMINATION.
6.1. TERM. Unless earlier terminated as set forth herein, the
initial term of this Agreement will be thirty eight (38)
months from the Effective Date (the "Initial Term").
6.2. RENEWAL. Upon conclusion of the initial term of this
Agreement, AOL will have the right to renew the Agreement
for successive one-year renewal terms (each a "Renewal
Term" and together with the Initial Term, the "Term").
During any such Renewal Term: (i) MP will not be required
to pay any guaranteed, fixed payment or perform the
cross-promotional obligations specified in Section 1;
and (ii) AOL will not be required to provide MP with
prominent promotional placements as described on Exhibit
A; provided that (iii) for so long as AOL may elect to
continue to provide MP with prominent promotional
placements (including permanent placements in video
related and shopping areas) during a Renewal Term, MP will
continue to perform its cross-promotional obligations and
MP will pay to AOL the payments provided for pursuant to
Section 4.4(i) hereof. In the event that AOL does not
elect to continue to provide MP with prominent promotional
placements, then MP will pay to AOL the payments provided
for in Section 4.4(ii) hereof. A Renewal Term shall
automatically commence following the expiration of the
Initial Term (or prior Renewal Term, as the case may be),
provided that AOL shall be entitled to terminate any such
Renewal Term with thirty (30) days prior written notice
to MP.
6.3. EXPIRATION OF TERM. Upon expiration of the Initial Term
or the Term, as the case may be, AOL shall have the right
to promote one or more "pointers" or links from the AOL
Network to the Affiliated MP Site or, at MP's option, to
an MP Interactive Site selling products substantially
similar to the MP products, and use MP's tradenames,
trademarks and service marks in connection with such
promotion. In such event, MP shall make the payments
provided for in Section 4.4(ii) hereof, and the Parties
will continue to be bound by the legal provisions of
Exhibit G attached hereto.
6.4. TERMINATION FOR BREACH. Except as expressly provided
elsewhere in this Agreement, either Party may terminate
this Agreement at any time in the event of a material
breach of
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the Agreement by the other Party which remains uncured
after thirty (30) days written notice thereof to the
other Party (or such shorter period as may be specified
elsewhere in this Agreement); provided that AOL will not
be required to provide notice to MP in connection with
MP's failure to make any payment to AOL required
hereunder, and the cure period with respect to any
scheduled payment will be fifteen (15) days from the date
for such payment provided for herein. Notwithstanding the
foregoing, in the event of a material breach of a
provision that expressly requires action to be completed
within an express period shorter than 30 days, either
Party may terminate this Agreement if the breach remains
uncured after written notice thereof to the other Party.
6.5. TERMINATION FOR BANKRUPTCY/INSOLVENCY. Either Party may
terminate this Agreement immediately following written
notice to the other Party if the other Party (i) ceases
to do business in the normal course, (ii) becomes or is
declared insolvent or bankrupt, (iii) is the subject of
any proceeding related to its liquidation or insolvency
(whether voluntary or involuntary) which is not dismissed
within (90) calendar days or (iv) makes an assignment for
the benefit of creditors.
6.6. TERMINATION ON CHANGE OF CONTROL. In the event of (i) a
Change of Control of MP resulting in control of MP by an
Interactive Service or (ii) a Change of Control of AOL,
AOL may terminate this Agreement by providing thirty (30)
days prior written notice of such intent to terminate.
6.7. EARLY TERMINATION RIGHT. Notwithstanding anything to the
contrary contained herein, AOL shall have the right to
cancel this Agreement by providing MP with no less than
thirty (30) days written notice, on the one (1) year
anniversary of the Effective Date. In the event that AOL
exercises its termination right pursuant to this Section
6.7, and provided that MP shall not have generated
Transaction Revenues in excess of [***] as of the
termination date, then AOL shall pay to MP [***] within
thirty (30) days after the termination becomes effective,
and MP shall not be required to make the payments
provided for in Sections 4.1(iv)(b) and 4.1(v).
7. MANAGEMENT COMMITTEE/ARBITRATION.
7.1. MANAGEMENT COMMITTEE. The Parties will act in good faith
and use commercially reasonable efforts to promptly
resolve any dispute, claim, controversy or disagreement
(each a "Dispute") between the Parties or any of their
respective subsidiaries, affiliates, successors and
assigns under or related to this Agreement or any
document executed pursuant to this Agreement or any of
the transactions contemplated hereby. If the Parties
cannot resolve the Dispute within such time frame, the
Dispute will be submitted to the Management Committee for
resolution. For ten (10) days following submission of the
Dispute to the Management Committee, the Management
Committee will have the exclusive right to resolve such
Dispute; provided further that the Management Committee
will have the final and exclusive right to resolve
Disputes arising from any provision of the Agreement
which expressly or implicitly provides for the Parties to
reach mutual agreement as to certain terms. If the
Management Committee is unable to amicably resolve the
Dispute during the ten-day period, the the Management
Committee will consider in good faith the possibility of
retaining a third party mediator to facilitate resolution
of the Dispute. In the event the Management Committee
elects not to to retain a mediator, the dispute will be
subject to the resolution mechanisms described below.
"Management Committee" will mean a committee made up of a
senior executive from each of the Parties for the purpose
of resolving Disputes under this Section 7 and generally
overseeing the relationship between the Parties
contemplated by this Agreement. Neither Party will seek,
nor will be entitled to seek, binding outside resolution
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of the Dispute unless and until the Parties have been unable
amicably to resolve the Dispute as set forth in this Section 7
and then, only in compliance with the procedures set forth in
this Section 7.
7.2. ARBITRATION. Except for Disputes relating to issues of
(i) proprietary rights, including but not limited to intellectual
property and confidentiality, and (ii) any provision of the
Agreement which expressly or implicitly provides for the
Parties to reach mutual agreement as to certain terms (which
will be resolved by the Parties solely and exclusively through
amicable resolution as set forth in Section 7.1), any Dispute
not resolved by amicable resolution as set forth in Section 7.1
will be governed exclusively and finally by arbitration. Such
arbitration will be conducted by the American Arbitration
Association ("AAA") in Washington, D.C. and will be initiated
and conducted in accordance with the Commercial Arbitration
Rules ("Commercial Rules") of the AAA, including the AAA
Supplementary Procedures for Large Complex Commercial Disputes
("Complex Procedures"), as such rules will be in effect on the
date of delivery of a demand for arbitration ("Demand"), except
to the extent that such rules are inconsistent with the
provisions set forth herein. Notwithstanding the foregoing, the
Parties may agree in good faith that the Complex Procedures
will not apply in order to promote the efficient arbitration of
Disputes where the nature of the Dispute, including without
limitation the amount in controversy, does not justify the
application of such procedures.
7.3. SELECTION OF ARBITRATORS. The arbitration panel will consist
of three arbitrators. Each Party will name an arbitrator within
ten (10) days after the delivery of the Demand. The two
arbitrators named by the Parties may have prior relationships
with the naming Party, which in a judicial setting would be
considered a conflict of interest. The third arbitrator,
selected by the first two, should be a neutral participant,
with no prior working relationship with either Party. If the
two arbitrators are unable to select a third arbitrator within
ten (10) days, a third neutral arbitrator will be appointed by
the AAA from the panel of commercial arbitrators of any of the
AAA Large and Complex Resolution Programs. If a vacancy in the
arbitration panel occurs after the hearings have commenced, the
remaining arbitrator or arbitrators may not continue with the
hearing and determination of the controversy, unless the
Parties agree otherwise.
7.4. GOVERNING LAW. The Federal Arbitration Act, 9 U.S.C. Secs. 1-16,
and not state law, will govern the arbitrability of all
Disputes. The arbitrators will allow such discovery as is
appropriate to the purposes of arbitration in accomplishing a
fair, speedy and cost-effective resolution of the Disputes. The
arbitrators will reference the Federal Rules of Civil Procedure
then in effect in setting the scope and timing of discovery.
The Federal Rules of Evidence will apply in toto. The
arbitrators may enter a default decision against any Party who
fails to participate in the arbitration proceedings.
7.5. ARBITRATION AWARDS. The arbitrators will have the authority to
award compensatory damages only. Any award by the arbitrators
will be accompanied by a written opinion setting forth the
findings of fact and conclusions of law relied upon in reaching
the decision. The award rendered by the arbitrators will be
final, binding and non-appealable, and judgment upon such award
may be entered by any court of competent jurisdiction. The
Parties agree that the existence, conduct and content of any
arbitration will be kept
9
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confidential and no Party will disclose to any person any
information about such arbitration, except as may be required by
law or by any governmental authority or for financial reporting
purposes in each Party's financial statements.
7.6. FEES. Each Party will pay the fees of its own attorneys,
expenses of witnesses and all other expenses and costs in
connection with the presentation of such Party's case
(collectively, "Attorneys' Fees"). The remaining costs of the
arbitration, including without limitation, fees of the
arbitrators, costs of records or transcripts and administrative
fees (collectively, "Arbitration Costs") will be born equally
by the Parties. Notwithstanding the foregoing, the arbitrators
may modify the allocation of Arbitration Costs and award
Attorneys' Fees in those cases where fairness dictates a
different allocation of Arbitration Costs between the Parties
and an award of Attorneys' Fees to the prevailing Party as
determined by the arbitrators.
7.7. NON ARBITRATABLE DISPUTES. Any Dispute that is not subject to
final resolution by the Management Committee or to arbitration
under this Section 7 or by law (collectively, "Non-Arbitration
Claims") will be brought in a court of competent jurisdiction
in the Commonwealth of Virginia. Each Party irrevocably
consents to the exclusive jurisdiction of the courts of the
Commonwealth of Virginia and the federal courts situated in the
Commonwealth of Virginia, over any and all Non-Arbitration
Claims and any and all actions to enforce such claims or to
recover damages or other relief in connection with such claims.
8. STANDARD TERMS. The Standard Online Commerce Terms & Conditions set
forth on Exhibit F attached hereto and Standard Legal Terms &
Conditions set forth on Exhibit G attached hereto are each hereby made
a part of this Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
Effective Date.
AMERICA ONLINE, INC. DVD EXPRESS, INC.
By: /s/ [illegible] By: /s/ Michael Dubelko
-------------------------- --------------------------
Name Name: Michael Dubelko
Title: Title: President
10
<PAGE>
EXHIBIT A
PLACEMENT/PROMOTION
AOL SERVICE, DCI, AOL INTERNATIONAL
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SCREEN DESCRIPTION TYPE OF PLACEMENT
------ ----------- -----------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
LEVEL 1 PROMOTIONS
- --------------------------------------------------------------------------------
1 Entertainment Channel- Permanent Branded Presence; Premier Screen*
Home Video Main (placement scheduled for 11/98)
- --------------------------------------------------------------------------------
2 Entertainment Channel, Rotational Banners
Run of Channel (Movies,
Video, etc.)
- --------------------------------------------------------------------------------
3 Network Programming- Seasonal and Holiday Premium
Seasonal/Holiday Promotional Packages; Rotational
Contextual Packages Banners
- --------------------------------------------------------------------------------
4 AOL Shopping Channel: Anchor Tenant Placement
Electronics & Video
Department
- --------------------------------------------------------------------------------
5 AOL Shopping Channel: Tenant Placement
Computing Software
Department
- --------------------------------------------------------------------------------
6 AOL Shopping Channel: Seasonal and Holiday Premium
Holiday Gift Programs Rotational Banners
- --------------------------------------------------------------------------------
7 DCI National Page Rotational placements-banners or
graphic/text integration
- --------------------------------------------------------------------------------
8 DCI Main City Level Page Rotational placements-banners or
graphic/text integration
- --------------------------------------------------------------------------------
9 DCI-Movie Guide Permanent Anchor Tenant
- --------------------------------------------------------------------------------
10 DCI Entertainment Main Rotational placements-banners or
Screens graphic/text integration
- --------------------------------------------------------------------------------
11 Sports, Lifestyles, Contextual Promotion and/or
Interests, Personal Rotational Banners
Finance, Health, Travel,
Research & Learn,
Infuluence and Games
Channels; AOL Live
- --------------------------------------------------------------------------------
12 Three (3) AOL Service Three (3) permanent Keywords for
keywords, DVD Express brand
- --------------------------------------------------------------------------------
</TABLE>
* To the extent that MP develops Content in connection with the Exclusive
Products which is satisfactory to AOL in its reasonable judgement and
discretion, AOL will provide MP with greater contextual integration of such
Content on this screen.
11
<PAGE>
AOL NETWORK (CONT'D)
<TABLE>
- --------------------------------------------------------------------------------
LEVEL 2 PROMOTIONS
- --------------------------------------------------------------------------------
<S> <C> <C>
1 People Connection: Rotational Banners in Contextually Relevent Chat
Arts and Entertainment
- --------------------------------------------------------------------------------
2 Run of Service- Rotational Banners Targeted by Key Demographic/
Demographically Psychographic Variables
Targeted Banners
- --------------------------------------------------------------------------------
3 Entertainment Channel Rotational Banners
Newsletters
- --------------------------------------------------------------------------------
4 AOL Find Placement in Products area of AOL Find
- --------------------------------------------------------------------------------
5 International (AOL Asia Placement in Entertainment and Shopping areas
and AOL Europe)
- --------------------------------------------------------------------------------
LEVEL 3 PROMOTIONS
- --------------------------------------------------------------------------------
1 Run of Service- Rotational Banners; Random Serving
General
- --------------------------------------------------------------------------------
2 Other Comparable As determined by the Parties
Promotions
- --------------------------------------------------------------------------------
TOTAL IMPRESSIONS: [ * * * ]
- --------------------------------------------------------------------------------
</TABLE>
AOL.com
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SCREEN DESCRIPTION
------ -----------
- --------------------------------------------------------------------------------
<S> <C> <C>
LEVEL 1 PROMOTIONS
- --------------------------------------------------------------------------------
1 AOL.com Shopping Permanent Anchor Tenant Placement (or equivalent
Channel: Books, Music, in case of redesign)
Video Department (or
equivalent case of
redesign)
- --------------------------------------------------------------------------------
2 AOL.com Shopping Tenant Placement
Channel: Computing
Software Department
- --------------------------------------------------------------------------------
3 AOL.com movies, Contextual Placement and/or Rotational Promotion
Entertainment, other
channels
- --------------------------------------------------------------------------------
4 AOL.com Keyword Entertainment Keyword Packages, Computing
Package Software keyword package
- --------------------------------------------------------------------------------
LEVEL 2 PROMOTIONS
- --------------------------------------------------------------------------------
1 AOL.com Home Page Banner on Home Page
- --------------------------------------------------------------------------------
2 Other Comparable As determined by the Parties
Broad Reach
Promotions
- --------------------------------------------------------------------------------
TOTAL IMPRESSIONS [ * * * ]
- --------------------------------------------------------------------------------
BONUS IMPRESSIONS POOL
- --------------------------------------------------------------------------------
LEVEL 1 PROMOTIONS [ * * * ]
- --------------------------------------------------------------------------------
OR
- --------------------------------------------------------------------------------
LEVEL 2 PROMOTIONS [ * * * ]
- --------------------------------------------------------------------------------
OR
- --------------------------------------------------------------------------------
LEVEL 3 PROMOTIONS [ * * * ]
- --------------------------------------------------------------------------------
</TABLE>
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
12
<PAGE>
During the first year of the Initial Term, AOL shall have the right, in its
sole discretion, to provide MP with the foregoing "bonus" Impressions in the
manner specified above and the Impressions Commitment will be adjusted
accordingly.
<TABLE>
ESTIMATED AGGREGATE
ANNUAL IMPRESSIONS
TARGETS
<C> <C>
Year 1 [***]
Year 2 [***]
Year 3 [***]
TOTAL [***]
</TABLE>
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
13
<PAGE>
EXHIBIT B
DEFINITIONS
The following definitions will apply to this Agreement:
ADDITIONAL MP CHANNEL. Any other distribution channel (e.g., an Interactive
Service other than AOL) through which MP makes available an offering
comparable in nature to the Affiliated MP Site.
ADVERTISING REVENUES. The combination of AOL Advertising Revenues and
Internet Advertising Revenues:
AOL ADVERTISING REVENUES. Aggregate amounts collected plus the fair
market value of any other compensation received (such as barter
advertising) by MP, AOL or either Party's agents, as the case may be,
arising from the license or sale of advertisements, promotions, links or
sponsorships ("Advertisements") that appear within any pages of the
Affiliated MP Site which may be exclusively available to AOL Users, less
applicable Advertising Sales Commissions. AOL Advertising Revenues does
not include amounts arising from Advertisements on any screens or forms
preceding, framing or otherwise directly associated with the Affiliated
MP Site, which will be sold exclusively by AOL.
INTERNET ADVERTISING REVENUES. For each Advertisement on a page of the
Affiliated MP Site or any MP Interactive Site which is not exclusively
available to AOL Users, the product of : (a) the amount collected plus
the fair market value of any other compensation received (such as barter
advertising) by MP or its agents arising from the license or sale of
such Advertisement attributable to a given period of time less
applicable Advertising Sales Commissions and (b) the quotient of (i)
Impressions on the page containing such Advertisement by AOL Users for
such period of time divided by (ii) total Impressions on the page
containing such Advertisement by all users for such period of time (the
"Internet Advertising Quotient") (or such other percentage or formula as
is mutually agreed upon in writing by the Parties). MP will be
responsible for calculating the Internet Advertising Quotient related to
Internet Advertising Revenues. For any period during which MP fails to
calculate the Internet Advertising Quotient (other than as a sole result
of AOL's failure to provide necessary Impressions information), such
quotient will be deemed to be one hundred percent (100%).
ADVERTISING SALES COMMISSION. (i) Actual amounts paid as commission to third
party agencies by either buyer or seller in connection with sale of the
Advertisement or (ii) [***] in the event the Party has sold the Advertisement
directly and will not be deducting any third party agency commissions.
AFFILIATED MP SITE. The specific MP Interactive Site to be promoted and
distributed by AOL hereunder through which MP can market and complete
transactions regarding its Products.
AGGREGATE REVENUE THRESHOLD. Site Revenues generated by MP hereunder equal to
[***].
AOL INTERACTIVE SITE. Any Interactive Site which is managed, maintained,
owned or controlled by AOL or its agents.
AOL LOOK AND FEEL. The elements of graphics, design, organization,
presentation, layout, user interface, navigation and stylistic convention
(including the digital implementations thereof) which are generally
associated with Interactive Sites within the AOL Service or AOL.com.
AOL MEMBER. Any authorized user of the AOL Service, including any
sub-accounts using the AOL Service under an authorized master account.
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
14
<PAGE>
AOL NETWORK. (i) The AOL Service, (ii) AOL.com and (iii) any other product or
service owned, operated, distributed or authorized to be distributed by or
through AOL or its affiliates worldwide (and including those properties
excluded from the definitions of the AOL Service or AOL.com). It is
understood and agreed that the rights of MP relate only to the AOL Service
and AOL.com and not generally to the AOL Network.
AOL PURCHASER. (i) Any person or entity who enters the Affiliated MP Site
from the AOL Network including, without limitation, from any third party area
therein (to the extent entry from such third party area is traceable through
both Parties' commercially reasonable efforts), and generates Transaction
Revenues (regardless of whether such person or entity provides an e-mail
address during registration or entrance to the Affiliated MP Site which
includes a domain other than an "AOL.com" domain); and (ii) any other person
or entity who, when purchasing a product, good or service through an MP
Interactive Site, provides an AOL.com domain name as part of such person or
entity's e-mail address; provided that any person or entity who has
previously satisfied the definition of AOL Purchaser will remain an AOL
Purchaser, and any subsequent purchases by such person or entity will also
give rise to Transaction Revenues hereunder (and will not be conditioned on
the person or entity's satisfaction of clauses (i) or (ii) above).
AOL SERVICE. The standard narrow-band U.S. version of the America
Online-Registered Trademark- brand service, specifically excluding (a)
AOL.com or any other AOL Interactive Site, (b) the international versions of
an America Online service (e.g., AOL Japan), (c) "ICQ," "AOL NetFind-TM-,"
"AOL Instant Messenger-TM-," "Digital Cities,"NetMail-TM-," "Electra",
"Thrive", "Real Fans", "Love@AOL", "Entertainment Asylum" or any similar
independent product, service or property which may be offered by, through or
with the U.S. version of the America Online-Registered Trademark- brand
service, (d) any programming or Content area offered by or through the U.S.
version of the America Online-Registered Trademark- brand service over which
AOL does not exercise complete operational control (including, without
limitation, Content areas controlled by other parties and member-created
Content areas), (e) any yellow pages, white pages, classifieds or other search,
directory or review services or Content offered by or through the U.S. version
of the America Online-Registered Trademark- brand service, (f) any property,
feature, product or service which AOL or its affiliates may acquire subsequent
to the Effective Date and (g) any other version of an America Online service
which is materially different from the standard narrow-band U.S. version of the
America Online brand service, by virtue of its branding, distribution,
functionality, Content and services, including, without limitation, any
co-branded version of the service and any version distributed through any
broadband distribution platform or through any platform or device other than a
desktop personal computer.
AOL USER. Any user of the AOL Service, AOL.com or the AOL Network.
AOL.com. AOL's primary Internet-based Interactive Site marketed under the
"AOL.COM-TM-" brand, specifically excluding (a) the AOL Service, (b) any
international versions of such site, (c) "ICQ, "AOL NetFind-TM-," "AOL
Instant Messenger-TM-,"NetMail-TM-" or any similar independent product or
service offered by or through such site or any other AOL Interactive Site,
(d) any programming or Content area offered by or through such site over
which AOL does not exercise complete operational control (including, without
limitation, Content areas controlled by other parties and member-created
Content areas), (e) any programming or Content area offered by or through the
U.S. version of the America Online-Registered Trademark- brand service which
was operated, maintained or controlled by the former AOL Studios division
(e.g., Electra), (f) any yellow pages, white pages, classifieds or other
search, directory or review services or Content offered by or through such
site or any other AOL Interactive Site, (g) any property, feature, product or
service which AOL or its affiliates may acquire subsequent to the Effective
Date and (h) any other version of an America Online Interactive Site which is
materially different from AOL's primary Internet-based Interactive Site
marketed under the "AOL.COM-TM-" brand, by virtue of its branding,
distribution, functionality, Content and services, including, without
limitation, any co-branded versions and any version distributed through any
broadband distribution platform or through any platform or device other than
a desktop personal computer.
CHANGE OF CONTROL. (a) The consummation of a reorganization, merger or
consolidation or sale or other disposition of substantially all of the assets
of a party; or (b) the acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1933, as amended) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under such Act) or more
15
<PAGE>
than 50% of either (i) the then outstanding shares of common stock of such
party; or (ii) the combined voting power of the then outstanding voting
securities of such party entitled to vote generally in the election of
directors.
CONFIDENTIAL INFORMATION. Any information relating to or disclosed in the
course of the Agreement, which is or should be reasonably understood to be
confidential or proprietary to the disclosing Party, including, but not
limited to, the material terms of this Agreement, information about AOL
Members, AOL Users, AOL Purchasers and MP customers, technical processes and
formulas, source codes, product designs, sales, cost and other unpublished
financial information, product and business plans, projections, and marketing
data. "Confidential Information" will not include information (a) already
lawfully known to or independently developed by the receiving Party, (b)
disclosed in published materials, (c) generally known to the public, or (d)
lawfully obtained from any third party.
CONTENT. Text, images, video, audio (including, without limitation, music
used in synchronism or timed relation with visual displays) and other data,
Products, advertisements, promotions, links, pointers and software, including
any modification, upgrades, updates, enhancements and related documentation.
DCI. Local interactive consumer content and services for particular
metropolitan or other local areas in the United States which is developed,
assembled, packaged and marketed by Digital City, Inc.
FINANCING EVENT. At any time after the Effective Date, the receipt by MP, in
a single transaction or series of related transactions, of funding of at
least [***] but less than [***].
IMPRESSION. User exposure to the applicable Promotion, as such exposure may
be reasonably determined and measured by AOL in accordance with its standard
methodologies and protocols.
INTERACTIVE SERVICE. An entity offering one or more of the following: (i)
online or Internet connectivity services (e.g., an Internet service
provider); (ii) a broad selection of aggregated third party interactive
content (or navigation thereto) (e.g., an online service or search and
directory service); (iii) communications software capable of serving as the
principal means through which a user creates, sends and receives electronic
mail or real time online messages.
INTERACTIVE SITE. Any interactive site or area, including, by way of example
and without limitation, (i) an MP site on the World Wide Web portion of the
Internet or (ii) a channel or area delivered through a "push" product such as
the Pointcast Network or interactive environment such as Microsoft's Active
Desktop.
KEYWORD SEARCH TERMS. The Keyword-TM- online search terms made available on
the AOL Service for use by AOL Members, combining AOL's Keyword-TM- online
search modifier with a term or phrase specifically related to MP (and
determined in accordance with the terms of this Agreement).
LICENSED CONTENT. All Content offered through the Affiliated MP Site pursuant
to this Agreement or otherwise provided by MP or its agents in connection
herewith (e.g., offline or online promotional Content, Promotions, AOL
"slideshows", etc.), including in each case, any modifications, upgrades,
updates, enhancements, and related documentation.
MAJOR FINANCING EVENT. At any time after the Effective Date, the occurrence
of either (i) the receipt by MP, in a single transaction or series of related
transactions, of funding of at least [***] or (ii) the receipt of funding by MP
as a result of the initial public offering of securities of MP pursuant to an
effective registration statement under the Securities Act of 1993, as amended
MP INTERACTIVE SITE. Any Interactive Site (other than the Affiliated MP Site)
which is managed, maintained, owned or controlled by MP or its agents.
PREMIER PRODUCTS. Consumer movies and other consumer oriented video content
delivered in fixed media formats (including, without limitation, VHS
cassettes, digital video disks, DIVX and laserdiscs,
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
16
<PAGE>
("Video Products"), specifically excluding, however, (i) music audio
entertainment products, (ii) any form of computer software (e.g. games and
entertainment programs) and (iii) any movie or video content or other
products distributed or delivered through an electronic data transfer format.
PRODUCT. Any product, good or service which MP (or others acting on its
behalf or as distributors) offers, sells, provides, distributes or licenses
to AOL Users directly or indirectly through (i) the Affiliated MP Site
(including through any Interactive Site linked thereto), (ii) any other
electronic means directed at AOL Users (e.g., e-mail offers), or (iii) an
"offline" means (e.g., toll-free number) for receiving orders related to
specific offers within the Affiliated MP Site requiring purchasers to
reference a specific promotional identifier or tracking code, including,
without limitation, products sold through surcharged downloads (to the extent
expressly permitted hereunder).
SITE REVENUES. The combination of Transaction Revenues and Advertising
Revenues.
TRANSACTION REVENUES. Aggregate amounts paid by AOL Purchasers in connection
with the sale, licensing, distribution or provision of any Products,
including, in each case, service charges, and excluding, in each case, (a)
amounts collected for sales or use taxes or duties and (b) credit card
processing fees and shipping and handling charges (provided that, if these
charges represent (at any time during the Term) a source of profit for MP,
such charges will be included in the definition of Transaction Revenues),
credits and chargebacks for returned or canceled goods or services, but not
excluding cost of goods sold or any similar cost.
7
<PAGE>
EXHIBIT C
MPA CROSS-PROMOTION
A. Within each MP Interactive Site, MP shall include the following (the "AOL
Promo"): a prominent promotional banner (at least 90 x 30 in size)
appearing on the first screen of the MP Interactive Site, to promote such
AOL products or services as AOL may designate (for example, the America
Online-Registered Trademark- brand service, the CompuServe-Registered
Trademark- brand service, the AOL.com-Registered Trademark- site, any of
the Digital City-Registered Trademark- services or the AOL Instant
Messenger-TM- service). AOL, in consultation with MP, will provide the
creative content to be used in the AOL Promo (including designation of
links from such content to other content pages). MP shall post (or
update, as the case may be) the creative content supplied by AOL within
the spaces for the AOL Promos within five days of its receipt of such
content from AOL. Without limiting any other reporting obligations of the
Parties contained herein, MP shall provide AOL with monthly written
reports specifying the number of Impressions to the pages containing the
AOL Promo during the prior month. In addition, within each MP Interactive
Site, MP shall provide prominent promotion for the keywords associated
with MP's Online Area and links from the MP Interactive Site to the
relevant topic areas on AOL's AOL.com site. In connection with the
foregoing, AOL will pay MP a standard bounty fee for any new subscribers
to the AOL Service who subscribe to the AOL Service through the AOL Promo.
B. In MP's television, radio, print and "out of home" (e.g., buses and
billboards) advertisements and in any publications, programs, features or
other forms of media over which MP exercises at least partial editorial
control, MP will include specific references or mentions (verbally where
possible) of the availability of MP's Online Area through the America
Online-Registered Trademark- brand service, which are at least as
prominent as any references that MP makes to any MP Interactive Site (by
way of site name, related company name, URL or otherwise). Without
limiting the generality of the foregoing, MP's listing of the "URL" for
any MP Interactive Site will be accompanied by an equally prominent
listing of the "keyword" term on AOL for MP's Online Area.
8
<PAGE>
EXHIBIT D
DESCRIPTION OF PRODUCTS AND OTHER CONTENT
DVD - Video products
DVD - ROM products
DVD - Audio products
DVD - Recordable media
DVD - Enhanced DVD products, (e.g., products currently in development by VM
Labs)
Laserdisc
Videotape
Sega
Playstation
Movie memorabilia
Home Theater accessories (e.g., replacement cases, cd wipes, disk cleaners,
etc.)
Hats and T-Shirts, provided that any hats or t-shirts that are sold in the
Affiliated MP Site must be related to Video Products or contain an MP logo or
trademark, and cannot represent a substantial portion of Transaction Revenues.
19
<PAGE>
EXHIBIT E
OPERATIONS
1. GENERAL. The Affiliated MP Site (including the Products and other Content
contained therein) will be in the top three (3) in the video sale and rental
industry, as determined by each of the following methods : (a) based on a
cross-section of third-party reviewers who are recognized authorities in such
industry and (b) with respect to all material quality averages or standards
in such industry, including each of the following: (i) pricing of Products,
(ii) scope and selection of Products, (iii) quality of Products, (iv)
customer service and fulfillment associated with the marketing and sale of
Products and (v) ease of use. In addition, the Affiliated MP Site will, with
respect to each of the measures listed above, be competitive in all respects
with that which is offered by any MP Competitors.
2. AFFILIATED MP SITE INFRASTRUCTURE. MP will be responsible for all
communications, hosting and connectivity costs and expenses associated with
the Affiliated MP Site. MP will provide all hardware, software,
telecommunications lines and other infrastructure necessary to meet traffic
demands on the Affiliated MP Site from the AOL Network. MP will design and
implement the network between the AOL Service and Affiliated MP Site such
that (i) no single component failure will have a materially adverse impact on
AOL Members seeking to reach the Affiliated MP Site from the AOL Network and
(ii) no single line will run at more than 70% average utilization for a
5-minute peak in a daily period. In this regard, MP will provide AOL, upon
request, with a detailed network diagram regarding the network infrastructure
supporting the Affiliated MP Site. In the event that MP elects to create a
custom version of the Affiliated MP Site in order to comply with the terms of
this Agreement, MP will bear responsibility for all aspects of the
implementation, management and cost of such mirrored site.
3. OPTIMIZATION; SPEED. MP will use commercially reasonable efforts to
ensure that: (a) the functionality and features within the Affiliated MP Site
are optimized for the client software than in use by AOL Members; and (b) the
Affiliated MP Site is designed and populated in a manner that minimizes
delays when AOL Members attempt to access such site. At a minimum, MP will
ensure that the Affiliated MP Site's data transfers initiate within fewer
than fifteen (15) seconds on average. Prior to commercial launch of any
material promotions described herein, MP will permit AOL to conduct
performance and load testing of the Affiliated MP Site (in person or through
remote communications), with such commercial launch not to commence until
such time as AOL is reasonably satisfied with the results of any such testing.
4. USER INTERFACE. MP will maintain a graphical user interface within the
Affiliated MP Site that is competitive in all material respects with
interfaces of other similar sites based on similar form technology. AOL
reserves the right to review and approve the user interface and site design
prior to launch of the Promotions and to conduct focus group testing to
assess compliance with respect to such consultation and with respect to MP's
compliance with the preceding sentence.
5. TECHNICAL PROBLEMS. MP agrees to use commercially reasonable efforts to
address material technical problems (over which MP exercises control)
affecting use by AOL Members of the Affiliated MP Site (a "MP Technical
Problem") promptly following notice thereof. In the event that MP is unable
to promptly resolve a MP Technical Problem following notice thereof from AOL
(including, without limitation, infrastructure deficiencies producing user
delays), AOL will have the right to regulate the promotions it provides to MP
hereunder until such time as MP corrects the MP Technical Problem at issue.
6. MONITORING. MP will ensure that the performance and availability of the
Affiliated MP Site is monitored on a continuous basis. MP will provide AOL
with contact information (including e-mail, phone, pager and tax information,
as applicable, for both during and after business hours) for Partner's
principal business and technical representatives for use in cases when issues
or problems arise with respect to the Affiliated MP Site.
7. TELECOMMUNICATIONS. The Parties agree to explore encryption methodology
to secure data communications between the Parties' data centers. The network
between the Parties will be configured such that no single component failure
will significantly impact AOL Users. The network will be sized such that no
single line runs at more than 70% average utilization for a 5-minute peak in
a daily period.
8. SECURITY. MP will utilize Internet standard encryption technologies
(e.g., Secure Socket Layer - SSL) to provide a secure environment for
conducting transactions and/or transferring private member information (e.g.
credit card numbers, banking/financial information, and member address
information) to and from the Affiliated MP Site. MP will facilitate periodic
reviews of the Affiliated MP Site by AOL in order to evaluate the security
risks of such site. MP will promptly remedy any security risks or breaches of
security as may be identified by AOL's Operations Security team.
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9. TECHNICAL PERFORMANCE.
i. MP will design the Affiliated MP Site to support the Windows
version of the Microsoft Internet Explorer 3.0 and 4.0 browser, the
Macintosh version of the Microsoft Internet Explorer 3.0, and make
commercially reasonable efforts to support all other AOL browsers
listed at:
"http://webmaster.info.com/BrowTable.html."
ii. To the extent MP creates customized pages on the Affiliated MP Site
for AOL Members, MP will configure the server from which it serves
the site to examine the HTTP User-Agent field in order to identify
the "AOL Member-Agents" listed at:
"http://webmaster.info.aol.com/Brow2Text.html."
iii. MP will periodically review the technical information made
available by AOL at http://webmaster.info.aol.com/CacheText.html.
iv. MP will design its site to support HTTP 1.0 or later protocol as
defined in RFC 1945 (available at "http://ds.internic.net/rfc/rfc
1945.text") and to adhere to AOL's parameters for refreshing cached
information listed at http://webmaster.info.aol.com/CacheText.html.
v. Prior to releasing material, new functionality or features through
the Affiliated MP Site ("New Functionality"), MP will use
commercially reasonable efforts to either (i) test the New
Functionality to confirm its compatibility with AOL Service client
software or (ii) provide AOL with written notice of the New
Functionality so that AOL can perform tests of the New
Functionality to confirm its compatibility with the AOL Service
client software.
10. AOL INTERNET SERVICES MP SUPPORT. AOL will provide MP with access to the
standard online resources, standards and guidelines documentation, technical
phone support monitoring and after-hours assistance that AOL makes generally
available to similarly situated web-based customers. AOL support will not, in
any case, be involved with content creation on behalf of MP or support for
any technologies databases, software or other applications which are not
supported by AOL or are related to any MP area other than the Affiliated MP
Site. Support to be provided by AOL is contingent on MP providing to AOL demo
account information (where applicable), a detailed description of the
Affiliated MP Site's software, hardware and network architecture and access
to the Affiliated MP Site for purposes of such performance and load testing
as AOL elects to conduct.
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EXHIBIT F
STANDARD ONLINE COMMERCE TERMS & CONDITIONS
1. AOL NETWORK DISTRIBUTION. MP will not authorize or permit any third
party to distribute or promote the Products or any MP Interactive Site
through the AOL Network absent AOL's prior written approval. The Promotions
and any other promotions or advertisements purchased from or provided by AOL
will link only to the Affiliated MP Site, will be used by MP solely for its
own benefit and will not be resold, traded, exchanged, bartered, brokered or
otherwise offered to any third party.
2. PROVISION OF OTHER CONTENT. In the event that AOL notifies MP that (i)
as reasonably determined by AOL, any Content within the Affiliated MP Site
violates AOL's then-standard Terms of Service (as set forth on the America
Online-Registered Trademark- brand service at Keyword term "TOS"), the terms
of this Agreement or any other standard, written AOL policy or (ii) AOL
reasonably objects to the inclusion of any Content within the Affiliated MP
Site (other than any specific items of Content which may be expressly
identified in this Agreement), then MP will take commercially reasonable
steps to block access by AOL Users to such Content using MP's then-available
technology. In the event that MP cannot, through its commercially reasonable
efforts, block access by AOL Users to the Content in question, then MP will
provide AOL prompt written notice of such fact. AOL may then, at its option,
restrict access from the AOL Network to the Content in question using
technology available to AOL. MP will cooperate with AOL's reasonable requests
to the extent AOL elects to implement any such access restrictions.
3. CONTESTS. MP will take all steps necessary to ensure that any contest,
sweepstakes or similar promotion conducted or promoted through the Affiliated
MP Site (a "Contest") complies with all applicable federal, state and local
laws and regulations.
4. NAVIGATIONAL ICONS. Subject to the prior consent of MP, which consent
will not be unreasonably withheld, AOL will be entitled to establish
navigational icons, links and pointers connecting the Affiliated MP Site (or
portions thereof) with other content areas on or outside of the AOL Network.
5. DISCLAIMERS. Upon AOL's request, MP agrees to include within the
Affiliated MP Site a product disclaimer (the specific form and substance to
be mutually agreed upon by the Parties) indicating that transactions are
solely between MP and AOL Users purchasing Products from MP.
6. AOL LOOK AND FEEL. MP acknowledges and agrees that AOL will own all
right, title and interest in and to the elements of graphics, design,
organization, presentation, layout, user interface, navigation and stylistic
convention (including the digital implementations thereof) which are
generally associated with online areas contained within the AOL Network,
subject to MP's ownership rights in any MP trademarks or copyrighted material
with the Affiliated MP Site.
7. MANAGEMENT OF THE AFFILIATED MP SITE. MP will manage, review, delete,
edit, create, update and otherwise manage all Products available on or
through the Affiliated MP Site, in a timely and professional manner and in
accordance with the terms of this Agreement. MP will ensure that each
Affiliated MP Site is current, accurate and well-organized at all times. MP
warrants that the Products and other Licensed Content: (i) will not infringe
on or violate any copyright, trademark, U.S. patent or any other third party
right, including without limitation, any music performance or other
music-related rights; (ii) will not violate AOL's then-applicable Terms of
Service; and (iii) will not violate any applicable law or regulation,
including those relating to contests, sweepstakes or similar promotions.
Additionally, MP represents and warrants that it owns or has a valid license
to all rights to any Licensed Content used in AOL "slideshow" or other
formats embodying elements such as graphics, animation and sound, free and
clear of all encumbrances and without violating the rights of any other
person or entity. MP also warrants that a reasonable basis exists for all
Product performance or comparison claims appearing through the Affiliated MP
Site. MP shall not in any manner, including, without limitation in any
Promotion, the Licensed Content or the Materials state or imply that AOL
recommends or endorses MP or MP's Products (e.g., no statements that MP is an
"official" or "preferred" provider of products or services for AOL). AOL will
have no obligations with respect to the Products available on or through the
Affiliated MP Site, including, but not limited to, any duty to review or
monitor any such Products.
8. DUTY TO INFORM. MP will promptly inform AOL of any information related to
the Affiliated MP Site which could reasonably lead to a claim, demand, or
liability of or against AOL and/or its affiliates by any third party.
9. CUSTOMER SERVICE. It is the sole responsibility of MP to provide
customer service to persons or entities purchasing Products through the AOL
Network ("Customers"). MP will bear full responsibility for all
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customer service, including without limitation, order processing, billing,
fulfillment, shipment, collection and other customer service associated with
any Products offered, sold or licensed through the Affiliated MP Site, and
AOL will have no obligations whatsoever with respect thereto. MP will receive
all emails from Customers via a computer available to MP's customer service
staff and generally respond to such emails within one business day of
receipt. MP will receive all orders electronically and generally process all
orders within one business day of receipt, provided Products ordered are not
advance order items. MP will ensure that all orders of Products are received,
processed, fulfilled and delivered on a timely and professional basis. MP
will offer AOL Users who purchase Products through such Affiliated MP Site a
money back satisfaction guarantee. MP will bear all responsibility for
compliance with federal, state and local laws in the event that Products are
out of stock or are no longer available at the time an order is received. MP
will also comply with the requirements of any federal, state or local
consumer protection or disclosure law. Payment for Products will be collected
by MP directly from customers. MP's order fulfillment operation will be
subject to AOL's reasonable review.
10. PRODUCTION WORK. In the event that MP requests AOL's production
assistance in connection with (i) ongoing programming and maintenance related
to the Affiliated MP Site, (ii) a redesign of or addition to the Affiliated
MP Site (e.g., a change to an existing screen format or construction of a new
custom form), (iii) production to modify work performed by a third party
provider or (iv) any other type of production work, MP will work with AOL to
develop a detailed production plan for the requested production assistance
(the "Production Plan"). Following receipt of the final Production Plan, AOL
will notify MP of (i) AOL's availability to perform the requested production
work, (ii) the proposed fee or fee structure for the requested production and
maintenance work and (iii) the estimated development schedule for such work.
To the extent the Parties reach agreement regarding implementation of
agreed-upon Production Plan, such agreement will be reflected in a separate
work order signed by the Parties. To the extent MP elects to retain a third
party provider to perform any such production work, work produced by such
third party provider must generally conform to AOL's standards & practices
(as provided on the America Online brand service at Keyword term
"styleguide"). The specific production resources which AOL allocates to any
production resources which AOL allocates to any production work to be
performed on behalf of MP will be determined by AOL in its sole discretion.
11. OVERHEAD ACCOUNTS. To the extent AOL has granted MP any overhead
accounts on the AOL Service, MP will be responsible for the actions taken
under or through its overhead accounts, which actions are subject to AOL's
applicable Terms of Service and for any surcharges, including, without
limitation, all premium charges, transaction charges, and any applicable
communication surcharges incurred by any overhead Account issued to MP but MP
will not be liable for charges incurred by any overhead account relating to
AOL's standard monthly usage fees and standard hourly charges, which charges
AOL will bear. Upon the termination of this Agreement, all overhead accounts,
related screen names and any associated usage credits or similar rights, will
automatically terminate. AOL will have no liability for loss of any data or
content related to the proper termination of any overhead account.
12. NAVIGATION TOOLS. Any Keyword Search Terms to be directed to the
Affiliated MP Site shall be (i) subject to availability for use by MP and
(ii) limited to the combination of the Keyword-TM- search modifier combined
with a registered trademark of MP. AOL reserves the right to revoke at any
time MP's use of any Keyword Search Terms which do not incorporate registered
trademarks of MP. MP acknowledges that its utilization of a Keyword Search
Term will not create in it, nor will it represent it has, any right, title or
interest in or to such Keyword Search Term, other than the right, title and
interest MP holds in MP's registered trademark independent of the Keyword
Search Term. Without limiting the generality of the foregoing, MP will not:
(a) attempt to register or otherwise obtain trademark or copyright protection
in the Keyword Search Term; or (b) use the Keyword Search Term, except for
the purposes expressly required or permitted under this Agreement. To the
extent AOL allows AOL Users to "bookmark" the URL or other locator for the
Affiliated MP Site, such bookmarks will be subject to AOL's control at all
times. Upon the termination of this Agreement, MP's rights to any Keyword
Search Terms and bookmarking will terminate.
13. AOL USER COMMUNICATIONS. To the extent MP sends any form of
communications to AOL Users, MP will promote the Affiliated MP Site as the
location at which to purchase Products (as compared to any more general or
other site or location). In addition, in any communication to AOL Users or on
the Affiliated MP Site, MP will not encourage AOL Users to take any action
inconsistent with the scope and purpose of this Agreement, including without
limitation, the following actions: (a) using Content other than the Licensed
Content; (b) bookmarking of Interactive Sites; (c) using Interactive Sites
other than those covered by the revenue-sharing provisions herein; (d)
changing the default home page on the AOL browser, or (e) using any
Interactive Service other than AOL. Any email newsletters sent to AOL Users
by MP or its agents
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will (i) be subject to AOL's policies on use of the email functionality,
including but not limited to AOL's policy on unsolicited bulk email, (ii) be
sent only to AOL Users requesting to receive such newsletters, (iii) not
contain Content which violates AOL's Terms of Service, and (iv) not contain
any advertisements, marketing or promotion for any other Interactive Service.
In any commercial e-mail communications to AOL Users which are otherwise
permitted hereunder, MP will provide the recipient with a prominent and easy
means to "opt-out" of receiving any future commercial e-mail communications
from MP.
14. MERCHANT CERTIFICATION PROGRAM. MP will participate in any generally
applicable "Certified Merchant" program operated by AOL or its authorized
agents or contractors. Such program may require merchant participants on an
ongoing basis to meet certain reasonable, generally applicable standards
relating to provision of electronic commerce through the AOL Network
(including, as a minimum, use of 40-bit SSL encryption and if requested by
AOL, 128-bit encryption) and may also require the payment of certain
reasonable certification fees to the applicable entity operating the program.
Each Certified Merchant in good standing will be entitled to place on its
affiliated Interactive Site an AOL designed and approved button promoting the
merchant's status as an AOL Certified Merchant.
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EXHIBIT G
STANDARD LEGAL TERMS & CONDITIONS
1. PROMOTIONAL MATERIALS/PRESS RELEASES. Each Party will submit to the
other Party, for its prior written approval, which will not be unreasonably
withheld or delayed, any marketing, advertising, press releases, and all
other promotional materials related to the Affiliated MP Site and/or
referencing the other Party and/or its trade names, trademarks, and service
marks (the "Materials"); provided, however, that either Party's use of screen
shots of the Affiliated MP Site for promotional purposes will not require the
approval of the other Party so long as America Online-Registered Trademark-
is clearly identified as the source of such screen shots; and provided
further, however, that following the initial public announcement of the
business relationship between the Parties in accordance with the approval and
other requirements contained herein, either Party's subsequent factual
reference to the existence of a business relationship between the Parties
will not required the approval of the other Party. Each Party will solicit
and reasonably consider the views of the other Party in designing and
implementing such Materials. Once approved, the Materials may be used by a
Party and its affiliates for the purpose of promoting the Affiliated MP Site
and the content contained therein and reused for such purpose until such
approval is withdrawn with reasonably prior notice. In the event such
approval is withdrawn, existing inventories of Materials may be depleted.
Notwithstanding the foregoing, either Party may issue press releases and
other disclosures as required by law or as reasonably advised by legal
counsel without the consent of the other Party and in such event, the
disclosing Party will provide at least five (5) business days prior written
notice of such disclosure.
2. LICENSE. MP hereby grants AOL a non-exclusive worldwide license to
market, license, distribute, reproduce, display, perform, transmit and
promote the Licensed Content (or any portion thereof) through such areas or
features of the AOL Network as AOL deems appropriate. MP acknowledges and
agrees that the foregoing license permits AOL to distribute portions of the
Licensed Content in synchronism or timed relation with visual displays
prepared by MP or AOL (e.g., as part of an AOL "slideshow"). In addition,
AOL Users will have the right to access and use the Affiliated MP Site.
3. TRADEMARK LICENSE. In designing and implementing the Materials and
subject to the other provisions contained herein, MP will be entitled to use
the following trade names, trademarks, and service marks of AOL: the
"America Online-Registered Trademark-" brand service, "AOL-TM-"
service/software and AOL's triangle logo; and AOL and its affiliates will be
entitled to use the trade names, trademarks and service marks of MP for which
MP holds all rights necessary for use in connection with this Agreement
(collectively, together with the AOL marks listed above, the "Marks");
provided that each Party: (i) does not create a unitary composite mark
involving a Mark of the other Party without the prior written approval of
such other Party; and (ii) displays symbols and notices clearly and
sufficiently indicating the trademark status and ownership of the other
Party's Marks in accordance with applicable trademark law and practice.
4. OWNERSHIP OF TRADEMARKS. Each Party acknowledges the ownership of the
other Party in the Marks of the other Party and agrees that all use of the
other Party's Marks will inure to the benefit, and be on behalf, of the other
Party. Each party acknowledges that its utilization of the other Party's
Marks will not create in it, nor will it represent it has, any right, title,
or interest in or to such Marks other than the licenses expressly granted
herein. Each Party agrees not to do anything contesting or impairing the
trademark rights of the other Party.
5. QUALITY STANDARDS. Each Party agrees that the nature and quality of its
products and services supplied in connection with the other Party's Marks
will conform to quality standards set by the other Party. Each Party agrees
to supply the other Party, upon request, with a reasonable number of samples
of any Materials publicly disseminated by such Party which utilize the other
Party's Marks. Each Party will comply with all applicable laws, regulations,
and customs and obtain any required government approvals pertaining to use of
the other Party's marks.
6. INFRINGEMENT PROCEEDINGS. Each Party agrees to promptly notify the other
Party of any unauthorized use of the other Party's Marks of which it has
actual knowledge. Each Party will have the sole right and discretion to bring
proceedings alleging infringement of its Marks or unfair competition related
thereto; provided, however, that each Party agrees to provide the other Party
with its reasonable cooperation and assistance with respect to any such
infringement proceedings.
7. REPRESENTATIONS AND WARRANTIES. Each Party represents and warrants to the
other Party that: (i) such Party has the full corporate right, power and
authority to enter into this Agreement and to perform the acts required of if
hereunder; (ii) the execution of this Agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do not and
will not violate any agreement to which such Party is a party or by which it
is otherwise bound; (iii) when executed and delivered by such
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Party, this Agreement will constitute the legal, valid and binding obligation
of such Party, enforceable against such Party in accordance with its terms;
and (iv) such Party acknowledges that the other Party makes no
representations, warranties or agreements related to the subject matter
hereof that are not expressly provided for in this Agreement. MP hereby
represents and warrants that it possesses all authorizations, approvals,
consents, licenses, permits, certificates or other rights and permissions
necessary to sell the MP Products.
8. CONFIDENTIALITY. Each Party acknowledges that Confidential Information
may be disclosed to the other Party during the course of this Agreement. Each
Party agrees that it will take reasonable steps, at least substantially
equivalent to the steps it takes to protect its own proprietary information,
during the term of this Agreement, and for a period of three years following
expiration nor termination of this Agreement to prevent the duplication or
disclosure of Confidential Information of the other Party, other than by or
to its employees or agents who must have access to such Confidential
Information to perform such Party's obligations hereunder, who will each
agree to comply with this section. Notwithstanding the foregoing, either
Party may issue a press release or other disclosure containing Confidential
Information without the consent of the other Party, to the extent such
disclosure is required by law, rule, regulation or government or court order.
In such event, the disclosing Party will provide at least five (5) business
days prior written notice of such proposed disclosure to the other Party.
Further, in the event such disclosure is required of either Party under the
laws, rules or regulations of the Securities and Exchange Commission or any
other applicable governing body, such Party will (i) redact mutually
agreed-upon portions of this Agreement to the fullest extent permitted under
applicable laws, rules and regulations and (ii) submit a request to such
governing body that such portions and other provisions of this Agreement
receive confidential treatment under the laws, rules and regulations of the
Securities and Exchange Commission or otherwise be held in the strictest
confidence to the fullest extent permitted under the laws, rules or
regulations of any other applicable governing body.
9. LIMITATION OF LIABILITY; DISCLAIMER; INDEMNIFICATION.
9.1 LIABILITY. UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE
OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY
DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES), ARISING FROM BREACH OF THE AGREEMENT, THE SALE OF PRODUCTS, THE USE
OR INABILITY TO USE THE AOL NETWORK, THE AOL SERVICE, AOL COM OR THE
AFFILIATED MP SITE, OR ARISING FROM ANY OTHER PROVISION OF THIS AGREEMENT,
SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST
BUSINESS (COLLECTIVELY, "DISCLAIMED DAMAGES"); PROVIDED THAT EACH PARTY
WILL REMAIN LIABLE TO THE OTHER PARTY TO THE EXTENT ANY DISCLAIMED DAMAGES
ARE CLAIMED BY A THIRD PARTY AND ARE SUBJECT TO INDEMNIFICATION PURSUANT TO
SECTION 9.3 EXCEPT AS PROVIDED IN SECTION 9.3 (I) LIABILITY ARISING UNDER
THIS AGREEMENT WILL BE LIMITED TO DIRECT, OBJECTIVELY MEASURABLE DAMAGES, AND
(II) THE MAXIMUM LIABILITY OF ONE PARTY TO THE OTHER PARTY FOR ANY CLAIMS
ARISING IN CONNECTION WITH THIS AGREEMENT WILL NOT EXCEED THE AGGREGATE
AMOUNT OF PAYMENT OBLIGATIONS OWED TO THE OTHER PARTY HEREUNDER IN THE YEAR
IN WHICH THE EVENT GIVING RISE TO LIABILITY OCCURS; PROVIDED THAT EACH PARTY
WILL REMAIN LIABLE FOR THE AGGREGATE AMOUNT OF ANY PAYMENT OBLIGATIONS OWED
TO THE OTHER PARTY PURSUANT TO THE AGREEMENT.
9.2 NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS
AGREEMENT, NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY
DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING
THE AOL NETWORK, THE AOL SERVICE, AOL COM OR THE AFFILIATED MP SITE.
INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF
PERFORMANCE WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, AOL
SPECIFICALLY DISCLAIMS ANY WARRANTY REGARDING THE PROFITABILITY OF THE
AFFILIATED MP SITE.
9.3 INDEMNITY. Either Party will defend, indemnify, save and hold harmless
the other Party and the officers, directors, agents, affiliates,
distributors, franchisees and employees of the other Party from any and all
third party claims, demands, liabilities, costs or expenses, including
reasonable attorneys' fees ("Liabilities"), resulting from the Indemnifying
Party's material breach of any duty, representation or warranty of this
Agreement.
9.4 CLAIMS. If a Party entitled to indemnification hereunder (the
"Indemnified Party") becomes aware of any matter it believes is
indemnifiable hereunder involving any claim, action, suit, investigation,
arbitration or other proceeding against the Indemnified Party by any third
party (each an "Action"), the Indemnified Party will give the other
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Party (the "Indemnifying Party") prompt written notice of such Action. Such
notice will (i) provide the basis on which Indemnification is being asserted
and (ii) be accompanied by copies of all relevant pleadings, demands, and
other papers related to the Action and in the possession of the Indemnified
Party. The Indemnifying Party will have a period of ten (10) days after
delivery of such notice to respond. If the Indemnifying Party elects to
defend the Action or does not respond within the requisite ten (10) day
period, the Indemnifying Party will be obligated to defend the Action, at its
own expense, and by counsel reasonably satisfactory to the Indemnified
Party. The Indemnified Party will cooperate, at the expense of the
Indemnifying Party, with the Indemnifying Party and its counsel in the
defense and the Indemnified Party will have the right to participate fully,
at its own expense, in the defense of such Action. If the Indemnifying Party
responds within the required ten (10) day period and elects not to defend
such Action, the Indemnified Party will be free, without prejudice to any of
the Indemnified Party's rights hereunder, to compromise or defend (and
control the defense of) such Action. In such case, the Indemnifying Party
will cooperate at its own expense, with the Indemnified Party and the
counsel in the defense against such Action and the Indemnifying Party will
have the right to participate fully, at its own expense, in the defense of
Action. Any compromise or settlement of an Action will require the prior
written consent of both Parties hereunder, such consent not to be
unreasonably withheld or delayed.
9.5. ACKNOWLEDGMENT. AOL and MP each acknowledges that the provisions of
this Agreement were negotiated to reflect an informed, voluntary allocation
between them of all risks (both known and unknown) associated with the
transactions contemplated hereunder. The limitations and disclaimers related
to warranties and liability contained in this Agreement are intended to limit
the circumstances and extent of liability. The provisions of this Section 9
will be enforceable independent of and severable from any other enforceable
or unenforceable provision of this Agreement.
10. SOLICITATION OF AOL USERS. During the term of the Agreement and for a
two year period thereafter, MP will not use the AOL Network (including,
without limitation, the e-mail network contained therein) to solicit AOL
Members on behalf of another Interactive Service. More generally, MP will not
send unsolicited, commercial e-mail (i.e., "spam") through or into AOL's
products or services, absent a Prior Business Relationship. For purposes of
this Agreement, a "Prior Business Relationship" will mean that the AOL Member
to whom commercial e-mail is being sent has voluntarily either (i) engaged in
a transaction with MP or (ii) provided information to MP through a contest,
registration or other communication, which included clear notice to the AOL
Member that the information provided could result in commercial e-mail being
sent to that AOL Member by MP or its agents. Any commercial e-mail to be sent
through or into AOL's products or services shall also be subject to AOL's
then-standard restrictions on distribution of bulk e-mail (e.g., related to
the time and manner in which such e-mail can be distributed through or into
the AOL product or service in question).
11. COLLECTION AND USE OF USER INFORMATION. MP shall ensure that its
collection, use and disclosure of information obtained from AOL Members under
this Agreement ("Member Information") complies with (i) all applicable laws
and regulations and (ii) AOL's standard privacy policies, available on the
AOL Service at the keyword term "Privacy" (or, in the case of the Affiliated
MP Site, MP's standard privacy policies so long as such policies are
prominently published on the site and provide adequate notice, disclosure and
choice to users regarding MP's collection, use and disclosure of user
information). MP will not disclose Member Information collected hereunder to
any third party in a manner that identifies AOL Members as end users of an
AOL product or service or use Member Information collected under this
Agreement to market another Interactive Service.
12. EXCUSE. Neither Party will be liable for, or be considered in breach of or
default under this Agreement on account of, any delay or failure to perform as
required by this Agreement as a result of any causes or conditions which are
beyond such Party's reasonable control and which such Party is unable to
overcome by the exercise of reasonable diligence.
13. INDEPENDENT CONTRACTORS. The Parties to this Agreement are independent
contractors. Neither Party is an agent, representative or MP of the other
Party. Neither Party will have any right, power or authority to enter into any
agreement for or on behalf of, or incur any obligation or liability of, or to
otherwise bind, the other Party. This Agreement will not be interpreted or
construed to create an association, agency, joint venture or partnership
between the Parties or to impose any liability attributable to such a
relationship upon either Party.
14. NOTICE. Any notice, approval, request, authorization, direction or other
communication under this Agreement will be given in writing and will be
deemed to have been delivered and given for all purposes (i) on the delivery
date if delivered by electronic mail on the AOL Network (to screenname
"[email protected]" in the case of AOL) or by confirmed facsimile; (ii) on
the delivery date if delivered personally to the Party to whom the same is
directed; (iii) one business day after deposit with a commercial overnight
carrier, with written verification of receipt; or (iv) five business days
after the mailing date, whether or not actually received, if sent by U.S.
mail, return
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receipt requested, postage and charges prepaid, or any other means of rapid
mail delivery for which a receipt is available. In the case of AOL, such
notice will be provided to both the Senior Vice President for Business
Affairs (fax no. 703-265-1206) and the Deputy General Counsel (fax no.
703-265-1105); each at the address of AOL set forth in the first paragraph
of this Agreement. In the case of MP, except as otherwise specified
herein, the notice address will be the address for MP set forth in
the first paragraph of this Agreement, with the other relevant notice
information, including the recipient for notice and, as applicable, such
recipient's fax number or AOL e-mail address, to be as reasonably identified
by AOL.
15. LAUNCH DATES. In the event that any terms contained herein relate to or
depend on the commercial launch date of the Affiliated MP Site contemplated
by this Agreement (the "Launch Date"), then it is the intention of the
Parties to record such Launch Date in a written instrument signed by both
Parties promptly following such Launch Date; provided that, in the absence of
such a written instrument, the Launch Date will be as reasonably determined
by AOL based on the information available to AOL.
16. NO WAIVER. The failure of either Party to insist upon or enforce strict
performance by the other Party of any provision of this Agreement or to
exercise any right under this Agreement will not be construed as a waiver or
relinquishment to any extent of such Party's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same will
be and remain in full force and effect.
17. RETURN OF INFORMATION. Upon the expiration or termination of this
Agreement, each Party will, upon the written request of the other Party,
return or destroy (at the option of the Party receiving the request) all
confidential information, documents, manuals and other materials specified
the other Party.
18. SURVIVAL. Section 6.3 of the body of the Agreement, Section 13 of
Exhibit F, and Sections 8 through 28 of this Exhibit, will survive the
completion, expiration, termination or cancellation of this Agreement.
19. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and
supersedes any and all prior agreements of the Parties with respect to the
transactions set forth herein. Neither Party will be bound by, and each Party
specifically objects to, any term, condition or other provision which is
different from or in addition to the provisions of this Agreement (whether or
not it would materially alter this Agreement) and which is proffered by the
other Party in any correspondence or other document, unless the Party to be
bound thereby specifically agrees to such provision in writing.
20. AMENDMENT. No change, amendment or modification of any provision of this
Agreement will be valid unless set forth in a written instruments signed by
the Party subject to enforcement of such amendment, and in the case of AOL,
by an executive of at least the same standing to the executive who signed the
Agreement.
21. FURTHER ASSURANCES. Each Party will take such action (including, but not
limited to, the execution, acknowledgment and delivery of documents) as may
reasonably be requested by any other Party for the implementation or
continuing performance of this Agreement.
22. ASSIGNMENT. MP will not assign this Agreement or any right, interests
or benefit under this Agreement without the prior written consent of AOL.
Assumption of the Agreement by any successor to MP that is an Interactive
Service (including, without limitation, by way of merger or consolidation),
will be subject to AOL's prior written approval. Subject to the foregoing,
this Agreement will be fully binding upon, inure to the benefit of and be
enforceable by the Parties hereto and their respective successors and assigns.
23. CONSTRUCTION SEVERABILITY. In the event that any provision of this
Agreement conflicts with the law under which this Agreement is to be
construed or if any such provision is held invalid by a court with
jurisdiction over the Parties to this Agreement, (i) such provision will be
deemed to be restated to reflect as nearly as possible the original
intentions of the Parties in accordance with applicable law, and (ii) the
remaining terms, provisions, covenants and restrictions of this Agreement
will remain in full force and effect.
24. REMEDIES. Except where otherwise specified, the rights and remedies
granted to a Party under this Agreement are cumulative and in addition to,
and not in lieu of, any other rights or remedies which the Party may possess
at law or in equity; provided that, in connection with any dispute hereunder,
MP will be not entitled to offset any amounts that it claims to be due and
payable from AOL against amounts otherwise payable by MP to AOL.
25. APPLICABLE LAW. Except as otherwise expressly provided herein, this
Agreement will be interpreted, construed and enforced in all respects in
accordance with the laws of the Commonwealth of Virginia except for its
conflicts of laws principles.
26. EXPORT CONTROLS. Both Parties will adhere to all applicable laws,
regulations and rules relating to the export of technical data and will not
export or re-export any technical data, any products received from the other
Party or the direct product of such technical data to any prescribed
28
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country listed in such applicable laws, regulations and rules unless properly
authorized.
27. HEADINGS. The captions and headings used in this Agreement are inserted
for convenience only and will not affect the meaning or interpretation of
this Agreement.
28. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which will be deemed an original and all of which together will constitute
one and the same document.
29
<PAGE>
AFFILIATE AGREEMENT
This Affiliate Agreement (the "Agreement") is entered into as of September 1,
1998 (the "Effective Date") between One Zero Media, Inc. ("OZM"), a
Massachusetts corporation with principal offices at 65 Chapel Street, Newton,
Massachusetts 02158, and DVD Express, Inc. ("Affiliate"), a California
corporation with principal offices at 7083 Hollywood Blvd, Suite 305,
Hollywood, CA 90028.
INTRODUCTION
WHEREAS, OZM produces the television series entitled "Wild Wild Web" (the
"Series"), an entertainment series focusing on the Internet and computers, and
owns and operates the world wide web site currently accessible at
http://www.getwild.com (the "Entertainment Zone"), which features popular
culture and entertainment content, and is the exclusive producer and
aggregating partner for the entertainment content area on the world wide web
site called "AltaVista" as contracted in Exhibit A, and currently accessible
at http://www.altavista.digital.com (the "AltaVista Site").
OZM is the exclusive producer and aggregating partner for the entertainment
content and commerce area tentatively entitled the "Entertainment Zone" on
the AltaVista site, which content area also will be accessible at
http://www.getwild.com. OZM has exclusivity covering content and commerce
partners for entertainment news, entertainment events on the web, chats (on
the subject areas encompassed within this Section 2.1) and webcasts, popular
music (U.S.), concert listings, film and movies, TV, comedy, radio, episodic
content, extreme and amateur sports, games, literature, zines and various
magazines, pop culture and fashion coverage and such other topics and
features as the parties may mutually agree.
WHEREAS, Affiliate owns and operates a business marketing DVD's on a world
wide web site currently accessible at http://www.dvdexpress.com (the
"Affiliate Site"); and
WHEREAS, Affiliate desires to be the preferred provider of DVD content and
product on the Entertainment Zone, and to link the Affiliate Site to the
Entertainment Zone through an initial co-branded home page (the "Co-Branded
Home Page").
NOW, THEREFORE, the parties agree to the following terms and conditions:
1. OZM DUTIES
OZM hereby appoints Affiliate the "Preferred Provider" of the DVD Area on
the Entertainment Zone, which appointment shall entitle Affiliate to receive
the following services from OZM commencing as of August 25, 1998:
1.1. EXCLUSIVITY. Affiliate will be the sole provider of the
Entertainment Zone's DVD Store Area. Affiliate acknowledges and agrees that
the Entertainment Zone will feature Preferred Providers in a number of
different categories of goods and services and that some de
<PAGE>
minimis overlap in the goods and services offered by Preferred Providers in
different categories is possible. No other company can run DVD-based
advertising in the Entertainment Zone.
1.2. ADVERTISING.
a. MERCHANDISING ON ENTERTAINMENT ZONE. Affiliate may submit its
products/services to OZM for consideration for TV Series product placement to
enhance merchandising opportunities. OZM will use reasonable commercial
efforts to place Affiliate's submissions based on its editorial discretion
and consistent with applicable law.
b. ADVERTISEMENTS ON CO-BRANDED HOME PAGE. OZM shall sell
advertising for the Co-Branded DVD Store Home Page, and shall determine the
presentation, implementation, and location of such advertising through the
Entertainment Zone/Altavista standard templates. OZM will only sell
non-competitive advertising in this area.
c. AD BANNERS. As an allocation of Affiliate's compensation, [***]
worth of ad banners will be placed in the Entertainment Zone during year 1,
[***] in year 2, and [***] in year 3. These will be placed against a [***]
CPM on the site.
1.3. SEARCH RESULTS LINKS. See Altavista Search Results Agreement
document.
1.4. LINKS.
a. ENTERTAINMENT ZONE. OZM will provide Affiliate one
"Merchandising Link" on the home page of the Entertainment Zone per week
which shall be prominently displayed. A Merchandising Link is a mutually
agreed-upon graphical icon or logo that includes a hyperlink to the
Co-Branded Home Page.
b. MOVIES HOME PAGE. OZM will provide Affiliate one Merchandising
Link on the Movies Home Page on an ongoing basis. DVD Express will share this
Merchandising Link with OZM's Video's electronic commerce partner 50/50.
Co-habitation and/or rotation of merchandising links between DVD Express and
the video partner on the Movies Home Page will be designated by OZM through
consent of both DVD Express and the video partner. DVD Express will also
receive a graphical link on the Movies Home Page to the DVD store as well as
integration of links to the store from Entertainment Zone movie-related
content and editorial.
c. CO-BRANDED STORE HOME PAGE STORE. OZM shall control the
standard Entertainment Zone template which will live on the Co-Branded DVD
Store Home Page. All content and commerce on the DVD Store homepage other
than the standard templates and all other pages within the DVD Store will be
under the discretion and control of DVD Express.
1.5. TELEVISION SERVICES. OZM will produce for Affiliate one segment,
consistent with OZM's production practices and subject to applicable law,
featuring Affiliate's services which shall be aired on the Series a minimum
of two times during each twelve month term of this Agreement. The segment
shall feature the Affiliate's web site, and/or mutually-agreed upon goods or
services available from the Affiliate's web site. OZM shall also produce one
thirty second vignette of an editorial nature featuring Affiliate's content
which shall be distributed to a minimum of 130 television markets for the
purpose of insertion into local programming.
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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1.6. CONTESTS. OZM and DVDExpress will conduct contests from time to
time as mutually agreed to.
1.7. ENTERTAINMENT ZONE GUIDEBAR. OZM will include on the
Entertainment Zone guidebar a mutually-agreed upon graphical icon or
graphical text link to the Movies Home Page (OZM guidebars provide navigation
to different parts of the Entertainment Zone site.) The Co-branded DVD Store
Area shall be prominently listed as a main category on the Movies Home Page.
<PAGE>
2. AFFILIATE DUTIES
2.1. DVD AREA. Affiliate will use commercially reasonable efforts to
construct and have fully operational by September 1, 1998 the DVD Store
Area. Affiliate shall operate the Affiliate Site and Co-Branded Home Page
using the best business practices, high ethical standards, and in a manner
that enhances the good will of the Entertainment Zone, the foregoing being at
least equal to the practices of comparable companies offering comparable
world wide web services and products. If OZM becomes aware of any deficiency
in this area it will notify Affiliate, who will take prompt corrective
action to rectify the noted deficiency.
2.2. ADVERTISING. Affiliate shall provide OZM advertising and related
promotional materials for display on the Entertainment Zone in accordance
with the terms of this Section 2.2.
a. AFFILIATE SUBMISSIONS. OZM must receive all Affiliate
submissions of advertising and/or merchandising link materials ("Submissions")
at least ten (10) business days prior to the date on which an advertisement
is scheduled to appear ("Submission Deadline"). All Affiliate Submissions
should be e-mailed to [email protected]. Any change to an Affiliate
Submission must be made in writing, with an e-mail copy sent to
[email protected], and received by OZM at least five (5) business days
prior to the Submission Deadline.
b. REJECTIONS. OZM reserves the right, in its sole discretion
and without liability, to reject, omit or exclude any Affiliate Submissions
and/or advertisements that OZM believes contains unlawful, infringing or
objectionable content (as defined in Section 5.2 below) at any time, with or
without notice to Affiliate and regardless or whether such Affiliate
Subnmissions and/or Advertisements were previously accepted or published.
c. AFFILIATE SITE ADVERTISEMENTS. Affiliate shall control all
advertising and links on the Affiliate Site except for the Entertainment Zone
standard template on the DVD Store homepage, and shall determine the
presentation, implementation, and location of such advertising and links.
2.3 ADVERTISING TAG WORDS. Affiliate will work with OZM, to supply
the tag words for the DVD Area for purposes of the Search Results service set
forth in Section 1.
2.4 PROMOTION OF ENTERTAINMENT ZONE. Affiliate, at no cost to OZM,
will include at all times during the term of this Agreement a co-branded
presence for the Entertainment Zone within the DVD store page that is
linkable back to the Entertainment Zone Homepage and/or to the DVD Store
Homepage
2.5 CO-BRANDED HOME PAGE. Affiliate will use materials provided by
OZM, including Marks as defined in Section 9, to the Co-Branded Home Page.
The style of the Co-Branded Home Page will conform to Entertainment Zone
style standards.
3. COMPENSATION
<PAGE>
3.1 In consideration of OZM's performance hereunder, Affiliate shall
pay OZM as follows:
a. YEAR 1. In Year 1, which shall be the twelve months following
the Effective Date, Affiliate shall pay to OZM a nonrefundable $1,300,000
which amount represents a minimum guarantee payable as follows [***]. In Year
1, OZM agrees to deliver a rate of [***] per user click-through against the
$1,300,000, thus guaranteeing a minimum of [***] to the DVD Store. Affiliate is
not required to make the first installment payment until it has received [***]
click-throughs.
b. YEAR 2. In Year 2, Affiliate shall pay to OZM a nonrefundable
$2,000,000 which amount represents a minimum guarantee, payable in [***]
consecutive payments of [***] with the first payment due upon the first day of
the second term of this agreement, and each subsequent payment due upon the
first business day of the following [***]. In Year 2, OZM agrees to deliver a
rate of [***] per user click-through against the $2,000,000, thus guaranteeing
a minimum of [***] users to the DVD Store.
c. YEAR 3. In Year 3, Affiliate shall pay to OZM a nonrefundable
$3,300,000, which amount represents a minimum guarantee, payable in [***]
consecutive payments of [***] with the first payment due upon the first day
of the third term of this agreement, and each subsequent payment due upon the
first business day of the following [***]. In Year 3, OZM agrees to deliver a
rate of [***] per user click-through against the $3,300,000, thus
guaranteeing a minimum of [***] users to the DVD Store.
3.2. AUDITS. OZM agrees that Affiliate may have auditors reasonably
acceptable to OZM audit OZM's books and records related to payments under
this Agreement not more than once per calendar year, during business hours
and upon ten (10) business days written notice. OZM agrees to reimburse
Affiliate for the reasonable costs of the audit if the audit discloses an
underpayment of ten percent (10%) or more.
3.3 MAKE GOODS. Affiliate is not required to make the scheduled payments
as specified until it has received its click-through from the prior payment.
4. TERM AND TERMINATION
4.1. TERM. This Agreement shall be effective as of the Effective Date
and, unless earlier terminated in accordance with this Section, will continue
in effect for an initial period of three years. Thereafter, this Agreement
shall automatically renew under new conditions unless
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
Affiliate elects not to renew this Agreement, by written notice to OZM given
at least 120 days prior to the expiration date of the current term.
4.2. TERMINATION. Either party may terminate this Agreement upon the
material breach by the other party of a material provision of the Agreement,
which breach is not cured within thirty (30) days of the date of written
notice thereof.
4.3. EFFECT OF TERMINATION. Immediately following termination or
expiration of this Agreement, (i) all linking to the Affiliate-related pages
from the Entertainment Zone and Altavista shall be terminated, (ii) each
party shall return to the other all tangible manifestations of Confidential
Information; (iii) all licenses granted by either party hereunder shall
automatically terminate and each party shall immediately cease use of the
licensed materials; and (iv) each party shall immediately pay the other party
all amounts due and owing. Other than for compensation due, neither party
shall be liable to the other party merely as a result of termination or
expiration of this Agreement in accordance with this Section.
4.4. SURVIVAL. In addition to those sections of this Agreement that
survive expiration or termination of this Agreement by their express terms,
Sections 3.2, 3.3, 4.3, 4.4, 5, 6, 7, 8, AND 10 shall survive expiration or
termination of this Agreement.
5. WARRANTIES
5.1. OZM REPRESENTATIONS AND WARRANTIES. OZM hereby represents and
warrants to Affiliate:
a. RIGHTS GRANTED. (i) OZM has authorized the person who has
signed this Agreement for OZM to execute and deliver this Agreement to
Affiliate on behalf of OZM; (ii) it has all rights and licenses necessary to
enter into this Agreement and perform its obligations hereunder; and (iii) it
has not previously granted and will not grant the specific rights granted to
Affiliate herein to any third party.
b. DISCLAIMER. EXCEPT AS EXPRESSLY SET FORTH HEREIN, OZM DOES NOT
MAKE ANY WARRANTIES CONCERNING THE ENTERTAINMENT ZONE AND ALL MATERIALS
THEREIN, EXPRESS, IMPLIED OR OTHERWISE. OZM SPECIFICALLY DISCLAIMS THE
IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND
NONINFRINGEMENT WITH RESPECT TO THE ENTERTAINMENT ZONE AND ALL RELATED
MATERIALS, ALL OF WHICH ARE PROVIDED BY OZM ON AN "AS IS" AND "AS AVAILABLE
BASIS".
5.2. AFFILIATE REPRESENTATIONS AND WARRANTIES. Affiliate hereby
represents and warrants to OZM:
a. RIGHTS GRANTED. (i) Affiliate has authorized the person who has
signed this Agreement for Affiliate to execute and deliver this Agreement to
OZM on behalf of Affiliate; (ii) it has all rights and licenses necessary to
enter into this Agreement and perform its obligations hereunder.
<PAGE>
b. NO INFRINGEMENT OR VIOLATION OF RIGHTS. All material made
available or provided by Affiliate to OZM hereunder, including without
limitation material within Affiliate's advertisements, the activities
conducted through the Affiliate Site, the DVD Area, and Affiliate's Marks
(as defined in Section 9), do not now, and will not, violate any civil or
criminal laws or any rights of any third parties, including, but not limited
to, infringement or misappropriation of any copyright, patent, trademark,
service mark, trade secret, music, image, or other proprietary or property
right, false advertising, unfair competition, defamation, obscenity, invasion
of privacy or rights of celebrity, violation of any anti-discrimination law
or regulation, gambling, gaming and contest laws, rules and regulations, or
any other right of any person or entity.
c. COMPLIANCE WITH LAW; NO OBJECTIONABLE CONTENT. Affiliate will
at all times comply with all applicable state, federal and foreign laws,
rules and regulations. All material made available or provided by Affiliate
to OZM hereunder, including without limitation material within Affiliate's
advertisements, Affiliate Site, the DVD Area, and Affiliate's Marks (as
defined in Section 9), do not now, and will not, include or link to any
material that is: unlawful, harmful, fraudulent, threatening, abusive,
harassing, defamatory, vulgar, obscene, profane, hateful, racially,
ethnically or otherwise objectionable, including, without limitation, any
material that encourages conduct that would constitute a criminal offense,
give rise to civil liability, or otherwise violate any applicable local,
state, national or international law.
6. LIMITATION OF LIABILITY AND INDEMNIFICATION
6.1. LIMITATION. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER
OR ANY THIRD PARTY FOR ANY LOST PROFITS, LOST DATA, COSTS OF PROCUREMENT OF
SUBSTITUTE GOODS OR SERVICES, OR ANY FORM OF SPECIAL, INCIDENTAL, INDIRECT,
CONSEQUENTIAL OR PUNITIVE DAMAGES OF ANY KIND (WHETHER OR NOT FORESEEABLE),
ARISING OUT OF, UNDER OR RELATING TO THIS AGREEMENT, WHETHER BASED ON BREACH
OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY OR OTHERWISE,
EVEN IF SUCH OTHER PARTY IS INFORMED IN ADVANCE OF THE POSSIBILITY OF SUCH
DAMAGES. OZM'S TOTAL LIABILITY UNDER THIS AGREEMENT IS LIMITED TO THE
PAYMENTS RECEIVED BY OZM FROM AFFILIATE HEREUNDER DURING THE TWELVE MONTH
PERIOD PRIOR TO THE EVENT GIVING RISE TO LIABILITY. THE FOREGOING LIMITATIONS
SHALL NOT APPLY TO ACTS OR OMISSIONS INVOLVING INTENTIONAL MISCONDUCT.
6.2. FAILURE OF ESSENTIAL PURPOSE. The parties have agreed that the
limitations and exclusions of liability specified in this Agreement will
survive and apply even if any limited remedy specified in this Agreement is
found to have failed of its essential purpose. Affiliate acknowledges that
OZM has set its rates and entered into this Agreement in reliance upon the
limitations of liability and the disclaimers of warranties and damages set
forth herein, and that the same form an essential basis of the bargain between
the parties.
6.3. INDEMNIFICATION. Each party will defend and indemnify the other
party and its customers and affiliates for, and hold them harmless from, any
loss, expense (including reasonable attorney's fees and court costs), damage
or liability arising out of any claim, demand or suit resulting from a breach
of any of the representations and warranties of the indemnifying
<PAGE>
party set forth herein. As a condition to indemnification: (a) the
indemnified party will promptly inform the indemnifying party in writing of
any such claim, demand or suit and the indemnifying party will fully
cooperate in the defense thereof; (b) the indemnified party will give the
indemnifying party sole control of the defense and all related settlement
negotiations (unless the indemnified party shall have reasonably concluded
that counsel selected by the indemnifying party shall have a conflict of
interest due to different or additional defenses in which case the
indemnifying party shall be liable for the fees of separate counsel for
indemnified party); and (c) the indemnified party will not agree to the
settlement of any such claim, demand or suit prior to a final judgement
thereon without the consent of the indemnifying party, which consent shall
not be unreasonably withheld or delayed.
7. CONFIDENTIALITY
7.1. CONFIDENTIAL INFORMATION. For purposes of this Agreement,
Confidential Information means: (i) business or technical information of
either party, including but not limited to any information relating to either
party's product plans, designs, costs, product prices and names, finances,
marketing plans, web site usage data, customer lists, business opportunities,
personnel, research, development or know-how; (ii) any written information
designated by either party as confidential or proprietary or, if orally
disclosed, reduced to writing by the disclosing party and designated as
confidential or proprietary within thirty (30) days of such disclosure; (iii)
all materials furnished by one party in connection with any audit conducted
hereunder; and (iv) the terms and conditions of this Agreement.
7.2. EXCLUSIONS. Confidential Information will not include: (i)
information that is or becomes generally known or available by publication,
commercial use or otherwise through no fault or breach of this Agreement by the
receiving party; (ii) information that is rightfully in the receiving party's
possession prior to first receiving it from the disclosing party; (iii)
information that is lawfully received by the receiving party from a third
party, without restriction on use or disclosure and without breach of a nonuse
or nondisclosure obligation; or (iv) information that the receiving party can
prove with written evidence is independently developed by the receiving party,
without use of or access to Confidential Information of the disclosing party.
7.3. OBLIGATIONS. Each party will not use the other party's
Confidential Information, except as expressly permitted under this Agreement
and will not disclose such Confidential Information to any third party, except
to its employees and consultants with a need to know for such party's
performance of this Agreement (and only subject to binding use and disclosure
restrictions at least as protective as those set forth herein executed in
writing by such employees or consultants). However, each party may disclose
Confidential Information of the other party: (i) pursuant to an order or
requirement, to which it is subject, of a court, administrative agency or
other governmental body, provided that such party gives reasonable notice to
the other party to contest such order or requirement; (ii) on a confidential
basis to legal and financial advisors and potential investors, provided,
however, that prior to such disclosure, the party disclosing the Confidential
Information shall secure an agreement from the third party receiving the
Confidential Information to keep such information confidential; and (iii)
otherwise as required by any law, rule, or regulation, to which it is
subject, provided that such party gives the other party reasonable advance
notice of such disclosure.
<PAGE>
8. PROPRIETARY RIGHTS
OZM and Affiliate each shall retain any and all right, title and interest
in and to each such party's respective intellectual property of any nature
(including patents, rights under patent applications and patents issuing on
such applications, trade secrets, copyrights, trademarks and other business
names (including goodwill in such marks), among others), subject to the
rights granted by the parties in Section 9 (concerning rights with respect
to business marks). OZM and Affiliate each agree to reproduce, and agree not
to remove or obscure proprietary rights legends (such as copyright notices,
among others) or license terms and conditions included with any intellectual
property provided in connection with this Agreement. If, as a result of any
collaboration by OZM or Affiliate under this Agreement, they become joint
owners of intellectual property by operation of law, then they will
cooperate, subject to prudent business judgment, to establish, register,
maintain and protect such intellectual property.
9. TRADEMARK LICENSE
OZM and Affiliate each will have the right, without separate charge, to
use in promoting the Entertainment Zone and the DVD Area the other's
("Owner's") business name and any trade names, trademarks and service marks
(collectively, "Marks") that OZM may adopt for use with the Entertainment
Zone or that Affiliate may adopt for use with the DVD Area. Any such use must
be identical to the use by the Owner, or as approved by the Owner in writing
in advance, or otherwise in accordance with any Mark usage guidelines
communicated by the Owner. The Owner retains all goodwill and all other
rights thereto, and the other party obtains no goodwill or any other rights
thereto as a result of the use of the owner's Marks.
<PAGE>
10. GENERAL
10.1. ASSIGNMENT. Affiliate may not assign this Agreement in whole or in
part, by operation of law or otherwise, without OZM's written consent, and
any attempted assignment of this Agreement without such consent will be null
and void. Subject to the foregoing, the rights and obligations of the parties
will bind and inure to the benefit of their respected successor and assigns.
Notwithstanding the foregoing, affiliate may transfer and assign this
Agreement to any party that acquires affiliate by merger, sale of stock, sale
of assets or otherwise.
10.2. GOVERNING LAW. The validity, construction and performance of this
Agreement, and the legal relations between the parties to this Agreement,
will be governed by and only in the courts of the State of Massachusetts and
the United States. In any such action, Affiliate submits to the personal
jurisdiction of such courts and waives any objections to venue of such courts.
10.3. FORCE MAJEURE. Except for the obligation to pay money, neither
party will be liable to the other party for any failure or delay in
performance caused by reasons beyond such party's reasonable control, and
such failure or delay will not constitute a breach of this Agreement.
10.4. U.S. DOLLARS. All payments by one party to the other party under
this Agreement shall be in U.S. Dollars.
10.5. NOTICES. Any notices under this Agreement will be sent by
confirmed facsimile, nationally-recognized express delivery service, or
certified or registered mail, return receipt requested, to the address first
set forth above or such other address as the party specifies in writing.
Notice by confirmed facsimile or express delivery service will be deemed
received and effective upon delivery. Notice by certified or registered mail
will be deemed received and effective five (5) days after dispatch.
10.6. RELATIONSHIP OF PARTIES. Neither this Agreement nor the parties'
business relationship establishing hereunder will be construed as a
partnership, joint venture or agency relationship or as granting a franchise.
10.7. WAIVER. The waiver of any breach or default of this Agreement
will not constitute a waiver of any subsequent breach or default, and will
not act to amend or negate the rights of the waiving party.
10.8. SEVERABILITY. If one or more of the provisions contained in this
Agreement is determined to be invalid, illegal or unenforceable in any
respect under any applicable statute or rule of law, then such provision will
be considered inoperable to the extent of such invalidity, illegality or
unenforceability, and the reminder of this Agreement will continue in full
force and effect. The parties hereto agree to replace any such invalid,
illegal or unenforceable provision with a new provision that has the most
nearly similar permissible economic and legal effect.
10.9. ENTIRE AGREEMENT. This Agreement is the complete and exclusive
agreement between the parties with respect to the subject matter hereof,
superseding and replacing any and
<PAGE>
all prior agreements, communications, and understandings (both written and
verbal) regarding such subject matters. This Agreement may only be modified,
or any rights under it waived, by a written document executed by both parties.
10.10. COMPLIANCE WITH LAW. Each party shall comply in all material
respects with all applicable federal, state and local laws, statutes,
ordinances, rules and regulations in the performance of its duties hereunder.
10.11. COUNTERPARTS. This Agreement may be executed in counterparts.
Each of which shall be deemed as original and all of which together shall
constitute one instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their duly authorized representatives as of the date first
written above.
AFFILIATE ONE ZERO MEDIA, INC.
Signature: /s/Michael Dubelko 8/14/98 Signature: /s/Gordon Thomas Aley
Name: Michael Dubelko Name: Gordon Thomas Aley
Title: President Title: VP, Business Development
Signature: /s/ Alan B. Chebot
Name: Alan B. Chebot
Title: President
<PAGE>
EXHIBIT A
FOUR YEAR EXCLUSIVE CONTRACT BETWEEN ALTAVISTA AND ONEZERO MEDIA, INC.
<PAGE>
Exhibit 10.12
DISTRIBUTION AGREEMENT
This AGREEMENT is entered into by and between Infoseek Corporation, a
corporation duly organized under the laws of California, with its principal
place of business at 1399 Moffett Park Drive, Sunnyvale, California
94089-1134, hereinafter referred to as "Infoseek", and DVD Express Inc., a
corporation organized under the laws of the State of California with its
principal place of business at 7083 Hollywood Boulevard, Suite 100, Los
Angeles, California, hereinafter referred to as "Content Partner" or "DVD".
WITNESSETH:
WHEREAS, Infoseek has developed and maintains an Internet information search
and navigation service (the "Service") located at www.infoseek.com through
which information is provided to its users ("Users"); and
WHEREAS, Content Partner is the provider of information described in Appendix
A hereto (the "Content"), which Content Partner and Infoseek desire to make
available to Users;
NOW, THEREFORE, for good and valuable consideration, and in consideration of
the mutual covenants and conditions herein set forth, and with the intent to
be legally bound thereby, Infoseek and Content Partner hereby agree as
follows:
1. LICENSE; OBLIGATIONS OF CONTENT PARTNER
1.1 Subject to the terms and conditions of this Agreement, Content
Partner hereby grants to Infoseek and its subsidiaries and
affiliates (collectively "Infoseek"), a fully-paid, irrevocable,
worldwide, non-exclusive right and license to use, reproduce,
adapt, incorporate, integrate, distribute and otherwise exploit the
Content on the Service to be hosted on Infoseek's servers
("Infoseek-hosted Content") to Users via on-line access provided
directly or indirectly by Infoseek and, in conjunction with
Infoseek's activities pursuant to this Agreement, to exploit the
applicable copyrights, trade names, trade dress, trademarks and
other intellectual property rights of Content Partner. Content
Partner shall license to Infoseek only such Content to which it
owns and/or has rights to provide hereunder. Content Partner shall
notify Infoseek within a reasonable time in the event such Content
becomes no longer available for display on the Service and Infoseek
will remove such Content within a reasonable time. The terms set
forth in the Appendices attached hereto shall also apply to this
Agreement.
1.2 a. Content Partner will deliver to Infoseek the Infoseek-hosted
Content in a mutually agreeable format, electronically via
modem or Internet access (e.g. Internet ftp, Internet html, or
Internet e-mail). Content Partner agrees to certify that all
deliveries hereunder were made electronically. Content Partner
will promptly correct any errors contained in the
Infoseek-hosted Content of which it becomes aware. Content
Partner will make updates to the Infoseek-hosted Content
available to Infoseek on a regular mutually agreed upon basis.
Infoseek shall have the right, but not the obligation, to
remove, or direct Content Partner to remove, from the
Infoseek-hosted Content, information or other material which
Infoseek, in its sole discretion, determines to be offensive,
in poor taste, or otherwise objectionable.
b. The portion of the Content not to be hosted on Infoseek's
servers will be hosted on Content Partner's servers and
accessed by Users from a Content Partner/Infoseek co-branded
Web page ("Co-Branded Page") pursuant to the specifications in
Appendix C hereto. Content Partner shall cooperate and assist
Infoseek by promptly answering questions and complaints
regarding the Content. Content Partner shall promptly inform
Infoseek of any event or circumstance, and provide all
information pertaining to such event or circumstance, related
to the Content which could lead to a claim or demand against
Infoseek by any third party.
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1.3 Content Partner agrees not to override browser back button
functionality to prevent Users who link to the Content Partner
service from the Service from returning to the Service.
1.4 Each party will be responsible for its respective
telecommunications charges with respect to the provision of
respective portions of the Content to Infoseek and to Users.
Infoseek retains the right to adapt or otherwise alter the design,
look, content and any other attributes of the Content and the
Service and Service pages. Infoseek will use commercially
reasonable efforts to incorporate into the Content error
corrections, as provided and identified as such by Content Partner.
2. FEES AND PAYMENTS
2.1 Content Partner will make payments to Infoseek in the amounts and
at the times specified in Appendix B. Content Partner will be
responsible for the proper payment of all taxes, including sales,
excise and value added taxes, which may be levied in connection
therewith, exclusive of taxes based upon Infoseek's net income.
2.2 a. Each payment will be accompanied by a report which details the
payment due and which contains the methodology used to
calculate the payment due. Such report will include the
information specified in Appendix B.
b. Infoseek shall have the right to retain a U.S. nationally
prominent or other mutually agreeable independent auditor to
whom Content Partner shall allow reasonable access to Content
Partner's applicable books of account and other for the
purpose of verifying the amounts due and payable to Infoseek
under this Agreement. Access to Content Partner's
documentation shall be during Content Partner's regular
business hours upon at least fifteen (15) business days prior
written notice. Infoseek may request audits no more than once
in a consecutive twelve (12) month period and may not review
records more than twelve (12) months old. In the event that an
audit discloses an underpayment, Content Partner shall
immediately pay to Infoseek the amount of such underpayment
and in the event that an audit discloses an underpayment of
one hundred thousand dollars ($100,000) or more, Content
Partner shall immediately pay to Infoseek the amount of such
underpayment and shall pay the reasonable costs of such audit.
3. CONFIDENTIAL INFORMATION
3.1 Either Infoseek or Content Partner may disclose to the other (the
"Receiving Party") certain information that the disclosing party
deems to be confidential and proprietary ("Proprietary
Information"), and technical and other business information of the
disclosing party that is not generally available to the public.
3.2 The Receiving Party agrees to use Proprietary Information solely in
conjunction with its performance under this Agreement and not to
disclose or otherwise use such information in any fashion. The
Receiving Party, however, will not be required to keep confidential
such Proprietary Information that becomes generally available
without fault on its part; is already rightfully in the Receiving
Party's possession without restriction prior to its receipt from
the disclosing party; is independently developed by the Receiving
Party; is disclosed by third parties without similar restrictions;
is rightfully obtained by the Receiving Party from third parties
without restriction; or is otherwise required by law or judicial
process.
4. REPRESENTATIONS AND WARRANTIES
4.1 Content Partner is the owner and/or has the right to grant the
rights hereunder and Content Partner is solely responsible for any
legal liability whether in tort, contract, or otherwise
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arising out of or relating to (i) the Content, and/or (ii) any
material to which users can link through the Content. Content
Partner represents and warrants to Infoseek, and any entities
("Third Party Entities") to and by whom Content is delivered for
display to users, that it holds the necessary rights to permit the
use of Content by Infoseek for the purpose of this Agreement; that
its entry into this Agreement does not violate any agreement with
any other party; that its performance under this Agreement will
conform to applicable laws and government rules and regulations;
and that the use, reproduction, distribution, transmission, or
display of Content, any data regarding users, and any material to
which users can link through Content, will not (a) violate any laws
or any rights of any third parties, including, but not limited to,
such violations as infringement or misappropriation of any
copyright, patent, trademark, trade dress, trade secret, music,
image, or other proprietary or property right, false advertising,
unfair competition, defamation, invasion of privacy or publicity
rights, moral or otherwise, or rights of celebrity, violation of
any antidiscrimination law or regulation, or any other right of any
person or entity; or (b) contain any material that is: unlawful,
harmful, fraudulent, threatening, abusive, harassing, defamatory,
vulgar, obscene, profane, hateful, racially, ethnically, or
otherwise objectionable, including, without limitation, any material
that supports, promotes or otherwise encourages wrongful
conduct that would constitute a criminal offense, give rise to
civil liability, or otherwise violate any applicable local, state,
national or international laws.
4.2 Infoseek represents and warrants to Content Partner that its entry
into this Agreement does not violate any agreement with any other
party; that its performance under this Agreement will conform to
applicable laws and government rules and regulations; and that the
technology as utilized by the Service does not infringe any
copyright, patent, trademark, trade dress or trade secret of any
person or entity.
5. LIMITATION OF LIABILITY; DISCLAIMER
5.1 IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY
SPECIAL, INDIRECT, CONSEQUENTIAL OR EXEMPLARY DAMAGES OF ANY
NATURE, EVEN IF SUCH PARTY SHALL HAVE BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
5.2 EXCEPT AS SET FORTH IN SECTION 4, NEITHER PARTY MAKES ANY, AND EACH
PARTY ACKNOWLEDGES THAT THE OTHER HAS NOT MADE ANY, AND HEREBY
SPECIFICALLY DISCLAIMS ANY, REPRESENTATIONS OR WARRANTIES, EXPRESS
OR IMPLIED, REGARDING THE SERVICE, THE CONTENT OR THE OPERATION OF
THE CONTENT ON THE SERVICE, INCLUDING, BUT NOT LIMITED TO ANY
IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
6. TERM AND TERMINATION
6.1 This Agreement shall be effective on the date executed by Infoseek
("Effective Date") and shall continue in force for an initial term
ending twenty four (24) months from the Effective Date ("Initial
Term"). Launch Date is defined as the date the Content Partner's
elements become available to Users on the Service as designated in
writing by Infoseek to Content Partner. Upon prior mutual written
agreement, the then current term of this Agreement may be renewed at
the end of such initial term and each anniversary date thereafter
for one (1) year renewal terms. Infoseek or Content Partner may
terminate this Agreement at any time, without cause, upon at least
sixty (60) days prior written notice.
6.2 Either party will have the right to terminate this Agreement if the
other party is in default of any obligation herein, which default
is incapable of cure or which, being capable of cure, is not cured
within sixty (60) days (or fourteen (14) days with respect to any
default in any payment obligation) after receipt of written notice
of such default from the non-defaulting party or within such
additional cure period as the non-defaulting party may authorize.
If the
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Content Partner's service does not meet the following performance
standards, Infoseek shall notify the Content Partner in writing and
upon such notice Infoseek shall have the right to terminate in
accordance with the following:
a. Uptime Performance: The Content Partner service shall maintain a
one hundred percent (100%) uptime within a one week period
(with the exception of any scheduled maintenance performed by
Content Partner where Infoseek is notified in advance) as
measured by HTML requests from Infoseek at five (5) minute
intervals with thirty (30) second time-outs. Service uptime
means a User is able to link to Content Partner's service. If
Content Partner's service fails to meet such uptime
performance standards and is not corrected within forty-eight
(48) hours from written notification to Content Partner by
Infoseek, Infoseek may immediately terminate this Agreement
upon written notice. Such Uptime Performance shall be measured
by multiple independent third party ISPs.
b. Functional Performance: The Content Partner service shall
function ninety-nine percent (99%) of the time within a one
week period (with the exception of any scheduled maintenance
performed by Content Partner where Infoseek is notified in
advance) as measured by HTML requests from Infoseek at five
(5) minute intervals with thirty (30) second time-outs. If the
Content Partner's service fails to meet such functional
performance standards for a period of five (5) consecutive
working days after written notification by Infoseek, Infoseek
may immediately terminate the Agreement upon written notice.
Functional service means a User can perform a transaction on
Content Partner's service. Such Functional Performance shall be
measured by multiple independent third party ISPs.
6.3 All provisions of this Agreement which may be reasonably
interpreted or construed as surviving the termination or expiration
of this Agreement shall survive the termination or expiration of
this Agreement.
6.4 Upon the termination or expiration of this Agreement, each party
shall promptly return all Proprietary Information, and other
information, documents, manuals and other materials belonging to the
other party, except as may be otherwise provided in this Agreement.
7. FORCE MAJEURE
Neither party will be liable for delay or default in the performance of
its obligation under this Agreement (other than for non-payment) if
such delay or default is caused by conditions beyond its reasonable
control, including, but not limited to, fire, flood, accident,
earthquakes, telecommunications line failures, storm, acts of war, riot,
government interference, strikes and/or walk-outs.
8. ADVERTISING AND PROMOTION
8.1 Content Partner and Infoseek may undertake such joint marketing
efforts as may be mutually agreed upon from time to time. Each
party shall cooperate and assist the other party by supplying,
without charge, reasonable quantities of materials for the other
party's marketing and promotional activities.
8.2 Unless required by law or to assert its rights under this
Agreement, and except for disclosure on a "need to know basis" to
its own employees, and its legal, investment, financial and other
professional advisers on a confidential basis, each party agrees
not to disclose the terms of this Agreement or matters related
thereto without the prior written consent of the other party.
Content Partner, however, may identify Infoseek in its published
listing of available services or distributors.
9. INDEMNIFICATION
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9.1 Content Partner agrees to defend, indemnify and hold Infoseek and
Third Party Entities and its and their officers, directors, agents and
employees harmless from and against any and all claims, demands,
liabilities, actions, judgments, and expenses, including reasonable
fees and expenses of attorneys, paralegals and other professionals,
arising out of or related to (i) any breach of any of Content
Partner's representations and warranties hereunder, or (ii) any injury
to person or property caused by any products or services sold or
otherwise made available through the Content.
9.2 Infoseek agrees to defend, indemnify and hold Content Partner and its
officers, directors, agents and employees harmless from and against
any and all claims, demands, liabilities, actions, judgments, and
expenses, including reasonable fees and expenses of attorneys,
paralegals and other professionals, arising out of or related to any
breach of any of Infoseek's representations and warranties hereunder.
10. GENERAL TERMS AND CONDITIONS
10.1 The parties to this Agreement are independent contractors. Neither
party is an agent, representative or partner of the other party.
Neither party shall have any right, power or authority to enter into
any agreement for or on behalf of, or to incur any obligation or
liability for, or to otherwise bind, the other party. This Agreement
shall not be interpreted or construed to create an association, joint
venture, co-ownership, co-authorship, or partnership between the
parties or to impose any partnership obligation or liability upon
either party.
10.2 Content Partner shall not assign, sublicense or otherwise transfer
(voluntarily, by operation of law or otherwise) this Agreement or any
right, interest or benefit under this Agreement, without the prior
written consent of Infoseek. Any attempted assignment, sublicense or
transfer in derogation hereof shall be null and void. Subject to the
foregoing, this Agreement shall be fully binding upon, inure to the
benefit of and be enforceable by the parties hereto and their
respective successors and assigns.
10.3 No change, amendment or modification of any provision of this
Agreement or waiver of any of its terms will be valid unless set forth
in writing and signed by the party to be bound thereby.
10.4 This Agreement shall be interpreted, construed and enforced in all
respects in accordance with the laws of the State of California. Each
party irrevocably consents to the exclusive jurisdiction of any state
or federal court for or within Santa Clara County, California over any
action or proceeding arising out of or related to this Agreement, and
waives any objection to venue or inconvenience of the forum in any
such court.
10.5 The failure of either party to insist upon or enforce strict
performance by the other party of any provision of this Agreement or
to exercise any right under this Agreement shall not be construed as
a waiver or relinquishment to any extent of such party's right to
assert or rely upon any such provision or right in that or any other
instance; rather the same shall be and remain in full force and
effect.
10.6 Any notice, approval, request, authorization, direction or other
communication under this Agreement shall be given in writing, will
reference this Agreement, and shall be deemed to have been delivered
and given (a) when delivered personally; (b) three (3) business days
after having been sent by registered or certified U.S. mail, return
receipt requested, postage and charges prepaid, whether or not
actually received; or (c) one (1) business day after deposit with a
commercial overnight courier, with written verification of receipt.
All communications will be sent to the addresses set forth below or to
such other address as may be designated by a party by giving written
notice to the other party pursuant to this section 10.6.
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If to Content Partner: If to Infoseek:
DVD Express Inc. Infoseek Corporation
Attention: Legal Department Attention: Legal Department
7083 Hollywood Boulevard 1399 Moffett Park Drive
Suite 100 Sunnyvale, CA 94089-1134
Los Angeles, CA 90028
10.7 This Agreement constitutes the entire agreement between the parties
and supersedes any and all prior agreements or understandings between
the parties with respect to the subject matter hereof. Neither party
shall be bound by, and each party specifically objects to, any term,
condition or other provision or other condition which is different
from or in addition to the provisions of this Agreement (whether or
not it would materially alter this Agreement) and which is proffered
by the other party in any purchase order, correspondence or other
document, unless the party to be bound thereby specifically agrees to
such provision in writing.
10.8 The headings used in this document are for convenience only and are
not to be construed to have legal significance. In the event that any
provision of this Agreement conflicts with the law under which this
Agreement is to be construed or if any such provision is held invalid
by a court with jurisdiction over the parties to this Agreement, such
provision shall be deemed to be restated to reflect as nearly as
possible the original intentions of the parties in accordance with
applicable law, and the remainder of this Agreement shall remain in
full force and effect.
ACCEPTED FOR INFOSEEK CORPORATION ACCEPTED FOR DVD EXPRESS
By:/s/ Andrew E. Newton By:/s/ Michael Dubelko
------------------------------- -----------------------------
Authorized Signature Authorized Signature
Print Name: Andrew E. Newton Print Name: Michael Dubelko
------------------------- ----------------------
Title: VP and General Counsel Title: President
------------------------------ ---------------------------
Date: 10/13/98 Date: 10/8/98
------------------------------ ---------------------------
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APPENDIX A
1. CONTENT
"Content" means the Infoseek-hosted Content, and all materials, logos,
attributions, information, and data (a) appearing on the Co-Branded Pages,
excluding portions thereof provided by Infoseek; (b) linked to or from the
Infoseek-hosted Content; or (c) originated by and/or appearing on Content
Partner's site.
PROGRAM DESCRIPTION
For the term of this Agreement, Content Partner shall be the exclusive paid
DVD movie promoter on the Movie Sub-Channel homepage on the Service as
specified in Appendix D, excluding unpaid content, except as otherwise
specified herein. "Exclusive paid DVD movie promoter" means that Infoseek
shall not enter into an Agreement to display any ad banners, spotlights
and content selling DVD movies on the Movie Sub-Channel homepage. In
addition, for the term of this Agreement, Infoseek agrees that that no
more than one paid promoter of VHS video movies shall appear on the Movie
Sub-Channel homepage, excluding ad banners and spotlights and unpaid
content, on the Service.
For the term of this Agreement, Infoseek will not accept advertising on the
Movie Sub-Channel homepage promoting the sale of DVD movies on the Service
from Named Direct Competitors listed on Appendix E. Infoseek shall not be
prevented from entering into arrangements with any entity involving direct
advertising and promotion on the Service of anything other than the sale of
DVD Movies. Infoseek shall guarantee the following elements and positioning
as described below. Above the fold shall mean the appearance of text or
graphics at the top of a web page visible to Users on an 800x600-pixel
screen without scrolling down ("Above the Fold").
2.1 YEAR 1
a. ONE (1) ANCHOR SPONSOR BUTTON sponsoring the Movie Sub-channel: to be
located Above the Fold, on the Entertainment Channel Home Page. Such
button shall link directly to a Co-branded page hosted by DVD. Annual
Traffic Guarantee [***].
b. ONE (1) CONTENT BOX: to be located Above the Fold, on the Movie
Sub-channel of the Entertainment Channel. Annual Traffic Guarantee
[***].
c. TEXT LINK: to be located on the Entertainment Channel Directory
Results Pages. Annual Traffic Guarantee [***].
d. BANNERS - ENTERTAINMENT CHANNEL: Annual Traffic Guarantee [***].
e. BANNERS - ULTRAMATCH: Annual Traffic Guarantee [***].
f. BANNERS - GENERAL ROTATION: Annual Traffic Guarantee [***].
g. KEYWORDS - DVD, MOVIE(S): Annual Traffic Guarantee [***].
YEAR 2
h. ONE (1) ANCHOR SPONSOR BUTTON sponsoring the Movie Sub-channel: to be
located Above the Fold, on the Entertainment Channel Home Page.
Such button shall link directly to a Co-branded page hosted by DVD.
Annual Traffic Guarantee [***].
i. ONE (1) CONTENT BOX: to be located Above the Fold, on the Movie
Sub-channel of the
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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Entertainment Channel. Annual Traffic Guarantee [***].
j. TEXT LINK: to be located on the Entertainment Channel Directory
Results Pages. Annual Traffic Guarantee [***].
k. BANNERS - ENTERTAINMENT CHANNEL: Annual Traffic Guarantee [***].
l. BANNERS - ULTRAMATCH: Annual Traffic Guarantee [***].
m. BANNERS - GENERAL ROTATION: Annual Traffic Guarantee [***].
n. KEYWORDS - DVD, MOVIE(S): Annual Traffic Guarantee [***].
2.2 Infoseek shall provide Content Partner with a weekly report which will
summarize weekly page impressions delivered to the Entertainment Music
Sub-Channel for each of the elements described in 2.1 above; Anchor
sponsor button, Content Box, Text Link, Banners - Entertainment Channel
Banners - Ultramatch, Banners - General Rotation, & the Keywords - DVD and
Movie(s).
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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FEES AND PAYMENTS
1. FEES AND PAYMENTS
1.1 YEAR 1
Content Partner shall pay Infoseek a total Fixed Fee of two million
seventy five thousand dollars ($2,075,000) in such amouonts and on such
dates as follows:
a. [***]
b. [***]
1.2 YEAR 2
Content Partner shall pay Infoseek a total Fixed Fee of three million
two hundred thousand dollars ($3,220,000) in such amounts and on such
dates as follows:
c. [***]
d. [***]
1.2 For the term of this Agreement, Infoseek shall submit an invoice to
Content Partner prior to the end of each month following the Launch Date
indicating the amount due and payable to Infoseek with respect to
Sections 1.1 and 1.2.
1.3 In the event this Agreement is terminated before the end of the Initial
Term, a prorated refund of fixed fees calculated in good faith by
Infoseek shall be made to Content Partner.
1.4 REVENUE SHARING
DVD shall pay to Infoseek a revenue share of [***] on all gross revenue
generated from goods and services sold by DVD to Users originating their
interaction from www.infoseek.com or the Co-Branded Pages, less
exchanges, returns, and shipping, not to exceed [***] of gross sales.
Such revenue share payments shall be paid net 30 days from the end of
each quarter in which it is earned.
2.0 PAYMENT ADDRESSES
All payments are to be mailed to:
Attention: Accounts Receivable
Infoseek Corporation
1399 Moffett Park Drive
Sunnyvale, CA 94089
All invoices from Infoseek are to be mailed to:
APPENDIX C
*** CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
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SPECIFICATIONS
Co-Branded Pages Specifications:
- - Infoseek will provide the Infoseek logo to Content Partner
- - Content Partner shall not resize the Infoseek logo, animate it, change the
background color of the Infoseek logo, or place any other image within
15 pixels of the top, bottom, or sides of the Infoseek logo
- - The Infoseek logo must be linked to http:www.infoseek.com
- - The Infoseek logo must appear above the fold on all Co-Branded Pages that
are linked to and/or from the applicable Infoseek channel home page.
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APPENDIX D
MOCK-UP PAGES(S)
See attached pages
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APPENDIX E
NAMED DIRECT COMPETITORS
DVD empire
amazon.com
reel.com
netflix.com
mega dvd
imdb.com
videoserve.com
lada universal
image entertainment
ken crain's
big star
spree
kozmo
blockbuster
dvd next
videos now
total E
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- --------------------------------------------------------------------------------
[LOGO] HOME - STOCKS - NEWS - YELLOW PAGES UPS
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TRACKING
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----------
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------------------------------------------------------------------
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- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
MUSIC BOULEVARD MUSIC NEWS:
MUSICBLVD.COM
CLASSICAL:
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--------------------------------------
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</TABLE>
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--- ---------------------------
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------------- ------------------
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---------------
- --------------------------------------------------------------------------------
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<TABLE>
<S> <C>
1. Billboard Online SUPPLIED DAILY by myLAUNCH
---------------- --------
2. Sonic Net
--------- EXCLUSIVE MUSIC FEATURES
3. MTV - Chris Stills A Still-Life Portrait 9/9/98 4:00:00 PM
--- ----------------------------------------------------
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----------- ---------------------------------------------------
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----------- --------------------------------------------------
6. Pollstar
--------
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-------------- - Chaka Khan Come 2 My House 9/29/98
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------ - The Church Hologram Of Baal 9/22/98
9. Wall of Sound -----------------------------------
------------- - Yatsura Slain By Yatsura 9/22/98
10. Spinner --------------------------------
-------
PROVIDED BY myLAUNCH
--------
</TABLE>
- --------------------------------------------------------------------------------
HEAR IT LIVE
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EXPLORE THESE TICKETING SERVICES:
Ticketmaster | TicketWeb | Entertainment Ticketfinder | Ticket Trader
------------ --------- -------------------------- -------------
<PAGE>
- --------------------------------------------------------------------------------
[LOGO] HOME - STOCKS - NEWS - YELLOW PAGES UPS
MAPS - CHAT - FREE WEB PAGE - HELP PACKAGE
TRACKING
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------------------------ ------
ENTERTAINMENT dvds Infoseek Entertainment Go
------------------------ ------
- --------------------------------------------------------------------------------
SEARCH AGAIN OR SEARCH WITHIN THESE 9,482 RESULTS TO REFINE YOUR QUERY.
JUMP TO WEB SEARCH RESULTS
------------------
------------------- ------------- -----------------------
New search or Search within results
------------------- ------------- -----------------------
Books about music
-----------------
and film at
-----------
Borders.com. In
---------------
stock. Fast
-----------
delivery.
---------
RECOMMENDED JUMP TO: REVIEWED WEB SITE TOPICS - WEB SEARCH RESULTS - SEARCH BOX
------------------------ ------------------ ----------
- --------------------------------------------------------------------------------
ENTERTAINMENT: movies, music, TV
- -------------- ------ ----- --
CHAT ROOMS: TV and Movies, who's in and what's grim
- ----------- ------------- ------------------------
REVIEWED WEB SITE TOPICS JUMP TO: RECOMMENDED - WEB SEARCH RESULTS - SEARCH BOX
----------- ------------------ ----------
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--------------------
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- -------- DVD Express
-----------
--------------------
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------------------
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----- --------------------------
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----------- ------------------------ ----------
- --------------------------------------------------------------------------------
RESULTS 1-10 OF 9,482 TOTAL RESULTS HIDE SUMMARIES | UNGROUP RESULTS | NEXT 10 |
-------------- --------------- -------
*** PAGES FROM THE SAME SITE ARE GROUPED TOGETHER.
---------------------
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- -------------------- Books about film,
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---------------------
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- -------------------------------------------------------
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- --------------------------------- CLASSIFIEDS.
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We sell new and used movies and films in the TV's to concert
following formats: videos, videocassettes, ---------------
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- -------------------------------------------------------------------------------
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- ------------
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- --------------------------------------------------------------------------
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- -------------------
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***See more pages from this site
-----------------------------
<PAGE>
<TABLE>
<S><C>
MULTIMEDIA
- ----------
JULY 28, 1997 VOL. 150 NO. 4 ASIA Hot Stuff: A Complete Film on One Side of a Disc Digital Video Discs
have arrived, and they look superb. Is this curtains for VHS and laser? By Steve...
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-----------------------------
TENDING TO "BLACK AND WHITE" SOMEWHAT: THE MPI DVDS VS. LASERDISC
- -----------------------------------------------------------------
Home page | Beatle News Briefs | Beatle TV Alert | Beatle Calendar of Events | The Beatles - today |
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70% DATE: 31 MAY 1998, Size 13.1K, http://www.best.com/--abbeyrd/beatdvd.htm
JUMBO VIDEO (FONTHILL). VIDEOS AND DVDS FOR SALE AND RENT; MOVIES, FILMS, VHS VIDEO ...
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Jumbo Video (Fonthill). Village Plaz Hwy #20, Fonthill, ON LOS 130. We sell new and used movies and
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MANY DVD'S FS : CAESAR HAS HEARD YOUR PLEAS!
- --------------------------------------------
[Follow Ups][Post Followup][DVDHunt.com Want To Sell Message Board] Posted by J Edmonds on August 02,
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67% DATE: 14 AUG 1998, Size 12.2K, http://www.dvdhunt.com/sell/messages/501.html
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-----------------------------
JUMBO VIDEO # 109 (ST. JOHN'S). VIDEOS AND DVDS FOR SALE AND RENT: MOVIES, FILMS, VHS VIDEO ...
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Jumbo Video # 109 (St. John's). 141 Torbay Rd, St Johns, NF A1A 2H1. We sell new and used movies and
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We have the latest new releases of ...
57% DATE: 27 AUG 1998, Size 12.9K, http://www.jumbo109.formovies.com/html/index.htm
</TABLE>
RESULTS 1-10 OF 9,482 TOTAL RESULTS HIDE SUMMARIES | UNGROUP RESULTS | NEXT 10
-------------- --------------- -------
*** PAGES FROM THE SAME SITE ARE GROUPED TOGETHER.
<PAGE>
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[LOGO] HOME - STOCKS - NEWS - YELLOW PAGES UPS
MAPS - CHAT - FREE WEB PAGE - HELP PACKAGE
TRACKING
- --------------------------------------------------------------------------------
------------------------ ------
ENTERTAINMENT Infoseek Entertainment Go
------------------------ ------
- --------------------------------------------------------------------------------
[LOGO].COM
Click here
----------
Books about music and film at Borders.com. In stock. Fast delivery.
---------------------------------------------------------------------
BOOKS MUSIC SPONSORED BY
- ----- ----- MUSIC BOULEVARD
Shopping, reviews, SPONSORED BY CDs, the charts
magazines -----------
BORDERS.COM
-----------
MOVIES SPONSORED BY TELEVISION
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Showtimes, videos DVD EXPRESS Listings, soaps, dramas, stars
-----------
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ENTERTAINMENT NEWS
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MUSIC:
NEWS HEADLINES FROM myLAUNCH
--------
- - Porn Site Owners To Webcast 'World's Biggest Hip-Hop Concert'
-------------------------------------------------------------
9/9/98 6:00:00 PM
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- - Fat Joe, Big Pun Busted; Noreaga Surrenders 9/9/98 6:00:00 PM
-------------------------------------------------------------
- - Dust Brothers Get Busy With Several New Projects 9/9/98 6:00:00 PM
------------------------------------------------------------------
- - It's All About The Benjamins For Stones, Master P 9/9/98 11:00:00 AM
--------------------------------------------------------------------
- - Fugees' Lauryn Queen Of The Hill For Second Week 9/9/98 11:00:00 AM
-------------------------------------------------------------------
MORE MUSIC: Rocktropolis | Jazz Central Station
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TV: Popular TV shows | Soap operas
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MOVIES: Movie meta-sites | Hollywood news
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BOOKS: Literary sites | Reviews
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EXPLORE REVIEWED WEB SITES
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- - Science fiction and stuff
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OUR TOP 10 ENTERTAINMENT SITES
1. Mr. Showbiz
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DO IT TONIGHT
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CHECK YOUR LOCAL LISTINGS FOR THE TIMES OF YOUR FAVORITE TV SHOWS AT TVgrid.Com.
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seek
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USE MovieLink TO LOCATE THE SILVER SCREEN NEAREST YOU.
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<PAGE>
PANDESIC LLC
HOSTED PANDESIC-TM- E-BUSINESS SOLUTION
AGREEMENT
PANDESIC-TM- E-BUSINESS SOLUTION
CONTRACT #_______
Date: March 25, 1998
With: DVD EXPRESS, Inc., 7083 Hollywood Blvd., Suite 305, Los Angeles, CA,
90028 ("Merchant")
This agreement (the "Agreement") sets out the terms and conditions under
which Pandesic LLC, a Delaware limited liability company, with its offices at
Sunnyvale, California ("Pandesic") will make available the Pandesic-TM-
E-Business Solutions service to Merchant who wishes to implement an
electronic commerce capability with integrated internal business
functionality. Pandesic and Merchant agree as follows:
1. PANDESIC E-BUSINESS SOLUTIONS SERVICE AND LICENSE
Pandesic will provide services which include the implementation, hosting and
administration of Merchant's Pandesic-TM- E-Business Solution on
computer servers operated by Pandesic (the "Hosted Services") and
configured with and containing the software and related documentation
(which together with any upgrades, modifications, or enhancements which
Pandesic may provide to Merchant hereunder shall be referred to as the
"Licensed Software"), all as more specifically described in this
Agreement and in Schedule A hereto (collectively, the "Pandesic
E-Business Solutions Service").
2. DEFINITIONS
In this Agreement,
a) "Documentation" means the standard documentation provided to
Merchant by Pandesic describing the Pandesic E-Business Solutions
Service and the Licensed Software and their operation, whether
transmitted on paper, on magnetic media or by electronic means.
b) "Affiliates" means those entities whose goods and services are sold
by Merchant, on a consignment basis, through Merchant's web site
utilizing Merchant's Pandesic E-Business Solutions Service.
3. PANDESIC-TM- E-BUSINESS SOLUTIONS SERVICE
Pandesic or its representatives will:
i) install the Licensed Software on servers operated by Pandesic,
at Pandesic's facilities or on other servers, as mutually
agreed upon (the "Pandesic Server");
ii) implement, host and administer Merchant's Internet commerce
activities utilising the Pandesic-TM- E-Business Solution; and
iii) provide a total of up to 5 hours of training to Merchant's
employees at Merchant's facilities in the U.S.A..
4. SOFTWARE LICENSE
a) Pandesic hereby grants to Merchant, during the Pandesic E-Business
Solutions Service Term, a non-exclusive, and non-assignable (except
as permitted in Section 18) license to use the Licensed Software
for the purposes of conducting business over the Internet, subject
to the limitations set out in Schedule A hereto.
b) Merchant acknowledges that certain third party software programs
are bundled in the Licensed Software (the "Supplier Software") and
may be subject to electronic clickwrap licenses from such suppliers
(a "Supplier Agreement"). Merchant agrees that it will not access
or use the Supplier Software unless it has accepted the Supplier
Agreement in accordance with the procedure required by such
supplier(s), and it further agrees that in case of any conflict
between this Agreement and a Supplier Agreement, the terms of the
Supplier Agreement shall govern with respect to the Supplier Software
licensed pursuant hereto.
5. MAINTENANCE AND SUPPORT SERVICES
a) Pandesic will provide to Merchant the maintenance and support services
set out in Schedule B in respect of the Licensed Software (the
"Maintenance and Support Services"). Merchant agrees to provide access
for, accept, and do nothing to prevent electronic communications from
and to Pandesic and its third party service providers. It is
acknowledged and agreed that network and server security is the joint
responsibility of Merchant and
<PAGE>
-2-
Pandesic and Pandesic cannot be responsible for third party spamming of
Merchant's system.
6. ADDITIONAL TERMS
a) Pandesic will provide the enhanced functionality to the Pandesic
E-Business Solutions Service, either specifically for Merchant or
generally as part of the standard product, according to the timetable
and functionality list set out in Schedule D, attached.
b) Notwithstanding any other provision of this Agreement, Merchant shall
have the option of terminating this Agreement for any reason within 90
days of the date the Licensed Software is made ready for use by the
Merchant. Sections 13, 14 and 15 shall continue to apply in such event.
c) [***] Merchant shall; (i) participate in at least 2 marketing activities
in each month, as requested by Pandesic, such as reference calls and site
visits by potential Pandesic merchants, customer meetings, participation
in public seminars and participation in trade shows; (ii) Merchant shall
prominently display the Pandesic logo on the home page of its storefront
web site, subject to the trademark provisions of Section 20. The size and
placement of the logo shall be determined by Pandesic and Merchant, acting
reasonably, with the intent that it be a prominent feature of the web
site look and feel; (iii) Merchant shall employ a full-time director of
technology whose function will be to act as liaison to Pandesic in
developing new functionality and applications for the Licensed Software.
d) The Merchant acknowledges that its rights to use the Pandesic
trademarked logo (the "Logo") hereunder will terminate upon the earlier
of (a) termination of this Agreement and (b) at Pandesic's request for
any reason. The Merchant will only use the Logo as permitted hereunder.
The Merchant acknowledges that the Merchant has no rights or interest in
the Logo and all use of the Logo shall inure to the benefit of Pandesic.
The nature and quality of all services rendered by the Merchant in
connection with the Logo, and related advertising, promotional and other
related uses of the Logo by the Merchant shall conform to standards set
by and shall be under the control of Pandesic.
e) Pandesic shall have Merchant's web site live and operational within by
April 27, 1998 failing which Merchant may terminate in accordance with
Sub-section 6(b), above. This obligation is contingent upon Merchant
co-operating fully with Pandesic in such web site creation and
deployment. The new Merchant web site shall have the a similar format,
look and feel to their current web site.
f) [***]
g) [***]
7. TITLE TO THE LICENSED SOFTWARE
Merchant acknowledges that its rights pursuant to this Agreement do not
extend beyond the rights to the licenses granted pursuant to Section 4
and that it does not otherwise acquire any rights of ownership or
possession or any interest in intellectual property in the Licensed
Software. Merchant agrees that it will not, at any time during or after
the termination of this Agreement, contest or challenge Pandesic's and
its suppliers ownership of or rights in or related to the intellectual
property in the Licensed Software. Title to any medium containing the
Licensed Software delivered to Merchant shall remain with Pandesic.
***CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
-3-
8. RESTRICTIONS
Merchant, its employees, agents, consultants and Affiliates will not:
a) copy, modify, alter, disassemble, decompile, translate or convert into
human readable form, or reverse engineer, all or any part of the
Licensed Software and shall not use the Licensed Software to develop
any derivative works or any functionally compatible or
competitive software, except to the extent permitted under
applicable law. However, Merchant may create interfaces to
the Licensed Software or modify the provided interfaces to
permit interfacing with Merchant's legacy database systems. Merchant
shall not separate the Licensed Software into its component parts nor
incorporate any component files into any product, nor shall it remove
any proprietary, trademark or copyright markings or confidentiality
legends within the Licensed Software (and Pandesic agrees that it
shall not make such markings or legends visible to customers of
Merchant);
b) offer, for a fee or free of charge, services consisting of the
processing of data through the use of the Pandesic Server or the
Licensed Software for or for the benefit of any person other than
Merchant or its Affiliates;
c) use the Pandesic Server or the Licensed Software for commercial time
sharing, rental or service bureau use;
d) SELL, LEASE, RENT, LICENSE, SUB-LICENSE, TRANSFER, MARKET, DISTRIBUTE,
REDISTRIBUTE, OR OTHERWISE PART WITH THE LICENSED SOFTWARE OR ANY
COPIES OF THE LICENSED SOFTWARE, IN ANY MANNER OR IN ANY FORM NOT
EXPRESSLY PERMITTED BY THIS AGREEMENT; or
e) use the Licensed Software in any manner which violates any law or
regulation; is for a fraudulent purpose; contravenes public policy;
may cause Pandesic or its licensors to be subject to investigation,
prosecution or legal action or in contravention with the written
instructions provided by Pandesic.
9. CHARGES
a) In respect of Pandesic's provision of the Pandesic E-Business
Solutions Service Merchant will pay to Pandesic the service fees in
the amount and within the time set out Schedule C. The fees referred
to in this Section 9 do not include any taxes. If Pandesic is
required to pay any sales, use, property, value added, goods and
services or other federal or state or local taxes (excepting any taxes
on Pandesic's income) based on or as a result of the Pandesic
E-Business Solutions Service, lease or the license granted pursuant to
this Agreement, or Merchant's use of the Pandesic Server or the
Licensed Software, such taxes shall be charged to and collected from
Merchant in addition to the service fees set out in Part 1 of Schedule
C.
b) Merchant shall maintain complete and accurate records of its accounts
including, without limitation, invoices, correspondence and all
banking, financial or other records related to its use of the Pandesic
E-Business Solutions Service during the existence of this Agreement
and for at least three years after termination or expiration.
10. AUDIT
Pandesic shall have the right, on a once per year basis, to audit and inspect
Merchant's use of the Pandesic E-Business Solutions Service and the sales
records associated therewith in order to verify compliance with the terms
of this Agreement.
11. TERM
a) The term of this Agreement will commence on the date hereof.
b) Subject to Section 12, the term of Pandesic's obligation to provide
the Pandesic-TM- E-Business Solutions Service and Merchant's
obligations to pay for such will end 24 months from the date on which
the Licensed Software is made ready for use by the Merchant (the
"Initial Term"), following which it will be automatically renewed for
further successive one year terms (each, a "Renewal Term") unless
Pandesic or Merchant gives the other party at lease 90 days notice of
non-renewal prior to the end of the Initial Term or any Renewal Term
(the Initial Term and any
<PAGE>
-4-
Renewal Terms collectively, the "Pandesic-TM- E-Business Solutions
Service Term").
12. TERMINATION
a) Pandesic may immediately terminate this Agreement and its obligations
under all Schedules attached hereto by notice in writing to Merchant
if any of the following occur:
i. Merchant's use of the Licensed Software exceeds the scope of the
license conferred by Section 4;
ii. Merchant materially breaches any term of this Agreement and such
breach is not cured within 10 days of notice to Merchant of such
breach; or
iii. MERCHANT MAKES ANY ATTEMPT TO ASSIGN, SUB-LICENCE, OR OTHERWISE
TRANSFER ANY OF ITS RIGHTS UNDER THIS AGREEMENT OTHER THAN AS
PERMITTED BY SECTION 18.
b) The provisions of Sections 12, 13, 14 and 15 will continue to apply
between Pandesic and Merchant following the termination of this
Agreement.
c) Upon the termination of this Agreement pursuant to Section 12(a):
i) Merchant's rights under Section 4 shall immediately cease;
ii) Merchant shall return to Pandesic, or destroy (such destruction
to be certified in writing by an officer of Merchant), at the
Merchant's expense, all copies of the Licensed Software and
Documentation within 30 days of termination;
iii) Pandesic shall be under no further obligation to provide the
Maintenance and Support Services.
d) Termination of this Agreement shall not limit either party from
pursuing any other remedies available to it, including injunctive
relief, not shall such termination relieve Merchant, in the event that
it terminates this Agreement or its breach causes such termination,
from its obligation to pay fees accrued prior to the termination and
the present value of the minimum monthly fees from the date of
termination through the end of the E-Business Solutions Service Term,
discounted at a rate of six (6%) per annum.
e) In the event of any termination hereunder, Merchant shall not be
entitled to any refund of any payments made by Merchant.
13. CONFIDENTIALITY
a) Merchant and Pandesic each acknowledge that, during the term of this
Agreement, it will receive information from the other party that the
disclosing party regards as confidential (collectively, the
"Confidential Information"). Pandesic and Merchant each agree to take
measures to protect the confidentiality of the other party's
Confidential Information that, in the aggregate, are no less
protective than those measures it uses to protect the confidentiality
of its own Confidential Information, but at a minimum, Merchant
and Pandesic shall take reasonable steps to (i) use Confidential
Information of the other party only for the purposes of this
Agreement; (ii) avoid disclosure of such Confidential Information
to any third party, without the disclosing party's prior written
consent, other than to each other's employees and contractors on
a need-to-know basis; (iii) advise its employees and contractors
of the confidential nature of the Confidential Information and
of the prohibitions contained herein; (iv) not duplicate such
Confidential Information, except as reasonably necessary to
perform their duties hereunder, and (vi) not remove or destroy
any proprietary or copyright notice appearing therein.
b) This Section 13 will not apply to Confidential Information that:
i) is rightfully known to the recipient prior to receipt from the
disclosing party;
ii) is required to be disclosed under the laws of that party's
jurisdiction (provided that the parties shall meet and discuss in
good faith reasonable and lawful methods for limiting such
disclosure);
iii) is disclosed to an assignee of Pandesic; or
iv) is or later enters the public domain.
c) Pandesic and Merchant each acknowledge that its failure to comply with
the provisions of this Section 13 will cause irreparable harm to the
other party which cannot be adequately compensated for in damages, and
accordingly acknowledges that the other party will be
<PAGE>
-5-
entitled, in addition to any other remedies available to it, to
interlocutory and permanent injunctive relief to restrain any
anticipated, present or continuing breach of this Section.
14. NO WARRANTIES.
PANDESIC WARRANTS THAT THE LICENSED SOFTWARE WILL SUBSTANTIALLY CONFORM TO
THE FUNCTIONAL SPECIFICATIONS CONTAINED IN THE DOCUMENTATION. PANDESIC
DOES NOT WARRANT THAT THE LICENSED SOFTWARE WILL OPERATE UNINTERRUPTED OR
THAT IT WILL BE FREE FROM MINOR DEFECTS OR ERRORS WHICH DO NOT MATERIALLY
AFFECT SUCH PERFORMANCE OR THAT THE APPLICATIONS CONTAINED IN THE
LICENSED SOFTWARE ARE DESIGNED TO MEET ALL OF MERCHANT'S OR ITS
AUTHORIZED AFFILIATES' BUSINESS REQUIREMENTS.
ONE OF PANDESIC'S LICENSORS IS TAXWARE INTERNATIONAL, INC. ("TAXWARE"). WITH
RESPECT TO SUCH TAXWARE SOFTWARE AND DATA, PANDESIC DOES NOT WARRANT THE
ACCURACY OF THE DATA AND OTHER CALCULATIONS MADE BY THE TAXWARE SOFTWARE.
MERCHANT BEARS FULL RESPONSIBILITY FOR THE DETERMINATION OF THE ACCURACY
AND APPLICABILITY OF THE OUTPUT FROM THE TAXWARE SOFTWARE AND
ACKNOWLEDGE AND UNDERSTAND THAT TAX CALCULATIONS OFTEN INVOLVE
INTERPRETATIONS AND THAT THE DATA OF MANY JURISDICTIONS CAN CHANGE
RAPIDLY. MERCHANT UNDERSTANDS THAT TAXWARE IS NOT PROVIDING SPECIFIC TAX
ADVICE AND MERCHANT SHOULD OBTAIN THE ADVICE OF QUALIFIED PROFESSIONALS
IN THIS AREA.
15. LIMITATION OF LIABILITY.
A) NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT OR ANY
STATUTE OR RULE OF LAW, SUBJECT TO SECTION 13(C), PANDESIC'S
CUMULATIVE LIABILITY FOR ALL CLAIMS ARISING OUT OF OR IN CONNECTION
WITH THIS AGREEMENT AND ANY SCHEDULES ATTACHED HERETO, WHETHER DIRECTLY
OR INDIRECTLY, INCLUDING, WITHOUT LIMITATION, FROM OR IN CONNECTION
WITH THE PANDESIC E-BUSINESS SOLUTIONS SERVICE, THE PANDESIC SERVER,
THE HOSTING SERVICES, THE LICENSED SOFTWARE, OR THE PROVISION OF THE
MAINTENANCE AND SUPPORT SERVICES SHALL NOT EXCEED THE LESSER OF THE
CHARGES PAYABLE BY MERCHANT PURSUANT TO THIS AGREEMENT IN THE YEAR IN
WHICH THE CAUSE OF ACTION AROSE OR $500,000.
B) NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT,
CONSEQUENTIAL OR SPECIAL DAMAGES CLAIMED BY ONE OF THE PARTIES OR
ANY THIRD PARTY, INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF
PROFITS OR REVENUE, DATA LOSS OR FAILURE TO RELEASE EXPECTED SAVINGS,
HOWEVER DERIVED.
C) NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT OR ANY
STATUTE OR RULE OF LAW EXCEPT FOR ITS OBLIGATIONS UNDER SECTIONS 9
AND 13, MERCHANT'S CUMULATIVE LIABILITY FOR ALL CLAIMS ARISING OUT OF
OR IN CONNECTION WITH THIS AGREEMENT AND ANY SCHEDULES ATTACHED
HERETO, WHETHER DIRECTLY OR INDIRECTLY, INCLUDING, WITHOUT LIMITATION,
FROM OR IN CONNECTION WITH THE PANDESIC E-BUSINESS SOLUTIONS SERVICE,
THE PANDESIC SERVER, THE HOSTING SERVICES, THE LICENSED SOFTWARE, OR
THE PROVISION OF THE MAINTENANCE AND SUPPORT SERVICES SHALL NOT
EXCEED THE LESSER OF THE CHARGES PAYABLE BY MERCHANT PURSUANT TO THIS
AGREEMENT IN THE YEAR IN WHICH THE CAUSE OF ACTION AROSE OR $500,000.
D) THIS SECTION 15 APPLIES REGARDLESS OF THE GROUNDS ON WHICH MERCHANT
BASES ITS CLAIM, INCLUDING BUT NOT LIMITED TO CONTRACT OR TORT, EVEN
IF THE DAMAGES ARE CAUSED BY BREACH OF CONTRACT (INCLUDING, WITHOUT
LIMITATION, FUNDAMENTAL BREACH), OR BY THE NEGLIGENCE, GROSS
NEGLIGENCE, NEGLIGENT MISREPRESENTATION OR OTHER FAULT OF
PANDESIC,AND EVEN IF
<PAGE>
-6-
PANDESIC HAS BEEN ADVISED OF THE POSSIBILITY OF THESE DAMAGES.
16. AUTHORIZATION
The relationship between Pandesic and Merchant is intended to be that of
independent contractors. Merchant acknowledges that Pandesic is
providing a service and granting a license only, and that by
providing the Pandesic E-Business Solutions Service Pandesic is not
acting as the employee, agent or representative in any other capacity
of Merchant.
17. PROPRIETY RIGHT INFRINGEMENT
a) Subject to Section 15, Pandesic will indemnify Merchant and save
Merchant harmless for and against any and all costs, losses, damages,
legal costs and expenses, liability, claims and demands incurred by
or made against Merchant alleging that the use of the Licensed
Software by Merchant in accordance with the terms of this Agreement
infringes or otherwise breaches the copyright, trade secret, or other
intellectual property, other than patent rights, of any third party,
provided that Merchant gives Pandesic prompt notice of, and
reasonable assistance in defending, any claim to which this Section
17 applies, and provided further that Pandesic will have sole
authority to defend and contest or settle any claim to which this
Section 17 applies.
b) Pandesic will have no liability under this Section 17 for, and
Merchant will indemnify and save Pandesic harmless from and against
any and all costs, losses, damages, legal costs and expenses,
liability, claims and demands incurred by or made against Pandesic in
connection with any claim described in this Section 17 and any claim
for breach of patent rights which is based upon Merchant's use of the
Licensed Software in connection with any other hardware, software or
services not provided by Pandesic, or in any manner which is not
authorized by this Agreement.
c) If any of the Licensed Software becomes, or in Pandesic's judgment is
likely to become, the subject of a claim that infringes a proprietary
right or if Pandesic settles a claim of infringement, Pandesic may, at
its sole option, discretion and expense:
i) obtain for Merchant the right to continue using the Licensed
Software;
ii) replace or modify the Licensed Software to make in non-infringing
so long as the replacement or modification is substantially
similar to the Licensed Software; or
iii) terminate this Agreement and refund to Merchant the Service fees
paid pursuant to Section 9(a) during the month in which the
termination occurs.
d) The maximum aggregate liability of Pandesic under this Section 17
shall equal the lesser of the aggregate payments made by Merchant to
Pandesic under this Agreement in the twelve months immediately prior
to the time the claim of infringement arises or $500,000, and if
there should be more than one claim of infringement, the amount
payable under such indemnity in respect of each claim shall be
divided pro rata.
e) This Section 17 states the entire liability of Pandesic and the
exclusive remedy of Merchant with respect to any claim of
infringement, including patent, copyright or trade secret infringement.
18. ASSIGNMENT
A) MERCHANT MAY NOT, WITHOUT PANDESIC'S PRIOR WRITTEN CONSENT, ASSIGN,
SUBLICENSE, PLEDGE, GRANT A SECURITY INTEREST IN OR OTHERWISE TRANSFER
THIS AGREEMENT OR ANY OF ITS RIGHTS OR OBLIGATIONS UNDER THIS
AGREEMENT, TO ANY PERSON.
B) ANY ATTEMPT OR ANY PURPORTED ACT OR ATTEMPTED ACT TO DO ANY OF THE
THINGS PROHIBITED BY THIS SECTION 18 SHALL BE NULL AND VOID.
19. ARBITRATION
Except for the right of either party to apply to a court of competent
jurisdiction for a temporary restraining order or other provisional
remedy to preserve the status quo or prevent irreparable harm pending
the selection and confirmation of a panel of arbitrators, and for the
right of Pandesic to bring suit on an open account for any payments
due Pandesic hereunder, any controversy or claim arising out of
<PAGE>
-7-
or relating to this Agreement shall be settled by arbitration in San
Francisco, California, in accordance with the Commercial Arbitration Rules of
the American Arbitration Association, and judgement upon the award rendered
by the arbitrators may be entered in any court having jurisdiction thereof.
Arbitration shall be conducted by a single arbitrator who shall have a
background or training in computer law, computer science, or marketing of
computer products. The arbitrator shall have the authority to grant
injunctive relief in a form substantially similar to that which would
otherwise be granted by a court of law.
20. General
a) The inclusion of headings in this Agreement is for convenience of
reference only and shall not affect its construction or
interpretation.
b) This Agreement and the Schedules attached hereto constitute the
entire agreement between the parties pertaining to the subject
matter hereof. There are no warranties, conditions, or
representations (including any that may be implied by statute) and
there are no agreements in connection with such subject matter
except as specifically set forth or referred to in this Agreement.
No reliance is placed on any warranty, representation, opinion,
advice or assertion of fact made by any party hereto or its
directors, officers, employees or agents, to any other party hereto
or its directors, officers, employees or agents, except to the
extent that the same has been reduced to writing and included as a
term of this Agreement. Accordingly, there shall be no liability,
either in tort or in contract, assessed in relation to any such
warranty, representation, opinion, advice or assertion of fact,
except to the extent aforesaid.
c) Except as expressly provided in this Agreement, no amendment or
waiver of this Agreement shall be binding unless executed in
writing by the party to be bound thereby. No agent or
representative of Pandesic, except an Officer, has authority to
alter, modify or waive any provision of this Agreement. No waiver
of any provision of this Agreement shall constitute a waiver of any
other provision nor shall any waiver of any provision of this
Agreement constitute a continuing waiver unless otherwise expressly
provided.
d) This Agreement shall inure to the benefit of and be binding upon
the respective successors and permitted assigns of the parties
hereto.
e) If any provisions of this Agreement shall for any reason be held
illegal or unenforceable, such provision shall be deemed separable
from the remaining provisions of this Agreement and shall in no way
affect or impair the validity of the enforceability of the
remaining provisions of this Agreement.
f) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REFERENCE TO
CONFLICT OF LAWS PRINCIPLES. THE PARTIES AGREE THAT THIS AGREEMENT
IS NOT SUBJECT TO AND SHALL NOT BE INTERPRETED BY THE UNITED
NATIONS CONVENTION ON CONTRACTS FOR THE SALE OF GOODS.
g) Any notice or other communication required or permitted to be given
pursuant to or in connection with this Agreement shall be in
writing and shall be given by hand or overnight delivery to the
address noted above for each of the respective parties.
h) Time is of the essence of this Agreement.
i) Neither party shall be liable under this Agreement by reason of any
failure or delay in the performance of its obligations hereunder
(except for the payment of money) on account of any cause which is
beyond the reasonable control of such party.
j) Merchant shall not disclose the terms of this Agreement to any
third parties.
k) It is acknowledged and agreed that Pandesic may use sub-contractors
to perform any or all of the services to be performed hereunder.
<PAGE>
-8-
IN WITNESS WHEREOF Pandesic and Merchant have
executed this Agreement on the date first written.
PANDESIC LLC
Per: /s/ Harold Hughes
-----------------------------
DVD EXPRESS, INC.
Per: /s/ Michael Dubelko 3/26/98
-----------------------------
<PAGE>
SCHEDULE A
PANDESIC E-BUSINESS SOLUTIONS-TM- CONTRACT # __________
SOFTWARE LIST
DESCRIPTION OF SERVICE EQUIPMENT:
Description of Licensed Software:
Pandesic-TM- E-business solution software product version 2.0
RESTRICTIONS AND LIMITATIONS OF THE PANDESIC E-BUSINESS SOLUTION SERVICE AND
LICENSE:
i) Merchant shall have a maximum of 10,000 base products offered on its Web
site.
ii) Merchant is permitted a maximum of 9 warehouses.
iii) Merchant operates on a supplier, reseller or physical consignment
business model.
iv) Merchant is permitted to place its web site on the hosted server to a
maximum configuration of 50MB of disk space and 1 GB bandwith
utilisation per month, provided that Merchant uses static web pages for
its web site.
DOCUMENTATION:
Attached hereto in the form of Appendices to this Schedule A.
<PAGE>
- 10 -
SCHEDULE A, APPENDIX 1
PANDESIC HOSTING DEFINITION
The Pandesic Hosted E-Business Solution allows a Merchant to receive the
benefits of the Pandesic Solution without the costs of running and
supporting a system at their own site.
OBJECTIVE
This document outlines Pandesic's responsibilities and obligations to the
Merchant.
1. SOLUTION COMPONENTS (SEE PANDESIC PRODUCT DEFINITION OVERVIEW)
1.1. HOSTING SERVER AND NETWORK BANDWIDTH -- Pandesic will allocate the
appropriate (to be mutually agreed between the parties acting
reasonably) server capacity and network bandwidth to the Merchant for
their Pandesic Solution, subject only to minimum monthly fees.
1.1.1. CORPORATE WEBSITES -- Hosting includes 25-200 MB of disk
space and 0.5-2 GB of network bandwidth per month for
hosting corporate static web pages, beyond which additional
usage-based fees will be applicable. Pandesic cannot host
dynamic web pages (pages linked to non-Pandesic applications
or databases).
1.2. ADDITIONAL HARDWARE -- Pandesic will provide two Wedge barcode
scanners and one printer (including a network card and barcode
printing cartridge) for the Merchant's first warehouse, and will
install them in the Merchant's warehouse. After the first
warehouse, Pandesic will install further warehouses on a time and
materials basis (required hardware is purchased by the Merchant).
1.2.1. PROVIDED BY MERCHANT -- The Merchant will need to provide a
PC and appropriate software (for specifications see PANDESIC
PRODUCT DEFINITION OVERVIEW), and security hardware if desired
or necessary. If the Merchant is not located in the warehouse,
they will also need one or more additional Web-enabled PCs to
maintain their Pandesic Solution.
1.3. SOFTWARE -- The Hosted Solution encompasses all the software
functionality described in the PANDESIC PRODUCT DEFINITION
OVERVIEW. Pandesic will provide the Merchant with SAP Client
software.
1.3.1. PROVIDED BY MERCHANT -- The Merchant needs a system capable
of Web browsing with Microsoft Internet Explorer 3.0 (or
higher) or Netscape Navigator 3.0 (or higher). Pandesic does
not provide the Merchant with web editing software such as
Microsoft FrontPage or Visual Interdev.
2. DEPLOYMENT (SEE DEPLOYMENT STATEMENT OF WORK)
2.1. PREPARATION -- During the preparation phase, the Merchant completes
the pre-work (including designing the store front and preparing
catalog content) and education is provided to the Merchant on the
Pandesic Solution.
2.2. INSTALLATION -- The hardware and software, as described above, is
delivered, setup, configured and tested.
2.3. INITIALIZATION -- The Merchant receives 5 hours of training and the
Pandesic Solution is personalized with basic store setup. The
Merchant tests the system.
2.4. ROLLOUT -- The Merchant completes the store setup, including
loading all of their catalog products, and links the store to their
corporate web site.
<PAGE>
-11-
2.5. CUSTOMIZATION - The Merchant is responsible for additional
customization or legacy integration. Pandesic will only allow and
support hosted systems utilizing SAP's ALE (Application Link
Enabling) technology or flat-file transfers. Customization and
legacy integration may require additional fees due to service,
hardware or bandwidth requirements.
3. EVERGREEN SERVICES AND UPGRADES
3.1. SYSTEM MAINTENANCE AND ADMINISTRATORS - System monitoring and
maintenance will be provided by Pandesic and/or an authorized
Hosting Partner. These services will encompass the hardware,
Windows NT, Microsoft SQL Sever, Microsoft IIS, Pandesic Application
Software, SAP R/3, Cybercash, Taxware, Citibank, and any other
hosted components of the Pandesic Solution.
3.2. BACKUP SERVICES - The Merchant's system will be backed up daily
and weekly, or as per a mutually agreed upon schedule.
3.3. DOWNTIME RESPONSE - 24x7x365 mission-critical downtime response.
3.4. CUSTOMER AND TECHNICAL SUPPORT - Customer and technical support
will be available Monday through Friday, 5am PST to 8pm PST.
3.5. EVERGREEN HARDWARE, NETWORK SCALABILITY - Pandesic will guarantee
Evergreen server capacity and network bandwidth as is appropriate
to meet mutually agreed upon performance benchmarks.
3.5.1. ADDITIONAL SERVER, NETWORK REQUIREMENTS - If the Merchant
requires additional non-Pandesic Solution server or bandwidth
capacity, including legacy integration traffic, Pandesic may
elect to charge additional usage-based fees which shall be
based upon actual out-of-pocket costs.
3.6. EVERGREEN UPGRADES - Pandesic or an authorized partner will perform
upgrades and patches at Pandesic's discretion, barring
backwards-compatibility or legacy integration issues. If such
issues exist, Pandesic will work with the Merchant to determine a
mutually acceptable timeframe and process for upgrading.
4. HOSTING FACILITIES
4.1. CURRENT FACILITIES - Pandesic currently hosts systems at its
Folsom, CA site. It provides T1 Internet access, firewall security,
physical security, and immediate proximity to Pandesic technicians.
T1 redundancy and UPS capabilities are currently being evaluated
for installation.
4.2. PANDESIC HOSTING PARTNER - Pandesic is currently evaluating
best-of-class Network Service Providers as candidates for a
Pandesic Hosting Partner. If selected, the Pandesic Hosting Partner
will provide the hosting facilities and services in cooperation
with Pandesic. Pandesic customers installed at Pandesic's Folsom,
CA site will be moved to the Hosting Partner's site within a
mutually agreed upon timeframe.
<PAGE>
-12-
SCHEDULE A, APPENDIX 2
PANDESIC PRODUCT DEFINITION OVERVIEW
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
HARDWARE - PROVIDED BY PANDESIC
- -------------------------------------------------------------------------------
SERVER CAPACITY Shared capacity; Compaq or
Hewlett-Packard; 4 x 200 MHz Intel
Pentium-Registered Trademark- Pro
processors; 1 GB RAM; 30 GB Hard Disk;
Ethernet Card
BANDWIDTH Shared T1 access
WAREHOUSE PRINTER Hewlett-Packard 5Si; Barcode printing
cartridge; Ethernet Card
BARCODE SCANNER Symbol LS4004 Wedge scanner
- -------------------------------------------------------------------------------
HARDWARE - PROVIDED BY MERCHANT
- -------------------------------------------------------------------------------
WAREHOUSE PC Intel 166 MHz Pentium-Registered
Trademark- Processor or equivalent; 32
Mb RAM; 1 Gb Hard Drive; CD-ROM;
Ethernet Card; Windows NT Server v4.0
TERMINALS ON LAN FOR OS is Unix, Windows 95, or Windows NT
- CUSTOMER SUPPORT FUNCTION Hardware is unspecified
- ACCOUNTING AND FINANCE
- MERCHANDISING (PRODUCT
MANAGEMENT)
- WEB DEVELOPMENT (IF NOT
OUTSOURCED)
SECURITY HARDWARE Optional, depends on security required
SCANNER OR DIGITAL CAMERA Unspecified - for catalog setup/maintenance
- -------------------------------------------------------------------------------
SOFTWARE - PROVIDED BY PANDESIC
- -------------------------------------------------------------------------------
PANDESIC APPLICATION SOFTWARE
DATABASE SERVER Microsoft SQL Server 6.5
OS & WEB SERVER LICENSE Microsoft Windows NT Server 4.0
NT Resource Kit
Microsoft Internet Information Server
(IIS) 4.0
BROWSER Microsoft LE 4.0
ELECTRONIC MAIL MetaInfo Send Mail
TRANSACTION PAYMENTS SYSTEM Cybercash
TAX SOFTWARE AVP Taxware
SAP INTERFACE SAP GUI client
REMOTE TERMINAL ACCESS SOFTWARE PCAnywhere
<PAGE>
-13-
- -------------------------------------------------------------------------------
SOFTWARE - PROVIDED BY MERCHANT
- -------------------------------------------------------------------------------
OS ON OFFICE TERMINALS Unix, Windows 95, Windows NT
BROWSER ON OFFICE TERMINALS Netscape 3.0 or MS LE 3.0, or higher
versions
WEB EDITING PROGRAM Examples: MS FrontPage 97, MS Visual Interdev
IMAGE EDITOR Unspecified - for catalog setup/maintenance
</TABLE>
<PAGE>
-14-
SCHEDULE A, APPENDIX 3
STATEMENT OF WORK
HOSTED
The purpose of this document is to identify the activities and deliverables
that are included in the deployment portion of the Pandesic-TM- e-business
solution; to identify who completes these activities and what optional
services are available from the Certified Installer.
DEPLOYMENT OBJECTIVE
The objective of the Pandesic Deployment is for the Certified Installer, the
Merchant and Pandesic to work together on establishing and launching the
Internet shopping environment for the Merchant using the Pandesic-TM-
e-business solution.
ROLES AND RESPONSIBILITIES
The following resources are involved during a Deployment of the Pandesic
Solution:
1. Pandesic Deployment Manager
2. Certified Installers
3. Merchant Resources
The roles and responsibilities for these people include the following:
1. THE PANDESIC DEPLOYMENT MANAGER - The Pandesic Deployment Manager
has overall responsibility for the delivery and deployment of the
Pandesic-TM- e-business solution. They assist the merchant with
understanding the deployment methodology, preparing the prework
needed for the installation and coordinate activities with the
Certified Installer.
2. CERTIFIED INSTALLER - The Certified Installer will be responsible
for the initial personalization of software and the installation of
the printer at the distribution site.
3. MERCHANT - Multiple roles within the merchant's organization need
to be represented during the Deployment of the Pandesic-TM-
e-business solution. The following list is designed to provide you
with some guidelines as to the type of roles that will need to be
performed. This could represent different individuals or the same
person could facilitate multiple roles. When identifying Merchant
resources for the Deployment project, representatives from the
following areas should be included:
DISTRIBUTION CENTER - A representative from the warehouse that
will be used to stock merchandise for shipment to the
customer. This person will be responsible for executing
transactions to receive inventory into the warehouse, process
deliveries and return orders, and move inventory within the
the warehouse.
MARKETING/PLANNING - A representative who will be responsible
for executing transactions to maintain product and catalog
information, and maintain business information such as
supplier and freight costs and minimum inventory levels.
CUSTOMER SERVICE - A representative from the customer service
organization who will assist customers when required. This
person will be responsible for executing transactions to
cancel orders, issue customer credits, and sent replacement
orders when required.
<PAGE>
-15-
FINANCE - A representative from finance/accounting
organization who will process vendor payments, maintain month
end/ year-end period close and maintain vendor information.
Additionally, a project leader or primary contact should be identified
for the project. This project leader can also represent one of the
functional roles listed above.
SCOPE AND APPROACH
The deployment of the Pandesic Solution is accomplished utilizing the
Pandesic Deployment Methodology. This methodology is comprised of four
phases, which are highlighted below:
1. PREPARATION
During the Preparation phase, the merchant completes the pre-work
and education is provided to the Merchant on the Pandesic System.
2. INSTALLATION
The hardware and software is delivered, setup, configured and tested.
3. INITIALIZATION
The merchant receives additional training and the Pandesic Solution
is personalized with basic store setup. Merchant tests the system.
4. ROLLOUT
Merchant completes store setup, develops the creative store front if
desired, and integrates the store into the existing web site if
applicable.
PREPARATION
The preparation phase of the project sets the foundation for the installation
and initialization of the system. It is during this phase that the Merchant
must complete the activities outlined in the Merchant Pre-work Document.
These activities include, but are not limited to:
- Identify Credit Cards Vendors
- Sign up with CyberCash
- Establish business relationship with transportation carriers
- Identify consignment model
- Register a domain name
- Obtain a VeriSign Secure Server ID
- Establish online business rules
- Establish banking relationships
- Provide catalog, product and inventory information
- Develop strategies for marketing products online
- Establish physical space for the installation
- Obtain digital pictures of merchandise
- Complete Merchant Questionnaire
It is during the Preparation Phase that the Deployment coordinates the
scheduling of the installation with the Certified Installers based upon
completion of the Merchant pre-work. Additionally, the Deployment Manager
provides the Merchant with a high level overview of both the deployment
process and the Pandesic-TM- e-business solution.
<PAGE>
- 16 -
INSTALLATION
The installation of the Pandesic-TM- e-business solution is the first of a
two phase process. In this phase the Pandesic-TM- e-business solution is
configured, and tested at the hosting site. The installation of the
Pandesic-TM- e-business solution can only begin upon completion of the
Merchant Pre-work. It is during this phase that Pandesic will be responsible
for:
- Execution of the Pandesic provided Technical Script. Activities within
the script may include but are not limited to:
- Prepare the IP Configuration
- Prepare network properties
- Establish system settings
- Configure Internet information server
- Configure SQL Server
- Configure SAP System
- Run Patch Transports
- Update hostnames in RFC's
- NT configuration tasks
- Test SAP connection server
- Verify DCOM setting s
- Configure Cybercash
- Configure Citibank World Link
- Configure Verisign
- System Testing
Additionally, Pandesic will be responsible for the installation of a
single printer at a warehouse location.
The Functional Certified Installer will be responsible for using the
responses provided in the Prew-Work Questionnaire to execute the Functional
Script. Activities within the script may include but are not limited to:
- System preparation
- Create company basic information
- Define shipping conditions
- Update tax jurisdictions
- Create credit card conditions
- Establish financial information
- Establish automated background processes
- Create base materials, attributes and catalogs
- System testing
INITIALIZATION
During the Initialization Phase of the project is when the Merchant receives
training, the Pandesic-TM- e-business solution is personalized with basic
store set up, and the Merchant tests the initial system.
During this phase the Certified Installer will load the basic material,
catalog and inventory information for the base system.
The initial load of the Merchants information includes the following:
- Baseline configuration of 3 distribution centers
- Install 1 printer at a single distribution center
- Base line population of 50 products
<PAGE>
- 17 -
- Create basic product catalog - establish a basic
catalog hierarchy and build at least 10 basic
branches of that hierarchy
- Update inventory levels - populate the inventory levels
of the catalog products for at least 50 of the product
line items.
- Establish user id's and security to support the baseline
configuration
- Perform system backup.
Additionally, during this phase, the Certified Installer will deliver five
hours of functional training for the Merchant on overall operation and
maintenance of the Pandesic System. The final component of the Initialization
Phase of deployment is for the Merchant to test the baseline of products which
have been loaded during the Initialization phase. Upon completion of a
successful system test, the Merchant, Certified Installer, and Deployment
Manager will sign-off on the completion of the Installation and Initialization
of the Pandesic-TM- e-business solution.
ROLLOUT
It is during the Rollout Phase that the Merchant completes store set up,
develops the creative storefront and integrates the store into the existing
web site. Activities that the Merchant should perform include:
- Create full product material load
- Create all catalog levels
- Create all distribution centers
- Update inventory levels for full product line
- Establish security for all users
- Integrate Pandesic store with existing web site
- Full system testing
Upon completion of the above activities, the Pandesic-TM- e-business solution
is ready to go live.
ASSUMPTIONS
The following outlines the assumptions Pandesic has made related to the
deployment of the Pandesic-TM- e-business solution.
- The entire Merchant Pre-work document is completed before
beginning the installation phase of the project.
- Additional work related to the deployment not listed above is
not included in the pricing of the Pandesic-TM- e-business
solution, but may be contracted for an additional fee.
FEES
As part of the Pandesic-TM- e-business solution, Pandesic will provide a
Deployment Manager at no additional charge. Fees that are the responsibility
of the merchant include:
- Registration of the domain name through Internic
- Obtaining VeriSign Secure Digital ID
- Bank Fees and other fees associated with establishing
secure financial transaction processing
Any additional services, other than those described above, provided by the
Certified Installer are arranged directly between the Merchant and the
Certified Installer.
<PAGE>
-18-
- --------------------------------------------------------------------------------
MERCHANT ROLES NOT INCLUDED AS PART OF THE PANDESIC E-BUSINESS SOLUTION
PREWORK
MERCHANT WEBSITE DESIGN & CONTENT
PREPARATION
Pandesic Project Coordination
Merchant Education
Merchant Complete Merchant Questionnaire
INSTALLATION
Pandesic Installation Support
Certified Installer Functional & Technical Installation
Merchant Training
INITIALIZATION
Pandesic Installation Support
Certified Installer System Initialization & Test
System Restoration
Merchant certification
ROLLOUT
Pandesic Quality Control
MERCHANT SYSTEM CUSTOMIZATION
- --------------------------------------------------------------------------------
EVERGREEN - PROVIDED BY PANDESIC
- --------------------------------------------------------------------------------
24x7 MISSION CRITICAL COVERAGE Database down, hardware problems, etc.
BACKUP SERVICES Daily and weekly backups
CUSTOMER, TECHNICAL SUPPORT 5am PST - 8pm PST, Mon-Fri
SOFTWARE UPGRADES Minimize downtime on major upgrades
HARDWARE, NETWORK UPGRADES Pandesic will determine performance
benchmarks and upgrade as needed
<PAGE>
SCHEDULE B
PANDESIC E-BUSINESS SOLUTIONS-TM- CONTRACT # ______
MAINTENANCE AND SUPPORT SERVICES
1. MAINTENANCE AND SUPPORT SERVICES
a) During such periods as Pandesic makes available such services
generally to its Merchants for the Pandesic E-Business Solutions
Services, Pandesic will provide the following maintenance and support
services (the "Maintenance and Support Services") to Merchant in
respect of the Licensed Software:
i) telephone support, consisting of the following:
a) explaining specific functions and features of the Service
Equipment and the Licensed Software;
b) guiding Merchant's employees in the performance of specific
operations using the Service Equipment and the Licensed
Software; and,
c) first level response to defect reports; and,
ii) correction of errors in the Licensed Software, which Pandesic is
able to reproduce and which cause a material loss of function in
the Licensed Software;
subject, in each case, to Pandesic's ability to procure from third party
licensors, where necessary, assistance or software required to provide
the Maintenance and Support Services. In order to receive Maintenance
and Support Services hereunder, Merchant must provide the required
remote support and update connections to the Service Equipment as and
when required by Pandesic.
b) Pandesic will provide the Maintenance and Support Services on a 7 day
by 24 hour basis.
c) Any request for Maintenance and Support Services must be made by
Merchant to Pandesic by telephone and must describe, with reasonable
specificity, the Maintenance and Support Services required.
2. EXCLUDED SERVICES
a) Maintenance and Support Services will not include the following
("Excluded Services"):
i) user education and training except as otherwise expressly stated
in this Agreement;
ii) third party software implementation or installation;
iii) on-site support;
iv) modification of the Licensed Software;
v) correction of errors attributable, in Pandesic's reasonable
opinion, to operator error;
vi) correction of errors attributable, in Pandesic's reasonable
opinion, to the Merchant's use of software other than the
Licensed Software in conjunction with the Licensed Software; and
vii) Merchant's individual network security unless it is part of
Pandesic's general network security for its hosted E-Business
Solutions Service server operations.
b) Pandesic may, at its sole option, provide Excluded Services to the
Merchant from time to time at such rates and charges as may be
mutually agreed between Pandesic and the Merchant.
<PAGE>
-20-
3. LICENSED SOFTWARE UPGRADES
Pandesic may from time to time make available modified and/or enhanced
versions of the Licensed Software ("Upgrades"). Pandesic will make each
such Upgrade available to Merchant on the same terms as Pandesic makes
such Upgrade generally available to other licensees of the Licensed
Software. Maintenance and Support shall only be provided in respect of
the most current version of the Licensed Software and the previous
version (i.e. version 1.x and version 1.[x minus 1]).
<PAGE>
-21-
SCHEDULE C
PANDESIC E-BUSINESS SOLUTIONS-TM- CONTRACT # ________
CHARGES TO MERCHANT
[***]
***CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
-22-
[***]
***CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
-23-
SCHEDULE D
PANDESIC E-BUSINESS SOLUTIONS-TM- CONTRACT # ______
LIST AND TIMETABLE OF FUNCTIONALITY ENHANCEMENTS
------------------------------------------------
PHASE 1: ON INSTALLATION
REQUIREMENT: CUSTOMER BASED ORDER MANAGEMENT:
- Customer needs web based facility to make changes to their
outstanding orders. Changes will include adding line items,
deleting line items, change delivery dates
SOLUTION: Initial solution will provide customer with order change
capability but the back-end processing of those changes will result in
the cancellation and re-entry of the order. This will be invisible to
the customer except that he/she will receive a new order number when
changing orders. Longer term solution will be for customer changes to
be applied to the original order rather than deletion and creation of
a new order
CUSTOM DEVELOPMENT REQUIRED: Front-end changes to allow customer to make
changes to the order, then taking those changes and passing them back
to the R/3 engine so the original order can be deleted then a new
order created. Longer term solution will require re-configuration of
the R/3 engine to allow for change orders and a front-end facility to
allow customers to make those changes.
REQUIREMENT: PRE-ORDERS AND BACK-ORDERS:
- System needs to allow the customer to distinguish between
pre-(advanced releases of videos) and back-orders (titles not in
stock)
- System needs to allow customer to order a DVD prior to official
release of the title
- Provide ability for customer select delivery/shipment options
such as "ship complete" or ship when three titles at a minimum
are available, etc.
SOLUTION: Creation of separate catalog categories, and the assignment of
specific videos to those categories will allow customers to
distinguish between pre-releases and other titles when browsing the
catalog. Pre-releases titles will be set with an inventory qty of 0,
allowing the customer to place the order. The Licensed Software will
treat these pre-release orders like back-orders. Distinction between
pre-release orders and standard back orders can be explained through
language on the site explaining the difference between pre-releases
and back-orders for titles already released. Customer would then have
the option to select either "ship order complete" or "ship when
available" for their order.
CUSTOM DEVELOPMENT REQUIRED: Enable the Licensed Software to allow the
consumer to select "ship order complete", indicating that the order is
not to be shipped until all line items are ready for delivery. The
Licensed Software's default setting is to ship each line item as it's
available. This will give the customer the choice to "ship when
available" or "ship order complete."
REQUIREMENT: COMBINE PICK AND PACK SLIP AND REDUCE THAT PROCESS TO ONE FORM:
<PAGE>
-24-
SOLUTION: Merchant will attempt to use the Licensed Software standard
configuration of separate pick and pack slips, but reserves the right to
request re-configuration to a single form if this is not workable in the
long run.
REQUIREMENT: DYNAMIC CREATION OF "WHAT'S NEW", "COMING ATTRACTIONS", AND
SEARCH-ALPHA LIST.
SOLUTION: The Licensed Software will allow for "What's New" and "Coming
Attraction" categories in the catalog. To achieve this, Merchant only has
to assign individual titles to those categories. The Licensed Software
will also provide a "Search-Alpha" list for users to see all store titles
(except adult videos) in a single drop-down box.
CUSTOM DEVELOPMENT REQUIRED: Creation of a "Search-Alpha" capability.
REQUIREMENT: DYNAMIC CATEGORIES
- Conceal adult titles on storefront via secure access of some type
- Block customers referred from certain sites (Gateway) from seeing
adult and Playboy titles in any and all places these titles may
appear including withing the "new arrivals" section.
- Adult and Playboy title option display in user profile
SOLUTION: The Licensed Software will provide a capability to block
customers referred from certain sites from seeing adult titles. Concealed
adult titles on store front via secure access and "Adult title option
display in user profile" will be delivered in a later phase.
CUSTOM DEVELOPMENT REQUIRED: Track customers coming from certain sites and
prevent the "Adult-title" catalog category from being displayed to
customer.
REQUIREMENT: SEND EMAIL NOTIFICATION TO A CUSTOMER IF A PRE-ORDERED PRODUCT
SHIPPING DATE IS CHANGED. PROVIDE A MANUAL OR SCHEDULED PROCESS TO RUN EVERY N
DAY(S) TO EMAIL CUSTOMERS ABOUT STATUS CHANGES TO ORDERS.
SOLUTION: The Licensed Software already supports this requirement.
REQUIREMENT: PROVIDE THE ABILITY TO ALLOW THE CUSTOMER TO ENTER SPECIFIC
SHIPPING INSTRUCTIONS ON AN ORDER SUCH AS "DO NOT INCLUDE INVOICE IN BOX".
SOLUTION: The Licensed Software is to provide capability to allow customer
to specify special shipping conditions. These requests will be in the form
of text based note entered by the customer at order placement time and will
print on the pick list.
CUSTOM DEVELOPMENT REQUIRED: Enable "special notes" field on order form.
These notes will print on pick list as special handling instructions for
warehouse.
<PAGE>
-25-
REQUIREMENT: TRACK FOR REPORTING PURPOSES, ORDERS REFERRED FROM CERTAIN
URLs. (THIS IS TO ACCOMMODATE COMMISSION TACKING.)
SOLUTION: The Licensed Software will provide the capability to
track orders referred from certain URL's through reporting.
CUSTOM DEVELOPMENT REQUIRED: Ability to track referred customers
from certain sites. This requires we associate a specific order from
a referred site. Creation of a report to identify orders actually
placed from referred site visits.
PHASE 2: TARGETED FOR MID/LATE JUNE IMPLEMENTATION
REQUIREMENT: PROVIDE THE ABILITY TO DEFINE SELECTED ORDERS FOR HUMAN REVIEW
PRIOR TO PROCESSING (I.E., HOLD ALL FOREIGN ORDERS, HOLD ORDERS THAT HAVE
DIFFERENT SHIP-TO ADDRESSES FROM BILL-TO ADDRESSES, HOLD MULTIPLE ORDERS FOR
THE SAME CREDIT CARD.)
SOLUTION: Pandesic and Merchant to work to refine requirements and
provide solution for June delivery.
CUSTOM DEVELOPMENT REQUIRED: Enable block order capability based on
Merchant conditions. Also provide Review Queue to allow Merchant to
view blocked orders and disposition as appropriate.
REQUIREMENT: STORE CUSTOMERS USER ACCOUNT PROFILE WITH CREDIT CARD
INFORMATION -- NEEDS TO STORE MULTIPLE CREDIT CARD NUMBERS.
SOLUTION: PANDESIC TO ADD TO VER. 2.1 ROADMAP. The Licensed Software
to provide functionality so consumer does not have to re-enter credit
card information if they've shopped at the store before. For June
delivery. The Licensed Software can either store the credit card numbers
with the customer account information on the same Pandesic server or
Pandesic can utilize the Cybercash database to retrieve previously used
credit cards. Pandesic will also work with Merchant to define longer term
solution requirements for inclusion into 2.1 release.
CUSTOM DEVELOPMENT REQUIRED: Custom work will depend on Merchant
solution preference:
a) Store credit card numbers on Pandesic server. The Licensed Software
will store multiple credit card numbers with the customers profile
information on the Pandesic server. Allow customer to either use
existing credit card info or enter a different number as an override.
b) Utilize Cybercash database to retrieve previously used credit cards:
Credit card numbers will not be stored on Pandesic server but rather
retrieved from remote Cybercash database using previous order
information.
REQUIREMENT: SUPPORT ORDERS TAKEN BY PHONE (1-800) AS WELL AS WWW.
<PAGE>
-26-
SOLUTION: Pandesic is already working on 1-800 call center
templates which will allow Merchant 1-800 operators to utilize a more
efficient interface for placing phone orders. These new templates
will be ready for the June phase.
CUSTOM DEVELOPMENT REQUIRED: Provided Merchant is content with the
templates already being developed, there is no custom development
required. However, if the templates do not meet Merchant's needs,
custom work will be required.
PHASE 3: TARGETED FOR PANDESIC 2.1 RELEASE (SCHEDULED FOR AUGUST)
REQUIREMENT: "ONE CLICK" ORDER CAPABILITY
SOLUTION: ADD TO PANDESIC'S 2.1 ROADMAP. Pandesic and Merchant to work
to refine requirements and provide solution for Pandesic release 2.1
delivery. REQUIREMENT: GIFT CERTIFICATES
SOLUTION: Already on Pandesic 2.1 roadmap.
REQUIREMENT: PROVIDE THE ABILITY TO STAGE PICKING (I.E., STAGE ALL FOREIGN
SHIPMENTS TO PRINT JUST THOSE PICK, PACK AND SHIPPING PAPERS).
SOLUTION: ADD TO PANDESIC'S 2.1 ROADMAP. Pandesic is already planning
on staged shipments for ver. 2.1 but not currently planning on
staging by ship-to destination (country). Need to work with Merchant
to understand requirements and incorporate into 2.1 solution.
REQUIREMENT: PROVIDE THE ABILITY TO ALLOW THE CUSTOMER TO SPECIFY A FIXED
NUMBER OF TITLES TO BE SHIPPED IN EACH SHIPMENT. THIS PROVIDES THE CUSTOMER
THE ABILITY TO MINIMIZE SHIPPING COSTS. EXAMPLE: "SHIP WHEN A MINIMUM OF
THREE TITLES ARE AVAILABLE."
SOLUTION: ADD TO PANDESIC'S 2.1 ROADMAP. Need to work with Merchant to
understand requirements and incorporate into 2.1 solution.
CUSTOM DEVELOPMENT REQUIRED: Modification to R-3 engine to allow for
variable customer shipment criteria.
PHASE 4: FUTURE PANDESIC RELEASES BEYOND VER 2.1 (TARGET DECEMBER)
REQUIREMENT: IF A CUSTOMER REQUESTS TWO BACKORDERED TITLES TO BE SHIPPED AS
AVAILABLE, AND THE ARRIVE ON THE SAME DAY BUT ONE IN THE MORNING AND ONE IN
THE AFTERNOON, HOW MIGHT WE DEAL WITH THE SUPERFLUOUS SHIPPING CHARGES THAT
WOULD REQUIRE THE CUSTOMER TO PAY?
<PAGE>
-27-
SOLUTION: Not a planned feature. Pandesic and Merchant to discuss for
consideration into future releases. The system will not generate
multiple shipping charges to the customer, however Merchant may incur
added shipping charges for the subsequent shipments.
CUSTOM DEVELOPMENT: Pandesic to deliver a consolidated batch picking
process that will provide ability to consolidate multiple deliveries
per order based on a Merchant schedule.
REQUIREMENT: CUSTOMER MAINTAINED ORDERS, "MULTIPLE" ORDER MANAGEMENT:
Provide the ability for customers to maintain multiple order baskets
(example, CDNOW's Lunchbox.)
SOLUTION: Pandesic and Merchant to discuss the planned 'personal wish
list' to see if this meets the Lunchbox requirements. This feature
provides the customer the ability to maintain a selection of items
and to decide at a later date to create an order from this selection.
The 'wish list' is a planed feature for the 2.1 release in August.
<PAGE>
-28-
AGREEMENT
This Agreement (the "Agreement") is entered into by and between Pandesic
LLC, a Delaware limited liability company, with its offices in Sunnyvale,
California ("Pandesic") and DVD Express, Inc., a California corporation with
its offices in Hollywood, California ("DVD Express") as of this 9th day of
April, 1999.
WHEREAS, Pandesic and DVD Express entered into that certain E-Business
Solution Agreement dated March 25, 1998 (the "E-Business Agreement"); and
WHEREAS, the E-Business Agreement was entered into by both Pandesic and
DVD Express during the early stages of their respective business development;
and
WHEREAS, Section 13 of the E-Business Agreement entitled
"Confidentiality" does not specifically obligate either Pandesic or DVD
Express to keep the terms of such E-Business Agreement confidential; and
WHEREAS, it was always the understanding and intent of both Pandesic and
DVD Express that the terms of the E-Business Agreement be subject to the
confidentiality provisions set forth in Section 13 of such E-Business
Agreement; and
WHEREAS, DVD Express is filing a Registration Statement on Form S-1 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") in connection with an initial public offering of its common
stock; and
WHEREAS, in accordance with the rules promulgated under the Securities
Act of 1933, as amended (the "Securities Act"), DVD Express is required to
file the E-Business Agreement with the Commission as an exhibit to the
Registration Statement; and
WHEREAS, Pandesic and DVD Express acknowledge and are concerned about
the filing of the E-Business Agreement in that it may result in disclosure to
the public of highly sensitive economic, commercial, proprietary and other
such information set forth in the E-Business Agreement which could cause
competitive and economic harm to both Pandesic and DVD Express; and
WHEREAS, DVD Express has agreed to file with the Commission an
application for an order granting confidential treatment of certain highly
sensitive portions of the E-Business Agreement (the "Confidential Treatment
Application"), in connection with, but not part of, DVD Express' Registration
Statement; and
WHEREAS, Pandesic permits DVD Express to file the Confidential Treatment
Application with the Commission; and
WHEREAS, Pandesic and DVD Express wish to include the terms and
provisions of the E-Business Agreement within the definition of "Confidential
Information" contained in Section 13 of such E-Business Agreement; and
<PAGE>
-29-
WHEREAS, Pandesic and DVD Express mutually agree to use their best
efforts to keep confidential the terms of the E-Business Agreement.
NOW, THEREFORE, for good and valuable consideration, and in
consideration of the mutual covenants set forth above, Pandesic and DVD
Express hereby agree as follows:
Section 13 of the E-Business Agreement is hereby amended to read as
follows:
13. Confidentiality.
a) Merchant and Pandesic each acknowledge that, during the term of
this Agreement, it will receive information from the other party
that the disclosing party regards as confidential, including the
terms and provisions of this Agreement (collectively, the
"Confidential Information"). Pandesic and Merchant each agree
to take measures to protect the confidentiality of the other
party's Confidential Information that, in the aggregate, are no
less protective than those measures it uses to protect the
confidentiality of its own Confidential Information, but at a
minimum, Merchant and Pandesic shall take reasonable steps to
(i) use Confidential Information of the other party only for the
purposes of this Agreement; (ii) avoid disclosure of such
Confidential Information to any third party, without the
disclosing party's prior written consent, other than to each
other's employees and contractors on a need-to-know basis; (iii)
advise its employees and contractors of the confidential nature
of the Confidential Information and of the prohibitions
contained herein; (iv) not duplicate such Confidential
Information, except as reasonably necessary to perform their
duties hereunder, and (v) not remove or destroy any proprietary
or copyright notice appearing therein.
b) This Section 13 will not apply to Confidential Information that:
i) is rightfully known to the recipient prior to receipt from
the disclosing party;
ii) is required to be disclosed under the laws of that party's
jurisdiction and/or the federal securities laws (provided
that the parties shall meet and discuss in good faith
reasonable and lawful methods for limiting such disclosure);
iii) is disclosed to an assignee of Pandesic; or
iv) is or later enters the public domain.
c) Pandesic and Merchant each acknowledge that its failure to
comply with the provisions of this Section 13 will cause
irreparable harm to the other party which cannot be adequately
compensated for in damages, and accordingly acknowledges that
the other party will be entitled, in addition to any other
remedies available to it, to interlocutory and permanent
<PAGE>
-30-
injunctive relief to restrain any anticipated, present or
continuing breach of this Section.
IN WITNESS WHEREOF, Pandesic and DVD Express have executed this
Agreement as of the date above first written.
Pandesic LLC
/s/ Harold Hughes
---------------------------
By: Harold Hughes
Its:
DVD Express, Inc.
/s/ Michael Dubelko
---------------------------
By: Michael Dubelko
Its: President
<PAGE>
[LOGO]
VIA FEDERAL EXPRESS
August 3, 1998
Tushar Patel
325 Eugenie St.
Chicago, IL 60614
Dear Tushar:
This letter will confirm the understanding and agreement between Tushar Patel
("Seller") and DVD EXPRESS, Inc. ("Buyer") regarding sale and transfer of the
following domain names DVD.COM, HOMETHEATER.COM, HOMETHEATRE.COM and
HOMETHEATRE.NET (collectively, the "Property").
Subject to the terms and conditions of this Agreement, Seller agrees to sell
and Buyer agrees to purchase all rights in and to the Property.
The Property consists of the domain name "DVD.COM" "HOMETHEATER.COM",
"HOMETHEATRE.COM" and "HOMETHEATER.NET", together with the domain name
registration through Network Solutions, Inc. Internet Network Information
Center ("InterNic"), as originally registered by Seller on September 3, 1995,
May 2, 1995, August 15, 1995 and August 28, 1995, respectively.
The consideration for the Property shall be $200,553. The total sum shall be
placed in the client trust account at the law firm of Troop Stueber Pasich
Reddick & Tobey, LLP, 10940 Wilshire Blvd. Los Angeles, Ca. 90024 and be
released to Seller upon confirmation of the completed transfer of the
Property by Network Solutions, Inc. through the Internet Network Information
Center ("InterNic").
In addition to the compensation provided herein, Buyer will issue to Seller,
a one-year option to purchase 10,000 shares of Buyer's common stock at an
exercise price of $7.00 per share.
<PAGE>
Seller represents and warrants that the Property is free and clear of all
liens and encumbrances, that the Property does not infringe upon the
trademark or other intellectual property of any third party, and that Seller
has the right to enter into this agreement. Seller will provide all
information and assistance necessary to allow Buyer to complete a transfer of
the property to Buyer within InterNic or such other organization that may
effect such sale and transfer.
Upon demand of any party, any dispute shall be resolved by binding
arbitration under proceedings administered by the American Arbitration
Association or such other administrator as the parties mutually agree.
Please indicate your agreement to the above terms by signing below where
indicated, and returning to my attention.
Sincerely,
/s/ Michael J. Dubelko
Michael J. Dubelko
President
DVD EXPRESS, Inc.
Agreed and accepted:
/s/ Tushar Patel 8/5/98
- ------------------------------------
Tushar Patel Date
<PAGE>
WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
- -------------------------------------------------------------------------------
$1,000,000.00 BEVERLY HILLS, CALIFORNIA
JULY 23, 1998
FOR VALUE RECEIVED, the undersigned DVD EXPRESS, INC. ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank") at its office at BEVERLY HILLS PRIVATE CLIENT SERVICES, 9600 SANTA
MONICA BLVD, BEVERLY HILLS, CA 90210, or at such other place as the holder
hereof may designate, in lawful money of the United States of America and in
immediately available funds, the principal sum of $1,000,000.00, or so much
thereof as may be advanced and be outstanding, with interest thereon, to be
computed on each advance from the date of its disbursement as set forth
herein.
INTEREST:
(a) INTEREST. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) at a
rate per annum .75000% above the Prime Rate in effect from time to time. The
"Prime Rate" is a base rate that Bank from time to time establishes and which
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto. Each change in the rate of interest
hereunder shall become effective on the date each Prime Rate change is
announced within Bank.
(b) PAYMENT OF INTEREST. Interest accrued on this Note shall be payable
on the 1ST day of each MONTH, commencing SEPTEMBER 1, 1998.
(c) DEFAULT INTEREST. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note
shall bear interest until paid in full at an increased rate per annum
(computed on the basis of a 360-day year, actual days elapsed) equal to 4%
above the rate of interest from time to time applicable to this Note.
BORROWING AND REPAYMENT:
(a) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions of this Note and of any document executed in connection with or
governing this Note; provided however, that the total outstanding borrowings
under this Note shall not at any time exceed the principal amount stated
above. The unpaid principal balance of this obligation at any time shall be
the total amounts advanced hereunder by the holder hereof less the amount of
principal payments made hereon by or for any Borrower, which balance may be
endorsed hereon from time to time by the holder. The outstanding principal
balance of this Note shall be due and payable in full on SEPTEMBER 1, 1999.
(b) ADVANCES. Advances hereunder, to the total amount of the principal
sum available hereunder, may be made by the holder at the oral or written
request of (i) MICHAEL J. DUBELKO, any one acting alone, who are authorized to
request advances and direct the disposition of any advances until written
notice of the revocation of such authority is received by the holder at the
office designated above, or (ii) any person, with respect to advances
deposited to the credit of any account of any Borrower with the holder, which
advances, when so deposited, shall be conclusively presumed to have been made
to or for the benefit of each Borrower regardless of the fact that persons
other than those authorized to request advances may have authority to draw
against such account. The holder shall have no obligation to determine whether
any person requesting an advance is or has been authorized by any Borrower.
(c) APPLICATION OF PAYMENTS. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
EVENTS OF DEFAULT:
The occurrence of any of the following shall constitute an "Event of
Default" under this Note:
(a) The failure to pay any principal, interest, fees or other charges
when due hereunder or under any contract, instrument or document executed in
connection with this Note.
(b) The filing of a petition by or against any Borrower, any guarantor
of this Note or any general partner or joint venturer in any Borrower which
is a partnership or a joint venture (with each such guarantor, general
partner and/or joint venturer referred to herein as a "Third Party Obligor")
under any provisions of the Bankruptcy Reform Act, Title 11 of the United
States Code, as amended or recodified from time to time, or under any similar
or other law relating to bankruptcy, insolvency, reorganization or other
relief for debtors; the appointment of a receiver, trustee, custodian or
liquidator of or for any part of the assets or property of any Borrower or
Third Party Obligor; any Borrower or Third Party Obligor becomes insolvent,
makes a general assignment for the benefit of creditors or is generally not
paying its debts as they become due; or any attachment or like levy on any
property of any Borrower or Third Party Obligor.
REVOLVING LINE OF CREDIT NOTE (08/96), PAGE 1
<PAGE>
(c) The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any Borrower or Third Party
Obligor which is a corporation, partnership, joint venture or other type of
entity.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred
any obligation for borrowed money, any purchase obligation, or any other
liability of any kind to any person or entity, including the holder.
(e) Any financial statement provided by any Borrower or Third Party
Obligor to Bank proves to be incorrect, false or misleading in any material
respect.
(f) Any sale or transfer of all or a substantial or material part of the
assets of any Borrower or Third Party Obligor other than in the ordinary
course of its business.
(g) Any violation or breach of any provision of, or any defined event of
default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed in
connection with or securing this Note.
MISCELLANEOUS:
(a) REMEDIES. Upon the occurrence of any Event of Default, the holder
of this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by each Borrower, and
the obligation, if any, of the holder to extend any further credit hereunder
shall immediately cease and terminate. Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel),
expended or incurred by the holder in connection with the enforcement of the
holder's rights and/or the collection of any amounts which become due to the
holder under this Note, and the prosecution or defense of any action in any
way related to this Note, including without limitation, any action for
declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing
incurred in connection with any bankruptcy proceeding (including without
limitation, any adversary proceeding, contested matter or motion brought by
Bank or any other person) relating to any Borrower or any other person or
entity.
(b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower
shall be joint and several.
(c) GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the state of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.
DVD EXPRESS, INC.
By: /s/ Michael J. Dubelko
-------------------------------------
MICHAEL J. DUBELKO
PRESIDENT
REVOLVING LINE OF CREDIT NOTE (08/96), PAGE 2
<PAGE>
ADDENDUM TO PROMISSORY NOTE
THIS ADDENDUM is attached to and made a part of that certain promissory
note executed by DVD EXPRESS, INC. ("Borrower") and payable to WELLS FARGO
BANK, NATIONAL ASSOCIATION ("Bank"), or order, dated as of July 23, 1998, in
the principal amount of One Million Dollars ($1,000,000.00) (the "Note").
The following provisions are hereby incorporated into the Note:
1. So long as Bank remains committed to extend credit to
Borrower under this Note and until payment in full of all
obligations of Borrower hereunder, Borrower shall provide to Bank
all of the following, in form and detail satisfactory to Bank:
(a) annually, but not later than each June 1, a financial
statement of Borrower, prepared by Borrower, to include balance sheet
and income statement, and within 15 days after filing, but in no event
later than each June 1, copies of Borrower's filed federal income tax
returns, for such
(b) annually, but not later than each June 1, a financial
statement of guarantor, prepared by Guarantor, to include balance sheet
and income statement, and within 15 days after filing, but in no event
later than each June 1, copies of Guarantor's filed federal income tax
returns, for such year; and
(c) from time to time such financial and other information as
Bank may reasonably request.
2. Notwithstanding anything herein to the contrary, Borrower
shall maintain a zero balance on this Note for a period of at least
thirty (30) consecutive days prior to the maturity date hereof.
3. Borrower shall maintain unencumbered personal liquid assets
(defined as cash, cash equivalents and/or publicly traded/quoted
marketable securities acceptable to Bank) with an aggregate fair market
value not at any time less than One Million Dollars ($1,000,000.00)
4. YEAR 2000 COMPLIANCE:
So long as Bank remains committed to extend credit to Borrower
under this Note and until payment in full of all obligations of Borrower
hereunder, Borrower agrees to perform
<PAGE>
all acts reasonably necessary to ensure that (a) Borrower and any
business in which Borrower holds a substantial interest, and (b) all
customers, suppliers and vendors that are material to Borrower's
business, become Year 2000 Compliant in a timely manner. Such acts shall
include, without limitation, performing a comprehensive review and
assessment of all of Borrower's systems and adopting a detailed plan,
with itemized budget, for the remediation, monitoring and testing of
such systems. As used herein, "Year 2000 Compliant" shall mean, in
regard to any entity, that all software, hardware, firmware, equipment,
goods or systems utilized by or material to the business operations or
financial condition of such entity, will properly perform date sensitive
functions before, during and after the year 2000. Borrower shall,
immediately upon request, provide to Bank such certifications or other
evidence of Borrower's compliance with the terms hereof as Bank may from
time to time require.
5. ARBITRATION:
(a) ARBITRATION. Upon the demand of any party, any Dispute shall
be resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Note. A "Dispute" shall mean any
action, dispute, claim or controversy of any kind, whether in contract
or tort, statutory or common law, legal or equitable, now existing or
hereafter arising under or in connection with, or in any way pertaining
to, this Note and each other document, contract and instrument required
hereby or now or hereafter delivered to Bank in connection herewith
(collectively, the "Documents"), or any past, present or future
extensions of credit and other activities, transactions or obligations
of any kind related directly or indirectly to any of the Documents,
including without limitation, any of the foregoing arising in connection
with the exercise of any self-help, ancillary or other remedies pursuant
to any of the Documents. Any party may be summary proceedings bring an
action in court to compel arbitration of a Dispute. Any party who fails
or refuses to submit to arbitration following a lawful demand by any
other party shall bear all costs and expenses incurred by such other
party in compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be
administered by the American Arbitration Association ("AAA") or such
other administrator as the parties shall mutually agree upon in
accordance with the AAA Commercial Arbitration Rules. All Disputes
submitted to arbitration shall be resolved in accordance with the
Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the
Documents.
2
<PAGE>
The arbitration shall be conducted at a location in California selected by
the AAA or other administrator. If there is any inconsistency between the
terms hereof and any such rules, the terms and procedures set forth herein
shall control. All statutes of limitation applicable to any Dispute shall
apply to any arbitration proceeding. All discovery activities shall be
expressly limited to matter directly relevant to the Dispute being
arbitrated. Judgment upon any award rendered in an arbitration may be entered
in any court having jurisdiction; provided however, that nothing contained
herein shall be deemed to be a waiver by any party that is a bank of the
protections afforded to it under 12 U.S.C. Section 91 or any similar
applicable state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provisions hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary
remedies, including without limitation injunctive relief, sequestration,
attachment, garnishment or the appointment of a receiver, from a court of
competent jurisdiction before, after or during the pendency of any
arbitration or other proceeding. The exercise of any such remedy shall not
waive the right of any party to compel arbitration or reference hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive law
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the State of California, (ii) may
grant any remedy or relief that a court of the state of California could
order or grant within the scope hereof and such ancillary relief as is
necessary to make effective any award, and (iii) shall have the power to
award recovery of all costs and fees, to impose sanctions and to take such
other actions as they deem necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the California Rules of
Civil Procedure or other applicable law. Any Dispute in which the amount in
controversy is $5,000,000 or less shall be decided by a single arbitrator who
shall not render an award of greater than $5,000,000 (including damages,
costs, fees and expenses). By submission to a single arbitrator, each party
expressly waives any right or claim to recover more than $5,000,000. Any
Dispute in which the amount in controversy
-3-
<PAGE>
exceeds $5,000,000 shall be decided by a majority vote of a panel of
three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000,
the arbitrators shall be required to make specific, written findings of fact
and conclusions of law. In such arbitrations (A) the arbitrators shall not
have the power to make any award which is not supported by substantial
evidence or which is based on legal error, (B) an award shall not be binding
upon the parties unless the findings of fact are supported by substantial
evidence and the conclusions of law are not erroneous under the substantive
law of the state of California, and (C) the parties shall have in addition to
the grounds referred to in the Federal Arbitration Act for vacating,
modifying or correcting an award the right to judicial review of (1) whether
the findings of fact rendered by the arbitrators are supported by substantial
evidence, and (2) whether the conclusions of law are erroneous under the
substantive law of the state of California. Judgment confirming an award in
such a proceeding may be entered only if a court determines the award is
supported by substantial evidence and not based on legal error under the
substantive law of the state of California.
(f) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration
if the Dispute concerns indebtedness secured directly or indirectly, in whole
or in part, by any real property unless (i) the holder of the mortgage, lien
or security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or
benefits that might accrue to them by virtue of the single action rule
statute of California, thereby agreeing that all indebtedness and obligations
of the parties, and all mortgages, liens and obligations of the parties, and
all mortgages, liens and security interests securing such indebtedness and
obligations, shall remain fully valid and enforceable. If any such Dispute is
not submitted to arbitration, the Dispute shall be referred to a referee in
accordance with California Code of Civil Procedure Section 638 et seq., and
this general reference agreement is intended to be specifically enforceable
in accordance with said Section 638. A referee with the qualifications
required herein for arbitrators shall be selected pursuant to the AAA's
selection procedures. Judgment upon the decision rendered by a referee shall
be entered in the court in which such
-4-
<PAGE>
proceeding was commenced in accordance with California Code of Civil
Procedure Sections 644 and 645.
(g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business, by
applicable law or regulation, or to the extent necessary to exercise any
judicial review rights set forth herein. If more than one agreement for
arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Documents or the subject
matter of the Dispute shall control. This Note may be amended or modified
only in writing signed by Bank and Borrower. If any provision of this Note
shall be held to be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or any
remaining provisions of this Note. This arbitration provision shall survive
termination, amendment or expiration of any of the Documents or any
relationship between the parties.
IN WITNESS WHEREOF, this Addendum has been executed as of the same date
as the Note.
DVD EXPRESS, INC.
By: /s/ Michael J Dubelko
---------------------
Michael J. Dubelko
President
-5-
<PAGE>
WELLS FARGO BANK CONTINUING GUARANTY
- --------------------------------------------------------------------------------
TO: WELLS FARGO BANK, NATIONAL ASSOCIATION
1. GUARANTY; DEFINITIONS. In consideration of any credit or other
financial accommodation heretofore, now or hereafter extended or made to DVD
EXPRESS, INC. ("Borrowers"), or any of them, by WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank"), and for other valuable consideration, the undersigned
MICHAEL J. DUBELKO ("Guarantor"), jointly and severally unconditionally
guarantees and promises to pay to Bank, or order, on demand in lawful money
of the United States of America and in immediately available funds, any and
all indebtedness of any of the Borrowers to Bank. The term "Indebtedness" is
used herein in its most comprehensive sense and includes any and all
advances, debts, obligations and liabilities of Borrowers, or any of them,
heretofore, now or hereafter made, incurred or created, whether voluntary or
involuntary and however arising, whether due or not due, absolute or
contingent, liquidated or unliquidated, determined or undetermined, and
whether Borrowers may be liable individually or jointly with others, and
whether recovery upon such Indebtedness may be or hereafter becomes
unenforceable.
2. MAXIMUM LIABILITY; SUCCESSIVE TRANSACTIONS; REVOCATION; OBLIGATION
UNDER OTHER GUARANTEES. The liability of Guarantor shall not exceed at any
one time the sum of $1,000,000.00 for principal, plus all interest thereon
and costs and expenses pertaining to the enforcement of this Guaranty and/or
the collection of the Indebtedness of any of the Borrowers to Bank.
Notwithstanding the foregoing, Bank may permit the Indebtedness of Borrowers
to exceed Guarantor's liability. This is a continuing guaranty and all
rights, powers and remedies hereunder shall apply to all past, present and
future Indebtedness of each of the Borrowers to Bank, including that arising
under successive transactions which shall either continue the Indebtedness,
increase or decrease it, or from time to time create new Indebtedness after
all or any prior Indebtedness has been satisfied, and notwithstanding the
death, incapacity, dissolution, liquidation or bankruptcy of any of the
Borrowers or Guarantor or any other event or proceeding affecting any of the
Borrowers or Guarantor. This Guaranty shall not apply to any new Indebtedness
created after actual receipt by Bank of written notice of its revocation as
to such new Indebtedness; provided however, that loans or advances made by
Bank of any of the Borrowers after revocation under commitments existing
prior to receipt by Bank of such revocation, and extensions, renewals or
modifications, of any kind, of Indebtedness incurred by any of the Borrowers
or committed by Bank prior to receipt by Bank of such revocation, shall not
be considered new Indebtedness. Any such notice must be sent to Bank by
registered U.S. mail, postage prepaid, addressed to its office at BEVERLY
HILLS PRIVATE CLIENT SERVICES, 9600 SANTA MONICA BLVD, BEVERLY HILLS, CA
90210, or at such other address as Bank shall from time to time designate.
Any payment by Guarantor with respect to the Indebtedness shall not reduce
Guarantor's maximum obligation hereunder unless written notice to that effect
is actually received by Bank at or prior to the time of such payment. The
obligations of Guarantor hereunder shall be in addition to any obligations of
Guarantor under any other guaranties of any liabilities or obligations of any
of the Borrowers or any other persons heretofore or hereafter given to Bank
unless said other guaranties are expressly modified or revoked in writing;
and this Guaranty shall not, unless expressly herein provided, affect or
invalidate any such other guarantees.
3. OBLIGATIONS JOINT AND SEVERAL; SEPARATE ACTIONS; WAIVER OF STATUTE
OF LIMITATIONS; REINSTATEMENT OF LIABILITY. The obligations hereunder are
joint and several and independent of the obligations of Borrowers, and a
separate action or actions may be brought and prosecuted against Guarantor
whether action is brought against any of the Borrowers or any other person,
or whether any of the Borrowers or any other person is joined in any such
action or actions. Guarantor acknowledges that this Guaranty is absolute and
unconditional, there are no conditions precedent to the effectiveness of this
Guaranty, and this Guaranty is in full force and effect and is binding on
Guarantor as of the date written below, regardless of whether Bank obtains
collateral or any guaranties from others or takes any other action
contemplated by Guarantor. Guarantor waives the benefit of any statute of
limitations affecting Guarantor's liability hereunder or the enforcement
thereof, and Guarantor agrees that any payment of any Indebtedness or other
act which shall toll any statute of limitations applicable thereto shall
similarly operate to toll such statute of limitations applicable to
Guarantor's liability hereunder. The liability of Guarantor hereunder shall be
CONTINUING GUARANTY (08/96), PAGE 1
<PAGE>
reinstated and revived and the rights of Bank shall continue if and to the
extent that for any reason any amount at any time paid on account of any
Indebtedness guaranteed hereby is rescinded or must otherwise be restored by
Bank, whether as a result of any proceedings in bankruptcy or reorganization
or otherwise, all as though such amount had not been paid. The determination
as to whether any amount so paid must be rescinded or restored shall be made
by Bank in its sole discretion; provided however, that if Bank chooses to
contest any such matter at the request of Guarantor, Guarantor agrees to
indemnify and hold Bank harmless from and against all costs and expenses,
including reasonable attorneys' fees, expended or incurred by Bank in
connection therewith, including without limitation, in any litigation with
respect thereto.
4. AUTHORIZATIONS TO BANK. Guarantor authorizes Bank either before or
after revocation hereof, without notice to or demand on Guarantor, and
without affecting Guarantor's liability hereunder, from time to time to: (a)
alter, compromise, renew, extend, accelerate or otherwise change the time for
payment of, or otherwise change the terms of, the Indebtedness or any portion
thereof, including increase or decrease of the rate of interest thereon; (b)
take and hold security for the payment of this Guaranty or the Indebtedness
or any portion thereof, and exchange, enforce, waive, subordinate or release
any such security; (c) apply such security and direct the order or manner of
sale thereof, including without limitation, a non-judicial sale permitted by
the terms of the controlling security agreement or deed of trust, as Bank in
its discretion may determine; (d) release or substitute any one or more of
the endorsers or any other guarantors of the Indebtedness, or any portion
thereof, or any other party thereto; and (e) apply payments received by Bank
from any of the Borrowers to any Indebtedness of any of the Borrowers to
Bank, in such order as Bank shall determine in its sole discretion, whether
or not such Indebtedness is covered by this Guaranty, and Guarantor hereby
waives any provision of law regarding application of payments which specifies
otherwise. Bank may without notice assign this Guaranty in whole or in part.
Upon Bank's request, Guarantor agrees to provide to Bank copies of
Guarantor's financial statements.
5. REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants
to Bank that: (a) this Guaranty is executed at Borrowers' request; (b)
Guarantor shall not, without Bank's prior written consent, sell, lease,
assign, encumber, hypothecate, transfer or otherwise dispose of all or a
substantial or material part of Guarantor's assets other than in the ordinary
course of Guarantor's business; (c) Bank has made no representation to
Guarantor as to the creditworthiness of any of the Borrowers; and (d)
Guarantor has established adequate means of obtaining from each of the
Borrowers on a continuing basis financial and other information pertaining to
Borrowers' financial condition. Guarantor agrees to keep adequately informed
from such means of any facts, events or circumstances which might in any way
affect Guarantor's risks hereunder, and Guarantor further agrees that Bank
shall have no obligation to disclose to Guarantor any information or material
about any of the Borrowers which is acquired by Bank in any manner.
6. GUARANTOR'S WAIVERS.
(a) Guarantor waives any right to require Bank to: (i) proceed against
any of the Borrowers or any other person; (ii) marshal assets or proceed
against or exhaust any security held from any of the Borrowers or any other
person; (iii) give notice of the terms, time and place of any public or
private sale of personal property security held from any of the Borrowers or
any other person, or otherwise comply with the provisions of Section 9504 of
the California Uniform Commercial Code; (iv) take any action or pursue any
other remedy in Bank's power; or (v) make any presentment or demand for
performance, or give any notice of nonperformance, protest, notice of protest
or notice of dishonor hereunder or in connection with any obligations or
evidences of indebtedness held by Bank as security for or which constitute in
whole or in part the Indebtedness guaranteed hereunder, or in connection with
the creation of new or additional Indebtedness.
(b) Guarantor waives any defense to its obligations hereunder based
upon or arising by reason of: (i) any disability or other defense of any of
the Borrowers or any other person; (ii) the cessation or limitation from any
cause whatsoever, other than payment in full, of the Indebtedness of any of
the Borrowers or any other person; (iii) any lack of authority of any
officer, director, partner, agent or any other person acting or purporting to
act on behalf of any of the Borrowers which is a corporation, partnership or
other type of entity, or any defect in the formation of any of such Borrower;
(iv) the application by any of the Borrowers of the proceeds of any
Indebtedness for purposes other than the purposes represented by Borrowers
to, or intended proceeds of any Indebtedness for purposes other than the
purposes represented by Borrowers to, or intended or understood by, Bank or
Guarantor; (v) any act or omission by Bank which directly or indirectly
results in or
CONTINUING GUARANTY (08/96), PAGE 2
<PAGE>
aids the discharge of any of the Borrowers or any portion of the Indebtedness
by operation of law of otherwise, or which in any way impairs or suspends any
rights or remedies of Bank against Borrower; (vi) any impairment of the value
of any interest in any security for the Indebtedness or any portion thereof,
including without limitation, the failure to obtain or maintain perfection or
recordation of any interest in any such security, the release of any such
security without substitution, and/or the failure to preserve the value of,
or to comply with applicable law in disposing of, any such security; or (vii)
any modification of the Indebtedness, in any form whatsoever, including any
modification made after revocation hereof to any Indebtedness incurred prior
to such revocation, and including without limitation the renewal, extension,
acceleration or other change in time for payment of, or other change in the
terms of, the Indebtedness or any portion thereof, including increase or
decrease of the rate of interest thereon. Until all Indebtedness shall have
been paid in full, Guarantor shall have no right of subrogation, and
Guarantor waives the right to enforce any remedy which Bank now has or may
hereafter have against any of the the Borrowers or any other person, and
waives any benefit of, or any right to participate in, any security now or
hereafter held by Bank. Guarantor further waives all rights and defenses
Guarantor may have arising out of (A) any election or remedies by Bank, even
though that election of remedies, such as a non-judicial foreclosure with
respect to any security for any portion of the Indebtedness, destroys
Guarantor's rights of subrogation of Guarantor's rights to proceed against
any of the Borrowers for reimbursement, or (B) any loss of rights Guarantor
may suffer by reason of any rights, powers or remedies of any of the
Borrowers in connection with any anti-deficiency laws or any other laws
limiting, qualifying or discharging Borrowers' Indebtedness, whether by
operation of Sections 726, 580a or 580d of the Code of Civil Procedure as
from time to time amended, or otherwise, including any rights Guarantor may
have to a Section 580a fair market value hearing to determine the size of a
deficiency following any trustee's foreclosure sale or other disposition of
any real property security for any portion of the Indebtedness.
7. BANK'S RIGHTS WITH RESPECT TO GUARANTOR'S PROPERTY IN BANK'S
POSSESSION. In addition to all liens upon and rights of setoff against the
monies, securities or other property of Guarantor given to Bank by law, Bank
shall have a lien upon and a right of setoff against all monies, securities
and other property of Guarantor now or hereafter in the possession of or on
deposit with Bank, whether held in a general or special account or deposit or
for safekeeping or otherwise, and every such lien and right of setoff may be
exercised without demand upon or notice to Guarantor. No lien or right of
setoff shall be deemed to have been waived by any act or conduct on the part
of the Bank, or by any neglect to exercise such right of setoff or to enforce
such lien, or by any delay in so doing, and every right of setoff and lien
shall continue in full force and lien shall continue in full force and effect
until such right of setoff or lien is specifically waived or released by Bank
in writing.
8. SUBORDINATION. Any Indebtedness of any of the Borrowers now or
hereafter held by Guarantor is hereby subordinated to the Indebtedness of
Borrowers to Bank. Such Indebtedness of Borrowers to Guarantor is assigned
to Bank as security for this Guaranty and the Indebtedness and, if Bank
requests, shall be collected and received by Guarantor as trustee for Bank
and paid over to Bank on account of the Indebtedness of Borrowers to Bank but
without reducing or affecting in any manner the liability of Guarantor under
the other provisions of this Guaranty. Any notes or other instruments now or
hereafter evidencing such Indebtedness of any of the Borrowers to Guarantor
shall be marked with a legend that the same are subject to this Guaranty and,
if Bank so requests, shall be delivered to Bank. Guarantor will, and Bank is
hereby authorized in the name of Guarantor from time to time to, execute and
file financing statements and continuation statements and execute such other
documents and take such other action as Bank deems necessary or appropriate
to perfect, preserve and enforce its rights hereunder.
9. REMEDIES; NO WAIVER. All rights, powers and remedies of Bank
hereunder are cumulative. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy hereunder shall affect or operate as a
waiver of such right, power or remedy; nor shall any single or partial
exercise of any such right, power or remedy preclude, waive or otherwise
affect any other or further exercise thereof or the exercise of any other
right, power or remedy. Any waiver, permit, consent or approval of any kind
by bank of any breach of this Guaranty, or any such waiver of any provisions
or conditions hereof, must be in writing and shall be effective only to the
extent set forth in writing.
10. COSTS, EXPENSES AND ATTORNEYS' FEES. Guarantor shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended
CONTINUING GUARANTY (08/96), PAGE 3
<PAGE>
or incurred by Bank in connection with the enforcement of any of Bank's
rights, powers or remedies and/or the collection of any amounts which become
due to Bank under this Guaranty, and the prosecution or defense of any action
in any way related to this Guaranty, whether incurred at the trial or
appellate level, in an arbitration proceeding or otherwise, and including any
of the foregoing incurred in connection with any bankruptcy proceeding
(including without limitation, any adversary proceeding, contested matter or
motion brought by Bank or any other person) relating to Guarantor or any
other person or entity. All of the foregoing shall be paid by Guarantor with
interest from the date of demand until paid in full at a rate per annum equal
to the greater of ten percent (10%) or Bank's Prime Rate in effect from time
to time. The "Prime Rate" is a base rate that Bank from time to time
establishes and which serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto.
11. SUCCESSORS; ASSIGNMENT. This Guaranty shall be binding upon and
inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however,
that Guarantor may not assign or transfer any of its interests or rights
hereunder without Bank's prior written consent. Guarantor acknowledges that
Bank has the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in, any Indebtedness of
Borrowers to Bank and any obligations with respect thereto, including this
Guaranty. In connection therewith, Bank may disclose all documents and
information which Bank now has or hereafter acquires relating to Guarantor
and/or this Guaranty, whether furnished by Borrowers, Guarantor or otherwise.
Guarantor further agrees that Bank may disclose such documents and
information to Borrowers.
12. AMENDMENT. This Guaranty may be amended or modified only in writing
signed by Bank and Guarantor.
13. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this
Guaranty as a Guarantor hereby expressly agrees that recourse may be had
against his or her separate property for all his or her obligations under
this Guaranty.
14. APPLICATION OF SINGULAR AND PLURAL. In all cases where there is but
a single Borrower, then all words used herein in the plural shall be deemed
to have been used in the singular where the context and construction so
require; and when there is more than one Borrower named herein, or when this
Guaranty is executed by more than one Guarantor, the word "Borrowers" and the
word "Guarantor" respectively shall mean all or any one or more of them as
the context requires.
15. UNDERSTANDING WITH RESPECT TO WAIVERS; SEVERABILITY OF PROVISIONS.
Guarantor warrants and agrees that each of the waivers set forth herein is
made with Guarantor's full knowledge of its significance and consequences,
and that under the circumstances, the waivers are reasonable and not contrary
to public policy or law. If any waiver or other provision of this Agreement
shall be held to be prohibited by or invalid under applicable public policy
or law, such waiver or other provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder
of such waiver or other provision or any remaining provisions of this
Agreement.
16. GOVERNING LAW. This Guaranty shall be governed by and construed in
accordance with the laws of the state of California.
17. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Guaranty. A "Dispute" shall mean any
action, dispute, claim or controversy of any kind, whether in contract or
tort, statutory or common law, legal or equitable, now existing or hereafter
arising under or in connection with, or in any way pertaining to, this
Guaranty and each other document, contract and instrument required hereby or
now or hereafter delivered to Bank in connection herewith (collectively, the
"Documents"), or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Documents, including without limitation, any of the
foregoing arising in connection with the exercise of any self-help, ancillary
or other remedies pursuant to any of the Documents. Any party may by summary
CONTINUING GUARANTY (08/96), PAGE 4
<PAGE>
proceedings bring an action in court to compel arbitration of a Dispute. Any
party who fails or refuses to submit to arbitration following a lawful demand
by any other party shall bear all costs and expenses incurred by such other
party in compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered
by the American Arbitration Association ("AAA") or such other administrator
as the parties shall mutually agree upon in accordance with the AAA
Commercial Arbitration Rules. All Disputes submitted to arbitration shall be
resolved in accordance with the Federal Arbitration Act (Title 9 of the
United States Code), notwithstanding any conflicting choice of law provision
in any of the Documents. The arbitration shall be conducted at a location in
California selected by the AAA or other administrator. If there is any
inconsistency between the terms hereof and any such rules, the terms and
procedures set forth herein shall control. All statutes of limitation
applicable to any Dispute shall apply to any arbitration proceeding. All
discovery activities shall be expressly limited to matters directly relevant
to the Dispute being arbitrated. Judgment upon any award rendered in an
arbitration may be entered in any court having jurisdiction; provided
however, that nothing contained herein shall be deemed to be a waiver by any
party that is a bank of the protections afforded to it under 12 U.S.C.
Section 91 or any similar applicable state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary
remedies, including without limitation injunctive relief, sequestration,
attachment, garnishment or the appointment of a receiver, from a court of
competent jurisdiction before, after or during the pendency of any
arbitration or other proceeding. The exercise of any such remedy shall not
waive the right of any party to compel arbitration or reference hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must
be active members of the California State Bar or retired judges of the state
or federal judiciary of California, with expertise in the substantive law
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to
make effective any award, and (iii) shall the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they
deem necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the California Rules of Civil Procedure or other
applicable law. Any Dispute in which the amount in controversy is $5,000,000
or less shall be decided by a single arbitrator who shall not render an award
of greater than $5,000,000 (including damages, costs, fees and expenses). By
submission to a single arbitrator, each party expressly waives any right or
claim to recover more than $5,000,000. Any Dispute in which the amount in
controversy exceeds $5,000,000 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must
actively participate in all hearings and deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the
contrary, in any arbitration in which the amount, in controversy exceeds
$25,000,000, the arbitrators shall be required to make specific, written
findings of fact and conclusions of law. In such arbitrations (i) the
arbitrators shall not have the power to make any award which is not supported
by substantial evidence or which is based on legal error, (ii) an award shall
not be binding upon the parties unless the findings of fact are supported by
substantial evidence and the conclusions of law are not erroneous under the
substantive law of the state of California, and (iii) the parties shall have
in addition to the grounds referred to in the Federal Arbitration Act for
vacating, modifying or correcting an award the right to judicial review of
(A) whether the findings of fact rendered by the arbitrators are supported by
substantial evidence, and (B) whether the conclusions of law are erroneous
under the substantive law of the state of California. Judgment confirming an
award in such a proceeding may be entered only if a court determines the
award is supported by substantial evidence and not based on legal error under
the substantive law of the state of California.
(f) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration
if the Dispute concerns indebtedness secured directly or indirectly, in
CONTINUING GUARANTY (08/96), PAGE 5
<PAGE>
whole or in part, by any real property unless (i) the holder of the mortgage,
lien or security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or
benefits that might accrue to them by virtue of the single action rule
statute of California, thereby agreeing that all indebtedness and obligations
of the parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If
any such Dispute is not submitted to arbitration, the Dispute shall be
referred to a referee in accordance with California Code of Civil Procedure
Section 638 et seq., and this general reference agreement is intended to be
specifically enforceable in accordance with said Section 638. A referee with
the qualifications required herein for arbitrators shall be selected pursuant
to the AAA's selection procedures. Judgment upon the decision rendered by a
referee shall be entered in the court in which such proceeding was commenced
in accordance with California Code of Civil Procedure Sections 644 and 645.
(g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business, by
applicable law or regulation, or to the extent necessary to exercise any
judicial review rights set forth herein. If more than one agreement for
arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Documents or the subject
matter of the Dispute shall control. This arbitration provision shall survive
termination, amendment or expiration of any of the Documents or any
relationship between the parties.
IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty
as of July 23, 1998.
/s/ MICHAEL J. DUBELKO
- ----------------------------
MICHAEL J. DUBELKO
<PAGE>
WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
_____________________________________________________________________________
$2,000,000.00 Beverly Hills, California
October 1, 1998
FOR VALUE RECEIVED, the undersigned DVD EXPRESS, INC. ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank") at its office at Beverly Hills Private Client Services, 9600 Santa
Monica Blvd, Beverly Hills, CA 90210, or at such other place as the holder
hereof may designate, in lawful money of the United States of America and in
immediately available funds, the principal sum of $2,000,000.00, or so much
thereof as may be advanced and be outstanding, with interest thereon, to be
computed on each advance from the date of its disbursement as set forth
herein.
INTEREST:
(a) INTEREST. The outstanding principal balance of this Note shall
bear interest (computed on the basis of a 360-day year, actual days elapsed)
at a rate per annum .25000% below the Prime Rate in effect from time to time.
The "Prime Rate" is a base rate that Bank from time to time establishes and
which serves as the basis upon which effective rates of interest are
calculated for those loans making reference thereto. Each change in the rate
of interest hereunder shall become effective on the date each Prime Rate
change is announced within Bank.
(b) PAYMENT OF INTEREST. Interest accrued on this Note shall be
payable on the 1st day of each month, commencing November 1, 1998.
(c) DEFAULT INTEREST. From and after the maturity date of this Note,
or such earlier date as all principal owing hereunder becomes due and payable
by acceleration or otherwise, the outstanding principal balance of this Note
shall bear interest until paid in full at an increased rate per annum
(computed on the basis of a 360-day year, actual days elapsed) equal to 4%
above the rate of interest from time to time applicable to this Note.
BORROWING AND REPAYMENT:
(a) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions of this Note and of any document executed in connection with or
governing this Note; provided however, that the total outstanding borrowings,
under this Note shall not at any time exceed the principal amount stated
above. The unpaid principal balance of this obligation at any time shall be
the total amounts advanced hereunder by the holder hereof less the amount of
principal payments made hereon by or for any Borrower, which balance may be
endorsed hereon from time to time by the holder. The outstanding principal
balance of this Note shall be due and payable in full on September 1, 1999.
(b) ADVANCES. Advances hereunder, to the total amount of the principal
sum available hereunder, may be made by the holder at the oral or written
request of (i) MICHAEL J. DUBELKO, any one acting alone, who are authorized
to request advances and direct the disposition of any advances until written
notice of the revocation of such authority is received by the holder at the
office designated above, or (ii) any person, with respect to advances
deposited to the credit of any account of any Borrower with the holder, which
advances, when so deposited, shall be conclusively presumed to have been made
to or for the benefit of each Borrower regardless of the fact that persons
other than those authorized to request advances may have authority, to draw
against such account. The holder shall have no obligation to determine
whether any person requesting an advance is or has been authorized by any
Borrower.
(c) APPLICATION OF PAYMENTS. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
EVENTS OF DEFAULT:
The occurrence of any of the following shall constitute an "Event of
Default" under this Note:
(a) The failure to pay any principal, interest, fees or other charges
when due hereunder or under any contract, instrument or document executed in
connection with this Note.
(b) The filing of a petition by or against any Borrower, any guarantor
of this Note or any general partner or joint venturer in any Borrower which
is a partnership or a joint venture (with each such guarantor, general
partner and/or joint venturer referred to herein as a "Third Party Obligor")
under any provisions of the Bankruptcy Reform Act, Title 11 of the United
States Code, as amended or recodified from time to time, or under any similar
or other law relating to bankruptcy, insolvency, reorganization or other
relief for debtors; the appointment of a receiver, trustee, custodian or
liquidator of or for any part of the assets or property of any Borrower or
Third Party Obligor; any Borrower or Third Party Obligor becomes insolvent,
makes a general assignment for the benefit of creditors or is generally not
paying its debts as they become due; or any attachment or like levy on any
property of any Borrower or Third Party Obligor.
Revolving Line of Credit Note (08/96): 02629, #2438842416 Page 1
<PAGE>
WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
_____________________________________________________________________________
(c) The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any Borrower or Third Party
Obligor which is a corporation, partnership, joint venture or other type of
entity.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred
any obligation for borrowed money, any purchase obligation, or any other
liability of any kind to any person or entity, including the holder.
(e) Any financial statement provided by any Borrower or Third Party
Obligor to Bank proves to be incorrect, false or misleading in any material
respect.
(f) Any sale or transfer of all or a substantial or material part of
the assets of any Borrower or Third Party Obligor other than in the ordinary
course of its business.
(g) Any violation or breach of any provision of, or any defined event
of default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed in
connection with or securing this Note.
MISCELLANEOUS:
(a) REMEDIES. Upon the occurrence of any Event of Default, the holder
of this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by each Borrower, and
the obligation, if any, of the holder to extend any further credit hereunder
shall immediately cease and terminate. Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel),
expanded or incurred by the holder in connection with the enforcement of the
holder's rights and/or the collection of any amounts which become due to the
holder under this Note, and the prosecution or defense of any action in any
way related to this Note, including without limitation, any action for
declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing
incurred in connection with any bankruptcy proceeding (including without
limitation, any adversary proceeding, contested matter or motion brought by
Bank or any other person) relating to any Borrower or any other person or
entity.
(b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower
shall be joint and several.
(c) GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the state of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
DVD EXPRESS, INC.
By: /s/ MICHAEL J. DUBELKO
-------------------------------
MICHAEL J. DUBELKO
PRESIDENT
Revolving Line of Credit Note (08/96): 02629, #2438842416 Page 2
<PAGE>
ADDENDUM TO PROMISSORY NOTE
THIS ADDENDUM is attached to and made a part of that certain promissory
note executed by DVD EXPRESS, INC. ("Borrower") and payable to WELLS FARGO
BANK, NATIONAL ASSOCIATION ("Bank"), or order, dated as of October 1, 1998,
in the principal amount of One Million Dollars ($2,000,000.00) (the "Note").
The following provisions are hereby incorporated into the Note:
1. So long as Bank remains committed to extend credit to Borrower
under this Note and until payment in full of all obligations of Borrower
hereunder, Borrower shall provide to Bank all of the following, in form
and detail satisfactory to Bank:
(a) annually, but not later than each June 1, a financial
statement of Borrower, prepared by Borrower, to include balance
sheet and income statement, and within 15 days after filing, but in
no event later than each June 1, copies of Borrower's filed federal
income tax returns for such year; and
(b) from time to time such financial and other information as
Bank may reasonably request.
2. YEAR 2000 COMPLIANCE:
So long as Bank remains committed to extend credit to Borrower under
this Note and until payment in full of all obligations of Borrower hereunder,
Borrower agrees to perform all acts reasonably necessary to ensure that (a)
Borrower and any business in which Borrower holds a substantial interest, and
(b) all customers, suppliers and vendors that are material to Borrower's
business, become Year 2000 Compliant in a timely manner. Such acts shall
include, without limitation, performing a comprehensive review and assessment
of all of Borrower's systems and adopting a detailed plan, with itemized
budget, for the remediation, monitoring and testing of such systems. As used
herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all
software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such entity,
will properly perform date sensitive functions before, during and after the
year 2000. Borrower shall, immediately upon request, provide to Bank such
certifications or other evidence of Borrower's compliance with the terms
hereof as Bank may from time to time require.
<PAGE>
3. ARBITRATION:
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Note. A "Dispute" shall mean any action,
dispute, claim or controversy of any kind, whether in contract or tort,
statutory or common law, legal or equitable, now existing or hereafter
arising under or in connection with, or in any way pertaining to, this Note
and each other document, contract and instrument required hereby or now or
hereafter delivered to Bank in connection herewith (collectively, the
"Documents"), or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Documents, including without limitation, any of the
foregoing arising in connection with the exercise of any self-help, ancillary
or other remedies pursuant to any of the Documents. Any party may by summary
proceedings bring an action in court to compel arbitration of a Dispute. Any
party who fails or refuses to submit to arbitration following a lawful demand
by any other party shall bear all costs and expenses incurred by such other
party in compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as
the parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States
Code), notwithstanding any conflicting choice of law provision in any of the
Documents. The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set
forth herein shall control. All statutes of limitation applicable to any
Dispute shall apply to any arbitration proceeding. All discovery activities
shall be expressly limited to matters directly relevant to the Dispute being
arbitrated. Judgment upon any award rendered in an arbitration may be entered
in any court having jurisdiction; provided however, that nothing contained
herein shall be deemed to be a waiver by any party that is a bank of the
protections afforded to it under 12 U.S.C. Section 91 or any similar
applicable state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property
-2-
<PAGE>
collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive law
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitrations hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may
grant any remedy or relief that a court of the state of California could
order or grant within the scope hereof and such ancillary relief as is
necessary to make effective any award, and (iii) shall have the power to
award recovery of all costs and fees, to impose sanctions and to take such
other actions as they deem necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the California Rules of
Civil Procedure or other applicable law. Any Dispute in which the amount in
controversy is $5,000,000 or less shall be decided by a single arbitrator who
shall not render an award of greater than $5,000,000 (including damages,
costs, fees and expenses). By submission to a single arbitrator, each party
expressly waives any right or claim to recover more than $5,000,000. Any
Dispute in which the amount in controversy exceeds $5,000,000 shall be
decided by majority vote of a panel of three arbitrators; provided however,
that all three arbitrators must actively participate in all hearings and
deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000,
the arbitrators shall be required to make specific, written findings of fact
and conclusions of law. In such arbitrations (A) the arbitrators shall not
have the power to make any award which is not supported by substantial
evidence or which is based on legal error, (B) an award shall not be binding
upon the parties unless the findings of fact are supported by substantial
evidence and the conclusions of law are not erroneous under the substantive
law of the state of California, and (C) the parties shall have in addition to
the grounds referred to in the Federal Arbitration Act for
-3-
<PAGE>
vacating, modifying or correcting an award the right to judicial review of
(1) whether the findings of fact rendered by the arbitrators are supported by
substantial evidence, and (2) whether the conclusions of law are erroneous
under the substantive law of the state of California. Judgment confirming an
award in such a proceeding may be entered only if a court determines the
award is supported by substantial evidence and not based on legal error under
the substantive law of the state of California.
(f) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration
if the Dispute concerns indebtedness secured directly or indirectly, in whole
or in part, by any real property unless (i) the holder of the mortgage, lien
or security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or
benefits that might accrue to them by virtue of the single action rule
statute of California, thereby agreeing that all indebtedness and obligations
of the parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If
any such Dispute is not submitted to arbitration, the Dispute shall be
referred to a referee in accordance with California Code of Civil Procedure
Section 638 et seq., and this general reference agreement is intended to be
specifically enforceable in accordance with said Section 638. A referee with
the qualifications required herein for arbitrators shall be selected pursuant
to the AAA's selection procedures. Judgment upon the decision rendered by a
referee shall be entered in the court in which such proceeding was commenced
in accordance with California Code of Civil Procedure Sections 644 and 645.
(g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business, by
applicable law or regulation, or to the extent necessary to exercise any
judicial review rights set forth herein. If more than one agreement for
arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Documents or the subject
matter of the Dispute shall control. This Note may be amended or modified
only in writing signed by Bank and Borrower. If any provision of this Note
shall be held to be prohibited by
-4-
<PAGE>
or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or any remaining provisions of this Note. This
arbitration provision shall survive termination, amendment or expiration of
any of the Documents or any relationship between the parties.
IN WITNESS WHEREOF, this Addendum has been executed as of the same date
as the Note.
DVD EXPRESS, INC.
By: /s/ MICHAEL J. DUBELKO
---------------------------
Michael J. Dubelko
President
-5-
<PAGE>
WELLS FARGO BANK CONTINUING GUARANTY
- ------------------------------------------------------------------------------
TO: WELLS FARGO BANK, NATIONAL ASSOCIATION
1. GUARANTY; DEFINITIONS. In consideration of any credit or other
financial accommodation heretofore, now or hereafter extended or made to DVD
EXPRESS, INC. ("Borrowers"), or any of them, by WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank"), and for other valuable consideration, the undersigned
MICHAEL J. DUBELKO ("Guarantor"), jointly and severally unconditionally
guarantees and promises to pay to Bank, or order, on demand in lawful money
of the United States of America and in immediately available funds, any and
all indebtedness of any of the Borrowers to Bank. The term "Indebtedness" is
used herein in its most comprehensive sense and includes any and all
advances, debts, obligations and liabilities of Borrowers, or any of them,
heretofore, now or hereafter made, incurred or created, whether voluntary or
involuntary and however arising, whether due or not due, absolute or
contingent, liquidated or unliquidated, determined or undetermined, and
whether Borrowers may be liable individually or jointly with others, and
whether recovery upon such Indebtedness may be or hereafter becomes
unenforceable.
2. MAXIMUM LIABILITY; SUCCESSIVE TRANSACTIONS; REVOCATION; OBLIGATION
UNDER OTHER GUARANTIES. The liability of Guarantor shall not exceed at any
one time the sum of $3,000,000.00 for principal, plus all interest thereon
and costs and expenses pertaining to the enforcement of this Guaranty and/or
the collection of the Indebtedness of any of the Borrowers to Bank.
Notwithstanding the foregoing, Bank may permit the Indebtedness of Borrowers
to exceed Guarantor's liability. This is a continuing guaranty and all
rights, powers and remedies hereunder shall apply to all past, present and
future Indebtedness of each of the Borrowers to Bank, including that arising
under successive transactions which shall either continue the Indebtedness,
increase or decrease it, or from time to time create new Indebtedness after
all or any prior Indebtedness has been satisfied, and notwithstanding the
death, incapacity, dissolution, liquidation or bankruptcy of any of the
Borrowers or Guarantor or any other event or proceeding affecting any of the
Borrowers or Guarantor. This Guaranty shall not apply to any new Indebtedness
created after actual receipt by Bank of written notice of its revocation as
to such new Indebtedness; provided however, that loans or advances made by
Bank to any of the Borrowers after revocation under commitments existing
prior to receipt by Bank of such revocation, and extensions, renewals or
modifications, of any kind, of Indebtedness incurred by any of the Borrowers
or committed by Bank prior to receipt by Bank of such revocation, shall not
be considered new Indebtedness. Any such notice must be sent to Bank by
registered U.S. mail, postage prepaid, addressed to its office at BEVERLY
HILLS PRIVATE CLIENT SERVICES, 9600 SANTA MONICA BLVD, BEVERLY HILLS, CA
90210, or at such other address as Bank shall from time to time designate.
Any payment by Guarantor with respect to the Indebtedness shall not reduce
Guarantor's maximum obligation hereunder unless written notice to that effect
is actually received by Bank at or prior to the time of such payment. The
obligations of Guarantor hereunder shall be in addition to any obligations of
Guarantor under any other guaranties of any liabilities or obligations of any
of the Borrowers or any other persons heretofore or hereafter given to Bank
unless said other guaranties are expressly modified or revoked in writing;
and this Guaranty shall not, unless expressly herein provided, affect or
invalidate any such other guaranties.
3. OBLIGATIONS JOINT AND SEVERAL; SEPARATE ACTIONS; WAIVER OF STATUTE
OF LIMITATIONS; REINSTATEMENT OF LIABILITY. The obligations hereunder are
joint and several and independent of the obligations of Borrowers, and a
separate action or actions may be brought and prosecuted against Guarantor
whether action is brought against any of the Borrowers or any other person,
or whether any of the Borrowers or any other person is joined in any such
action or actions. Guarantor acknowledges that this Guaranty is absolute and
unconditional, there are no conditions precedent to the effectiveness of this
Guaranty, and this Guaranty is in full force and effect and is binding on
Guarantor as of the date written below, regardless of whether Bank obtains
collateral or any guaranties from others or takes any other action
contemplated by Guarantor. Guarantor waives the benefit of any statute of
limitations affecting Guarantor's liability hereunder or the enforcement
thereof, and Guarantor agrees that any payment of any Indebtedness or other
act which shall toll any statute of limitations applicable thereto shall
similarly operate to toll such statute of limitations applicable to
Guarantor's liability hereunder. The liability of Guarantor hereunder shall be
CONTINUING GUARANTY (08/96), Page 1
<PAGE>
reinstated and revived and the rights of Bank shall continue if and to the
extent that for any reason any amount at any time paid on account of any
Indebtedness guaranteed hereby is rescinded or must otherwise be restored by
Bank, whether as a result of any proceedings in bankruptcy or reorganization
or otherwise, all as though such amount had not been paid. The determination
as to whether any amount so paid must be rescinded or restored shall be made
by Bank in its sole discretion; provided however, that if Bank chooses to
contest any such matter at the request of Guarantor, Guarantor agrees to
indemnify and hold Bank harmless from and against all costs and expenses,
including reasonable attorneys' fees, expended or incurred by Bank in
connection therewith, including without limitation, in any litigation with
respect thereto.
4. AUTHORIZATIONS TO BANK. Guarantor authorizes Bank either before or
after revocation hereof, without notice to or demand on Guarantor, and
without affecting Guarantor's liability hereunder, from time to time to:
(a) alter, compromise, renew, extend, accelerate or otherwise change the time
for payment of, or otherwise change the terms of, the Indebtedness or any
portion thereof, including increase or decrease of the rate of interest
thereon; (b) take and hold security for the payment of this Guaranty or the
Indebtedness or any portion thereof, and exchange, enforce, waive,
subordinate or release any such security; (c) apply such security and direct
the order or manner of sale thereof, including without limitation, a
non-judicial sale permitted by the terms of the controlling security
agreement or deed of trust, as Bank in its discretion may determine;
(d) release or substitute any one or more of the endorsers or any other
guarantors of the Indebtedness, or any portion thereof, or any other party
thereto; and (e) apply payments received by Bank from any of the Borrowers to
any Indebtedness of any of the Borrowers to Bank, in such order as Bank shall
determine in its sole discretion, whether or not such Indebtedness is covered
by this Guaranty, and Guarantor hereby waives any provision of law regarding
application of payments which specifies otherwise. Bank may without notice
assign this Guaranty in whole or in part. Upon Bank's request, Guarantor
agrees to provide to Bank copies of Guarantor's financial statements.
5. REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants
to Bank that: (a) this Guaranty is executed at Borrowers' request; (b)
Guarantor shall not, without Bank's prior written consent, sell, lease,
assign, encumber, hypothecate, transfer or otherwise dispose of all or a
substantial or material part of Guarantor's assets other than in the ordinary
course of Guarantor's business; (c) Bank has made no representation to
Guarantor as to the creditworthiness of any of the Borrowers; and (d)
Guarantor has established adequate means of obtaining from each of the
Borrowers on a continuing basis financial and other information pertaining to
Borrowers' financial condition. Guarantor agrees to keep adequately informed
from such means of any facts, events or circumstances which mights in any way
affect Guarantor's risks hereunder, and Guarantor further agrees that Bank
shall have no obligation to disclose to Guarantor any information or material
about any of the Borrowers which is acquired by Bank in any manner.
6. GUARANTOR'S WAIVERS.
(a) Guarantor waives any right to require Bank to: (i) proceed against
any of the Borrowers or any other person; (ii) marshal assets or proceed
against or exhaust any security held from any of the Borrowers or any other
person; (iii) give notice of the terms, time and place of any public or
private sale of personal property security held from any of the Borrowers or
any other person, or otherwise comply with the provisions of Section 9504 of
the California Uniform Commercial Code; (iv) take any action or pursue any
other remedy in Bank's power; or (v) make any presentment or demand for
performance, or give any notice of nonperformance, protest, notice of protest
or notice of dishonor hereunder or in connection with any obligations or
evidences of indebtedness held by Bank as security for or which constitute in
whole or in part the Indebtedness guaranteed hereunder, or in connection with
the creation of new or additional Indebtedness.
(b) Guarantor waives any defense to its obligations hereunder based upon
or arising by reason of: (i) any disability or other defense of any of the
Borrowers or any other person; (ii) the cessation or limitation from any
cause whatsoever, other than payment in full, of the Indebtedness of any of
the Borrowers or any other person; (iii) any lack of authority of any
officer, director, partner, agent or any other person acting or purporting to
act on behalf of any of the Borrowers which is a corporation, partnership or
other type of entity, or any defect in the formation of any of such Borrower;
(iv) the application by any of the Borrowers of the proceeds of any
Indebtedness for purposes other than the purposes represented by Borrowers
to, or intended or understood by, Bank or Guarantor; (v) any act or omission
by Bank which directly or indirectly results in or
CONTINUING GUARANTY (08/96), Page 2
<PAGE>
aids the discharge of any of the Borrowers or any portion of the Indebtedness
by operation of law or otherwise, or which in any way impairs or suspends any
rights or remedies of Bank against Borrower; (vi) any impairment of the value
of any interest in any security for the Indebtedness or any portion thereof,
including without limitation, the failure to obtain or maintain perfection or
recordation of any interest in any such security, the release of any such
security without substitution, and/or the failure to preserve the value of,
or to comply with applicable law in disposing of, any such security; or (vii)
any modification of the Indebtedness, in any form whatsoever, including any
modification made after revocation hereof to any Indebtedness incurred prior
to such revocation, and including without limitation the renewal, extension,
acceleration or other change in time for payment of, or other change in the
terms of, the Indebtedness or any portion thereof, including increase or
decrease of the rate of interest thereon. Until all indebtedness shall have
been paid in full, Guarantor shall have no right of subrogation, and
Guarantor waives any right to enforce any remedy which Bank now has or may
hereafter have against any of the Borrowers or any other person, and waives
any benefit of, or any right to participate in, any security now or hereafter
held by Bank. Guarantor further waives all rights and defenses Guarantor may
have arising out of (A) any election of remedies by Bank, even though that
election of remedies, such as a non-judicial foreclosure with respect to any
security for any portion of the Indebtedness, destroys Guarantor's rights of
subrogation or Guarantor's rights to proceed against any of the Borrowers for
reimbursement, or (B) any loss of rights Guarantor may suffer by reason of
any rights, powers or remedies of any of the Borrowers in connection with any
anti-deficiency laws or any other laws limiting, qualifying or discharging
Borrowers' Indebtedness, whether by operation of Sections 726, 580a or 580d
of the Code of Civil Procedure as from time to time amended, or otherwise,
including any rights Guarantor may have to a Section 580a fair market value
hearing to determine the size of a deficiency following any trustee's
foreclosure sale or other disposition of any real property security for any
portion of the Indebtedness.
7. BANK'S RIGHTS WITH RESPECT TO GUARANTOR'S PROPERTY IN BANK'S
POSSESSION. In addition to all liens upon and rights of setoff against the
monies, securities or other property of Guarantor given to Bank by law, Bank
shall have a lien upon and a right of setoff against all monies, securities
and other property of Guarantor now or hereafter in the possession of or on
deposit with Bank, whether held in a general or special account or deposit or
for safekeeping or otherwise, and every such lien and right of setoff may be
exercised without demand upon or notice to Guarantor. No lien or right of
setoff shall be deemed to have been waived by any act or conduct on the part
of Bank, or by any neglect to exercise such right of setoff or to enforce
such liens, or by any delay in so doing, and every right of setoff and lien
shall continue in full force and effect until such right of setoff or lien is
specifically waived or released by Bank in writing.
8. SUBORDINATION. Any Indebtedness of any of the Borrowers now or
hereafter held by Guarantor is hereby subordinated to the Indebtedness of
Borrowers to Bank. Such Indebtedness of Borrowers to Guarantor is assigned to
Bank as security for this Guaranty and the Indebtedness, if Bank requests,
shall be collected and received by Guarantor as trustee for Bank and paid
over to Bank on account of the Indebtedness of Borrowers to Bank but without
reducing or affecting in any manner the liability of Guarantor under the
other provisions of this Guaranty. Any notes or other instruments now or
hereafter evidencing such Indebtedness of any of the Borrowers to Guarantor
shall be marked with a legend that the same are subject to this Guaranty and,
if Bank so requests, shall be delivered to Bank. Guarantor will, and Bank is
hereby authorized in the name of Guarantor from time to time to, execute and
file financing statements and continuation statements and execute such other
documents and take such other action as Bank deems necessary or appropriate
to perfect, preserve and enforce its rights hereunder.
9. REMEDIES; NO WAIVER. All rights, powers and remedies of Bank
hereunder are cumulative. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy hereunder shall affect or operate as a
waiver of such right, power or remedy; nor shall any single or partial
exercise of any such right, power or remedy preclude, waive or otherwise
affect any other or further exercise thereof or the exercise of any other
right, power or remedy. Any waiver, permit, consent or approval of any kind by
bank of any breach of this Guaranty, or any such waiver of any provisions or
conditions hereof, must be in writing and shall be effective only to the
extent set forth in writing.
10. COSTS, EXPENSES AND ATTORNEYS' FEES. Guarantor shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended
CONTINUING GUARANTY (08/96), Page 3
<PAGE>
or Incurred by Bank in connection with the enforcement of any of Bank's
rights, powers or remedies and/or the collection of any amounts which become
due to Bank under this Guaranty, and the prosecution or defense of any action
in any way related to this Guaranty, whether incurred at the trial or
appellate level, in an arbitration proceeding or otherwise, and including any
of the foregoing incurred in connection with any bankruptcy proceeding
(including without limitation, any adversary proceeding, contested matter or
motion brought by Bank or any other person) relating to Guarantor or any
other person or entity. All of the foregoing shall be paid by Guarantor with
interest from the date of demand until paid in full at a rate per annum equal
to the greater of ten percent (10%) or Bank's Prime Rate in effect from time
to time. The "Prime Rate" is a base rate that Bank from time to time
establishes and which serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto.
11. SUCCESSORS; ASSIGNMENT. This Guaranty shall be binding upon and
incur to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however,
that Guarantor may not assign or transfer any of its interests or rights
hereunder without Bank's prior written consent. Guarantor acknowledges that
Bank has the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in, any Indebtedness of
Borrowers to Bank and any obligations with respect thereto, including this
Guaranty. In connection therewith, Bank may disclose all documents and
information which Bank now has or hereafter acquires relating to Guarantor
and/or this Guaranty, whether furnished by Borrowers, Guarantor or otherwise.
Guarantor further agrees that Bank may disclose such documents and
information to Borrowers.
12. AMENDMENT. This Guaranty may be amended or modified only in
writing signed by Bank and Guarantor.
13. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this
Guaranty as a Guarantor hereby expressly agrees that recourse may be had
against his or her property for all his or her obligations under this
Guaranty.
14. APPLICATION OF SINGULAR AND PLURAL. In all cases where there is
but a single Borrower, then all words used herein in the plural shall be
deemed to have been used in the singular where the context and construction
so require; and when there is more than one Borrower named herein, or when
this Guaranty is executed by more than one Guarantor, the word "Borrowers"
and the word "Guarantor" respectively shall mean all or any one or more of
them as the context requires.
15. UNDERSTANDING WITH RESPECT TO WAIVERS; SEVERABILITY OF
PROVISIONS. Guarantor warrants and agrees that each of the waivers set forth
herein is made with Guarantor's full knowledge of its significance and
consequences, and that under the circumstances, the waivers are reasonable
and not contrary to public policy or law. If any waiver or other provision of
this Agreement shall be held to be prohibited by or invalid under applicable
public policy or law, such waiver or other provision shall be ineffective
only to the extent of such prohibition or invalidity, without invalidating
the remainder of such waiver or other provision or any remaining provisions
of this Agreement.
16. GOVERNING LAW. This Guaranty shall be governed by and construed
in accordance with the laws of the state of California.
17. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Guaranty. A "Dispute" shall mean any
action, dispute, claim or controversy of any kind, whether in contract or
tort, statutory or common law, legal or equitable, now existing or hereafter
arising under or in connection with, or in any way pertaining to, this
Guaranty and each other document, contract and instrument required hereby or
now or hereafter delivered to Bank in connection herewith (collectively, the
"Documents"), or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Documents, including without limitation, any of the
foregoing arising in connection with the exercise of any self-help, ancillary
or other remedies pursuant to any of the Documents. Any party may be summary
CONTINUING GUARANTY (08/96), Page 4
<PAGE>
proceedings bring an action in court to compel arbitration of a Dispute. Any
party who fails or refuses to submit to arbitration following a lawful demand
by any other party shall bear all costs and expenses incurred by such other
party in compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as
the parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States
Code), notwithstanding any conflicting choice of law provision in any of the
Documents. The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set
forth herein shall control. All statutes of limitation applicable to any
Dispute shall apply to any arbitration proceeding. All discovery activities
shall be expressly limited to matters directly relevant to the Dispute being
arbitrated. Judgment upon any award rendered in an arbitration may be entered
in any court having jurisdiction; provided however, that nothing contained
herein shall be deemed to be a waiver by any party that is a bank of the
protections afforded to it under 12 U.S.C. Section 91 or any similar applicable
state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary
remedies, including without limitation injunctive relief, sequestration,
attachment, garnishment or the appointment of a receiver, from a court of
competent jurisdiction before, after or during the pendency of any
arbitration or other proceeding. The exercise of any such remedy shall not
waive the right of any party to compel arbitration or reference hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive law
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may
grant any remedy or relief that a court of the state of California could
order or grant within the scope hereof and such ancillary relief as is
necessary to make effective any award, and (iii) shall have the power to
award recovery of all costs and fees, to impose sanctions and to take such
other actions as they deem necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the California Rules of
Civil Procedures or other applicable law. Any Dispute in which the amount in
controversy is $5,000,000 or less shall be decided by a single arbitrator who
shall not render an award or greater than $5,000,000 (including damages,
costs, fees and expenses). By submission to a single arbitrator, each party
expressly waives any right or claim to recover more than $5,000,000. Any
Dispute in which the amount in controversy exceeds $5,000,000 shall be
decided by majority vote of a panel of three arbitrators; provided however,
that all three arbitrators must actively participate in all hearings and
deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000,
the arbitrators shall be required to make specific, written findings of fact
and conclusions of law. In such arbitrations (i) the arbitrators shall not
have the power to make any award which is not supported by substantial
evidence or which is based on legal error, (ii) an award shall not be binding
upon the parties unless the findings of fact are supported by substantial
evidence and the conclusions of law are not erroneous under the substantive
law of the state of California, and (iii) the parties shall have in addition
to the grounds referred to in the Federal Arbitration Act for vacating,
modifying or correcting an award the right to judicial review of (A) whether
the findings of fact rendered by the arbitrators are supported by substantial
evidence, and (B) whether the conclusions of law are erroneous under the
substantive law of the state of California. Judgment confirming an award in
such a proceeding may be entered only if a court determines the award is
supported by substantial evidence and not based on legal error under the
substantive law of the state of California.
(f) REAL PROPERTY COLLATERAL: JUDICIAL REFERENCE. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration
if the Dispute concerns indebtedness secured directly or indirectly, in
CONTINUING GUARANTY (08/96), Page 5
<PAGE>
whole or in part, by any real property unless (i) the holder of the mortgage,
lien or security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or
benefits that might accrue to them by virtue of the single action rule
statute of California, thereby agreeing that all indebtedness and obligations
of the parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If
any such Dispute is not submitted to arbitration, the Dispute shall be
referred to a referee in accordance with California Code of Civil Procedure
Section 638 et seq., and this general reference agreement is intended to be
specifically enforceable in accordance with said Section 638. A referee with
the qualifications required herein for arbitrators shall be selected pursuant
to the AAA's selection procedures. Judgment upon the decision rendered by a
referee shall be entered in the court in which such proceeding was commenced
in accordance with California Code of Civil Procedure Sections 644 and 645.
(g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all actions required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business, by
applicable law or regulation, or to the extent necessary to exercise any
judicial review rights set forth herein. If more than one agreement for
arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Documents or the subject
matter of the Dispute shall control. This arbitration provision shall survive
termination, amendment or expiration of any of the Documents or any
relationship between the parties.
IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty
as of October 1, 1998.
/s/ MICHAEL J. DUBELKO
- -------------------------------------
MICHAEL J. DUBELKO
CONTINUING GUARANTY (08/96), Page 6
<PAGE>
Beverly Hills Private Client Services
9600 Santa Monica Blvd.
Beverly Hills, CA 90210
February 11, 1998
Michael J. Dubelko
1125 Tower Road
Beverly Hills, CA 90210
Dear Mr. Dubelko:
This letter is to confirm that Wells Fargo Bank, National Association
("Bank"), subject to all terms and conditions contained herein, has agreed to
make available to Michael J. Dubelko ("Borrower") a commitment under which
Bank will issue standby letters of credit for the account of Borrower (each,
a "Letter of Credit" and collectively, "Letters of Credit") from time to time
up to and including February 15, 1999, not to exceed at any time the maximum
principal amount of Seven Hundred Fifty Thousand Dollars ($750,000.00)
("Letter of Credit Line").
I. CREDIT TERMS:
1. LETTER OF CREDIT LINE:
(a) LETTERS OF CREDIT. Letters of Credit shall be issued under the
Letter of Credit Line to guaranty delivery of goods to DVD Express, Inc. by
its suppliers; provided however, that the form and substance of each Letter
of Credit shall be subject to approval by Bank, in its sole discretion; and
provided further, that the aggregate of all undrawn amounts, and all amounts
drawn and unreimbursed, under any Letters of Credit issued by Bank under the
Letter of Credit Line shall not at any time exceed the maximum principal
amount available thereunder, as set forth above. Each Letter of Credit shall
be issued for a term not to exceed 365 days, as designated by Borrower;
provided, however, that no Letter of Credit shall have an expiration date
subsequent to February 15, 2000. Each Letter of Credit shall be subject to
the additional terms of the Application and Agreement for Standby Letter of
Credit Agreement and related documents, if any, required by Bank in
connection with the issuance thereof (each, a "Letter of Credit Agreement"
and collectively, "Letter of Credit Agreements").
<PAGE>
Michael J. Dubelko
February 11, 1998
Page 2
(b) REPAYMENT OF DRAFTS. Each draft paid by Bank under any Letter of
Credit shall be repaid by Borrower in accordance with the provisions of the
applicable Letter of Credit Agreement.
II. INTEREST/FEES:
1. INTEREST. The amount of each draft paid by Bank under any Letter of
Credit shall bear interest from the date such draft is paid by Bank to the
date such amount is fully repaid by Borrower at a rate per annum three
quarters of one percent (0.75%) above the Prime Rate in effect from time to
time.
2. COMPUTATION AND PAYMENT. Interest shall be computed on the basis of
a 360-day year, actual days elapsed. Interest shall be payable at the times
and place set forth in the Letter of Credit Agreement.
3. LETTER OF CREDIT FEES. Borrower shall pay to Bank (a) fees upon the
issuance of each Letter of Credit equal to one and one half of one percent
(1.5%) per annum (computed on the basis of a 360-day year, actual days
elapsed) of the face amount thereof, and (b) fees upon the payment or
negotiation by Bank of each draft under any Letter of Credit and fees upon
the occurrence of any other activity with respect to any Letter of Credit
(including without limitation, the transfer, amendment or cancellation of any
Letter of Credit) determined in accordance with Bank's standard fees and
charges then in effect for such activity.
III. REPRESENTATIONS AND WARRANTIES:
Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
letter and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to
Bank subject to this letter.
1. LEGAL STATUS. Borrower is qualified or licensed to do business in
all jurisdictions in which such qualification or licensing is required or in
which the failure to so qualify or to be so licensed could have a material
adverse effect on Borrower.
2. AUTHORIZATION AND VALIDITY. This letter, Letter of Credit
Agreement, and each other document, contract or instrument deemed necessary
by Bank to evidence any extension of credit to Borrower pursuant to the terms
and conditions hereof, or now or at any time hereafter required by or
delivered to Bank in connection with this letter (collectively, the "Loan
Documents")
<PAGE>
Michael J. Dubelko
February 11, 1998
Page 3
have been duly authorized, and upon their execution and delivery in accordance
with the provisions hereof will constitute legal, valid and binding
agreements and obligations of Borrower or the party which executes the same,
enforceable in accordance with their respective terms.
3. NO VIOLATION. The execution, delivery and performance by Borrower
of each of the Loan Documents do not violate any provision of any law or
regulation, or result in a breach of or constitute a default under any
contract, obligation, indenture or other instrument to which Borrower is a
party or by which Borrower may be bound.
4. LITIGATION. There are no pending, or to the best of Borrower's
knowledge threatened, actions, claims, investigations, suits or proceedings
by or before any governmental authority, arbitrator, court or administrative
agency which could have a material adverse effect on the financial condition
or operation of Borrower other than those disclosed by Borrower to Bank in
writing prior to the date hereof.
5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of
Borrower dated February 5, 1998, a true copy of which has been delivered by
Borrower to Bank prior to the date hereof, (a) is complete and correct and
presents fairly the financial condition of Borrower, (b) discloses all
liabilities of Borrower that are required to be reflected or reserved against
under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance
with generally accepted accounting principles consistently applied. Since the
date of such financial statement there has been no material adverse change in
the financial condition of Borrower, nor has Borrower mortgaged, pledged,
granted a security interest in or otherwise encumbered any of its assets or
properties except in favor of Bank or as otherwise permitted by Bank in
writing.
6. INCOME TAX RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year.
7. NO SUBORDINATION. There is no agreement, indenture, contract or
instrument to which Borrower is a party or by which Borrower may be bound
that requires the subordination in right of payment of any of Borrower's
obligations subject to this letter to any other obligation of Borrower.
8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, consents, approvals, franchises
<PAGE>
Michael J. Dubelko
February 11, 1998
Page 4
and licenses required and all rights to trademarks, trade names, patents and
fictitious names, if any, necessary to enable it to conduct the business in
which it is now engaged in compliance with applicable law.
9. ERISA. Borrower is in compliance in all material respects with all
applicable provisions of the Employee Retirement Income Security Act of 1974,
as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as
defined in ERISA) maintained or contributed to by Borrower (each, a "Plan");
no Reportable Event, as defined in ERISA, has occurred and is continuing with
respect to any Plan initiated by Borrower; Borrower has met its minimum
funding requirements under ERISA with respect to each Plan; and each Plan
will be able to fulfill its benefit obligations as they come due in
accordance with the Plan documents and under generally accepted accounting
principles.
10. OTHER OBLIGATIONS. Borrower is not in default on any obligation
for borrowed money, any purchase money obligation or any other material
lease, commitment, contract, instrument or obligation.
11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in
writing prior to the date hereof, Borrower is in compliance in all material
respects with all applicable federal or state environmental, hazardous waste,
health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or
properties, including without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Superfund Amendments
and Reauthorization Act of 1986, the Federal Resource Conservation and
Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of
the same may be amended, modified or supplemented from time to time. None of
the operations of Borrower is the subject of any federal or state
investigation evaluating whether any remedial action involving a material
expenditure is needed to respond to a release of any toxic or hazardous waste
or substance into the environment. Borrower has no material contingent
liability in connection with any release of any toxic or hazardous waste or
substance into the environment.
<PAGE>
Michael J. Dubelko
February 11, 1998
Page 5
IV. CONDITIONS:
1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank
to extend any credit contemplated by this letter is subject to fulfillment to
Bank's satisfaction of all of the following conditions:
(a) DOCUMENTATION. Bank shall have received each of the Loan
Documents, duly executed and in form and substance satisfactory to Bank.
(b) FINANCIAL CONDITION. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined by Bank, in the market
value of any collateral required hereunder or a substantial or material
portion of the assets of Borrower.
2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to
make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) COMPLIANCE. The representations and warranties contained herein
and in each of the other Loan Documents shall be true on and as of the date
of the signing of this letter and on the date of each extension of credit by
Bank pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date,
no default hereunder, and no condition, event or act which with the giving of
notice of the passage of time or both would constitute such a default, shall
have occurred and be continuing or shall exist.
(b) DOCUMENTATION. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
V. COVENANTS:
Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all
obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise
consents in writing:
<PAGE>
Michael J. Dubelko
February 11, 1998
Page 6
1. PUNCTUAL PAYMENT. Punctually pay all principal, interest, fees or
other liabilities due under any of the Loan Documents at the times and place
and in the manner specified therein.
2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently
applied, and permit any representative of Bank, at any reasonable time, to
inspect, audit and examine such books and records, to make copies of the
same, and inspect the properties of Borrower.
3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in
form and detail satisfactory to Bank:
(a) not later than each February 15th, a financial statement of
Borrower, prepared by Borrower, to include balance sheet and income
statement, and within 45 days after filing, but in no event later than each
February 15th, copies of Borrower's filed federal income tax returns for such
year;
(b) from time to time such other information as Bank may reasonably
request.
4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's
continued existence and with the requirements of all laws, rules, regulations
and orders of a governmental agency applicable to Borrower and/or its
business.
5. INSURANCE. Maintain and keep in force insurance of the types and
in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth
all insurance then in effect.
6. FACILITIES. Keep all properties useful or necessary to Borrower's
business in good repair and condition, and from time to time make necessary
repairs, renewals and replacements thereto so that such properties shall be
fully and efficiently preserved and maintained.
<PAGE>
Michael J. Dubelko
February 11, 1998
Page 7
7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and
all indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and
local property taxes and assessments, except (a) such as Borrower may in good
faith contest or as to which a bona fide dispute may arise, and (b) for which
Borrower has made provision, to Bank's satisfaction, for eventual payment
thereof in the event that Borrower is obligated to make such payment.
8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower with a claim in excess of
$100,000.00.
VI. DEFAULT, REMEDIES:
1. DEFAULT, REMEDIES. Upon the violation of any term or condition of
any of the Loan Documents, or upon the occurrence of any default or defined
event of default under any of the Loan Documents: (a) all indebtedness of
Borrower under each of the Loan Documents, any term thereof to the contrary
notwithstanding, shall at Bank's option and without notice become immediately
due and payable without presentment, demand, protest or notice of dishonor,
all of which are expressly waived by Borrower; (b) the obligation, if any, of
Bank to extend any further credit under any of the Loan Documents shall
immediately cease and terminate; and (c) Bank shall have all rights, powers
and remedies available under each of the Loan Documents, or accorded by law,
including without limitation the right to resort to any or all security for
any credit extended by Bank to Borrower under any of the Loan Documents and
to exercise any or all of the rights of a beneficiary or secured party
pursuant to the applicable law. All rights, powers and remedies of Bank may
be exercised at any time by Bank and from time to time after the occurrence
of any such breach or default, are cumulative and not exclusive, and shall be
in addition to any other rights, powers or remedies provided by law or equity.
2. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive
or otherwise affect any other or further exercise thereof or the exercise of
any other right, power or remedy. Any waiver, permit, consent or approval of
any kind by Bank of any breach of or default under any of the Loan Documents
must be in writing and shall be effective only to the extent set forth in
such writing.
<PAGE>
Michael J. Dubelko
February 11, 1998
Page 8
VII. MISCELLANEOUS:
1. NOTICES. All notices, requests and demands which any party is
required or may desire to give to any other party under any provision of this
letter must be in writing delivered to each party at its address first set
forth above, or to such other address as any party may designate by written
notice to all other parties. Each such notice, request and demand shall be
deemed given or made as follows: (a) if sent by hand delivery, upon delivery;
(b) if sent by mail, upon the earlier of the date of receipt or three (3)
days after deposit in the U.S. mail, first class and postage prepaid; and (c)
if sent by telecopy, upon receipt.
2. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fee (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in connection with (a) the negotiation and preparation of
this letter and the other Loan Documents, Bank's continued administration
hereof and thereof, and the preparation of amendments and waivers hereto and
thereto, (b) the enforcement of Bank's rights and/or the collection of any
amounts which become due to Bank under any of the Loan Documents, and (c) the
prosecution or defense of any action in any way related to any of the Loan
Documents, including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration
proceeding or otherwise, and including any of the foregoing incurred in
connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
3. SUCCESSORS, ASSIGNMENT. This letter shall be binding upon and
inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however,
that Borrower may not assign or transfer its interest hereunder without
Bank's prior written consent. Bank reserves the right to sell, assign,
transfer, negotiate or grant participations in all or any part of, or any
interest in, Bank's rights and benefits under each of the Loan Documents. In
connection therewith Bank may disclose all documents and information which
Bank now has or hereafter may acquire relating to any credit extended by Bank
to Borrower, Borrower or its business, or any collateral required hereunder.
<PAGE>
Michael J. Dubelko
February 11, 1998
Page 9
4. ENTIRE AGREEMENT; AMENDMENT. This letter and the other Loan
Documents constitute the entire agreement between Borrower and Bank with
respect to any extension of credit by Bank subject hereto and supersede all
prior negotiations, communications, discussions and correspondence concerning
the subject matter hereof. This letter may be amended or modified only in
writing signed by each party hereto.
5. NO THIRD PARTY BENEFICIARIES. This letter is made and entered into
for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity
shall be a third party beneficiary of, or have any direct or indirect cause
of action or claim in connection with, this letter or any other of the Loan
Documents to which it is not a party.
6. SEVERABILITY OF PROVISIONS. If any provision of this letter shall
be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of
this letter.
7. GOVERNING LAW. This letter shall be governed by and construed in
accordance with the laws of the State of California.
8. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this letter. A "Dispute" shall mean any action,
dispute, claim or controversy of any kind, whether in contract or tort,
statutory or common law, legal or equitable, now existing or hereafter
arising under or in connection with, or in any way pertaining to, any of the
Loan Documents, or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Loan Documents, including without limitation, any of
the foregoing arising in connection with the exercise of any self-help,
ancillary or other remedies pursuant to any of the Loan Documents. Any party
may by summary proceedings bring an action in court to compel arbitration of
a Dispute. Any party who fails or refuses to submit to arbitration following
a lawful demand by any other party shall bear all costs and expenses incurred
by such other party in compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as
the parties shall mutually agree upon
<PAGE>
Michael J. Dubelko
February 11, 1998
Page 10
in accordance with the AAA Commercial Arbitration Rules. All Disputes
submitted to arbitration shall be resolved in accordance with the Federal
Arbitration Act (Title 9 of the United States Code), notwithstanding any
conflicting choice of law provision in any of the Loan Documents. The
arbitration shall be conducted at a location in California selected by the
AAA or other administrator. If there is any inconsistency between the terms
hereof and any such rules, the terms and procedures set forth herein shall
control. All statutes of limitation applicable to any Dispute shall apply to
any arbitration proceeding. All discovery activities shall be expressly
limited to matters directly relevant to the Dispute being arbitrated.
Judgment upon any award rendered in an arbitration may be entered in any
court having jurisdiction; provided however, that nothing contained herein
shall be deemed to be a waiver by any party that is a bank of the protections
afforded to it under 12 U.S.C. Section 91 or any similar applicable state law.
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary
remedies, including without limitation injunctive relief, sequestration,
attachment, garnishment or the appointment of a receiver, from a court of
competent jurisdiction before, after or during the pendency of any
arbitration or other proceeding. The exercise of any such remedy shall not
waive the right of any party to compel arbitration or reference hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive law
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may
grant any remedy or relief that a court of the state of California could
order or grant within the scope hereof and such ancillary relief as is
necessary to make effective any award, and (iii) shall have the power to
award recovery of all costs and fees, to impose sanctions and to take such
other actions as they deem necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the California Rules of
Civil Procedure or other applicable law. Any Dispute in which the amount in
controversy is $5,000,000 or less shall be decided by a single arbitrator who
shall not render an award of greater than $5,000,000 (including damages,
costs, fees
<PAGE>
Michael J. Dubelko
February 11, 1998
Page 11
and expenses). By submission to a single arbitrator, each party expressly
waives any right or claim to recover more than $5,000,000. Any Dispute in
which the amount in controversy exceeds $5,000,000 shall be decided by
majority vote of a panel of three arbitrators; provided however, that all
three arbitrators must actively participate in all hearings and deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000,
the arbitrators shall be required to make specific, written findings of fact
and conclusions of law. In such arbitrations (i) the arbitrators shall not
have the power to make any award which is not supported by substantial
evidence or which is based on legal error, (ii) an award shall not be binding
upon the parties unless the findings of fact are supported by substantial
evidence and the conclusions of law are not erroneous under the substantive
law of the state of California, and (iii) the parties shall have in addition
to the grounds referred to in the Federal Arbitration Act for vacating,
modifying or correcting an award the right to judicial review of (A) whether
the findings of fact rendered by the arbitrators are supported by substantial
evidence, and (B) whether the conclusions of law are erroneous under the
substantive law of the state of California. Judgment confirming an award in
such a proceeding may be entered only if a court determines the award is
supported by substantial evidence and not based on legal error under the
substantive law of the state of California.
(f) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration
if the Dispute concerns indebtedness secured directly or indirectly, in whole
or in part, by any real property unless (i) the holder of the mortgage, lien
or security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or
benefits that might accrue to them by virtue of the single action rule
statute of California, thereby agreeing that all indebtedness and obligations
of the parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If
any such Dispute is not submitted to arbitration, the Dispute shall be
referred to a referee in accordance with California Code of Civil Procedure
Section 638 et seq., and this general reference agreement is intended to be
specifically enforceable in accordance with said Section 638. A referee with
the qualifications required herein for arbitrators shall be selected pursuant
to the AAA's selection procedures.
<PAGE>
Michael J. Dubelko
February 11, 1998
Page 12
Judgment upon the decision rendered by a referee shall be entered in the
court in which such proceeding was commenced in accordance with California
Code of Civil Procedure Sections 644 and 645.
(g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business, by
applicable law or regulation, or to the extent necessary to exercise any
judicial review rights set forth herein. If more than one agreement for
arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Loan Documents or the
subject matter of the Dispute shall control. This arbitration provision shall
survive termination, amendment or expiration of any of the Loan Documents or
any relationship between the parties.
Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions. Bank's commitment to extend any credit to
Borrower pursuant to the terms of this letter shall terminate on March 15,
1998, unless this letter is acknowledged by Borrower and returned to Bank on
or before that date.
Sincerely,
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/ KATIE MILLER
-----------------------------------
Katie Miller
Vice President
Acknowledged and accepted as of 2/26/98.
-------
/s/ MICHAEL J. DUBELKO
- ------------------------------
MICHAEL J. DUBELKO
<PAGE>
STANDBY LETTER OF CREDIT AGREEMENT
Text to be filed by amendment
<PAGE>
OPTION CERTIFICATE
(Incentive Stock Option)
THIS IS TO CERTIFY that DVD Express, Inc., a California corporation (the
"Company"), has granted to the officer or employee named below ("Optionee") an
incentive stock option (the "Option") to purchase shares of the Company's Common
Stock, no par value (the "Shares"), under the Stock Option Plan and Agreement
(Incentive Stock Option) (the "Option Plan") which is attached to this Option
Certificate (the "Certificate") as Annex I, as follows:
Name of Optionee: JOAN ABEND
Address of Optionee: 4144 TUJUNGA AVE. #108
STUDIO CITY, CA 91604
Number of Shares: 200,000
Option Exercise Price: $ 0.10
Option Grant Date: 6/1/97
Option Expiration Date: 6/1/2004
Exercise Schedule: The Option shall become exercisable as to 25% of the
Shares on the first anniversary of the date of grant and as to 1/48th of the
Shares on the last day of each calendar month thereafter until all of the shares
have vested (the "Vesting Date").
Summary of Other Terms: This Option is defined in the Option Plan. This
Certificate summarizes certain of the provisions of the Option Plan for your
information, but is not complete. Your rights are governed by the Option Plan,
not by this Summary. The Company strongly suggests that you carefully review the
full Option Plan prior to signing this Certificate or exercising the Option.
Among the terms of the Option Plan are the following:
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 "for cause," 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. If your employment ends due to death or permanent
disability, the Option terminates one year after the date of death or
disability, and is exercisable
<PAGE>
during such one year period as to the portion of the Option which had vested
prior to the date of death or disability. In all other cases, the Option
terminates 90 days after the date of termination of employment, and is
exercisable during such 90 day period as to the portion of the Option which had
vested prior to the date of termination of employment. Notwithstanding the
foregoing, the Company shall have the right to repurchase the Shares and/or
Options then subject to exercise upon termination of your employment for any
reason. See Paragraph 5.
Right of First Refusal: The Company has a right of First Refusal to
purchase the Shares acquired by you on the exercise of the Option. See Paragraph
8.
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. See
Paragraph 16(d).
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 Plan, accompanied by payment of the Exercise
Price 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 Paragraph 4.
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 Paragraph 7.
Waiver: By signing this Certificate, you will be agreeing to all of the
terms of the Option Plan, including those not summarized in this Certificate.
You will waive your rights to an options or stock which may have been promised
to you. See Paragraph 9.
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 Paragraph 14.
Value of Shares: If you are granted an Option first exercisable in any one
calendar year to purchase Shares valued in excess of $100,000 on the grant date,
then for tax purposes the incremental portion of such Shares with an aggregate
fair market value in excess of $100,000 shall be treated as non-statutory stock
options, rather than as incentive stock options (as that term is defined in
Section 422 of the Internal Revenue Code of 1986, as amended).
<PAGE>
AGREEMENT
The Company and the above-named Optionee each hereby agrees to be bound by
all of the terms and conditions of the Stock Option Plan and 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: 6/1/97
DVD EXPRESS, INC.
By: Michael Dubelko
------------------------------------
Its: President
------------------------------------
/s/ Joan Abend
-----------------------------------------
(Signature)
Joan Abend
-----------------------------------------
(Please print your name exactly as you
wish it to appear on any stock
certificates issued to you upon exercise
of the Option)
<PAGE>
ANNEX I
STOCK OPTION PLAN AND AGREEMENT
(Incentive Stock Option)
This STOCK OPTION PLAN AND AGREEMENT (this "Option Plan") is made
and entered into on the execution date of the Option Certificate to which it is
attached (the "Certificate"), by and between DVD Express, Inc., a California
corporation (the "Company"), and the officer or employee ("Optionee") named in
the Certificate.
Pursuant to this Option Plan, the Board of Directors of the
Company (the "Board" or the "Administrator") has authorized the grant to
Optionee of an incentive stock option to purchase shares of the Company's
Common Stock, par value $.01 per share (the "Common Stock"), upon the terms
and subject to the conditions set forth in this Option 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 Plan, 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 Paragraphs 3(b), 5, 7(c) and
7(d) of this Option Plan, 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 Plan, the Option may not be exercised, in whole or in part, unless and
until any then-applicable
<PAGE>
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.
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:
(a) written notice of exercise in form and substance identical
to Exhibit "A" attached to this Option Plan stating the number of shares of
Common Stock then being purchased (the "Purchased Shares"); and
(b) 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
Administrator, by transfer to the Company of issued and outstanding shares of
Common Stock, 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 of such shares shall be determined
as follows: (i) if the Stock is listed on an exchange or exchanges, or admitted
for trading in a market system which provides last sale data under Rule 11Aa3-1
of the General Rules and Regulations of the Securities and Exchange Commission
under the Securities and Exchange Act of 1934, as amended (a "Market System"),
the last reported sales price per share on the last business day prior to such
date on the principal exchange on which it is traded, or in such a Market
System, as applicable, or if no sale was made on such day on such principal
exchange or in such a Market System, as applicable, the last reported sales
price per share on the most recent day prior to such date on which a sale was
reported on such exchange or such Market System, as applicable; or (ii) if the
Common Stock is not then traded on an exchange or in such a Market System, the
average of the closing bid and asked prices per share for the Common Stock in
the over-the-counter market as quoted on NASDAQ on the day prior to such date;
or (iii) if the Common Stock is not listed on an exchange or quoted on NASDAQ,
an amount determined in good faith by the Administrator.
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 the preceding paragraph.
<PAGE>
5. Termination of Employment.
(a) If Optionee shall cease to be an officer or employee of
the Company or, any Subsidiary or Parent of the Company for any reason other
than death or permanent disability (a "Terminating Event"), Optionee shall have
the right, subject to the provisions of Paragraph 5(c) and (d) below, to
exercise the Option at any time following such Terminating Event until the
earlier to occur of (x) 90 days following the date of such Terminating Event and
(y) the expiration of the term of this Option as set forth in Paragraph 2 of
this Option Plan. The Option may be exercised following a Terminating Event only
to the extent exercisable as of the date of the Terminating Event. To the extent
unexercised at the end of the period referred to above, the Option shall
terminate. The Administrator, or a committee thereof, 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 Plan.
(b) If, by reason of death or permanent disability (a "Special
Terminating Event"), Optionee shall cease to be an officer, director, employee
or consultant of the Company or any Subsidiary or Parent of the Company, then
Optionee, Optionee's executors or administrators or any person or persons
acquiring the Option directly from Optionee by bequest or inheritance, shall,
subject to the provisions of Paragraph 5(c) below, have the right to exercise
the Option at any time following such Special Terminating Event until the
earlier to occur of (x) 12 months following the date of such Special Terminating
Event and (y) the expiration of the term of this Option as set forth in
Paragraph 2 of this Option Plan. The Option may be exercised following a Special
Terminating Event only to the extent exercisable at the date of the Special
Terminating Event. To the extent unexercised at the end of the period referred
to above, the Option shall terminate.
(c) Notwithstanding any other provision of this Option Plan,
following the occurrence of a Terminating Event or a Special Terminating Event,
the Company shall have the right to repurchase (the "Repurchase Right") all or
any portion of the Shares purchased by Optionee upon the exercise of the Option,
as well as any unexercised Options which Optionee has the right to exercise at
the time of termination. Following the occurrence of a Terminating Event (which
does not result from the Company's termination of Optionee's employment "for
cause") or a Special Terminating Event, the Repurchase Right shall be
exercisable at a price equal to the Fair Market Value of such Shares or, in the
case of unexercised options, the Fair Market Value of the Shares underlying such
unexercised options less the exercise price which would be payable upon the
exercise of such unexercised options. Following the occurrence of a Terminating
Event which does result from the Company's termination of Optionee's employment
"for cause," the Repurchase Right shall be exercisable as to all or any portion
of the Shares purchased by Optionee upon the exercise of the Option, as well as
any unexercised Options which Optionee has the right to exercise at the time of
termination, at a price equal to the initial exercise price of such Shares or,
in the case of unexercised options, the initial exercise price of the Shares
underlying such unexercised options less the exercise price which would be
payable upon the exercise of such unexercised options. Fair Market Value shall
be determined by the Administrator. To the extent that the Repurchase Right is
exercisable at the initial exercise price of the Shares or the Shares underlying
unexercised options, the exercise price shall become Fair Market
<PAGE>
Value as to 20% of such Shares which were originally subject to this Option Plan
on each of the first five anniversaries of the date of this Option Plan.
(d) If Optionee shall be terminated "for cause" by the
Company, any Subsidiary or any Parent, Optionee shall have the right to exercise
the Option at any time within 30 days after such termination of employment and
prior to the date of termination of the Option under Paragraph 2 of this Option
Plan with respect to all Shares with respect to which the Option was exercisable
on the date his employment terminated as to which the Option had not previously
been exercised.
(e) For purposes of this Option Plan, "cause" shall mean
(i) the failure or refusal by Optionee to perform his
duties to the Company; or
(ii) Optionee's willful disobedience of any orders or
directives of the Board or any officers thereof acting under the authority
thereof or Optionee'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 Optionee 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 Optionee 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 the Optionee 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 Optionee is not competent to
perform his duties of employment.
(f) For purposes of this Option Plan, "permanent disability"
shall mean permanent and total disability as defined by the Administrator.
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
Administrator may from time to time require.
6. Restrictions on Purchased Shares.
<PAGE>
None of the Purchased Shares shall be transferred (with or
without consideration), sold, offered for sale, assigned, pledged, hypothecated
or otherwise disposed of (each a "Transfer") 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:
(a) the Company has declined to exercise the right of first
refusal provided for in Paragraph 8 hereof;
(b) the Purchased Shares are Transferred pursuant to and in
conformity with (i) (x) an effective registration statement filed with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Act of 1933, as amended (the "Act"), or (y) an exemption from registration under
the Act, and (ii) the securities laws of any state of the United States; and
(c) 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 (i) (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 Act as then in effect, and the Rules and Regulations of
the Commission thereunder, and (ii) 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.
Any attempted Transfer which is not in full compliance with this
Paragraph 6 shall be null and void ab initio, and of no force or effect.
7. Adjustments upon Recapitalization.
Subject to any required action by the shareholders of the
Company:
(a) If the outstanding shares of the Common Stock shall be
subdivided into a greater number of shares of the Common Stock, or a dividend in
shares of Common Stock or other securities of the Company convertible into or
exchangeable for shares of the Common Stock (in which latter event the number of
shares of Common Stock issuable upon the conversion or exchange of such
securities shall be deemed to have been distributed) shall be paid in respect of
the shares of Common Stock, the Exercise Price in effect immediately prior to
such subdivision or at the record date of such dividend shall, simultaneously
with the effectiveness of such subdivision or immediately after the record date
of such dividend, be proportionately reduced, and conversely, if the outstanding
shares of Common Stock shall be combined into a smaller number of shares of
Common Stock, the Exercise Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased.
<PAGE>
(b) When any adjustment is required to be made in the Exercise
Price, the number of Shares purchasable upon the exercise of the Option shall be
adjusted to that number of Shares determined by (i) multiplying an amount equal
to the number of Shares purchasable on the exercise of the Option immediately
prior to such adjustment by the Exercise Price in effect imme diately prior to
such adjustment, and then (ii) dividing that product by the Exercise Price in
effect immediately after such adjustment.
(c) In the event of: (1) a dissolution or liquidation of the
Company, or any corporate separation or division, including, but not limited to,
a split-up, a split-off or a spin-off, or a 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 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, the Optionee's rights under
this Option Plan shall be expressly governed by the decisions made by the
Administrator.
(d) To the extent that the foregoing adjustments relate to
stock or securities of the Company, such adjustments shall be made by the
Administrator of the Plan, and its determination shall be final, binding and
conclusive.
(e) The provisions of this Paragraph 7 are intended to be
exclusive, and Optionee shall have no other rights upon the occurrence of any of
the events described in this Para graph 7.
(f) 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. Right of First Refusal.
Optionee agrees 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 Shares purchased by Optionee
pursuant to this Option Plan; and in the event Optionee desires to accept a bona
fide third-party offer for any or all of such Shares, the Shares shall first be
offered to the Company upon the same terms and conditions as are set forth in
the bona fide offer.
9. Waiver of Rights to Purchase Stock.
By signing this Option Plan, 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 the shares of Common Stock subject to
<PAGE>
the Option and any other right or option to purchase Common Stock which was
previously granted in writing to Optionee by the Board (or a committee thereof).
By signing this Option Plan, except as provided in the immediately preceding
sentence, Optionee specifically waives all rights which he or she may have had
prior to the date of this Option Plan to receive any option or equity security
of the Company.
10. 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 Option Plan
and/or the Purchased Shares have not been registered under the 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.
11. 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.
12. 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
Paragraph 7 of this Option Plan, 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.
13. Modification.
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 Section 422 of the Code or would alter or impair any rights of
the Optionee under the Option.
14. Disqualifying Disposition; Withholding.
<PAGE>
(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 any 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.
(c) With the consent of the Administrator, and in accordance
with any rules and procedures from time to time adopted by the Administrator,
Optionee may elect to satisfy his or her obligations under Paragraph 13(a) above
by (i) directing the Company to withhold a portion of the Shares otherwise
deliverable (or to tender back to the Company a portion of the Shares issued
where the Optionee (a "Section 16(b) Recipient") is required to report the
ownership of the Shares pursuant to Section 16(a) of the Securities Exchange Act
of 1934, as amended, and has not made an election under Section 83(b) of the
Code (a "Withholding Right")); 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 (as determined in accordance with the provisions of
Paragraph 4(b) hereof) 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.
(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 Plan or otherwise adopted by
the Administrator:
(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 Paragraph
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 Administrator as provided
in Subsection (iii) below, the Election once made will be irrevocable; and
(iii) no Election is valid unless the Administrator has
the right and power, in its sole discretion, with or without cause or reason
therefor, to consent to the Election, to refuse to consent to the Election, or
to disapprove the Election; and if the
<PAGE>
Administrator has not consented to the Election on or prior to the Tax Date, the
Election will be deemed approved.
(iv) If the Optionee on the date of delivery of the
Election to the Company is a Section 16(b) Recipient, the following additional
provisions will apply:
(A) the Election cannot be made during the six
calendar month period commencing with the date of grant of the Withholding Right
(even if the Option to which such Withholding Right relates has been granted
prior to such date); and
(B) the Election must be made any day six calendar
months or more prior to the Tax Date.
(e) To exercise a Withholding Right, the Rights holder must
follow the election procedures set forth below, together with such additional
procedures and conditions as may be set forth in the related Rights agreement or
otherwise adopted by the Administrator:
(i) The Rights holder must deliver to the Company his or
her written notice of election (the "Election") to have the Withholding Right
apply to all (or a designated portion) of his or her Right.
(ii) Unless disapproved by the Administrator as provided
in Subsection (iii) below, the Election once made will be irrevocable.
(f) Any election under Paragraph 13(b) above must:
(i) be made in writing on or prior to the Tax Date and
specify whether all or a stated percentage of the applicable taxes will be paid
in accordance with Paragraph 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) be irrevocable, once made;
(iii) conform to all rules and procedures from time to
time adopted by the Administrator and be made subject to rejection by the
Administrator for any reason; and
(iv) in the case of a Section 16(b) Recipient:
(A) not be made within six months of the grant of
the Option; and
<PAGE>
(B) be made not later than (x) six months less one
day prior to the Tax Date, or (y) in the ten day "window period" beginning on
the third day following the release of the Company's quarterly or annual summary
financial data as described in Rule 16b-3(e) of the Rules and Regulations of the
Securities and Exchange Commission promulgated under the Exchange Act.
15. 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.
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 Plan.
(b) Notices. All notices, requests, demands and other
communications under this Option Plan shall be in writing and shall be given to
the parties hereto as follows:
(i) If to the Company, to:
DVD Express, Inc.
7083 Hollywood Blvd., Suite 307
Los Angeles, CA 90028
(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 such
party in writing to the other party hereto. Any such notice, request, demand or
other communication shall be effective (i) 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 (ii) if given by
any other means, when delivered at the address specified in this subparagraph
(b).
(c) Transfer of Rights under this Option Plan. The Company may
at any time transfer and assign its rights and delegate its obligations under
this Option Plan to any other person, corporation, firm or entity, including its
officers, directors and stockholders, with or without consideration.
(d) Option Non-Transferable. Optionee may not sell, transfer,
assign or otherwise dispose of this Option except by will or the laws of descent
and distribution, and Stock
<PAGE>
Options may be exercised during the lifetime of the Option Holder only by the
Optionee or by his or her guardian or legal representative.
(e) Market Stand-Off. In the event of an 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,
including the Company's initial public offering, Optionee shall not sell, make
any short sale of, loan, hypothecate, pledge, grant any option for the
repurchase of, or otherwise dispose or Transfer for value or otherwise agree to
engage in any of the foregoing transactions with respect to any shares of Common
Stock 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 (the "Market
Stand-Off"); provided, however, that in no event shall such period exceed one
hundred- eighty (180) days. The Market Stand-Off shall terminate following the
expiration of the two-year period immediately following the effective date of
the Company's initial public offering.
(f) Successors and Assigns. Except to the extent specifically
limited by the terms and provisions of this Option Plan, this Option Plan shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors, assigns, heirs and personal representatives.
(g) Governing Law. THIS Option Plan 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.
(h) Severability. Should any paragraph or any part of a
paragraph within this Option Security Agreement be rendered void, invalid or
unenforceable by any Court of law for any reason, such invalidity or
unenforceability shall not void or render invalid or unenforceable any other
paragraph or part of a paragraph in this Option Plan.
(i) Attorney's Fees. In the event that any action, suit or
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.
(j) The Plan. The Option is made and issued pursuant to this
Option Plan, and it is intended, and shall be interpreted in a manner, to comply
therewith.
<PAGE>
(k) Miscellaneous. Titles and captions contained in this
Option Plan are inserted for convenience of reference only and do not constitute
a part of this Option Plan for any other purpose.
The Signature Page to this Option Plan consists of the last page of
the Certificate.
<PAGE>
Exhibit "A"
NOTICE OF EXERCISE
(To be signed only upon exercise of the Option)
TO: DVD Express, Inc.
The undersigned, the holder of the enclosed Stock Option Plan
(Incentive Stock Option), hereby irrevocably elects to exercise the purchase
rights represented by the Option and to purchase thereunder _________ * shares
of Common Stock of DVD Express, 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 B
None.
<PAGE>
ACKNOWLEDGMENT
December 29, 1998
DVD Express, Inc.
7083 Hollywood Boulevard
Los Angeles, California 90028
Re: Number of Shares Underlying Option Granted on June 1, 1997
Dear Sirs:
This letter confirms my understanding regarding the number of shares of
DVD Express, Inc. ("DVD Express") Common Stock that are underlying that certain
option agreement, dated June 1, 1997, between me and DVD Express (the "Option
Agreement"). I acknowledge that such Option Agreement was entered into in
contemplation of DVD Express'10 for 1 stock split effected in October 1997 and
that the 200,000 shares reflected in the Option Agreement were reflected on a
post-split basis and that such stock split was not intended to trigger the
anti-dilution provisions of the Option Agreement. Accordingly, I hereby confirm
that such Option Agreement, and specifically the number of shares that can be
purchased and the exercise price of the shares, is not affected by the 10 for 1
stock split and that the Option Agreement continues to evidence the right to
purchase 200,000 shares of DVD Express Common Stock at an exercise price of $.10
per share.
Sincerely,
/s/ Joan Abend
Joan Abend
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 0 905
<SECURITIES> 0 0
<RECEIVABLES> 18 255
<ALLOWANCES> 0 0
<INVENTORY> 251 1,804
<CURRENT-ASSETS> 275 9,910
<PP&E> 42 738
<DEPRECIATION> 8 92
<TOTAL-ASSETS> 310 19,489
<CURRENT-LIABILITIES> 119 7,666
<BONDS> 0 0
0 0
0 0
<COMMON> 350 16,496
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 310 19,489
<SALES> 0 0
<TOTAL-REVENUES> 1,269 16,907
<CGS> 1,046 15,086
<TOTAL-COSTS> 364 6,261
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 74
<INCOME-PRETAX> 142 4,514
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 142 4,514
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 142 4,514
<EPS-PRIMARY> (0.01) (0.30)
<EPS-DILUTED> (0.01) (0.30)
</TABLE>
