-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GZfx7fjpH/Wn48J4n4+dxGHf1L7xhgOjAzRzN+/d3DzZW9h3UFteNDKoV0tRziA5 cocWqZGo+7scs8gbMsLw0g== 0000944209-00-000360.txt : 20000315 0000944209-00-000360.hdr.sgml : 20000315 ACCESSION NUMBER: 0000944209-00-000360 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 26 FILED AS OF DATE: 20000314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FUTURE MEDIA PRODUCTIONS CENTRAL INDEX KEY: 0001069003 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 954486758 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-32444 FILM NUMBER: 569155 BUSINESS ADDRESS: STREET 1: FUTURE MEDIA PRODUCTIONS INC STREET 2: 25136 ANZA DRIVE CITY: VALENCIA STATE: CA ZIP: 91355 BUSINESS PHONE: 8052945575 MAIL ADDRESS: STREET 1: FUTURE MEDIA PRODUCTIONS INC STREET 2: 25136 ANZA DRIVE CITY: VALENCIA STATE: CA ZIP: 91355 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on March 14, 2000 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- FUTURE MEDIA PRODUCTIONS, INC. (Exact Name of Registrant as Specified in its Charter)
California 3652 95-4486758 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer ncorporationIor Organization) Classification Code Number) Identification No.)
--------------- 25136 Anza Drive Valencia, California 91355 (661) 294-5575 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) --------------- ALEX SANDEL, President Future Media Productions, Inc. 25136 Anza Drive Valencia, California 91355 (661) 294-5575 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) --------------- Copies to: Murray Markiles, Esq. Robert K. Montgomery, Esq. Scott D. Galer, Esq. Anton W. Leung, Esq. Phillip Gharabegian, Esq. Gibson, Dunn & Crutcher LLP Troop Steuber Pasich Reddick & 2029 Century Park East Tobey, LLP Los Angeles, California 90067 2029 Century Park East (310) 552-8500 Los Angeles, California 90067 (310) 728-3000 --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered in this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Maximum Title of Each Class of Aggregate Amount of Securities to be Registered Offering Price(1) Registration Fee - -------------------------------------------------------------------------------- Common Stock, no par value................... $70,000,000 $18,480
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee, pursuant to Rule 457(o) under the Securities Act of 1933. --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. Future + +Media may not sell these securities until the registration statement filed + +with the Securities and Exchange Commission is effective. This prospectus is + +not an offer to sell these securities and it is not soliciting an offer to + +buy these securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION-MARCH 14, 2000 PROSPECTUS - -------------------------------------------------------------------------------- Shares [LOGO OF FUTURE MEDIA PRODUCTIONS] Common Stock - -------------------------------------------------------------------------------- Future Media is offering shares and the selling shareholders are offering shares of common stock in an initial public offering. Prior to this offering, there has been no public market for Future Media's common stock. Future Media will not receive any proceeds from the sale of shares by the selling shareholders. Future Media is an independent manufacturer/replicator of Digital Versatile Discs (DVDs) and Compact Discs (CDs). Future Media targets its sales to companies in industries including Internet/online, film and entertainment, edutainment software, publishing and computer hardware. It is anticipated that the public offering price will be between $ and $ per share. Application has been made to include the common stock for quotation in the Nasdaq National Market under the symbol "FMPI".
Per Share Total Public offering price......................................... $ $ Underwriting discounts and commissions........................ $ $ Proceeds, before expenses, to Future Media.................... $ $ Proceeds to selling shareholders.............................. $ $
See "Risk Factors" on pages 8 to 13 for factors that should be considered beforeinvesting in the shares of Future Media. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Neither the Securities and Exchange Commission nor any state securities commission hasapproved or disapproved of these securities or passed upon the accuracy or adequacy of thisprospectus. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- The underwriters may purchase up to additional shares from Future Media and additional shares from the selling shareholders at the public offering price, less underwriting discounts and commissions. Delivery and payment for the shares will be on , 2000. Prudential Volpe Technology a unit of Prudential Securities CIBC World Markets , 2000 Description of Photographs: . Photographs of Future Media's headquarters, mastering facility, replication machines and printing machines. . Collage of manufactured DVDs and CDs. TABLE OF CONTENTS
Page ---- Prospectus Summary.................. 4 Risk Factors........................ 8 Forward-Looking Statements.......... 13 Termination Of S Corporation Status............................. 14 Use Of Proceeds..................... 15 Dividend Policy..................... 15 Dilution............................ 16 Capitalization...................... 17 Selected Financial Data............. 18 Management's Discussion and Analysis Of Financial Condition and Results Of Operations...................... 20 Industry Overview................... 26 Business............................ 28 Management.......................... 37 Certain Relationships and Related Transactions....................... 42 Principal and Selling Shareholders.. 44 Description Of Capital Stock........ 45 Shares Eligible For Future Sale..... 46 Underwriting........................ 47 Legal Matters....................... 49 Experts............................. 49 Where You Can Find More Information........................ 49 Index To Financial Statements....... F-1
- -------------------------------------------------------------------------------- You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information you should consider before investing in the common stock of Future Media. You should read the entire prospectus carefully. Future Media We are an independent manufacturer/replicator of Digital Versatile Discs (DVDs) and Compact Discs (CDs). We target our sales to companies in industries including Internet/online, film and entertainment, edutainment software, publishing and computer hardware. Our customers include America Online, Inc., Modus Media International Holdings, Inc., Havas Interactive, Inc., GT Interactive Software, Lions Gate Entertainment, infoUSA Inc., Interplay Entertainment Corp., Juno Online Services, Inc. and a major motion picture distributor. We have successfully implemented our business model, which consists of the following elements: . High volume customers: Our customer base is comprised of some of the highest volume customers of DVDs and CDs. . High replication capacity: Since inception we have continued to add new equipment and have become one of the largest independent manufacturers/replicators of DVDs and CDs in the United States. . Low cost structure: We achieve substantial economies of scale through our optimally designed facility at a single locale, our dedication to maximizing machine uptime and our flat organizational structure. . Superior turnaround service: We are dedicated to providing superior turnaround service by maintaining high throughput mastering technologies and high DVD/CD graphic printing capacity and by efficiently managing operational workflow. To implement our business model, we have developed a focused operating approach founded on the following key principles: . High capacity manufacturing capabilities at a single locale; . Optimally designed manufacturing facilities; . Self sufficient repair, maintenance and engineering capabilities; . Technologically advanced manufacturing equipment; and . Marketing our services directly to senior management. We believe that our focused operating approach distinguishes us from our competitors. We also believe that the effectiveness of our operating approach has been proven through the growth in our targeted customer base, the retention of our customers and our demonstrated long-term financial performance. To foster our continued growth in line with our business model, we plan to pursue the following opportunities: . Capitalize on the continuing growth of the DVD market; . Expand our position as a low cost CD manufacturer within the Internet/online, film and entertainment, edutainment software, publishing and computer hardware industries; and . Actively stimulate new CD replicating business through targeted Internet related marketing programs. We are a California corporation. Our executive offices are located at 25136 Anza Drive, Valencia, California 91355, and our telephone number is (661) 294- 5575. 4 The Offering Shares offered by Future Media................ shares Shares offered by the selling shareholders.... shares Total shares outstanding after this offering.. shares Use of proceeds by Future Media............... To repay all existing debt, to purchase capital equipment, to distribute retained earnings including an amount for the purpose of paying income taxes on our 2000 S Corporation earnings to our existing shareholders, and for general corporate purposes, including potential strategic investments. Proposed Nasdaq National Market symbol........ FMPI
Except as otherwise noted, all information in this prospectus regarding the number of outstanding shares of common stock does not include: . shares that the underwriters may purchase if they exercise their over- allotment option; . 1,200,000 shares of common stock available for issuance pursuant to our 1998 stock incentive plan, of which 828,000 shares were subject to outstanding options as of the date of this prospectus at a weighted average exercise price of $11.35 per share; and . 366,600 shares of common stock issuable upon exercise of warrants issued to David Moss, our Vice President-Operations, at an exercise price of $0.0017 per share. Also, except as otherwise noted, all information in this prospectus has been adjusted to give effect to the change of the status of Future Media from an S Corporation to a C Corporation for income tax purposes. Risk Factors You should consider the risk factors and the impact of events that could adversely affect our business before investing in our common stock. 5 Summary Selected Financial and Other Data (in thousands, except for per share and employee data) The following table summarizes certain selected financial and operating data contained in the financial statements and elsewhere in this prospectus.
Year Ended December 31 ------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- ------- Statement of Income Data: Net sales........................ $26,972 $25,814 $36,042 $43,311 $53,002 Cost of goods sold............... 14,821 11,972 23,132 27,304 31,938 ------- ------- ------- ------- ------- Gross profit..................... 12,151 13,842 12,910 16,007 21,064 Selling, general and administrative expenses......... 6,093 2,537 4,214 4,232 4,201 Stock related compensation expense(1)...................... -- -- -- 3,055 720 Abandoned offering costs......... -- -- -- 676 -- ------- ------- ------- ------- ------- Income from operations........... 6,058 11,305 8,696 8,044 16,143 Interest income.................. 12 252 42 35 1 Interest expense................. (957) (1,108) (818) (1,264) (1,404) Change in accounting estimate for royalties(2).................... -- 3,770 -- -- -- ------- ------- ------- ------- ------- Income before state income taxes........................... 5,113 14,219 7,920 6,815 14,740 Provision for state income taxes........................... 72 223 120 102 2 ------- ------- ------- ------- ------- Net income....................... $ 5,041 $13,996 $ 7,800 $ 6,713 $14,738 ======= ======= ======= ======= ======= Pro Forma Statement of Income Data (unaudited)(3): Income before provision for income taxes.................... $14,740 Pro forma income tax provision... 5,896 ------- Pro forma net income............. $ 8,844 ======= Pro forma basic earnings per share........................... $ 0.98 ======= Pro forma diluted earnings per share........................... $ 0.86 ======= Weighted average shares outstanding--basic.............. 9,000 ======= Weighted average shares outstanding--diluted............ 10,336 ======= Other Data: Capital expenditures............. $ 6,277 $ 1,585 $ 3,642 $ 6,752 $15,226 Depreciation and amortization.... 1,053 1,389 1,950 2,861 4,368 Number of full-time employees at period end...................... 44 57 75 92 127
December 31, 1999 --------------------------- Pro Pro Forma As Actual Forma(4) Adjusted(5) ------ -------- ----------- Balance Sheet Data: Current assets...................................... $8,253 $8,553 $ Property and equipment, net......................... 29,837 29,837 Total assets........................................ 41,089 41,389 Current liabilities................................. 16,165 33,272 Long-term debt, less current portion................ 5,327 5,327 Total shareholders' equity.......................... 19,469 2,362
6 - -------- (1) On January 1, 1998, we granted warrants to purchase 366,600 shares of common stock at an exercise price of $0.0017 per share to David Moss, our Vice President--Operations. These warrants expire on December 31, 2007. In connection with the grant of these warrants, we recognized compensation expense of $3,055,000 in 1998 representing the excess of the estimated fair value of the shares over the exercise price. In 1999 our existing shareholders committed to give 30,000 shares of their stock to a director for services to us. For the year ended December 31, 1999 we recorded stock related compensation expense of $720,000 for this commitment, based upon the estimated fair value of the shares to be given. (2) We executed license agreements with two developers of CD technology effective June 1, 1996 and October 1, 1996, respectively. The agreements set forth royalty rates payable to the licensors for the license to manufacture and sell CDs. We reached settlements totaling $70,000 for CD sales occurring before the effective dates of the agreements. Because of the settlement amounts, our prior estimates of royalty liabilities were overstated by approximately $3,770,000 and the adjustment to the accruals was made in 1996. (3) We have been exempt from paying federal income taxes and have paid certain state income taxes at a reduced rate because of our S Corporation status. Upon the completion of this offering, our S Corporation status will terminate. Pro forma statement of income data reflect the income tax expense recordable had we not been exempt from paying taxes under the S Corporation election. Because of the termination of our S Corporation status, we will be required to record a one-time, non-cash charge against historical earnings for additional deferred taxes based upon the increase in the effective tax rate from our S Corporation status (1.5%) to C Corporation status (approximately 40%). This charge will occur in the quarter during which our S Corporation status is terminated. If this charge was recorded at December 31, 1999, the amount would have been approximately $2.7 million. (4) The pro forma balance sheet reflects (i) an accrual for the distribution of retained earnings of approximately $14.4 million to our current shareholders, including an amount for the purpose of paying income taxes on S Corporation earnings and (ii) the recording of additional deferred taxes of approximately $2.7 million based on the increase in the effective tax rate upon our anticipated change from an S Corporation to a C Corporation. (5) Adjusted for pro forma adjustments discussed above and to give effect to the receipt and application of the estimated net proceeds of this offering, including a deduction of $ to be paid to Averil Capital Markets Group, Inc., a company controlled by one of our directors upon the closing of this offering and the repayment of existing bank debt. 7 RISK FACTORS You should carefully consider the following risk factors, in addition to the other information in this prospectus, before purchasing shares of our common stock. Each of these risk factors could adversely affect our business, operating results and financial condition as well as adversely affect the value of an investment in our common stock. Risks Related to Our Business We do not have long-term purchase contracts with our customers and therefore our customers could stop doing business with us at any time. Generally, we do not have agreements with our customers that contain purchase commitments or guarantees for an ongoing business relationship. Accordingly, our customers could stop doing business with us at any time and we cannot guarantee an ongoing business relationship with our customers. Since we operate with virtually no backlog, if a customer stops doing business with us, we may not be able to replace the lost business with business from another existing client or a new client. To the extent we are unable to replace the business, some of our capacity would go unused, our revenues could decline and our results of operations may be adversely affected. Our focus on high volume customers results in customer concentration and increases the likelihood that losing a single customer would have an adverse impact on our revenues and results of operations. As part of our business model, we seek to replicate DVDs and CDs for high volume customers to reduce our marginal production costs. This strategy results in customer concentration and has inherent risks. For example, our top three customers, America Online, Inc., Modus Media International Holdings, Inc., and Havas Interactive, Inc. accounted for approximately 56% of our net sales for the year ended December 31, 1999. If we lose any of our large customers, our revenues may be reduced and our operating results may be adversely impacted. Additionally, the merger between America Online, Inc. and Time Warner may result in the diversion of some replication business from us to Time Warner's internal DVD and CD manufacturing operations. If DVD and/or CD prices decline, our revenues and margins may be reduced and our operating results may be adversely impacted. Since the introduction of CD media in 1982, there has been a significant growth in the CD replicating business, which has attracted numerous entrants and resulted in increased worldwide CD production capacity. As a result of this increased competition, wholesale CD prices have historically declined. If CD prices decline further we may not be able to reduce our costs or increase our volume to offset the decline in price. Additionally, if the acceptance of the DVD medium continues to grow, the DVD replicating business may attract new entrants, which may result in an increased worldwide DVD production capacity. As a result, wholesale DVD prices may decline and we may not be able to reduce our costs or increase our volume to offset the decline in price. These pricing pressures in the DVD and CD replication business could reduce our revenues and margins, which would adversely impact our operating results. We may not succeed in developing a substantial DVD customer base, which would adversely impact our growth strategy. We commenced our DVD production in the fourth quarter of 1999. Our growth strategy depends in part on our ability to attract additional DVD customers. We believe motion picture producers and distributors, computer hardware manufacturers and producers of computer software and games will primarily drive DVD sales. Although we plan to expand our customer relationships, we will be competing for DVD business with captive DVD manufacturers of major motion picture companies and we may not be successful in attracting additional DVD customers. 8 We may experience operational downtime if we are forced to move production to another facility. Since our business model is based on operating replicating facilities at a single geographic locale to achieve efficiencies associated with high volume, we will not be able to move production quickly to another facility if we experience operational downtime or capacity reduction. Earthquakes, power outages, or other events outside of our control could cause such operational downtime or capacity reduction. Any operational downtime or capacity reduction could result in the loss of major orders or customers and have a disproportionate adverse impact on our business, financial condition and results of operation. We substantially depend upon our key personnel and they would be difficult to replace. We depend on our executive officers for our success and the loss of any of these officers or key employees could disrupt our business. We depend on our key executives, including Alex Sandel, who is our Chief Executive Officer and David Moss, who is our Vice President--Operations. In addition to his management duties, Mr. Sandel also plays a key role in our sales and marketing efforts. We have entered into an employment agreement with Mr. Moss. In addition, we have purchased $3 million of "key person" life insurance on each of Messrs. Sandel and Moss, of which we are the sole beneficiary. However, in the event of the death of either of these executive officers, the proceeds of such insurance may not be sufficient to offset our loss. Because our operating results may fluctuate and are unpredictable from quarter to quarter, our share price may be adversely affected. Our net sales, net income and results of operations have fluctuated from quarter to quarter, and we expect these fluctuations to continue in the future because of many factors, including: . seasonal pattern of certain of the businesses we serve; . timing of new product releases by our customers; . commercial success of products offered by our customers; . timing of expenses incurred to obtain and support new business; and . general changes in economic and industry conditions. The demand for DVDs and CDs is usually highest in the second half of the year concurrent with the new school year and holiday gift purchases. This seasonality could result in significant quarterly variations in financial results, with the third and fourth quarters generally being the strongest. Additionally, we anticipate that demand for DVDs will be somewhat dependent on the timing of motion picture releases, with DVDs typically being released six months following the theatrical release of a motion picture. We may not be able to adequately reduce our costs on a timely basis if our revenues do not meet expectations in any given quarter. In addition, historically our product mix has been more heavily weighted to lower margin customers in the first six months of each year. If our results of operations for any period fall below the expectations of securities analysts or investors, the price of our common stock could decline. We heavily rely on our customers in the Internet and computer software industries and our operations could be impaired if demand from such industries drops. Currently, a substantial portion of our sales is to Internet service providers and computer software companies. We are dependent upon the continued growth and financial stability of the Internet and computer software industries, which may be affected by changes in any of the following: . economic conditions; . consumer trends and preferences; . sales of personal computers; . the installed base of CD-ROM and DVD drives in computers; and . sales of interactive game consoles. 9 Our sales are also dependent upon the ability of software publishers to create commercially successful content and Internet service providers continuing to market their services through the mass distribution of CDs. If we do not respond to technological change, we could lose customers and our services could become obsolete. The industries in which we compete are characterized by rapidly changing technologies. We may not be able to successfully adapt our manufacturing processes to new technologies. Additionally, we may not have the financial resources to make the capital expenditures necessary for such adaptations or be able to generate sufficient sales to recover these capital expenditures. If we fail to keep pace with rapidly changing industry technology, we will be at a competitive disadvantage and could lose customers. In addition, competing technologies, such as broadband data delivery systems, may render our existing and/or planned products and services obsolete. Our future performance and profitability could be impaired if we are unable to manage growth. Our future performance and profitability will depend on a number of factors, including our ability to obtain production machinery, and recruit, motivate and retain qualified personnel. In addition, our performance will depend on whether we are able to implement enhancements to our operational and financial systems, including our reporting obligations for being a public company. Moreover, our management and our administrative and financial resources may face significant demands resulting from any future expansion, whether internally or through acquisitions. If we are unable to compete successfully against current and future competitors our revenues and operating results could be impaired. The DVD and CD replication industries are highly competitive. Our primary competitors include the following DVD and/or CD replication companies: AmericDisc; Carlton Communications PLC; Cinram International, Inc.; Denon Electronics, Inc.; Disctronics, Inc.; DOCdata N.V.; JVC Corporation; and Zomax Optical Media, Inc. A number of these companies can handle large volume requirements and offer services not currently offered by us. In addition to the above listed companies, we compete with foreign manufacturers that can operate at lower costs. To a limited extent, we compete with large captive manufacturing divisions of major music and entertainment companies. Many of our existing competitors and future potential competitors may be larger and more established and have greater financial and other resources. As a result, such competitors may respond more quickly than us to market demands or devote greater resources to the manufacture, promotion and sale of their products. We heavily depend on licenses for DVD and CD technology and we may not be successful in obtaining and maintaining such licenses. We could incur significant loss of revenues if we are unable to obtain and maintain such licenses. We cannot guarantee that we will successfully obtain and maintain licenses for the patented technology we use. We manufacture CDs using patented technology primarily under nonexclusive licenses from U.S. Philips Corporation and Discovision Associates. These CD licenses generally provide for the payment of royalties based upon the number, type and size of CDs sold. Our license from Discovision Associates continues until the last patent covered by such license expires and our license from U.S. Philips Corporation continues until the earlier of October 1, 2006 or the expiration of the last patent covered by such license. In order to manufacture/replicate DVDs we must obtain licenses from U.S. Philips Corporation and Sony Corporation for certain patented DVD technology. We have entered into nonexclusive DVD licenses with U.S. Philips Corporation, which continue until October 1, 2009. Additionally, we believe we have finalized a nonexclusive DVD licensing agreement with Sony Corporation to use Sony Corporation's patented DVD 10 technology. We are currently awaiting the receipt of the executed copy of this DVD licensing agreement with Sony Corporation. These DVD licenses generally provide for the payment of royalties based upon the number and type of DVDs sold. We cannot assure you neither we nor our licensors will not be sued for patent infringement and have to stop using the licensed technologies. Our operating results could be impaired by burdensome environmental regulation and other legal uncertainties. Since the DVD and CD manufacturing processes involve the use of hazardous materials, we are subject to federal, state and local regulations governing the storage, use and disposal of hazardous materials. Our liability in the event of an accident or the costs of remediation could exceed our resources or insurance coverage. Also, we may have to incur substantial expenditures as a result of having to engage in preventive or remedial action, having to reduce chemical exposure or dealing with waste treatment or disposal. Risks Related to this Offering and Our Common Stock The rights of our shareholders could be adversely affected because our founders control us. Upon completion of this offering, two of our founders can elect or remove all members of the board of directors and thereby control our affairs and management. Moreover, upon completion of this offering, these two founders, Alex Sandel and Jason Barzilay, will beneficially own approximately % ( % if the underwriters' over-allotment option is exercised in full) of our outstanding shares. As a result of such ownership, these founding shareholders, acting together, can determine the outcome of elections and other matters presented to our shareholders for approval. Such concentration of ownership may cause any of the following: . delay, defer or prevent a change in our control; . adversely affect the voting and other rights of our other shareholders; and . depress the price of our common stock. Our existing shareholders will receive substantial benefits from this offering. Our existing shareholders will receive substantial benefits from the sale of our common stock in this offering. Specifically, we expect to use approximately $27.9 million of the net proceeds from this offering to repay our borrowings (including approximately $8.3 million which will be distributed to existing shareholders for 1998 and 1999 S Corporation taxes) that our existing shareholders personally guaranteed. Our existing shareholders will be released from such guarantees when we repay our borrowings. Moreover, we expect to distribute approximately $8.9 million of the net proceeds from this offering to our existing shareholders as a distribution of retained earnings including an amount for the purpose of paying income taxes on 2000 S Corporation earnings. In addition, the selling shareholders will receive net proceeds of $ million in the aggregate, and may benefit from increased liquidity of their remaining investment in us resulting from this offering. Purchasers in this offering will experience immediate and substantial dilution. If you purchase our common stock upon completion of this offering, you will experience an immediate and substantial dilution in the pro forma net tangible book value of the common stock from the initial public offering price. You will sustain an immediate and substantial dilution of $ per share, (assuming an initial public offering price of $ per share), based on the pro forma net tangible book value at December 31, 1999 of $2.4 million. If outstanding stock options and warrants are exercised then you will experience additional dilution. 11 No prior public market exists for our common stock and no active trading market may develop. Prior to this offering our common stock has not had a public market. Additionally, we cannot be certain that as a result of this offering an active trading market for our common stock will develop, or if it develops whether it will continue. Our stock price could fluctuate and we cannot assure you that the shares offered pursuant to this offering will trade at market prices in the range of the initial public offering price. The initial public offering price does not necessarily bear any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value. The initial public offering price of the shares of our common stock is negotiated with the selling shareholders and the underwriters. The trading price of our common stock could be subject to wide fluctuations in response to any of the following: . variations in our operating results; . announcements relating to our business (including new product introductions by us or by our competitors); . technological trends; . securities analysts changing financial estimates; . changes in the stock price or operating performance of other companies investors may deem comparable to us; . changes in general economic conditions or the financial markets; and . changes in the manufacturing or retail industries. Sales of additional shares of our common stock into the public market may cause our stock price to fall. Upon completion of this offering, we will have shares of common stock outstanding ( if the underwriters' over-allotment option is exercised in full). Of those shares, a total of shares (plus additional shares if the underwriters exercise their over-allotment option in full) will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended, unless purchased or held by our affiliates as that term is defined in Rule 144 under the Securities Act. Pursuant to Rule 144, sales of common stock by our affiliates are subject to the volume limitations, manner of sale, and notice requirements. All of our executive officers, directors and shareholders, including the selling shareholders, will execute lock-up agreements under which they will agree to not sell or otherwise transfer, directly or indirectly, any shares of common stock or any securities convertible into, or exercisable or exchangeable for, any shares of common stock for a period of 180 days after the date of this prospectus without the prior written consent of Prudential Securities Incorporated, on behalf of the underwriters. After the expiration of the 180-day period, shares that can be sold under Rule 144 will be eligible for sale. Prudential Securities Incorporated may, in its sole discretion, at any time and without notice, release all or any portion of the shares of our common stock subject to these lock-up agreements. Sales of substantial amounts of our common stock in the public market, or the perception sales could occur, could adversely affect the prevailing market price for the common stock and could impair our ability to raise capital through a public offering of equity securities.
Number of shares Date of availability for resale into public market ---------------- -------------------------------------------------- 9,000,000 180 days after the date of this prospectus due to a lock-up agreement our two existing shareholders have with Prudential Securities. However, Prudential Securities can waive this restriction at any time and without notice. Since these shares are held by our affiliates, sales of these shares will also be subject to the volume limitations of Rule 144.
12 Provisions in our charter documents could deter takeover efforts or depress our stock price. Provisions of our Articles of Incorporation, Bylaws and California law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock issued in the future. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by our shareholders. Following this offering, we will not have any shares of preferred stock outstanding and we have no present intention to issue any shares of preferred stock. However, preferred stock could be issued with voting, liquidation, dividend and other rights superior to those of the common stock. An issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock, which may depress the market value of our common stock. Provisions of our Articles of Incorporation make it difficult for minority shareholders to obtain representation on the board of directors. Our Articles of Incorporation provide cumulative voting rights of shareholders, which cease at such time we have 800 or more holders of our common stock as of the record date of our most recent annual meeting of shareholders. This provision has the effect of making it more difficult for minority shareholders to obtain representation on the board of directors once we have 800 or more shareholders. FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements are subject to a number of risks, uncertainties and assumptions about us, including, among other things: . general economic and business conditions, both nationally and in our markets; . our expectations and estimates concerning future financial performance, financing plans and the impact of competition; . anticipated trends in our business; . existing and future regulations affecting our business; . successful implementation of our business strategy; . our relationship with large customers; . fluctuations in our operating results; . increasing adoption of alternative data delivery systems; . technological trends in the DVD and CD industries; and . other risk factors described under "Risk Factors" in this prospectus. In addition, in this prospectus, the words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect" and similar expressions, as they relate to us, our business or our management, are intended to identify forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. 13 TERMINATION OF S CORPORATION STATUS We have been treated as an S Corporation since our inception. As a result, our shareholders have been directly taxed on our earnings for federal income tax purposes instead of us. Other than a tax imposed on S Corporations by the State of California (currently 1.5% of income), our shareholders have also been responsible for state income taxes on earnings. Such taxation of our shareholders will continue through the date immediately preceding the date of termination of our S Corporation status. The termination date will occur immediately prior to the closing of this offering. On the termination date, we will become a C Corporation for tax purposes and be subject to federal and state corporate income taxes. From January 1, 2000 through the date of this prospectus we paid an aggregate of approximately $2.3 million in dividends to our shareholders. From the date of this prospectus through April 2000 we expect to pay approximately $6.0 million in additional dividends to our shareholders. Out of the proceeds of this offering, we expect to pay approximately $8.9 million in dividends to our shareholders, including approximately $1.8 million for the purpose of paying S Corporation taxes. Pursuant to our current loan agreement with Greyrock, we may not declare or pay any dividends or make any distribution without the prior written consent of Greyrock, except for distributions to existing shareholders for the purpose of paying income taxes on our S Corporation earnings. We have entered into a tax indemnification agreement with our existing shareholders relating to their respective income tax liabilities. The tax indemnification agreement is intended to assure we assume the taxes on the one hand and our existing shareholders assume certain taxes on the other only to the extent such parties received the related income giving rise to such taxes. The tax indemnification agreement generally provides, if an adjustment is made to our taxable income for a year in which we were treated as an S Corporation, we will indemnify our existing shareholders and our existing shareholders will indemnify us against any increase in indemnified party's income tax liability (including interest and penalties and related costs and expenses), with respect to any tax year to the extent such increase results in a related decrease in the income tax liability of the indemnifying party for any year. We will also indemnify the existing shareholders for all taxes imposed upon them as the result of their receipt of an indemnification payment under the tax indemnification agreement. Any payment made by us to the existing shareholders pursuant to the tax indemnification agreement may be considered by the Internal Revenue Service or state taxing authorities to be non-deductible by us for income tax purposes. 14 USE OF PROCEEDS The net proceeds to us from this offering, at an assumed initial public offering price of $ per share, are estimated to be approximately $ million, $ million if the underwriters' over-allotment options from us are exercised in full, after deducting the underwriting discounts and commissions and estimated offering expenses. We expect to use a portion of the net proceeds to repay all existing bank debt to Greyrock Capital, a division of Banc of America Commercial Finance Corporation, in an amount estimated to be approximately $27.9 million at closing. The bank debt was used to purchase capital equipment, to pay a distribution to the existing shareholders and for general corporate purposes. The existing shareholders have personally guaranteed repayment of the bank debt and upon repayment of the loan from Greyrock, the shareholder guarantees will terminate. We also expect to use approximately $14.1 million to purchase capital equipment. We also plan to distribute $ 8.9 million to our existing shareholders as a distribution of the retained earnings through the closing of this offering, including an amount for the purpose of paying income taxes on our S Corporation earnings. In addition, upon the closing of this offering we plan to pay $ to Averil Capital Markets Group, Inc., for services rendered in connection with this offering. Averil Capital Markets Group, Inc., is a financial advisory firm founded and controlled by Diana Maranon, who is one of our directors. The balance of the net proceeds will be used for working capital and general corporate purposes, including potential strategic investments. Pending such uses, we intend to invest the net proceeds in short-term, interest bearing securities or guaranteed obligations of the United States government. We will not receive any proceeds from the sale of shares by the selling shareholders. DIVIDEND POLICY Historically we have paid cash dividends when operating as an S Corporation. However, other than paying approximately $8.9 million out of the net proceeds of this offering to our existing shareholders as a distribution of retained earnings, including an amount for the purpose of paying income taxes on S Corporation earnings, we have no current intention to declare or pay dividends on our common stock following our conversion to C Corporation status. Instead, we intend to follow a policy of retaining earnings to finance the growth of our business. Our board of directors will have the discretion to determine any future dividend payments and such discretion may depend on the following: our results of operations; our financial condition; contractual and legal restrictions; and other factors our board of directors deems relevant. Pursuant to our current loan agreement with Greyrock, we may not declare or pay any dividends or make any distribution without the prior written consent of Greyrock, except for distributions to existing shareholders for the purpose of paying income taxes on our S Corporation earnings. 15 DILUTION Purchasers of our common stock in this offering will experience immediate and substantial dilution in the pro forma net tangible book value of our common stock from the initial public offering price. The pro forma net tangible book value of our common stock as of December 31, 1999 was $2.4 million. Pro forma net tangible book value per share is equal to our total tangible assets, less total liabilities, divided by the number of shares of common stock outstanding, after giving effect to (i) the distribution by us of approximately $14.4 million to our existing shareholders as a retained earnings distribution, including an amount for the purpose of paying income taxes on S Corporation earnings, and (ii) the recording by us of additional deferred taxes as if we were treated as a C Corporation at December 31, 1999. After giving effect to the sale of shares of common stock by us and the receipt and application of the estimated net proceeds, assuming an initial public offering price of $ per share, after deducting the underwriting discounts and commissions and estimated offering expenses, including an amount of $ to be paid to Averil Capital Markets Group, Inc., a company controlled by one of our directors upon the closing of this offering, our pro forma net tangible book value as of December 31, 1999 would have been approximately $ or $ per share. This represents an immediate increase in net tangible book value of $ per share to our current shareholders and an immediate and substantial dilution of $ per share to new shareholders purchasing shares in this offering. The following table illustrates this per share dilution: Assumed initial public offering price.......................... $ Pro forma net tangible book value as of December 31, 1999.... $0.26 Increase attributable to new shareholders.................... ----- Pro forma net tangible book value as of December 31, 1999 after the offering.................................................. ----- Dilution to new shareholders................................... $ =====
The following table summarizes a comparison of the number of shares of common stock acquired from us, the percentage ownership of such shares, the total consideration, the percentage of total consideration and the average price per share paid by the existing shareholders and by the investors purchasing shares of common stock in this offering, before the deduction of underwriting discounts and commissions and offering expenses.
Total Shares Purchased Consideration Average ----------------- --------------- Price Per Number Percent Amount Percent Share --------- ------- ------- ------- --------- Current shareholders............. 9,000,000 % $15,000 % $-- New investors.................... $ --------- ----- ------- ----- ---- 100.0% $ 100.0% ========= ===== ======= ===== ====
The foregoing tables and calculations assume no exercise of outstanding options under our 1998 stock incentive plan and no exercise of the warrants granted to David Moss. At the date of this prospectus, 828,000 shares of common stock were subject to outstanding options under our 1998 stock incentive plan at a weighted average exercise price of $11.35 per share and 366,600 shares of common stock were issuable upon exercise of the warrants held by David Moss at an exercise price of $0.0017 per share. To the extent options or warrants are exercised, there will be further dilution to new investors. 16 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1999 on (i) an actual basis; (ii) on a pro forma basis to give effect to the accrual for the payment of $14.4 million to our current shareholders as a distribution of retained earnings, including an amount for the purposes of paying income taxes on S Corporation earnings and the recording of additional deferred taxes of approximately $2.7 million based on the increase in the effective tax rate upon our anticipated change from an S Corporation to C Corporation; and (iii) pro forma as adjusted to reflect the pro forma adjustments and to give effect to our receipt of approximately $ million in estimated net proceeds from this offering, including a deduction of $ to be paid to Averil Capital Markets Group, Inc., a company controlled by one of our directors upon the closing of this offering and the application of these net proceeds, including the repayment of existing bank debt of $9.8 million at December 31, 1999, of which $5.3 million was classified as long-term debt.
At December 31, 1999 ----------------------------- Pro Pro Forma Actual Forma As Adjusted ------- ------- ----------- (in thousands) Long-term debt, less current portion............. $ 5,327 $ 5,327 $ ------- ------- ---- Shareholders' equity(1): Preferred Stock, no par value; 5,000,000 shares authorized; no shares issued or outstanding actual, pro forma or pro forma as adjusted........................... -- -- Common Stock, no par value; 45,000,000 shares authorized; 9,000,000 shares issued and outstanding actual and pro forma; shares outstanding pro forma as adjusted........................... 3,790 3,790 Note receivable from officer................... (1,428) (1,428) Retained earnings.............................. 17,107 -- ------- ------- ---- Total shareholders' equity................. 19,469 2,362 ------- ------- ---- Total capitalization....................... $24,796 $ 7,689 $ ======= ======= ====
- -------- (1) Does not include: (a) 1,200,000 shares of common stock available for issuance pursuant to our 1998 stock incentive plan, of which 828,000 shares were subject to outstanding options as of the date of this prospectus at a weighted average exercise price of $11.35 per share; and (b) 366,600 shares of common stock issuable upon exercise of warrants issued to David Moss, our Vice President--Operations, at an exercise price of $0.0017 per share. 17 SELECTED FINANCIAL DATA We derived the statement of income data for the years ended December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 presented below from our financial statements included in another part of this prospectus. The statement of income data for the years ended December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995, 1996 and 1997 are derived from our audited financial statements not included in this prospectus. The financial statements as of and for the years ended December 31, 1997, 1998 and 1999 have been audited by Ernst & Young, LLP, independent auditors. You should read the selected financial data together with the historical financial statements and related notes to our audited reports, as well as the section included in this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year Ended December 31 ------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- ------- (in thousands, except per share data) Statement of Income Data: Net sales........................ $26,972 $25,814 $36,042 $43,311 $53,002 Cost of goods sold............... 14,821 11,972 23,132 27,304 31,938 ------- ------- ------- ------- ------- Gross profit..................... 12,151 13,842 12,910 16,007 21,064 Selling, general and administrative expenses......... 6,093 2,537 4,214 4,232 4,201 Stock related compensation expense(1)...................... -- -- -- 3,055 720 Abandoned offering costs......... -- -- -- 676 -- ------- ------- ------- ------- ------- Income from operations........... 6,058 11,305 8,696 8,044 16,143 Interest income.................. 12 252 42 35 1 Interest expense................. (957) (1,108) (818) (1,264) (1,404) Change in accounting estimate for royalties(2).................... -- 3,770 -- -- -- ------- ------- ------- ------- ------- Income before state income taxes........................... 5,113 14,219 7,920 6,815 14,740 Provision for state income taxes........................... 72 223 120 102 2 ------- ------- ------- ------- ------- Net income....................... $ 5,041 $13,996 $ 7,800 $ 6,713 $14,738 ======= ======= ======= ======= ======= Earnings per share: Basic........................... $ 0.56 $ 1.56 $ 0.87 $ 0.75 $ 1.64 ======= ======= ======= ======= ======= Diluted......................... $ 0.56 $ 1.56 $ 0.87 $ 0.71 $ 1.43 ======= ======= ======= ======= ======= Shares used in computing earnings per share: Basic........................... 9,000 9,000 9,000 9,000 9,000 ======= ======= ======= ======= ======= Diluted......................... 9,000 9,000 9,000 9,498 10,336 ======= ======= ======= ======= ======= Pro Forma Statement of Income Data(3)(unaudited): Pro forma net income data: Income before provision for income taxes.................... $14,740 Pro forma income tax provision... 5,896 ------- Pro forma net income............. $ 8,844 ======= Pro forma basic earnings per share........................... $ 0.98 ======= Pro forma diluted earnings per share........................... $ 0.86 ======= Weighted average shares outstanding--basic.............. 9,000 ======= Weighted average shares outstanding--diluted............ 10,336 =======
December 31, December 31, 1999 ------------------------------- ------------------------------------- Pro Forma 1995 1996 1997 1998 Actual Pro Forma (4) As Adjusted (5) ------- ------- ------- ------- ------- ------------- --------------- (in thousands, except per share data) Balance Sheet Data: Current assets.......... $10,846 $11,252 $ 8,036 $ 9,204 $ 8,253 $ 8,553 Property and equipment, net.................... 11,896 12,097 17,636 21,898 29,837 29,837 Total assets............ 22,909 24,155 25,920 31,438 41,089 41,389 Current liabilities..... 12,839 8,865 14,132 16,246 16,165 33,272 Long term debt, less current portion........ 4,750 2,129 1,755 9,085 5,327 5,327 Total shareholders' equity................. 5,305 13,144 9,936 5,999 19,469 2,362 Dividends per share..... -- .68 1.22 1.52 .06 --
18 - -------- (1) On January 1, 1998, we granted warrants to purchase 366,600 shares of common stock at an exercise price of $0.0017 per share to David Moss, our Vice President--Operations. These warrants expire on December 31, 2007. In connection with the grant of these warrants, we recognized compensation expense of $3,055,000 in 1998 representing the excess of the estimated fair value of the shares over the exercise price. In 1999 our existing shareholders committed to give 30,000 shares of their stock to a director for services to us. For the year ended December 31, 1999 we recorded stock related compensation expense of $720,000 for this commitment, based upon the estimated fair value of the shares to be given. (2) We executed license agreements with two developers of CD technology effective June 1, 1996 and October 1, 1996, respectively. The agreements set forth royalty rates payable to the licensors for the license to manufacture and sell CDs. We reached settlements totaling $70,000 for CD sales occurring before the effective dates of the agreements. Because of the settlement amounts, our prior estimates of royalty liabilities were overstated by approximately $3,770,000 and the adjustment to the accruals was made in 1996. (3) We have been exempt from paying federal income taxes and have paid certain state income taxes at a reduced rate because of our S Corporation status. Upon the completion of this offering, our S Corporation status will terminate. Pro forma statement of income data reflect the income tax expense recordable had we not been exempt from paying taxes under the S Corporation election. Because of the termination of our S Corporation status, we will be required to record a one-time, non-cash charge against historical earnings for additional deferred taxes based upon the increase in the effective tax rate from our S Corporation status (1.5%) to C Corporation status (approximately 40%). This charge will occur in the quarter during which our S Corporation status is terminated. If this charge was recorded at December 31, 1999, the amount would have been approximately $2.7 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 7 to the December 31, 1999 financial statements. (4) The pro forma balance sheet reflects (i) an accrual for the distribution of retained earnings of approximately $14.4 million to our current shareholders, including an amount for the purpose of paying income taxes on S Corporation earnings and (ii) the recording of additional deferred taxes of approximately $2.7 million based on the increase in the effective tax rate upon our anticipated change from an S Corporation to a C Corporation. (5) Adjusted for pro forma adjustments discussed above and to give effect to the receipt and application of the net proceeds of this offering, including a deduction of $ to be paid to Averil Capital Markets Group, Inc., a company controlled by one of our directors upon the closing of this offering and the repayment of existing bank debt. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the "Selected Financial Data" and the financial statements and related notes, which are included in this prospectus. Results of Operations Sales are generally recorded at the time of shipment. However, in certain instances, sales are recognized upon completion of an order, prior to shipment, if the risks of ownership have passed to the customer. In these circumstances, which have been insignificant at the end of reporting periods, we obtain written instructions from the customer to hold the product for future shipment. Cost of goods sold consists primarily of the following: . raw materials; . direct labor; . depreciation of plant equipment; . repairs and maintenance of plant equipment; . royalties payable on the sale of DVDs and CDs; and . rent and utilities related to the plant facility. In addition to changes in these costs, our cost of goods sold as a percentage of net sales are affected by various factors, including the following: . DVD and CD units manufactured and associated number of units sold as a percentage of our total DVD and CD production capacity in any period, which directly affects gross margin due to the high component of fixed costs inherent in our operations; . average unit prices we are able to charge for our products, which are subject to market conditions; and . raw material packaging costs and associated direct labor costs required to fulfill customer orders during any particular period. Quarterly Results The following table sets forth certain unaudited statement of income data for the last eight quarters and has been prepared on the same basis as the annual information and in management's opinion includes all adjustments necessary to present fairly the information for each of the quarters below.
Three Months Ended -------------------------------------------------------------------------------------- 1998 1999 ------------------------------------------- ------------------------------------------ March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- -------- ------- ------------ ----------- (in thousands) Net sales............... $ 6,915 $9,794 $12,025 $14,577 $8,675 $11,313 $14,960 $18,054 Cost of goods sold...... 4,634 6,389 7,727 8,554 5,864 6,744 9,283 10,047 ------- ------ ------- ------- ------ ------- ------- ------- Gross profit............ 2,281 3,405 4,298 6,023 2,811 4,569 5,677 8,007 Selling, general and administrative expenses............... 861 1,146 812 1,413 1,072 1,030 888 1,211 Stock related compensation expense... 3,055 -- -- -- -- -- -- 720 Abandoned offering costs.................. -- -- -- 676 -- -- -- -- ------- ------ ------- ------- ------ ------- ------- ------- Income (loss) from operations............. (1,635) 2,259 3,486 3,934 1,739 3,539 4,789 6,076 Interest income......... -- 15 20 -- -- 24 28 (51) Interest expense........ (131) (317) (416) (400) (351) (330) (372) (351) ------- ------ ------- ------- ------ ------- ------- ------- Income (loss) before state income taxes..... (1,766) 1,957 3,090 3,534 1,388 3,233 4,445 5,674 Provision (benefit) for state income taxes..... (16) 19 46 53 -- -- 1 1 ------- ------ ------- ------- ------ ------- ------- ------- Net income (loss)....... $(1,750) $1,938 $ 3,044 $ 3,481 $1,388 $ 3,233 $ 4,444 $ 5,673 ======= ====== ======= ======= ====== ======= ======= =======
20 We have experienced, and expect to experience in the future, quarterly variations in revenues and earnings as a result of various factors, many of which are outside our control, including: .seasonal patterns of certain of the businesses we serve; .timing of new product releases by our customers; .commercial success of products offered by our customers; .timing of expenses incurred to obtain and support new business; and .general changes in economic and industry conditions. Typically, we experience increased demand for our products in our third and fourth quarters. Such increase is primarily due to the release of new products by our customers for the new school year and the holiday season. Yearly Results The following table provides certain statement of income data expressed as a percentage of net sales for the specified periods.
Year Ended December 31 ------------------------- 1997 1998 1999 ------- ------- ------- Net sales............................................ 100.0% 100.0% 100.0% Cost of goods sold................................... 64.2 63.0 60.3 ------- ------- ------- Gross profit......................................... 35.8 37.0 39.7 Selling, general and administrative expenses......... 11.7 9.8 7.9 Stock related compensation expense................... -- 7.1 1.4 Abandoned offering costs............................. -- 1.6 -- ------- ------- ------- Income from operations............................... 24.1 18.5 30.4 Interest income...................................... 0.1 0.1 -- Interest expense..................................... (2.2) (2.9) (2.6) ------- ------- ------- Income before state income taxes..................... 22.0 15.7 27.8 Provision for state income taxes..................... 0.3 0.2 -- ------- ------- ------- Net income........................................... 21.7% 15.5% 27.8% ======= ======= =======
As shown by the above table, over the last three years, as a percentage of sales our gross profit margins have increased from 35.8% in 1997 to 39.7% in 1999. In addition our selling, general and administrative expenses have decreased as a percentage of sales from 11.7% in 1997 to 7.9% in 1999. These favorable trends are a result of the fact that our business has a high percentage of fixed costs, both in costs of goods sold, which directly effects our gross profit, and in selling, general and administrative expenses. Therefore, by increasing revenues, our costs as a percentage of revenues tend to decrease resulting in higher income from operations as a percentage of sales. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Net Sales. Net sales totaled $53,001,871 for the year ended December 31, 1999 as compared to $43,311,180 for the year ended December 31, 1998. This represents an increase of $9,690,691 or 22.4% for the year ended December 31, 1999, as compared to the year ended December 31, 1998. This increase is a result of increased CD unit sales of approximately 26.3%, partially offset by lower packaging revenues. Our pricing is comprised of a price for the unit (CD or DVD) and a price for packaging, when our customers request this service. While our unit prices for CDs remained constant during 1999 as compared to 1998, our packaging revenues decreased by approximately $3,048,011. The additional CD unit sales during 1999 are a result of increased demand for our products with fulfillment of these orders made possible by production capacity added subsequent to 1998. In addition, we commenced production and shipment of DVDs during the fourth quarter of 1999, which added $2,718,333 to revenues for the year. 21 Cost of Goods Sold. Cost of goods sold was $31,937,704 for the year ended December 31, 1999 and $27,304,178 for the year ended December 31, 1998. Cost of goods sold as a percentage of sales was approximately 60.3% for the year ended December 31, 1999 as compared to 63.0% for the year ended December 31, 1998. As a percentage of sales in 1999, our raw materials costs decreased 4.8% and shipping costs decreased 0.7%, partially offset by increases in depreciation expense of 1.3%, factory overhead of 1.9% and royalties of 0.5%. Gross Profit. Gross profit for the year ended December 31, 1999 was $21,064,167 or 39.7% of net sales as compared to $16,007,002 or 37.0% of net sales for the year ended December 31, 1998. Our gross profit increased because our volume of CD and DVD units sold increased, in line with our business model, as a result of the increased production capacity we added during 1999. Selling, General and Administrative Expenses. As a percentage of net sales, selling, general and administrative expenses decreased from 9.8% for the year ended December 31, 1998 to 7.9% for the year ended December 31, 1999. Selling, general and administrative expenses were $4,200,969 for the year ended December 31, 1999 as compared to $4,232,741 for the year ended December 31, 1998, a decrease of $31,772 or approximately 0.8%. This decrease is the net result of reduced amounts paid for consulting fees (approximately $396,000), taxes and licenses (approximately $107,000) and miscellaneous items (approximately $147,000), offset by higher amounts paid for salaries and related benefits (approximately $486,000) and office related expenses (approximately $132,000) in 1999. Stock Related Compensation Expense. In 1999 our existing shareholders committed to give 30,000 shares of their stock to a director for services to us. For the year ended December 31, 1999 we recorded compensation expense of $720,000 for this commitment, based upon the estimated fair value of the shares to be given. On January 1, 1998, we granted warrants to purchase 366,600 shares of stock at $0.0017 per share to one of our officers, with the warrants expiring on December 31, 2007. In connection with these warrants, we recognized compensation expense for $3,055,000 in 1998 representing the excess of the estimated fair value of the shares over the exercise price. Income from Operations. Income from operations totaled $16,143,198 for the year ended December 31, 1999 and $8,043,528 for the year ended December 31, 1998. This represents an increase of $8,099,670 or 100.7% for the year ended December 31, 1999, as compared to the year ended December 31, 1998. Income from operations was 30.4% of net sales for the year ended December 31, 1999 and 18.5% of net sales for the year ended December 31, 1998. Excluding the stock related compensation expense in 1999 and 1998 and abandoned offering costs recognized in 1998, income from operations would have been 16,863,198 or 31.8% of net sales in 1999 and $11,774,261 or 27.2% of net sales in 1998. As a result, income from operations in 1999 as compared to 1998 would have increased $5,088,937 or 43.2%. Interest Expense. Interest expense was $1,403,694 for the year ended December 31, 1999 and $1,263,861 for the year ended December 31, 1998. The increase of 11.1% in 1999 as compared to 1998 is the net result of higher average borrowings during 1999, partially offset by lower average interest rates. Our weighted average interest rate on our debt was 10.1% for the year ended December 31, 1999 and 10.4% for the year ended December 31, 1998. Income Tax Expense. We have operated as an S Corporation for federal and state income tax purposes, and accordingly we are not subject to federal taxes and subject to only a minimal percentage of state income taxes. The only provision for income taxes was the amount required for state income tax purposes. Our total income tax expense was $2,000 for the year ended December 31, 1999 due to our S Corporation status and credits we receive for state taxes for purchases of manufacturing equipment. Net Income. Based on our S Corporation status and the factors discussed above, net income was $14,738,174 for the year ended December 31, 1999 and $6,712,633 for the year ended December 31, 1998. This represents an increase of $8,025,541 or 119.6% for the year ended December 31, 1999 as compared to the year ended December 31, 1998. 22 Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Net Sales. Net sales for the year ended December 31, 1998 totaled $43,311,180 compared to net sales for the year ended December 31, 1997, which totaled $36,042,427. This increase of $7,268,753, or 20.2%, is attributable to an increase in the number of CDs sold of approximately 55.9%, offset by lower average CD sales prices for the year ended December 31, 1998 compared to 1997. Our pricing is comprised of a price for the unit (CD) and a price for packaging, when our customers request this service. Our average unit price declined in 1998 as compared to 1997 by approximately 14.8%. In addition, our packaging revenues decreased by $1,384,468 in 1998 from the amounts in 1997. The additional unit sales during 1998 are a result of increased demand for our products with fulfillment of these orders made possible by production capacity added subsequent to 1997. Cost of Goods Sold. Cost of goods sold for the year ended December 31, 1998 totaled $27,304,178 or 63.0% of net sales, compared to $23,132,442 or 64.2% of net sales for the year ended December 31, 1997. As a percentage of net sales, increases in cost of sales in the year ended December 31, 1998 were related to increases in royalties of 2.2% and depreciation of production equipment of 1.3%, offset by decreases in factory overhead of 2.3%, raw material costs of 1.0% and obsolescence reserves of 1.4%. Gross Profit. Because of the foregoing, gross profit for the year ended December 31, 1998 was $16,007,002, as compared to $12,909,985 for the year ended December 31, 1997, an increase of $3,097,017 or 24.0%. As a percentage of net sales, gross profit was 37.0% in 1998 as compared to 35.8% in 1997. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4,232,741 for the year ended December 31, 1998 and $4,214,033 for the year ended December 31, 1997. This represents an increase of $18,708 or less than 1.0% in 1998 over 1997. As a percentage of net sales, selling, general and administrative expenses decreased from 11.7% for the year ended December 31, 1997 to 9.8% for the year ended December 31, 1998. Income from Operations. Because of the above items, income from operations was $8,043,528 for the year ended December 31, 1998 and $8,695,952 for the year ended December 31, 1997, a decrease of $652,424 or 7.5%. As a percentage of net sales, income from operations was 18.6% in 1998 and 24.1% in 1997. Excluding the stock warrant compensation expense and abandoned offering costs recognized in the year ended December 31, 1998, income from operations would have been $11,774,261 or 27.2% of net sales. This represents an increase of $3,078,309 or 35.4% of the amount in 1997. Interest Expense. Interest expense totaled $1,263,861 for the year ended December 31, 1998 and $817,998 for the year ended December 31, 1997. This increase in 1998 of $445,863, or 54.5%, is a result of higher average borrowings in 1998 as compared to 1997. The weighted average interest rate on our debt was 10.4% for the year ended December 31, 1998 and 10.5% for the year ended December 31, 1997. Income Tax Expense. We have operated as an S Corporation for federal and state income tax purposes, and accordingly we were not subject to federal taxes and we were only subject to a minimal percentage (1.5% of pretax income) of state income taxes. The only provision for income taxes was the amount required for state income tax purposes. Net Income. Because of the items discussed above, net income was approximately $6,712,633 for the year ended December 31, 1998 and was approximately $7,800,159 for the year ended December 31, 1997, a decrease of $1,087,526 or 13.9%. 23 Liquidity and Capital Resources Historically we have funded our operations and capital expenditures through cash flow from operations, borrowings under our lines of credit and favorable terms from our equipment vendors for the purchase of equipment used in our manufacturing operations. In February 1997, we entered into a credit agreement with Greyrock Capital, a division of Banc of America Commercial Finance Corporation ("Greyrock"), which was amended in January 1998 and further amended in April 1998, July 1998, June 1999 and January 2000. The credit agreement currently provides (i) receivable loans based on 80% of our eligible receivables, (ii) equipment loans based on 90% of the net purchase price of new equipment purchased and delivered subsequent to June 1999 and (iii) additional revolving loans. Under the credit agreement we are allowed to borrow the lower of $30,000,000, or an amount equal to 80% of our eligible receivables and up to $15,000,000 of equipment loans plus the unpaid balance of the revolving loans. The credit agreement had an original maturity date of February 28, 1998 and provided for automatic renewals. In January 2000, the maturity date was extended to June 30, 2001, and continues to provide for automatic renewals. The credit agreement is secured by accounts receivable, equipment, inventory and other assets and is personally guaranteed by our existing shareholders. Unlike a typical revolving loan or line of credit, loans under the Greyrock credit agreement are advanced at Greyrock's sole discretion. Accordingly, there can be no guarantee that funds will be available under this credit agreement in the future. We do not pay any commitment fees for the unused portion of the credit facility. Borrowings under receivable loans bear interest at the prime rate (8.5% at December 31, 1999) plus 2.0% per annum; however, the interest rate will not be less than 7.0% per annum. At December 31, 1999 there was a total of $1,852,303 borrowed under the receivable loans. Under the amendment of April 1998, the revolving loans were for up to $15,000,000, payable in monthly principal installments of $312,500 through (i) the earlier of the date the credit agreement terminates, or is terminated, or (ii) April 2002. In addition, this amendment disallowed any distributions to shareholders except for the purpose of paying income taxes on S corporation earnings. We obtained permission from Greyrock for the loans and advances to related parties that are described in Certain Relationships and Related Transactions. The revolving loans bear interest at the prime rate (8.5% at December 31, 1999) plus 2.0% per annum; however the interest rate will not be less than 7.0% per annum. The outstanding balance of the revolving loans was $9,062,500 at December 31, 1999. Under the amendment of June 1999, amounts borrowed under the equipment loans are to be repaid in 48 equal monthly payments of principal through the earlier of (i) the earlier of the date the credit agreement terminates, or is terminated or (ii) the date such equipment loans have been repaid in full. The equipment loans bear interest at the prime rate (8.5% at December 31, 1999) plus 2.0% per annum; however, the interest rate will not be less than 7.0% per annum. At December 31, 1999 no amounts had been borrowed under the equipment loans. As of December 31, 1999 we had available a total of $8,978,932 under the credit facility, of which $5,457,420 was available on the equipment loans and $3,521,512 was available under the receivable loans. We expect to use a portion of our net proceeds from this offering to repay all amounts outstanding under the credit agreement. We expect to maintain a $30 million credit facility with Greyrock or another lender. Net cash provided by operating activities was $23,046,306 for the year ended December 31, 1999. We spent a net amount of $5,667,671 in financing activities for the year ended December 31, 1999. This amount results mainly from repayment of long-term debt of $3,756,986, loans to an officer of $1,428,000 and distributions to the existing shareholders of $560,000 for the payment of taxes. We spent a total of $17,378,635 in investing activities in 1999. Of this amount, $15,226,235 was spent for property and equipment utilized in our operations. In addition, we made cash investments totaling $2,152,400 in two companies with whom we entered into strategic alliances. On December 21, 1999, we purchased 648 units of Lions Gate Entertainment totaling $1,652,400 through a public offering. Each unit consists of one share of 5.25% convertible redeemable preferred stock and 425 warrants. Through this investment, we were able to align ourselves with a motion picture company, which distributes DVDs. As an additional element to 24 our investment in Lions Gate Entertainment we received the right to replicate all of its DVDs at market prices for a period of three years. On December 23, 1999 we invested cash of $500,000 in Synthonics Technologies, Inc. in return for a note receivable convertible into 11,518,096 shares of Synthonics Technologies, Inc. common stock. As part of our investment, we agreed to replicate up to 2 million CDs without charge to Synthonics Technologies, Inc. and establish a catalog entity to develop and produce 3D interactive catalogs on behalf of Synthonics Technologies, Inc. and its customers. Out of the net proceeds of this offering, we anticipate investing approximately $14,100,000 in capital equipment. This new equipment will expand our capacity for replication of DVDs and CDs. It should be noted, however, the purchase of equipment is subject to many factors, including but not limited to future demand for our product. Therefore, no assurance can be given we will purchase equipment as described above, and actual equipment purchased may vary significantly from our projections. We believe cash flows from operations, net proceeds from this offering, together with available funds under the credit agreement, will be sufficient to support our operating and capital expenditures for the next twelve months. However, long-term capital requirements depend on many factors, including, but not limited to, the rate at which we expand our business, whether internally or through acquisitions and strategic alliances. To the extent the funds generated from the sources described above are insufficient to fund our activities in the short or long term, we will be required to raise additional funds through public or private financings. No assurance can be given additional funds will be available on terms acceptable to us. Seasonality The demand for DVDs and CDs is usually highest in the second half of the year, concurrent with the new school year and holiday gift purchases. This seasonality could result in significant quarterly variations in financial results, with the third and fourth quarters generally being the strongest. Inflation Prices for raw materials used in the production of DVDs and CDs have not changed substantially as a percentage of sales since 1996, and in certain instances decreased during the year 1999. However, some of our other manufacturing and selling, general and administrative costs have continued to increase (primarily in the aggregate and sometimes as a percentage of net sales) since the beginning of 1996. As our general CD selling price has been relatively unchanged over the last two years, we have been unable to pass these costs on to our customers. Despite this trend we have remained profitable by increasing net sales. Impact of Year 2000 In 1999, we completed our remediation and testing of systems. Because of those planning and implementation efforts, we experienced no significant disruptions in mission critical information technology and non-information technology systems and those systems have successfully responded to the Year 2000 date change. We did not incur any significant expenses during 1999 in connection with remediating our systems. We are not aware of any material problems resulting from Year 2000 issues, either with our products, internal systems, or the products and services of third parties. We will continue to monitor our mission critical computer applications and those of our suppliers and vendors throughout the year 2000 to ensure any latent Year 2000 matters arising are addressed promptly. Qualitative and Quantitative Disclosures About Market Risk We are exposed to market risk related to changes in interest rates. There are currently no risks related to foreign currency exchange rates and we do not use derivative financial instruments, swaps, commodity investments or hedging. Our interest expense is sensitive to changes in the prime rate. Due to the nature of our debt, we have concluded that there is no material market risk exposure. 25 INDUSTRY OVERVIEW The Digital Versatile Disc (DVD) and Compact Disc (CD) are among the most popular optical media for content delivery and are widely used in the distribution of movies, music, application and edutainment software, publishing content and Internet/online promotional materials. The wide acceptance of DVD and CD as a content delivery media has fueled the growth of the replication industry. The first commercial application of CD technology was storage and playback of pre-recorded music, or CD-Audio, which was adopted as an international standard in 1982, and introduced to the consumer market in 1983. The CD-ROM entered the market in 1991, providing cost-effective storage and retrieval of any combination of data, text, graphics, audio and video. The DVD entered commercial distribution in December 1996. DVDs are currently capable of storing up to 13 times as much data as CDs and are suitable for high quality playback of film and video, multi-channel surround sound audio and interactive media. An important advantage of DVD players and DVD-ROM drives, which should speed their market penetration, is their compatibility with CD-Audio and CD-ROMs. This compatibility feature of DVD players and DVD-ROM drives is expected to increase consumer acceptance of DVD technology. Unlike the introduction of CDs, when consumers were reluctant to purchase CD players because they would be required to spend substantial amounts on new music collections, consumers will be able to acquire the DVD players and DVD-ROM drives without making their CDs obsolete. During the past decade, CDs have become the dominant format in audio and portable data storage and retrieval markets. Since its introduction, the popularity of DVDs has grown rapidly and the DVD is increasingly becoming a standard format for video. DVDs and CDs can be replicated faster than traditional tape storage mediums at a comparable cost. In addition, consumer acceptance of the DVD and CD formats is due in part to the following combination of advantages over other mass storage formats: . Higher storage capacity / longer play time; . Greater portability and ease of storage; . Higher quality presentation including crisper sounds and sharper video; . Longer life as a result of lack of degradation; and . Random accessibility of data. CD-ROM. According to Infotech, CD-ROM disc units sold in the United States by CD-ROM replicators have grown at a compound annual growth rate of 34.0% from approximately 443 million units in 1996 to approximately 1.066 billion units in 1999. The consumer market has emerged within the past several years and its substantial growth is expected to help sustain CD-ROM unit sales in the next few years. Infotech estimates that total worldwide CD-ROM disc units sold will continue to increase through the year 2001. CD-ROM is well suited to applications involving the storage of large amounts of information in a form that can be distributed to a diverse user population. CD-ROM was developed in the late 1980s and was initially limited to business and professional applications such as library references and parts catalogs. In the 1990s, the increasingly widespread presence of personal computers (PCs) and CD-ROM drives has created a thriving consumer market for CD-ROM applications. Infotech estimates that in the United States, the installed base of CD-ROM drives will grow from approximately 60.4 million in 1996 to approximately 338.8 million by 2004 representing a compounded annual growth rate of 24.1%. In addition, CD-ROM discs can be played on DVD-ROM drives. This rapidly growing installed base of CD-ROM drives, as well as the growth in the installed base of DVD-ROM drives, expands the potential consumer market for publishers of CD-ROM software, data and entertainment products. 26 DVD. DVD is becoming the accepted new medium for home video distribution. Unlike videocassettes, DVD-Video experiences no image or sound degradation with normal use and offers greater storage capacity, indexing, random access and lower manufacturing costs. DVD is capable of holding a full length motion picture with up to three spoken languages, three foreign language subtitles and multi-channel, digital surround sound. Added features such as multilingual voice tracks, soundtrack albums, director's notes, out takes, story-based games and other CD applications may be available with the higher storage capacity afforded with DVDs. The home video market, both rental and purchased videos, has been served primarily by pre-recorded videotape (VHS). We believe the DVD-Video format will surpass the VHS format in the pre-recorded video market over time. Infotech estimates the following: . The installed base of DVD-Video players in the United States will increase from approximately 300,000 in 1997 to 39.6 million in 2004, representing a compounded annual growth rate of approximately 100.9%. Infotech estimates the worldwide installed base of DVD-Video players will reach 96.7 million players by 2004. . DVD-Video disc units sold in the United States by replicators will increase from 3.4 million units in 1997 to approximately 991.0 million units in 2004, representing a compounded annual growth rate of 124.9%. . In the United States, more than 5,000 DVD-Video titles are currently available and the number of titles will approach 42,500 by the end of 2004. In addition to the growth in home video, Infotech projects that DVD-ROM drive shipments in the United States will increase from approximately 125,000 in 1997 to 134.2 million in 2004, representing a compounded growth rate of 171.0%. Also, the next generation of game consoles being manufactured by Sega, Nintendo, Sony and Microsoft will be DVD-based. Consequently, there will be pressure on some software game manufacturers to produce higher-capacity software games in the DVD format. We believe that certain of our software game customers will supplement their CD business in this area. Infotech estimates that DVD-ROM disc units sold by replicators in the United States will increase from approximately 520,000 in 1997 to 589.0 million in 2004, representing a compounded growth rate of 173.1%. Growth of Internet Usage and E-Commerce As the number of Internet users has increased the functionality of the Internet has expanded to a medium that enables complex business-to-business communications and commerce. The Internet and related online technologies are revolutionizing the way businesses and consumers communicate, share information and conduct business. We believe CDs and DVDs will play an important role in the expansion of the Internet and online commerce. Specifically, we believe CDs, and potentially DVDs, will function as an important marketing medium for integrating Internet or online strategies with traditional commerce, distribution and communication channels, such as "bricks and mortar" stores, mail order catalogs, television sales and retail-based kiosks. DVDs and CDs have special features, in addition to those discussed above, which particularly enhance their use in connection with the Internet and e-commerce programs. These include the following: . The ability of a DVD or CD to direct or link consumers to a website; and . The increased ability to include special promotional or customer brand information in the form of graphics, audio, video and other data. In fact, certain of our Internet and e-commerce customers, most notably America Online, have already adopted a technique of mass-mailing CDs for marketing purposes as a cost effective alternative to other methods of advertising. 27 BUSINESS We are an independent manufacturer/replicator of Digital Versatile Discs (DVD) and Compact Discs (CD). We target our sales to companies in industries including Internet/online, film and entertainment, edutainment software, publishing and computer hardware. We have successfully implemented our business model, which consists of the following elements: . High volume customers: Our customer base is comprised of some of the highest volume customers of DVDs and CDs. . High replication capacity: Since inception we have continued to add new equipment and have become one of the largest independent manufacturers/replicators of DVDs and CDs in the United States. . Low cost structure: We achieve substantial economies of scale through our optimally designed facility at a single locale, our dedication to maximizing machine uptime and our flat organizational structure. . Superior turnaround service: We are dedicated to providing superior turnaround service by maintaining high throughput mastering technologies and high DVD/CD graphic printing capacity and by efficiently managing operational workflow. Our customers include America Online, Inc., Modus Media International Holdings, Inc., Havas Interactive, Inc., GT Interactive Software, Lions Gate Entertainment, infoUSA Inc., Interplay Entertainment Corp., Juno Online Services, Inc. and a major motion picture distributor. In order to achieve significant cost efficiencies we focus on customers requiring high volume production runs and have designed our business processes to support them. We are thereby able to achieve lower overall unit costs and therefore we believe we are less vulnerable to competitive pricing pressures and have greater flexibility in the pricing of our products and services. Due to our technologically advanced equipment, plant design, in-house engineering capabilities and workflow techniques, we believe we are one of the most efficient high volume, low cost DVD and CD manufacturers in the industry. As a result of these factors, as well as our self-sufficient engineering, repair and maintenance capabilities, we believe we are able to provide superior turnaround service. This is not only a fundamental selling advantage but also helps foster long-term relationships with our high volume customers. Based upon our strong business model, we believe we are well positioned to capitalize on the anticipated growth in the DVD market, the continuing growth in the CD-ROM market, as well as the growing use of CDs in connection with marketing of Internet, e-commerce and other distribution channels. Operating Approach We believe that our operating approach distinguishes us from our competitors and that the effectiveness of our operating approach has been proven through the growth in our targeted customer base, the retention of our customers and our demonstrated long-term financial performance. Our focused operating approach is based on the following principles. High Capacity Manufacturing Capabilities at a Single Locale. We maintain all of our production and mastering facilities within two buildings, aggregating approximately 73,000 square feet, in Valencia, California. In April 2000 we plan to move our production facilities into an 83,000 square foot building in the same area, at which time we will have approximately 112,000 square feet for our operations. With our current equipment configuration, we have current production capacity of approximately 220 million CDs per year or, as a result of having replicating machines convertible between DVD and CD, we have production capacity of 30 million DVDs and 140 million CDs per year. Following our move to the larger production facility, we will have sufficient square footage to more than double our current production capacity. By aggregating our production capacity in a single locale, we can maintain high product yield rates, manage costs and facilitate overall profitability. In addition, we believe we can more closely administer our daily production schedule and quickly respond to unanticipated time sensitive customer requests. Because of our fast turnaround times, we are able to fulfill the replication needs of a national customer base from our Valencia, California facility. We believe we have one of the most efficient facilities in the industry. As compared to others in the industry, our manufacturing facilities are relatively new and were designed to facilitate high volume production. We believe our sales per employee, operating income per employee, operating margins and yield rates historically have been among the highest in the industry. 28 Optimally Designed Manufacturing Facilities. Our manufacturing facilities have been engineered to provide optimal efficiency. The layout of our facilities, coupled with redundant operating systems, has allowed us to efficiently manage operational workflow and to maximize factory throughput. We are able to complete and control all mastering, replication, printing and packaging functions internally without dependence on outside subcontractors. As a result, we believe we have established faster turnaround times for customer orders than most others in the industry. Self-Sufficient Repair, Maintenance and Engineering Capabilities. We operate 24 hours a day, seven days a week, and have staff engineers on the production floor at all times to monitor and maintain a smooth production flow. In order to maximize our machine uptime, we maintain a full machine shop with substantial spare parts inventory for our manufacturing equipment. Our engineering talent, coupled with our investment in spare parts inventory, has allowed us to develop a high degree of self-sufficiency, resulting in higher productivity. We also maintain a close technical working relationship with each of our equipment vendors. Technologically Advanced Manufacturing Equipment. To implement our business model, we have always invested in the most advanced, high volume equipment available. As of December 31, 1999, we have invested approximately $39.1 million in our mastering, replication, printing and packaging equipment. We expect to invest approximately $18.0 million toward the purchase of new equipment during 2000, including $14.1 million of the net proceeds of this offering. Marketing Our Services Directly to Senior Management. Since our business model requires us to attract customers with large annual replication requirements, the selection of the replication vendor by our customers usually has higher visibility and importance at the executive levels. Consequently, we are able to more precisely target our prospective customers and minimize the use of field sales personnel. Alex Sandel, who has extensive relationships in the computer hardware and software industries, spearheads our sales and marketing effort. As a result, we are able to actively target and market our services at the executive level. A strong sales team with substantial experience in the CD replicating business and extensive industry knowledge and contacts supports Mr. Sandel. In addition to our sales team, we plan to utilize the relationships of the members of our board of directors to increase our visibility and penetration with both DVD and CD customers. Growth Strategy In order to foster our continued growth in line with our business model, we plan to pursue the following opportunities. Capitalize on the Continuing Growth of DVD. We commenced our DVD production in the fourth quarter of 1999. In order to continue our participation in this growing market, we have purchased and plan to purchase additional machines that will significantly increase our DVD manufacturing capacity. Through a direct sales effort targeting motion picture production companies, post production and authoring houses and existing edutainment customers, we intend to pursue a marketing strategy targeted at senior executives similar to the one we have successfully implemented in the CD-ROM market. We believe that our location in Southern California, as well as our independence from large entertainment companies, will provide an advantage in obtaining business from independent motion picture production companies as well as overflow work from the major motion picture production companies having captive replicating facilities. We have made and intend to continue to make strategic investments, where appropriate, in selected companies that either currently or in the future may have high volume DVD replication requirements. By making this type of strategic investment, we have the ability to negotiate a long-term exclusive DVD replication agreement. Expand our Position as a Low Cost CD-ROM Manufacturer. Our penetration of the marketplace for CDs is focused on the CD-ROM market with a significant presence among computer software developers and Internet/online providers. Because of our success as a low cost, high volume replicator, we believe we are well positioned to address the growth in the market for CD-ROM. We believe we can offer our customers cost effective CD manufacturing services with turnaround times among the shortest in the industry. In addition to maintaining our existing customer base, we intend to use the contacts of our board of directors and our senior executives' direct selling efforts to expand our customer base to other companies with high volume replicating needs. 29 Stimulate CD Demand through Targeted Internet-Related Marketing Programs. The rise of the Internet and related services has caused various industries to re- examine traditional distribution methods, such as "bricks and mortar" retail stores, direct mail catalogs, television sales and retail-based kiosks, and their connection to online users. This has caused both business-to-business and business-to-consumer companies to alter their marketing and distribution programs in order to address changing market trends caused by growing Internet commerce. In Europe, the CD has been a significant marketing tool, often distributed as inserts to magazines or other publications. In our market, some of our largest customers, such as America Online and Juno, are using CDs as marketing tools. We believe CDs, and potentially DVDs, will play an increasingly important role in the marketing strategy of many e-commerce and catalog companies. CDs are relatively inexpensive to both manufacture and mail. As compared to paper based catalogs, creating an updated or subsequent version of catalogs on CDs and DVDs is generally easier and less expensive. CDs and DVDs also provide interactive functionality and an entertaining means of advertising. Certain of our Internet and e-commerce customers, most notably America Online, have already adopted a technique of mass-mailing CDs for marketing purposes as a cost effective alternative to other methods of advertising. In order to capitalize on this market need, our objective is to assist companies in establishing and producing marketing programs enhancing, promoting and integrating their e-commerce businesses utilizing CDs and DVDs. We will focus on promoting our business through three principal avenues: . the digital production and distribution of product catalogs through CDs and, in the future, DVDs; . e-commerce programs capitalizing on the convergence of traditional retail, catalog, kiosk and online formats through various CD-based applications; and . marketing programs utilizing the CD as an advertising medium used to drive customers to a targeted online destination by either new or existing retailers and e-tailers. 30 Customers We service a broad range of high volume DVD and CD customers. The following table summarizes the principal market segments within DVD and CD-ROM and our market orientation, our current customer base and our estimate of the growth potential of the DVD and CD markets.
Estimated Estimated Selected CD-ROM DVD Market Segment Customers Potential Potential -------------- ------------------------- ---------- --------- (All CD customers except where DVD is indicated) Online Providers These customers are large users America Online High Low due to the continued and Juno growing prevalence of Internet and online services. These customers are attractive to us due to their less seasonal and higher volume requirements. Internet Marketing These customers include "bricks Synthonics Technologies High High and mortar," direct mail catalog, kiosk and online companies. They are looking to promote their e-commerce presence and integrate it with other distribution channels. The DVD and CD formats can stimulate new customer growth and also connect to the current customer base. Film/Entertainment One of the largest users of DVD A major motion picture Not High products. We are positioned to distributor/DVD applicable penetrate this market segment Lions Gate Entertainment/ based upon our capacity and DVD rapid turnaround capabilities. Edutainment Software This segment is one of the Havas Interactive High High mass-market segments most GT Interactive appropriately suited to our Interplay speed and quality capabilities. Encore These companies are expected to be large volume users driven by edutainment, games and application software. Microsoft Authorized Replicators and Turnkey Manufacturers These replicators are Modus Media High High authorized by Microsoft to Zomax assemble and distribute Banta operating systems, applications and manuals to OEM computer manufacturers. These companies outsource a significant portion of their CD requirements. Publishing Publishing companies are a infoUSA/CD and DVD High Medium large and increasing user of Ziff/Davis the DVD and CD formats given the continued transition from print to electronic media. This segment is expected to continue to grow because of the low cost of storing a high volume of printed product on DVD or CD. OEM Computer Hardware & Peripherals This is a substantial market 3dfx High Medium sector in which we have a Toshiba demonstrated track record; we Fountain Technology intend to continue to aggressively pursue PC and peripheral manufacturers.
31 Currently, approximately 40 customers account for substantially all of our net sales. Our top three customers, America Online, Modus Media and Havas Interactive, accounted for approximately 32%, 14% and 10%, respectively, of our net sales for the year ended December 31, 1999. We have expanded our customer base aggressively since our founding in July 1994 primarily due to the focused efforts of our senior management and sales team. We plan to continue expanding and diversifying our customer base in order to reduce our dependence on any one customer and to optimize our production capacity. Specifically, we plan to further expand and diversify our customer base beyond our current presence by further penetrating the Internet, film/entertainment, and publishing industries. Our current customer base is characterized primarily by: (i) customers requiring production runs that are annual and ongoing, less cyclical in nature and less time-sensitive, such as America Online and (ii) customers with substantial annual production requirements tied to seasonal consumer purchasing trends and product announcement cycles such as Havas Interactive and GT Interactive. To the extent we are successful in our efforts to promote DVD and CD business within the film/entertainment industry or through Internet related marketing programs, we will attract and acquire customers with substantial production requirements revolving around film releases, retail cycles and other planned marketing events. Our large capacity allows us to manage the competing demands of our customers on a daily basis. We work closely with customers to monitor the actual production schedule and the product quality and service delivered. Our business is based primarily on purchase orders. Due to our fast turnaround time, high capacity and strong customer service support, we believe that we have been able to develop excellent relationships with our customers. However, we do not have any significant backlog and we do not typically enter into supply contracts with our customers. As part of our effort to secure certain DVD business, we recently invested $1.7 million in Lions Gate Entertainment, a Canadian production and distribution film and entertainment studio, in order to become affiliated with and establish relationships within the entertainment industry. In addition, assuming price and quality are in line with industry standards, we have obtained the exclusive right to all of the DVD replication needs of Lions Gate for the next three years. We also have a five year agreement with Synthonics Technologies, Inc., which grants us exclusive rights to all DVD and CD replication needs of Synthonics, assuming price and quality are in line with industry standards. Sales and Marketing Our sales and marketing effort is tailored to a customer base consistent with our business model. We have targeted customers who require and depend upon high volume DVD and CD manufacturing capacity. We maintain a focused sales and marketing effort led by Alex Sandel and supported by a strong sales staff who have significant experience in the replication industry. Our sales and marketing efforts are focused on expanding our reach across the United States, across a broader industrial base, to customers in the Internet/online area and to the future users of DVDs and CDs. These efforts are supported by relationships and contacts of our board of directors and sales and marketing team. Develop DVD Customer Base. We believe DVD technology is positioned to become the new medium for home video and the high-capacity medium for software distribution and high-capacity computer games. Home Video: We anticipate DVD demand will continue to grow in the motion picture industry, the primary area utilizing the DVD format today. We intend to broaden our sales and marketing efforts in this industry through relationships certain of our directors have with leading motion picture producers and distributors. In order to further stimulate our growth and broaden our relationships within the entertainment industry, and where appropriate, we intend to continue making strategic investments in selected companies that can direct their DVD replication requirements exclusively to us. As an example, we recently invested $1.7 million in Lions Gate Entertainment, a Canadian production and distribution film and entertainment studio. As part of the investment, we received exclusive rights to all DVD replication needs of Lions Gate for the next three years, assuming price and quality are in line with 32 acceptable industry standards. Additionally, we are marketing to independent post-production companies that provide DVD authoring services to the motion picture industry because of the long-term relationships they have with the movie studios and, in certain cases, the autonomy to independently select the services of DVD replicators. Software Distribution and Computer Games: DVD-ROM drives are becoming increasingly popular. Furthermore, home video game companies, such as Sony, Nintendo and Sega, are introducing home video game consoles that are compatible with the DVD format. Microsoft has also announced its plans to introduce a DVD compatible game console. With this large installed base, which is projected to continue to grow, we believe there will be a growing demand for high-capacity computer games playable on the DVD format. In addition, some of our current customers in the software publishing industry are moving selected product titles to the DVD format. We will be well- positioned to attract future DVD business from our current computer hardware and software customers as a result of our strong relationships and demonstrated performance with these customers. Stimulate CD Demand through Targeted Internet-Related Marketing Programs. As a result of the increasing popularity of the Internet, many companies now have to integrate an Internet strategy with their traditional retail and direct mail marketing strategies. We believe CDs, and potentially DVDs, will play an increasingly important role as part of the marketing strategy of many e- commerce and catalog companies. When a CD or DVD is used as a catalog or promotional tool in the Internet e-commerce space, we believe it will generate high-volume demand. In order to capitalize on this market, our objective is to assist companies to establish and produce marketing programs enhancing, promoting and integrating their e-commerce businesses utilizing CDs and DVDs. We will focus on three principal areas: Targeted Internet Marketing Programs: We believe the CD format is well suited for driving customer traffic to designated online sites because it is less expensive than other advertising media, it can be targeted to an intended audience, it can deliver a dynamic, interactive advertising message and it can deliver to the customer software that currently cannot be delivered via the Internet due to file size concerns. The most notable example of this use, which involves our leading customer, is that of America Online. We are identifying and marketing to our current customers as well as potential customers this technique in stimulating growth in CDs. E-Commerce Programs: The introduction of online and digital capabilities has also introduced new and more engaging ways in which retailers and e- tailers can interact with their customers. There will be application programs that interactively promote commerce. These types of interactive programs may require CDs and DVDs as a program medium. We recently invested in Synthonics Technologies, Inc., a 3D technology firm, which utilizes its technology in the digital catalog, kiosk and e-commerce areas. As a result, we believe there will be opportunities for future CD replication. Digital Catalog Business: In order to respond to an increasingly "digital" consumer as well as the increasing popularity of online e- commerce, many direct mail catalog companies are considering various changes to their traditional distribution programs. One possible alternative is the partial or total substitution of the traditional paper- based catalog with a CD or DVD catalog. By following this approach, a company can appeal to the new and growing base of online consumers, "link" and drive traffic to its website, interact with customers in a more entertaining way, and more effectively integrate a customer with its online capabilities. Many customers and potential customers interested in CD or DVD marketing programs lack the knowledge and resources to internally develop and execute these programs. We will oversee the coordination of the overall production process of these programs. We intend to outsource the creative, graphic and production services necessary to implement the above programs. Where the customer handles creative programming, we will carry out our replicating and packaging functions upon delivery of a master from the customer. By following this model, we can stimulate growth in our main business, the replication of DVDs and CDs, while maintaining our core high volume business model. Broader Industry Coverage for CDs. Our marketing efforts have been historically targeted toward companies in the computer hardware and software industries, and we intend to further penetrate these areas. As 33 a result of the rise of the Internet, we will also continue to focus on online service providers and other related companies. Because of our efficiency, high capacity, fast turnaround time and independence within the replicating industry, we have obtained overflow work from other CD replicators that do not have sufficient internal capacity. We only accept orders from replicators who provide such work on a year-round basis. Our main marketing thrust is to attract new customers whose usage patterns are driven by fundamentals that counterbalance the seasonal usage patterns of the computer hardware and software market segments. We believe this strategy helps to balance capacity demands and thereby moderate seasonal fluctuations. Suppliers We seek to reduce costs and enhance quality by purchasing from a limited number of suppliers. However, all raw materials needed to manufacture our products are readily available from multiple suppliers at competitive prices. The principal raw materials used to manufacture DVDs are optical grade polycarbonate, aluminum, nickel, ultraviolet-curable lacquers and ink. Also, certain types of DVDs require a minimal amount of gold. The principal raw materials used to manufacture CDs are the same as those used for manufacturing DVDs, except for gold. Warehousing and Distribution We primarily use common carriers to ship products to customers throughout the United States. We also deliver products by truck directly to a small number of customers who demand direct shipping. To meet the needs of customers distant from our facility, we ship unpackaged or "spindled" DVDs and CDs directly to the customer or its distribution facility. If required, we have relationships with packaging companies in other parts of the United States that would be able to handle individual customer fulfillment needs. We currently believe that this strategy is superior to building multiple manufacturing facilities. The cost to ship unpackaged DVDs or CDs to a packaging company is lower than the investment required to construct, operate and maintain multiple manufacturing facilities. Also, by aggregating our production capacity in a single locale, we believe we can optimize our production capacity, maintain high product yield rates, manage costs and facilitate overall profitability. In addition, we believe we can more closely administer our daily production schedule and quickly respond to large volume, unanticipated time sensitive customer requests. Because of our low-cost structure and fast turnaround times, we are able to fulfill the replication needs of a national customer base from our Valencia, California facility. Seasonality and Backlog Our peak sales activity normally occurs in the four-month period from August through November, as hardware manufacturers and software developers introduce new products before the back-to-school and holiday season. Typically, DVDs and CDs are produced and shipped as orders are received and we operate with virtually no backlog during most of the year. As a result, net sales in any quarter generally are dependent on orders shipped in that quarter. However, we believe focusing our marketing efforts on a more diversified customer base will help reduce the effects of seasonal cycles of our business. For example, to the extent we are successful in our efforts to promote DVD and CD business within the film/entertainment industry or through Internet related marketing programs, we will attract and acquire customers with substantial production requirements revolving around film releases, retail cycles and other planned marketing events, which are not as seasonal as our computer hardware and software customers. Competition The DVD and CD replication industries are highly competitive. We believe that the principal competitive factors in the DVD replicating industry are price, quality, turnaround time, capacity and service and relationships with studios, with price and quality being the most important. We believe the factors listed above are also critical in the CD replicating industry, with price and turnaround time typically being the most important. We believe that we compete favorably with respect to each of these factors in both DVD and CD replicating and that the quality of our products and services, our low cost manufacturing operations, our ability to accommodate tight delivery schedules, and our flexibility in production create significant competitive advantages. 34 The replication industry can be divided into two categories: (i) companies that are affiliated with and are captives of large entertainment companies (music and motion pictures), and (ii) independent companies, such as us, that have no affiliation. We compete more directly with the independent replicators, which include: AmericDisc, Carlton Communications PLC, Cinram International, Inc., Denon Electronics, Inc., Disctronics, Inc., DOCdata N.V., JVC Corporation, and Zomax Optical Media, Inc. In addition to the above listed companies, we also compete with foreign manufacturers that can operate at lower costs than us. We do not typically compete directly with captive manufacturers. In some instances, we provide replication services to them to cover their overflow work caused by their own capacity constraints. These captive replicators include the following: Sony Music Entertainment, Inc., Polygram Holdings, Inc., Warner Advanced Media Operations and Warner Music Group (both divisions of Time Warner, Inc.), Bertelsmann Music Group and Capitol-EMI Music. Many of the independent replicators are manufacturers of DVDs and CDs but also other pre-recorded multimedia products including video cassettes, audio cassettes and audio CDs. In addition, certain of these independent replicators consider themselves full outsource service providers offering such services as call center operations, customer support, warehousing inventory management, distribution and fulfillment. We concentrate on providing high volume, low cost DVD and CD replication along with mastering, packaging and fulfillment services which are essential to our customers needs. We believe we distinguish ourselves from our competitors through our strict focus on those replication and affiliated services necessary to meet our customers' requirements for high capacity manufacturing and quick turnaround of DVDs and CDs. We may also face indirect competition from broadband online service providers, such as telephone, cable and wireless service providers. However, we believe online delivery of data will not, for the foreseeable future, be a practical alternative for consumers due to significant time and hardware storage requirements to download the capacity of a DVD or CD. DVD and CD Manufacturing Process The DVD and CD manufacturing process consists of three stages. Pre-production. Pre-production of DVDs and CDs consists of three distinct processes: pre-mastering, mastering and electroplating. Through these processes, metal stampers are created which contain tracks with pits and lands holding data in a digital format. The metal stampers are then mounted in the proper injection molding equipment to produce either DVDs or CDs. Pre- production begins with receipt of the customer's data, which is supplied in any number of approved input media. The mastering process forms the master image of the DVD or CD from which the polycarbonate replicas are molded. Mastering begins with the preparation of a glass substrate, which is coated with a thin photo resist layer and placed on a computer-controlled laser beam recorder. The laser exposes a series of areas in the photo-resist layer on the glass plate as the data is transferred from a playback device. Chemicals etch the exposed areas of photo resist layer, producing a series of microscopic "pits" and "lands," or physical representations of the digital information. The glass substrate is then developed and then initialized to produce the glass master. An electroplating unit is then used to electroplate the glass master with nickel vanadium to create the metal master (commonly referred to as the metal "father"). The metal father is then separated from the glass master and electroplated a second time to create an inverted impression on a metal "mother." A further electroplating process is used to produce several stampers from the metal mother. The nickel-plated stampers are punched, polished and mounted in the proper injection molding machine to replicate DVDs or CDs. Replication and Printing. CD replication uses a fully integrated in-line process, which incorporates injection molding machines, metallizing equipment, protective coating machinery and inspection equipment. To begin, optical grade polycarbonate plastic is heated and injected under high pressure into the mold cavity of the machine against the metal stamper. The molding process creates a clear polycarbonate disc with pits on one side containing all of the digitized data. In order to make the disc readable by reflected laser light, a thin layer 35 of reflective aluminum is deposited onto the disc surface by a metallizing machine. A clear protective coating is then applied to the disc by a spin coating device in order to protect the disc from scratches and oxidation and to serve as a base for printing on the disc. An in-line inspection device is used to scan each disc for physical flaws. Thereafter, the disc is ready for label printing, the final step of production. The DVD production process is essentially the same as the CD production process, except that DVD replication entails the use of a special substrate- bonding machine, which is integrated into the replication line itself. In addition, the replication process is slightly different from the production of other CD formats in that each replication line has two presses, which produce two polycarbonate substrates, each one-half the thickness of a standard CD. Information is molded onto a layer or multiple layers of a substrate depending on the specific data requirements. The two substrates are bonded together to form a DVD. A DVD-5 contains 4.7 gigabytes of data molded onto one layer of the polycarbonate substrate. A DVD-10 contains 9.4 gigabytes of data molded into both polycarbonate substrates. A DVD-9 contains approximately 8.5 gigabytes of data molded onto both polycarbonate substrates, one of which is semi- transparent. The semi-transparent layer contains a thin layer of reflective material, usually gold. Post-Production Services. Post-production services primarily involve printing, packaging, fulfillment and distribution, including confectionering, stickering, cellophaning, shrink-wrapping, spine printing, bundling and other services. We maintain equipment to provide for most customer-requested packaging configurations and use temporary labor to manage labor intensive packaging requests. Currently the standard packaging configuration is the jewel box with customer supplied print material on the bottom and top of the box. The jewel box is typically shrink-wrapped for protection. Employees At December 31, 1999, we had 127 full-time employees, including 3 engaged in sales and marketing, 13 engaged in general administration and finance and 111 engaged in DVD and CD replicating/manufacturing. In addition, we use temporary employees in varying numbers throughout the year, who are primarily engaged in packaging. We rely on our ability to vary the number of part-time and temporary employees in order to respond to fluctuating market demand for our packaging services. None of our employees are covered by a collective bargaining agreement. We believe we have a good relationship with our employees. Properties Our executive offices and manufacturing, sales and marketing operations are located at 25136 Anza Drive, Valencia, California, where we lease approximately 44,500 square feet of space. This lease expires on February 28, 2002. Our mastering facilities are located near our executive offices at 24833 Anza Drive, Valencia, California, in leased facilities occupying an aggregate of approximately 28,500 square feet of space. This lease expires on May 31, 2007. We expect to enter into a multi-year lease for approximately 83,000 square feet of space located at 24811 Avenue Rockefeller, Valencia, California at commercially standard terms. We currently plan to move our executive offices, manufacturing, sales and marketing operations to this location during April 2000. We are currently negotiating the release from our lease for the property located 25136 Anza Drive in Valencia, and we do not believe that this will result in any material out-of-pocket costs to us. We believe that our new facilities will be adequate to meet our projected needs for the foreseeable future. We do not believe that the relocation of certain of our operations to these new facilities will cause any material disruption in our business. See "Certain Relationships and Related Transactions." Legal Proceedings We are not involved in any pending, nor are we aware of any threatened, legal proceedings which we believe could reasonably be expected to have a material adverse effect on our business, operating results or financial condition. 36 MANAGEMENT Directors and Executive Officers The following table sets forth certain information with respect to our directors and executive officers as of February 15, 2000:
Name Age Position - ---- --- -------- Alex Sandel.................. 57 Chairman of the Board, Chief Executive Officer and President David Moss................... 39 Vice President--Operations Louis L. Weiss............... 49 Chief Financial Officer, Principal Accounting Officer and Secretary Sanford R. Climan(1)(2)...... 44 Director Mark Dyne(1)(2).............. 39 Director Diana Maranon................ 41 Director
- -------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. Directors are elected at each annual meeting of shareholders and hold office until the following annual meeting and their successors are duly elected and qualified. Our Bylaws presently provide the number of directors shall not be less than five nor more than nine, with the exact number to be fixed from time to time by resolution of our board of directors. The current number of directors is fixed at five. The remaining directors may fill any vacancy on the board of directors, including a vacancy resulting from an increase in the size of the board of directors. The board of directors cannot decrease the number of directors or shorten the term of any incumbent director. The board of directors appoints the executive officers and subject to employment contracts, such officers serve at the discretion of the board of directors. Alex Sandel is one of our co-founders and he has served as our Chairman of the Board, Chief Executive Officer and President since we were founded in June 1994. Mr. Sandel was one of the original founders of Packard Bell Electronics (1986), an innovative PC manufacturer that was first to market PCs via traditional consumer electronics retail outlets. Mr. Sandel served as a director of Packard Bell Electronics since its inception until 1999. Mr. Sandel is a principal shareholder in Argoguest, Inc., an incubator focused on investing in early stage Israeli-based Internet and Internet enabling technology companies. Mr. Sandel has founded, managed and held engineering positions with several companies over the past thirty years. He was educated at the Israeli Institute of Technology, Haifa, Israel. While continuing his education in the United States, he received his BSEE from California State College, Pomona, California (1969) and MSOR from the University of Southern California (1974). David Moss has served as our Vice President--Operations since our founding in June 1994. From May 1993 through May 1994, Mr. Moss served as Vice President and General Manager of ASR Recording, a manufacturer of CDs. From April 1991 through April 1993, Mr. Moss served as director of manufacturing at Denon Digital, also a manufacturer of CDs. Mr. Moss has worked in the CD and other media replication business for 15 years. He has a B.A. degree in Production and Operation Management and a B.A. degree in Computer Science, both from California State University at Northridge. Louis L. Weiss joined us in May 1998 as Chief Financial Officer and Principal Accounting Officer. From December 1996 through April 1998, Mr. Weiss served as Chief Financial Officer of P.D.I. Industries, Inc., a pharmaceuticals distributor. From January 1996 through September 1996, Mr. Weiss served as Chief Financial Officer of Cardkey Industries, a manufacturer of keycards for building security systems. From June 1992 through December 1995, Mr. Weiss served as President of LLW Associates, a financial consulting firm founded by Mr. Weiss. Mr. Weiss is a Certified Public Accountant (inactive status) and he has a B.B.A. and M.B.A. from the University of Wisconsin. 37 Sanford R. Climan has served as a Director since August 1998. Mr. Climan is Managing Director of Entertainment Media Ventures (EMV), a Los Angeles-based venture capital fund focused on investment in the areas of technology, media, and the Internet. From October 1995 through May 1997, Mr. Climan was Executive Vice President and President of Worldwide Business Development for Universal Studios, Inc., where he oversaw corporate international strategy and the following Universal Studios operating units: Consumer Products; Home Video; Pay Television; New Media; Spencer Gifts and Strategic Marketing. From June 1997 through February 1999 and from June 1986 to September 1995, Mr. Climan was a member of the senior management team at Creative Artists Agency, a leading talent and literary representation firm, working with both talent and corporate clients. Prior to joining CAA, Mr. Climan held executive positions at various entertainment companies, working in general management capacities, as well as overseeing areas of motion picture and television production and distribution. Mr. Climan serves as a director of a number of public and private companies. Mr. Climan received his B.A. from Harvard College, a M.S. in Health Policy and Management from the Harvard School of Public Health and his M.B.A. from Harvard Business School. Mark Dyne has served as a Director since August 1998. Since October 1996, Mr. Dyne has served as Chairman of the Board of Directors and as Chief Executive Officer of Brilliant Digital Entertainment, Inc., a production and development studio producing digital entertainment. Currently, Mr. Dyne is a Director of Ozisoft Pty. Limited, a company he founded in 1982. From November 1998 through January 2000, Mr. Dyne was Chief Executive Officer of Virgin Interactive Entertainment. From June 1995 through May 1997, Mr. Dyne served as an executive officer of Sega Enterprises (Australia) Pty., Ltd., a theme park developer, which operated the $70 million interactive indoor theme park in Darling Harbor in Sydney, Australia. Moreover, currently, Mr. Dyne is Chairman of the Board of Directors of Tag-It Pacific, Inc., a manufacturer of buttons, tags and other apparel trim products, and a director of Talent Connection.com, an entertainment portal. Diana Maranon has served as a Director since August 1998. Ms. Maranon is the President and Managing Director of Averil Capital Markets Group, Inc., a financial advisory firm, and a member of the National Association of Securities Dealers. Ms. Maranon serves as a director of Brilliant Digital Entertainment, Inc. Before founding Averil Capital Markets Group, Inc., in 1994, Ms. Maranon was a Vice President with Wasserstein Perella & Co., Inc., an investment banking firm, with whom she started in 1988. From 1985 to 1988, Ms. Maranon practiced securities law with Skadden Arps Slate Meagher & Flom, LLP. Ms. Maranon received J.D. and M.B.A. degrees from the University of California at Los Angeles and is a member of the California Bar. Board Committees The board of directors will maintain an audit committee and a compensation committee. The audit committee will review the scope of our audits, the engagement of our independent auditors and their audit reports. The members of the audit committee are Sanford Climan and Mark Dyne. The compensation committee will evaluate our compensation policies and administer our stock option plan. The members of the compensation committee are Sanford Climan and Mark Dyne. Director Compensation We intend to pay non-employee directors fees of $1,500 for each meeting personally attended. We intend to pay non-employee directors fees of $500 for each telephonic meeting attended. Our directors are also reimbursed for their reasonable travel expenses incurred in attending board or committee meetings. 38 Compensation Committee Interlocks and Insider Participation We did not have a compensation committee for the fiscal year ended December 31, 1999. Our board of directors made all decisions regarding executive compensation for the fiscal year ended December 31, 1999. No interlocking relationship exists between any member of our compensation committee and any member of any other company's board of directors or compensation committee. Executive Compensation The following table presents both cash and noncash compensation paid or to be paid by us to each of our executive officers who received compensation for the year ended December 31, 1999 in excess of $100,000: Summary Compensation Table
Annual Compensation Year Ended ---------------- Name and Principal Position December 31 Salary Bonus - --------------------------- ----------- -------- ------- Alex Sandel, Chief Executive Officer and President....................................... 1999 $540,000 -- David Moss, Vice President--Operations........... 1999 $461,561 $52,000 Louis Weiss, Chief Financial Officer............. 1999 $228,894 --
Employment Agreements with Executive Officers David Moss has an employment agreement with us. According to his agreement, he is entitled to a salary of $395,000 per year subject to automatic annual increases of six percent. The compensation committee can make further salary increase adjustments to Mr. Moss' agreement if they choose to do so. In addition, the compensation committee can grant bonus compensation to Mr. Moss. If Mr. Moss' employment is terminated without cause, he will be entitled to severance pay at his then-current annual salary through the expiration of his employment agreement plus a lump sum payment of $1,000,000. Mr. Moss' employment agreement is effective August 26, 1998 through August 26, 2003, subject to extension through August 26, 2006 upon our written consent and Mr. Moss' written consent. Fiscal Year-End Option Values
Number of Securities Value of Unexercised Underlying Unexercised In-The-Money Options at Options at Fiscal Year-End Fiscal Year-End Name Exercisable/Unexercisable Exercisable/Unexercisable - ---- -------------------------- ------------------------- Alex Sandel, Chief Executive Officer and President............... 72,500/217,500 David Moss, Vice President--Operations... 36,250/108,750 Louis Weiss, Chief Financial Officer....... 21,250/63,750
Stock Plan We adopted a stock incentive plan in May 1998. Each of our executive officers, other employees, non-employee directors or consultants is eligible to be considered for the grant of awards under our stock incentive plan. A maximum of 1,200,000 shares of common stock may be issued under our stock incentive plan. If any award expires or terminates for any reason, then the common stock subject to that award will again be available for issuance under our stock incentive plan. Our board of directors or a committee of two or more non-employee directors appointed by the board of directors will administer our stock incentive plan. The administrator will have full and final authority to select the executives and other employees to whom awards will be granted. Additionally, the administrator will have the full and final authority to grant the awards and to determine the terms and conditions of the awards and the number of shares to be issued. 39 Awards. Our stock incentive plan authorizes the administrator to enter into both incentive and non-statutory options. An award under the stock incentive plan may permit the recipient to pay the entire purchase price of the shares by delivering previously-owned shares of our capital stock. Plan Duration. Our board of directors adopted our stock incentive plan on May 7, 1998 and on the same day our shareholders approved the plan. Our stock incentive plan was subsequently amended on August 25, 1998. Our shareholders approved the amendment on the same day. As a result of the amendment the number of shares of our common stock subject to our stock incentive plan was increased to 1,200,000. As of the date of this prospectus, our board of directors has granted options covering an aggregate of 828,000 shares of our common stock to our directors, officers and employees, with a weighted average exercise price of $11.35 per share. The options will typically vest in four equal annual installments commencing on the first anniversary of the date of grant. Any award duly granted on or prior to May 7, 2008 may be exercised or settled in accordance with its terms. No award may be granted on or after May 7, 2008. Amendments. The administrator may amend or terminate our stock incentive plan at any time and in any manner. However, no recipient of any option may be deprived of any of his or her rights under the option as a result of any amendment or termination without his or her consent. Shareholder approval is required to increase the number of shares available for issuance under our stock incentive plan. Form S-8 Registration. We intend to file a registration statement under the Securities Act to register the 1,200,000 shares of our common stock reserved for issuance under our stock incentive plan and the 366,600 shares issuable upon David Moss' exercise of his warrants. The registration statement is expected to be filed shortly following the date of this prospectus and will become effective immediately upon filing with the Securities and Exchange Commission. Shares issued under our stock incentive plan after the effective date of this registration statement generally will be available for sale to the public without restriction, except for the 180-day lock-up provisions and except for shares issued to our affiliates, which will remain subject to the volume and manner of sale limitations of Rule 144. See "Shares Eligible for Future Sale." Limitation of Liability and Indemnification Matters Our Articles of Incorporation include a provision eliminating the personal liability of our directors to us and to our shareholders for monetary damages for breach of the director's fiduciary duties in certain circumstances. This limitation has no effect on a director's liability for any of the following: . for acts or omissions involving intentional misconduct or a knowing and culpable violation of law; . for acts or omissions a director believes to be contrary to our best interest or to the best interest of our shareholders; . for acts or omissions involving the absence of good faith on the part of the director; . for any transaction from which a director derived an improper personal benefit; . for acts or omissions showing a reckless disregard for the director's duty to us or to our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to us or to our shareholders; . for acts or omissions constituting an unexcused pattern of inattention amounting to abdication of the director's duty to us or to our shareholders; . under Section 310 of the California Corporations Code (concerning contracts or transactions between a director and us); or . under Section 316 of the California Corporations Code (concerning director's liability for improper dividends, loan and guarantees). This limitation of liability does not apply to a director acting in his capacity as an officer. Further, this limitation of liability provision does not affect the availability of injunctions and other equitable remedies available including injunctive relief or recession. 40 Our Articles of Incorporation and Bylaws provide indemnification of our directors and executive officers and discretionary indemnification of our other officers and employees and other agents to the fullest extent permitted by law. Pursuant to this provision, our Bylaws provide for indemnification of our directors, officers and employees. In addition, we may provide indemnification to persons whom we are not obligated to indemnify. The Bylaws also allow us to enter into indemnity agreements with individual directors, officers, employees and other agents. We have entered into indemnification agreements designed to provide the maximum indemnification permitted by law with all our directors and executive officers. These agreements, together with our Bylaws and Articles of Incorporation, may require us, among other things, to indemnify these directors against certain liabilities that arise by reason of their status or service as directors (other than liabilities resulting from willful misconduct of a culpable nature), to advance expenses to them as they are incurred, provided they undertake to repay the amount advanced if it is ultimately determined by a court that are not entitled to indemnification, and to obtain directors' and officers' insurance if available on reasonable terms. We maintain director and officer liability insurance. Section 317 of the California Code, our Bylaws and our indemnification agreements with our directors and executive officers make provision for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons, under certain circumstances, for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 41 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We have been treated as an S Corporation since our inception. We paid an aggregate of approximately $23.3 million in cash dividends to our shareholders from January 1, 1997 through March 1, 2000. These dividends were paid to our shareholders to pay their income taxes, and as a return of their investment. We intend to pay dividends aggregating approximately $8.9 million to our shareholders prior to the closing of this offering as a distribution of retained earnings and for the purpose of funding income taxes on 2000 S Corporation earnings. Our current shareholders have personally guaranteed repayment of the Greyrock bank debt. Upon completion of this offering and the application of the net proceeds to repay the loan from Greyrock, the shareholder guarantees will terminate. See "Use of Proceeds." Our current shareholders have entered into a tax indemnification agreement with us relating to their respective income tax liabilities. See "Termination of S Corporation Status." In January 2000, we loaned $2,630,000 to Alex Sandel with interest at our borrowing rate from Greyrock. We expect such amount to be repaid prior to or concurrently with the closing of this offering. In 1999, we made rental payments on a new facility totaling $86,000 to a company owned by Alex Sandel, our president and majority shareholder. We intend to enter into a multiyear lease agreement with this company. This lease, including the amount of the lease payments, is expected to be on terms similar with those currently prevailing in the market. During 1999, we made non-interest bearing loans to Alex Sandel totaling $1,472,000 and interest bearing loans totaling $1,075,000 (interest accrued at our borrowing rate from our major lender). These loans were repaid in their entirety during 1999 except for interest accrued, totaling approximately $72,000, which was subsequently forgiven by our board of directors. In December 1999, we invested $500,000 in Synthonics Technologies, Inc. in return for a note convertible into 11,518,096 shares of Synthonics common stock, which at the time represented approximately 38% of Synthonics outstanding shares. In addition, we agreed to replicate and package up to 2 million CDs without charge to Synthonics and establish a catalog entity to develop and produce 3D interactive digital catalogs on behalf of Synthonics for its customers. At the time of the investment, Diana Maranon, one of our directors, was a member of the board of directors of Synthonics. In December 1999, we made advances totaling $2,500,000 to Jason Barzilay, one of our shareholders. This amount was repaid before the end of 1999. During 1999, we also made a loan of $1,000,000 to a company owned by Alex Sandel and Jason Barzilay, which was repaid before the end of the year. Interest on these amounts accrued at our borrowing rate from Greyrock. In connection with the warrants issued to David Moss, our Vice President-- Operations, we loaned him a total of $1,428,000 in 1999 under promissory notes bearing compound interest at the rate of 4.6% per annum, in order to allow him to pay the federal and state taxes due as a result of the receipt of the warrants. The unpaid principal balance and any accrued but unpaid interest shall be due and payable on the earlier of: (1) January 1, 2006; or (2) the fifteenth day following the date of delivery of written demand for payment made at any time after the later of (a) the closing of a liquidity event (which includes this offering), or (b) if applicable, the expiration of any lock-up period imposed in connection with such liquidity event on our common stock held by David Moss. Since September 1997, Averil Capital Markets Group, Inc., a financial advisory firm founded and controlled by Diana Maranon, has performed various services for us including investigation of strategic and financing alternatives. As consideration for these services rendered, we have paid Averil Capital Markets Group, Inc. approximately $186,184, including expenses. As consideration for services rendered in connection 42 with this offering, we have agreed to pay Averil Capital Markets Group, Inc. a cash payment of 0.75% of the gross proceeds raised upon consummation of this offering and warrants to purchase shares of our common stock equivalent to 0.25% of the gross proceeds raised at an exercise price equal to 110% of the initial public offering price. The warrants given to Averil Capital Markets Group, Inc. will become exercisable on the first anniversary of this offering. We have entered into an indemnification agreement with Averil Capital Markets Group, Inc. pursuant to which we will indemnify Averil Capital Markets Group, Inc. and Ms. Maranon against any amounts these parties may become obligated to pay in connection with Ms. Maranon's service as one of our directors and her consulting services to us. We lease one of our two facilities in Valencia, California, from Bascal Properties II, a partnership owned by our existing shareholders. This lease expires in May 2007 and currently provides for a monthly base rent of $20,000, with periodic adjustments based on the consumer price index. We believe this lease is at prevailing market rates for similar properties. Rental payments to Bascal Properties II were $240,000 for the year ended December 31, 1999, $240,000 for the year ended December 31, 1998 and $140,000 for the year ended December 31, 1997. In June 1997, we loaned approximately $1.9 million to Bascal Properties II. This loan bore interest at prime plus two percent and was repaid in full in September 1997. On November 1, 1997, we entered into a Purchase and Sale Agreement with Packard Bell NEC. The Packard Bell NEC Agreement governed our relationship with Packard Bell NEC with respect to the procedures for ordering, pricing and delivering products, as well as product warranties. Pursuant to the Packard Bell NEC Agreement, Packard Bell NEC agreed to purchase from us substantially all of its United States requirements for CDs, so long as the pricing, terms, conditions and quality of the CDs being sold by us were at least as favorable as those available from any other third party supplier. The Packard Bell NEC Agreement expired in November 1999. At the time this agreement was entered into, our current shareholders owned a significant minority interest in Packard Bell NEC and Alex Sandel was a director of Packard Bell NEC. Historically, significant portions of our net sales have been to Packard Bell NEC. Our net sales to Packard Bell NEC were approximately $554,000 for the year ended December 31, 1999, $5.3 million for the year ended December 31, 1998, $12.1 million for the year ended December 31, 1997, $14.2 million for the year ended December 31, 1996 and $20.9 million for the year ended December 31, 1995. Such sales represented approximately 1.0% of our net sales for the year ended December 31, 1999, 12.4% of our net sales for the year ended December 31, 1998, 33.5% of our net sales for the year ended December 31, 1997, 55.3% of our net sales for the year ended December 31, 1996 and 65.8% of our net sales for the year ended December 31, 1995. At December 31, 1999, accounts receivable from Packard Bell NEC were approximately $23,000, or 0.3% of total trade receivables as of such date. We had net sales to Reveal Computer Products (formerly named Cal Circuit Abco, Inc. prior to December 1994), a re-packager of computer peripherals managed by Jason Barzilay and controlled by our current and former shareholders, amounting to $35,000 for the year ended December 31, 1996 and $4,212,000 for the year ended December 31, 1995. During the second quarter of 1996, we wrote off accounts receivable balances of $1,559,000 due from Reveal Computer Products. Moreover, from June 1995 to November 1995, we loaned an aggregate of approximately $3.3 million to Reveal Computer Products bearing interest at prime plus three percent. We determined this amount was uncollectible and reserved for it at December 31, 1995. We ultimately wrote off such amount in 1996, the same year Reveal Computer Products entered bankruptcy and ceased operations. 43 PRINCIPAL AND SELLING SHAREHOLDERS The following table presents information regarding the beneficial ownership of our common stock as of March 1, 2000, and as adjusted to reflect our sale of shares of our common stock and the selling shareholders sale of our common stock offered by this prospectus, for: . each person who is known to us to be the beneficial owner of more than 5% of our outstanding common stock; . each of our directors; and . the named executive officers as a group. The address of each person listed is in care of us, at 25136 Anza Drive, Valencia, California 91355, unless otherwise provided below such person's name.
Shares Beneficially Shares Beneficially Owned Prior to Owned After the Offering(1) Offering -------------------- Number of ---------------------- Number of Percent of Shares Number of Percent of Name of Beneficial Owner Shares Class Offered Shares Class - ------------------------ --------- ---------- --------- --------- ---------- Alex Sandel(2)............ 6,145,000 67.2% Jason Barzilay............ 3,000,000 33.3% David Moss(3)............. 439,100 4.7% Louis Weiss(4)............ 42,500 * 42,500 Sanford R. Climan(4)(5)... 30,000 * 30,000 Mark Dyne(4)(6)........... 7,500 * 37,500(9) Diana Maranon(4)(7)....... 7,500 * 7,500 All of the directors and executive officers as a group (six persons)(8)... 6,671,600 69.0%
- -------- * Less than one percent. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission that deem shares to be beneficially owned by any person who has or shares voting or investment power with respect to such shares. Shares of common stock under warrants or options currently exercisable or exercisable within 60 days of the date of this offering are deemed outstanding for purposes of computing the percentage ownership of the person holding such warrants or options but are not deemed outstanding for computing the percentage ownership of any other person. Unless otherwise indicated, the persons named in this table have sole voting and sole investment power with respect to all shares shown as beneficially owned, subject to community property laws where applicable. (2) Includes 145,000 shares of common stock, which may be purchased upon exercise of options that are currently exercisable. (3) Includes 366,600 shares of common stock, which may be purchased upon exercise of warrants that are currently exercisable and 72,500 shares of common stock, which may be purchased upon exercise of options that are currently exercisable. (4) Represents shares of common stock, which may be purchased upon exercise of options that are currently exercisable. (5) Mr. Climan's address is c/o Entertainment Media Ventures, LLC, 828 Moraga Drive Second Floor, Los Angeles, California 90049. (6) Mr. Dyne's address is c/o Brilliant Digital Entertainment, Inc., 6355 Topanga Canyon Boulevard, Suite 513, Woodland Hills, California 91367. (7) Ms. Maranon's address is c/o Averil Capital Markets Group, Inc., 2029 Century Park East, Suite 1900, Century City, California 90067. (8) Includes 671,600 shares of common stock, which may be purchased upon exercise of warrants and options that are currently exercisable. (9) Includes 30,000 shares to be given by the existing shareholders to Mr. Dyne. 44 DESCRIPTION OF CAPITAL STOCK We are authorized to issue 45,000,000 shares of our common stock, no par value and 5,000,000 shares of preferred stock, no par value. As of March 1, 2000, there were 9,000,000 shares of our common stock outstanding and there were two holders of record of the common stock. Currently, there are no shares of preferred stock outstanding. The following statements are brief summaries of our capital stock. Common Stock The holders of common stock are entitled to one vote for each share held of record on all matters on which the holders of common stock are entitled to vote and have cumulative voting rights with respect to the election of directors. The right to cumulate votes will automatically cease as of the first record date of our annual meeting of shareholders where we have at least 800 holders of our equity securities. The holders of our common stock are entitled to receive dividends in proportion to their ownership when, as and if declared by our board of directors out of legally available funds. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled subject to the rights of holders of preferred stock issued by us, if any, to share proportionally in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the common stock. The holders of common stock have no preemptive or conversion rights and they are not subject to further calls or assessments by us. Our common stock does not have any redemption or sinking fund provisions. The outstanding shares of our common stock are, and the common stock issuable pursuant to this offering will be, when issued, fully paid and nonassessable. Preferred Stock Our board of directors has the authority to issue the authorized and unissued preferred stock in one or more series and our board of directors may determine the designations, rights and preferences of the preferred stock. Accordingly, and without the need for shareholder approval, our board of directors has the power to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which adversely affect the voting power or other rights of the holders of our common stock. In the event of issuance, and under certain circumstances, we could use our preferred stock as a way of discouraging, delaying or preventing an acquisition or a change in our control. We do not currently intend to issue any shares of our preferred stock. Warrants We have granted to David Moss warrants to purchase 366,600 shares of our common stock. The warrants granted to David Moss expire on December 31, 2007 and are exercisable for $0.0017 per share. None of the warrants granted to David Moss will have any voting rights, dividend rights or preferences until such time as they are exercised for shares of our common stock. Effective upon the closing of this offering, we will grant to Averil Capital Markets Group, Inc. warrants to purchase shares of our common stock equivalent to 0.25% of the gross proceeds raised in this offering with an exercise price equal to 110% of the initial public offering price. The warrants granted to Averil Capital Markets Group, Inc. expire five years after they are granted. See "Certain Relationships and Related Transactions." Transfer Agent Our transfer agent and registrar for our common stock is U.S. Stock Transfer Corporation. 45 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. We cannot predict the effect, if any, that future sale of shares, or the availability of shares for future sale, will have on the prevailing market price for our common stock. Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales may occur, could adversely affect the prevailing market prices for our common stock. See "Risk Factors--Sales of additional shares of our common stock into the public market may cause our stock price to fall." Upon completion of this offering, we will have shares of our common stock outstanding, if the underwriters' over-allotment options are exercised in full. Of those shares, a total of shares, shares if the underwriters' over-allotment options are exercised in full, will be freely tradable without restriction or further registration under the Securities Act, unless purchased or held by our "affiliates" as that term is defined in Rule 144. All of our executive officers, directors and shareholders, including the selling shareholders have signed lock-up agreements under which they agreed not to sell or otherwise transfer, directly or indirectly, any shares of common stock or any securities convertible into, or exercisable or exchangeable for, any shares of common stock for a period of 180 days from the date of this prospectus without the prior written consent of Prudential Securities Incorporated. These lock-up agreements do not prevent us from granting additional options under our stock incentive plan. After the expiration of the 180-day period, shares that can be sold under Rule 144 will be eligible for sale. Prudential Securities Incorporated may, in its sole discretion, at any time and without notice, release all or any portion of the securities subject to these lock-up agreements.
Number of shares Date of availability for resale into public market ---------------- -------------------------------------------------- 9,000,000 180 days after the date of this prospectus due to a lock-up agreement our two existing shareholders have with Prudential Securities. However, Prudential Securities can waive this restriction at any time and without notice. Since these shares are held by our affiliates, sales of these shares will also be subject to the volume limitations of Rule 144.
In general, under Rule 144 as currently in effect, any person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: .1% of the then outstanding shares of common stock; or . the average weekly trading volume in the common stock during the four calendar weeks immediately preceding the date on which the notice of the sale on Form 144 is filed with the Securities and Exchange Commission. Within 90 days after the date of this prospectus, we intend to file a Registration Statement on Form S-8 covering an aggregate of approximately 1,566,600 shares of common stock, including the 828,000 shares of common stock which will then be subject to outstanding options and 366,600 shares of common stock underlying the warrants granted to David Moss. Additionally, we have agreed to file a Registration Statement on Form S-3 covering the shares of common stock underlying the warrants to be granted to Averil Capital Markets Group, Inc., after these warrants become exercisable. After the effective date of the Form S-8, shares of common stock issued upon exercise of options granted pursuant to our stock incentive plan and upon exercise of the warrants granted to David Moss will be available for sale in the public market. However, these shares will remain subject to Rule 144 volume limitations applicable to our affiliates and to the lock-up agreements. Shares of common stock issuable upon exercise of the warrants to be granted to Averil Capital Markets Group, Inc. will become exercisable subject to Rule 144 volume limitations, one year after the date these warrants were granted or the filing of the related Form S-3, whichever occurs first. 46 UNDERWRITING We have entered into an underwriting agreement with the underwriters named below, for whom Prudential Securities Incorporated and CIBC World Markets Corp. are acting as representatives. We and the selling shareholders are obligated to sell, and the underwriters are obligated to purchase, all of the shares offered on the cover page of this prospectus, if any are purchased. Subject to conditions of the underwriting agreement, each underwriter has severally agreed to purchase the shares indicated opposite its name:
Number of Underwriters Shares - ------------ --------- Prudential Securities Incorporated.................................... CIBC World Markets Corp. ............................................. ---- Total............................................................... ====
The underwriters may sell more shares than the total number of shares offered on the cover page of this prospectus and they have, for a period of 30 days from the date of this prospectus, over-allotment options to purchase up to additional shares from us and up to additional shares from the selling shareholders. If any additional shares are purchased, the underwriters will severally purchase the shares in the same proportion as per the table above. The representatives of the underwriters have advised us and the selling shareholders that the shares will be offered to the public at the offering price indicated on the cover page of this prospectus. The underwriters may allow a concession not in excess of $ per share to selected dealers and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the shares are released for sale to the public, the representatives may change the offering price and the concessions. The representatives have informed us and the selling shareholders that the underwriters do not intend to sell shares to any investor who has granted them discretionary authority. We and the selling shareholders have agreed to pay to the underwriters the following fees, assuming both no exercise and full exercise of the underwriters' over-allotment options to purchase additional shares:
Total Fees --------------------------------------------- Fee Without Exercise of Full Exercise of Per Share Over-Allotment Options Over-Allotment Options --------- ---------------------- ---------------------- Fees paid by us......... $ $ $ Fees paid by the selling shareholders........... $ $ $
In addition, we estimate that we will spend approximately $ in expenses for this offering. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in respect of these liabilities. We, our officers and directors, and all shareholders including our selling shareholders have entered into lock-up agreements pursuant to which we and they have agreed not to offer or sell any shares of common stock or securities convertible into or exchangeable or exercisable for shares of common stock for a period of 180 days from the date of this prospectus without the prior written consent of Prudential Securities Incorporated, on behalf of the underwriters. Prudential Securities Incorporated may, at any time and without notice, waive the terms of the lock-up agreements specified in the underwriting agreement. Prior to this offering, there has been no public market for our common stock. The public offering price, negotiated among Future Media, the selling shareholders, and the representatives is based upon various factors such as our financial and operating history and condition, our prospects, the prospects for the industry we are in and prevailing market conditions. 47 Prudential Securities Incorporated, on behalf of the underwriters, may engage in the following activities in accordance with applicable securities rules: . Over-allotments involving sales in excess of the offering size, creating a short position. Prudential Securities Incorporated may elect to reduce this short position by exercising some or all of the over-allotment options. . Stabilizing and short covering; stabilizing bids to purchase the shares are permitted if they do not exceed a specified maximum price. After the distribution of shares has been completed, short covering purchases in the open market may also reduce the short position. These activities may cause the price of the shares to be higher than would otherwise exist in the open market. . Penalty bids permitting the representatives to reclaim concessions from a syndicate member for the shares purchased in the stabilizing or short covering transactions. Such activities, which may be commenced and discontinued at any time, may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. Each underwriter has represented that it has complied and will comply with all applicable laws and regulations in connection with the offer, sale or delivery of the shares and related offering materials in the United Kingdom, including: . the Public Offers of Securities Regulations 1995; . the Financial Services Act 1986; and . the Financial Services Act 1986, (Investment Advertisements) (Exemptions) Order 1996 (as amended). We have asked the underwriters to reserve shares for sale at the same offering price directly to our officers, directors, employees and other business affiliates or related third parties. The number of shares available for sale to the general public in the offering will be reduced to the extent such persons purchase the reserved shares. Prudential Securities Incorporated facilitates the marketing of new issues online through its PrudentialSecurities.com division. Clients of Prudential AdvisorSM, a full service brokerage firm program, may view offering terms and a prospectus online and place orders through their financial advisors. 48 LEGAL MATTERS Our counsel, Troop Steuber Pasich Reddick & Tobey, LLP, Los Angeles, California, has rendered an opinion that the common stock offered by us, upon its sale will be duly and validly issued, fully paid and non-assessable. Gibson, Dunn & Crutcher LLP, Los Angeles, California, has acted as counsel to the underwriters in connection with certain legal matters relating to this offering. EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements at December 31, 1998 and 1999, and for each of the three years in the period ended December 31, 1999, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission in Washington, D.C., a registration statement under the Securities Act with respect to this offering. This Prospectus does not contain all of the information set forth in such registration statement and the exhibits thereto. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and with respect to any contract or other document filed as an exhibit to such registration statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement is qualified in its entirety by such reference. For further information about us and the shares offered, please review the registration statement and the exhibits. A copy of the registration statement, including the exhibits, may be inspected without charge at the Securities and Exchange Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain prescribed rates. When this offering is consummated, we will become subject to the informational requirements of the Securities Exchange Act and will file reports and other information with the Securities and Exchange Commission in accordance with its rules. These reports and other information concerning us may be inspected and copied at the public reference facilities referred to above as well as some of the regional offices of the Securities and Exchange Commission. The Securities and Exchange Commission maintains a web site, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the Securities and Exchange Commission at http://www.sec.gov. 49 INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Ernst & Young LLP, Independent Auditors........................ F-2 Balance Sheets at December 31, 1998 and December 31, 1999................ F-3 Statements of Income for years ended December 31, 1997, 1998 and 1999.... F-4 Statements of Shareholders' Equity for years ended December 31, 1997, 1998 and 1999........................................................... F-5 Statements of Cash Flows for years ended December 31, 1997, 1998 and 1999.................................................................... F-6 Notes to Financial Statements for December 31, 1997, 1998 and 1999....... F-7
F-1 Report of Independent Auditors The Board of Directors Future Media Productions, Inc. We have audited the accompanying balance sheets of Future Media Productions, Inc. as of December 31, 1998 and 1999 and the related statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Future Media Productions, Inc. as of December 31, 1998 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Los Angeles, California February 25, 2000 F-2 FUTURE MEDIA PRODUCTIONS, INC. BALANCE SHEETS
December 31 Pro Forma ----------------------- December 31, 1998 1999 1999 ----------- ----------- ------------ (unaudited) Assets Current assets: Accounts receivable (net of allowance for doubtful accounts of $163,000 in 1998 and $265,778 in 1999)............ $ 8,035,270 $ 7,202,126 Inventories............................ 726,774 766,868 Prepaid expenses....................... 433,497 284,101 Deferred income taxes.................. 8,000 -- 300,000 ----------- ----------- ---------- Total current assets..................... 9,203,541 8,253,095 Property and equipment, net.............. 21,898,093 29,837,448 Investments.............................. -- 2,852,400 Other assets............................. 336,268 145,845 ----------- ----------- Total assets............................. $31,437,902 $41,088,788 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Bank overdraft......................... $ 517,258 $ 370,489 Line of credit......................... 1,616,537 1,852,303 Accounts payable--trade................ 2,648,974 2,762,457 Accounts payable--capital equipment.... 4,449,059 1,530,356 Accrued expenses--royalties............ 2,213,294 4,101,760 Accrued expenses....................... 1,032,631 1,043,268 Deferred revenue....................... -- 700,000 Deferred income taxes.................. -- 40,500 -- Current portion of long-term debt...... 3,756,987 3,757,698 -- Current portion of capital lease obligations........................... 11,666 5,938 Distributions payable.................. -- -- 14,407,386 ----------- ----------- ---------- Total current liabilities................ 16,246,406 16,164,769 Long-term debt, less current portion..... 9,084,805 5,327,108 Capital lease obligations, less current portion................................. 17,479 11,525 Deferred income taxes.................... 90,000 116,000 3,200,000 Commitments Shareholders' equity: Preferred stock, no par value: Authorized shares--5,000,000......... Issued and outstanding shares--none.. -- -- Common stock, no par value: Authorized shares--45,000,000........ Issued and outstanding shares-- 9,000,000........................... 3,070,000 3,790,000 3,790,000 Retained earnings...................... 2,929,212 17,107,386 -- Note receivable from officer........... -- (1,428,000) (1,428,000) ----------- ----------- ---------- Total shareholders' equity............... 5,999,212 19,469,386 2,362,000 ----------- ----------- Total liabilities and shareholders' equity.................................. $31,437,902 $41,088,788 =========== ===========
The accompanying notes to the financial statements are an integral part of these statements. F-3 FUTURE MEDIA PRODUCTIONS, INC. STATEMENTS OF INCOME
Year Ended December 31 ------------------------------------- 1997 1998 1999 ----------- ----------- ----------- Net sales to unaffiliated companies.... $23,974,131 $37,962,123 $52,448,072 Net sales to related parties........... 12,068,296 5,349,057 553,799 ----------- ----------- ----------- Total net sales........................ 36,042,427 43,311,180 53,001,871 Cost of goods sold..................... 23,132,442 27,304,178 31,937,704 ----------- ----------- ----------- Gross profit........................... 12,909,985 16,007,002 21,064,167 Selling, general and administrative expenses.............................. 4,214,033 4,232,741 4,200,969 Stock related compensation expense..... -- 3,055,000 720,000 Abandoned offering costs............... -- 675,733 -- ----------- ----------- ----------- Income from operations................. 8,695,952 8,043,528 16,143,198 Other income (expense): Interest income...................... 42,105 35,189 670 Interest expense..................... (817,998) (1,263,861) (1,403,694) ----------- ----------- ----------- Other income (expense), net.......... (775,893) (1,228,672) (1,403,024) ----------- ----------- ----------- Income before provision for state income taxes.......................... 7,920,059 6,814,856 14,740,174 Provision for state income taxes....... 119,900 102,223 2,000 ----------- ----------- ----------- Net income............................. $ 7,800,159 $ 6,712,633 $14,738,174 Earnings per share: Basic................................ $ 0.87 $ 0.75 $ 1.64 =========== =========== =========== Diluted.............................. $ 0.87 $ 0.71 $ 1.43 =========== =========== =========== Shares used in computing earnings per share: Basic................................ 9,000,000 9,000,000 9,000,000 =========== =========== =========== Diluted.............................. 9,000,000 9,498,287 10,336,178 =========== =========== =========== Pro forma net income data (Notes 1 and 7, unaudited): Income before provision for income taxes............................... $ 7,920,059 $ 6,814,856 $14,740,174 Pro forma income tax provision....... 3,161,100 2,725,942 5,896,070 ----------- ----------- ----------- Pro forma net income................. $ 4,758,959 $ 4,088,914 $ 8,844,104 Pro forma basic earnings per share... $ 0.98 =========== Pro forma diluted earnings per share............................... $ 0.86 =========== Weighted average shares outstanding-- basic............................... 9,000,000 =========== Weighted average shares outstanding-- diluted............................. 10,336,178 ===========
The accompanying notes to the financial statements are an integral part of these statements. F-4 FUTURE MEDIA PRODUCTIONS STATEMENTS OF SHAREHOLDERS' EQUITY
Note Common Stock Receivable -------------------- from Retained Shares Amount Officer Earnings Total --------- ---------- ----------- ------------ ------------ Balance at January 1, 1997................... 9,000,000 $ 15,000 $ -- $ 13,129,440 $ 13,144,440 Dividends, $1.22 per share.................. -- -- -- (11,009,020) (11,009,020) Net income.............. -- -- -- 7,800,159 7,800,159 --------- ---------- ----------- ------------ ------------ Balance at December 31, 1997................... 9,000,000 15,000 -- 9,920,579 9,935,579 Dividends, $1.52 per share.................. -- -- -- (13,704,000) (13,704,000) Issuance of stock warrants............... -- 3,055,000 -- -- 3,055,000 Net income.............. -- -- -- 6,712,633 6,712,633 --------- ---------- ----------- ------------ ------------ Balance at December 31, 1998................... 9,000,000 3,070,000 -- 2,929,212 5,999,212 Dividends, $.06 per share.................. -- -- -- (560,000) (560,000) Loan to officer......... -- -- (1,428,000) -- (1,428,000) Contribution of capital................ -- 720,000 -- -- 720,000 Net income.............. -- -- -- 14,738,174 14,738,174 --------- ---------- ----------- ------------ ------------ Balance at December 31, 1999................... 9,000,000 $3,790,000 $(1,428,000) $ 17,107,386 $ 19,469,386 ========= ========== =========== ============ ============
The accompanying notes to the financial statements are an integral part of these statements. F-5 FUTURE MEDIA PRODUCTIONS, INC. STATEMENTS OF CASH FLOWS
Year Ended December 31 --------------------------------------- 1997 1998 1999 ----------- ------------ ------------ Operating activities Net income............................ $ 7,800,159 $ 6,712,633 $ 14,738,174 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....... 1,949,838 2,860,789 4,368,177 Stock related compensation expense.. -- 3,055,000 720,000 Provision for bad debts............. 955,243 120,000 120,000 Loss on disposals of property and equipment.......................... 20,959 57,058 -- Deferred income taxes............... 17,000 22,000 74,500 Changes in operating assets and liabilities: Accounts receivable................ (3,195,350) (1,347,486) 713,144 Inventories........................ 1,523,072 (92,276) (40,094) Prepaid expenses................... (121,019) (123,088) 149,396 Other assets....................... 279,437 (92,411) 190,423 Other receivables.................. -- 275,000 -- Accounts payable................... (850,930) 941,330 113,483 Accrued expenses................... 39,622 408,583 10,637 Accrued expenses--royalties........ 3,090,416 (1,953,206) 1,888,466 ----------- ------------ ------------ Net cash provided by operating activities........................... 11,508,447 10,843,926 23,046,306 Investing activities Capital expenditures.................. (3,641,686) (6,751,862) (15,226,235) Purchases of investments.............. -- -- (2,152,400) Proceeds from disposals of property and equipment........................ -- 20,000 -- ----------- ------------ ------------ Net cash used in investing activities........................... (3,641,686) (6,731,862) (17,378,635) Financing activities Net borrowings (repayments) on line of credit............................... (103,316) 1,352,893 235,766 Net payments on bank overdraft........ (914,366) (226,150) (146,769) Proceeds from long-term debt.......... 6,537,612 11,321,000 -- Repayments on long-term debt.......... (6,700,928) (2,844,843) (3,756,986) Note receivable from officer.......... -- -- (1,428,000) Payments on capital lease obligations.......................... (14,221) (10,964) (11,682) Dividends paid to shareholders........ (6,671,542) (13,704,000) (560,000) ----------- ------------ ------------ Net cash used in financing activities........................... (7,866,761) (4,112,064) (5,667,671) Net change in cash and cash equivalents.......................... -- -- -- Cash and cash equivalents at beginning of period............................ -- -- -- ----------- ------------ ------------ Cash and cash equivalents at end of period............................... $ -- $ -- $ -- =========== ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest........................... $ 817,998 $ 1,121,507 $ 1,403,749 State income taxes................. $ 107,000 $ 61,500 $ 1,800 Supplemental disclosure of non-cash transactions
During the year ended December 31, 1997, the Company distributed $11,009,020 to shareholders consisting of a $4,337,478 reduction of notes receivable due from shareholders and cash payments of $6,671,542. In 1999, the Company agreed to provide replications of two million CD's to Synthonics partially as part of the Company's investment in Synthonics (valued at $700,000). The accompanying notes to the financial statements are an integral part of these statements. F-6 FUTURE MEDIA PRODUCTION, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1999 1. Business and Summary of Significant Accounting Policies Description of Business Future Media Productions, Inc. (the Company) is an independent manufacturer/replicator of digital versatile discs (DVDs) and compact disks (CDs) to companies in industries including Internet/online, film and entertainment, edutainment software, publishing and computer hardware. The majority of the Company's business is targeted at high volume customers in these markets. Pro Forma Balance Sheet Information The Company is an S Corporation for income tax purposes. The pro forma unaudited December 31, 1999 information in the accompanying balance sheet reflects the distribution, in the amount of approximately $14,407,386 (unaudited), to shareholders upon conversion from an S Corporation to a C Corporation and the establishment of a net deferred tax liability of approximately $2,900,000 (unaudited), resulting in an approximately $2,700,000 (unaudited) reduction of retained earnings, upon conversion as discussed further in Note 1, "Income Taxes," and Note 7 to the financial statements. Estimates and Assumptions The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions affecting the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates, although management does not believe differences would materially affect the Company's financial position or results of operations. Concentration of Credit Risk The Company manufactures and distributes DVDs and CDs principally to companies in the Internet/online, film and entertainment, edutainment software, publishing and computer hardware industries throughout the United States. The Company grants credit to its customers and does not require collateral. Credit evaluations are performed periodically as needed. Concentrations of sales and credit exist and are described in Note 5. Cash Equivalents The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Inventories Inventories are stated at the lower of cost (determined on a first-in, first- out basis) or market. Property and Equipment Property and equipment is stated at cost and depreciated over its useful life ranging from three to ten years using the straight-line method. Maintenance and repairs are charged to expense as incurred and costs of additions and betterments increasing useful lives are capitalized. Amortization of leased property is computed by the straight-line method over the lesser of the asset life or, life of the lease. Income Taxes The Company has elected to be taxed under the S Corporation provisions of the Internal Revenue Code which provides, in lieu of corporate income taxes, the shareholders separately account for their pro rata share of F-7 FUTURE MEDIA PRODUCTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 the Company's items of income, deductions, losses and credits. Therefore, these statements do not include any provision for corporate federal income taxes. Similar provisions apply for California income tax reporting; however, California tax law provides for a 1.5% rate on taxable income at the corporate level. Accordingly, the income tax provision consists of 1.5% tax due on the California taxable income of the Company offset by certain manufacturing credits. In connection with the closing of the proposed public offering, the Company's S Corporation status will terminate and the Company will be taxed thereafter as a C Corporation. The pro forma statements of income reflect a provision for federal and state income taxes as if the Company was a C Corporation for the periods presented. Upon conversion to a C Corporation, the Company will establish a net deferred tax liability with an accompanying increase to income tax expense. If this charge were recorded at December 31, 1999, the amount would have been approximately $2,700,000 (unaudited), consisting primarily of timing differences related to depreciation. Immediately prior to the closing of the proposed public offering, the Company will enter into a tax indemnification agreement with the existing shareholders relating to respective income tax liabilities. The tax indemnification agreement is intended to assure the Company assumes taxes for the related income giving rise to such taxes and the existing shareholders assume taxes for which they have received the related income giving rise to such taxes. Revenue Recognition Revenues are recorded when products are shipped or orders are completed under purchase orders or contracts and are due to be shipped but awaiting instructions from the customer of the shipping destination. Revenues related to the latter have been insignificant at the end of reporting periods. Stock-Based Compensation The Company accounts for employee and director stock options using the intrinsic value method. Generally, the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant and no compensation expense is recognized. If the option price is less than fair value, the Company records compensation expense over the vesting period of the stock option. Options granted to non-employees are accounted for using a fair value method. The Company has disclosed the pro forma material effects of using the fair value method of all options in its financial statements. Earnings Per Share Basic earnings per share has been computed by dividing net income by the weighted average number of common shares outstanding for the periods presented. Diluted earnings per share has been computed by dividing net income by securities or other contracts to issue common stock as if these securities were exercised or converted to common stock. F-8 FUTURE MEDIA PRODUCTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 The following table sets forth the calculation for basic and diluted earnings per share for the periods presented:
Year Ended December 31 --------------------------------- 1997 1998 1999 ---------- ---------- ----------- Earnings: Net income............................. $7,800,159 $6,712,633 $14,738,174 ========== ========== =========== Shares: Weighted average shares for basic earnings per share.................... 9,000,000 9,000,000 9,000,000 Share equivalents for dividends to stockholders.......................... -- -- 623,641 Stock options and warrants............. -- 498,287 712,537 ---------- ---------- ----------- Weighted average shares for diluted earnings per share.................... 9,000,000 9,498,287 10,336,178 ========== ========== ===========
Pro Forma Earnings Per Share (unaudited) The Company is currently taxed as an S Corporation for federal income and California franchise tax purposes. Accordingly, the provision for income taxes for the periods presented reflect primarily state income tax. The pro forma unaudited earnings per share information is calculated as if the Company had been subject to tax as a C Corporation for the most recent period presented. Long-Lived Assets The Company reviews for the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate the carrying amount of any asset may not be recoverable. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount. If impairment is indicated, the amount of the loss to be recorded is based upon an estimate of the difference between the carrying amount and the fair value of the asset. Fair value is based upon discounted estimated cash flows expected to result from the use of the asset and its eventual disposition and other valuation methods. The Company has identified no such impairment losses. Comprehensive Income There were no significant items of comprehensive income and no impact of these items on the Company's results of operations for the years ended December 31, 1997, 1998 and 1999, and therefore no further disclosures related to this matter have been made. Reclassifications Certain reclassifications have been made to the December 31, 1997 and 1998 financial statements to conform to the presentation in 1999. 2. Inventories Inventories consisted of the following:
December 31 ------------------- 1998 1999 --------- --------- Raw materials........................................... $ 604,972 $ 668,515 Work-in process and finished goods...................... 121,802 98,353 --------- --------- $ 726,774 $ 766,868 ========= =========
F-9 FUTURE MEDIA PRODUCTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 3. Property and Equipment Property and equipment, net, consisted of the following:
December 31 -------------------------- 1998 1999 ------------ ------------ Plant equipment......... $ 27,799,629 $ 39,057,036 Computer equipment and software............... 95,736 237,871 Office furniture and equipment.............. 83,564 83,558 Automotive equipment.... 71,080 96,865 Leasehold improvements.. 815,912 1,698,122 Leased property under capital leases......... 57,540 57,540 ------------ ------------ 28,923,461 41,230,992 Less accumulated depreciation and amortization........... (7,025,368) (11,393,544) ------------ ------------ $ 21,898,093 $ 29,837,448 ============ ============
4. Investments On December 21, 1999, the Company purchased, through an underwriting, 648 units of Lions Gate Entertainment, a Canadian motion picture production and distribution company. Each unit was purchased for $2,550 or a total of $1,652,400. Each unit consists of one 5.25% Convertible Redeemable Preferred Stock and 425 warrants. Each share of preferred stock is convertible into 1,000 shares of common stock and each warrant entitles the holder to purchase one share of Lions Gate common stock at $5.00 per share. The closing quoted market value per share of Lions Gate on February 28, 2000 was $2.625. The warrants expire January 2004. On December 23, 1999, the Company paid in cash $500,000 to Synthonics Technologies, Inc. (Synthonics) in return for a note receivable convertible into 11,518,096 shares of Synthonics common stock, which at the time represented 38% of Synthonics outstanding shares. The Company agreed to replicate and package up to two million CDs without charge to Synthonics and establish a catalog company to develop and produce 3D interactive digital catalogs on behalf of Synthonics for its customers. A member of Synthonics Board of Directors is also a member of the Company's Board of Directors. The investment in Synthonics totaling $1,200,000 (including an amount of $700,000 as the fair market value of the replication services to be performed), will be accounted for under the equity method. 5. Related Party Transactions and Major Customers During the years ended December 31, 1997 and 1998, a significant portion of the Company's revenue activity consisted of sales to one affiliated company, which at the time was partially owned by the shareholders of the Company. Net sales to this affiliate, an original manufacturer of personal computers, were $12,068,296, $5,349,057 and $553,799 for the years ended December 31, 1997, 1998 and 1999, respectively, and represented 33.5%, 12.4% and 1.0% of the Company's net sales, respectively. At December 31, 1998 and 1999, accounts receivable from this affiliate were $614,538 and $23,103, or 7.5% and 0.3% of total trade receivables, respectively. Net sales to the Company's top two unaffiliated customers in 1997 and 1998 and top three unaffiliated customers in 1999 were 35.4%, 47.6% and 55.6% of total net sales, respectively, including one customer in 1999 which represented 32.1% of total net sales. Accounts receivable in the aggregate from these significant customers at December 31, 1998 and 1999 were $1,457,142, or 17.9% and $2,434,045, or 32.5% of total trade receivables, respectively. F-10 FUTURE MEDIA PRODUCTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 During the year ended December 31, 1997, the Company wrote off accounts receivable balances due from related parties in the aggregate of $670,263, none of which related to the receivables from the affiliated company discussed above. A director of the Company performed services for the Company including investigation of strategic and financing alternatives. As consideration for such services, the Company paid to the director $25,000, $101,184 and $0, including out of pocket expenses during the years ended December 31, 1997, 1998 and 1999. The Company has committed, upon consummation of an offering, to a cash payment to the director of 0.75% of the gross proceeds of an offering and additional equity securities, warrants, or other participating interests in the Company representing 0.25% of the consideration raised in value, priced in accordance with a Black-Scholes option model, with a minimum amount of warrants issuable pursuant to this transaction not to be less than $50,000 in value. After the end of the year, the Company paid a non-refundable retainer of $60,000 to this director, which will be credited against any transaction fees payable pursuant to the offering. During the year ended December 31, 1999, the Company made non-interest bearing loans totaling $1,427,000 and interest bearing loans totaling $1,075,000 (interest accrued at the Company's borrowing rate with its major lender) to its president. These loans were repaid in their entirety during 1999 except for interest accrued, totaling approximately $72,000, which was subsequently forgiven by the Company's Board of Directors. After the end of 1999, the Company loaned $2,630,000 to this officer with interest at the Company's borrowing rate with its major lender. During 1999, advances totaling $2,500,000 were made to one of the Company's shareholders. This amount was repaid before the end of 1999. In addition, a loan totaling $1,000,000 was made during 1999 to a company partially owned by the Company's president and this shareholder. This amount was repaid prior to the end of 1999. In connection with stock warrants issued to an officer of the Company (see Note 9), the Company loaned an officer a total of $1,428,000 under promissory notes bearing compound interest at the rate of 4.6% per annum. The unpaid principal balance and any accrued but unpaid interest shall be due and payable on the earlier of: (1) January 1, 2006; or (2) the fifteenth day following the date of delivery by the Company to Maker of written demand therefore made at any time after the later of (a) the closing of a Liquidity Event (as defined), or (b) if applicable, the expiration of any lock-up period imposed in connection with such Liquidity Event on the common stock of the Company, or any successor to the Company, held by Maker. In 1999, the Company made payments in lieu of lease payments on a new production facility to a company owned by the Company's president. Such payments during the year totaled $86,000. Subsequent to December 31, 1999, the Company expects to enter into a multi-year lease agreement with this company. Lease payments are expected to be negotiated at rates commensurate with commercial terms charged for similar properties in the area with increases based on the Consumer Price Index. 6. Financing In February 1997, the Company entered into a credit agreement (Credit Agreement) with a lender, which was amended in January 1998 and further amended in April 1998, July 1998, June 1999 and January 2000. The Credit Agreement currently provides loans based on 80% of the Company's eligible receivables (as defined) (Receivable Loans), loans based on 90% of the net purchase price of new equipment purchased and delivered subsequent to June 1999 (Equipment Loans) and additional revolving loans (Revolving Loans). Under the Credit Agreement the Company is allowed to borrow the lesser of $30,000,000 or an amount equal to 80% of the Company's eligible receivables (as defined), $15,000,000 of Equipment Loans plus the unpaid balance of F-11 FUTURE MEDIA PRODUCTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 the Revolving Loans. The Credit Agreement had an original maturity date of February 28, 1998 and provided for automatic renewals. In January 1998, the agreement was amended to have an original maturity of April 30, 1998 and in January 2000 the maturity date was extended to June 30, 2001, and continues to provide for automatic renewals. Borrowings under Receivable Loans bear interest at the prime rate (8.5% at December 31, 1999) plus 2.0% per annum; however, the interest rate will not be less than 7.0% per annum. Outstanding borrowings under the Receivable Loans amounted to $1,616,537 at December 31, 1998 and $1,852,303 at December 31, 1999. The Credit Agreement is secured by accounts receivable, equipment, inventory and other assets and is personally guaranteed by the shareholders of the Company. Interest expense related to the Receivable Loans for the years ended December 31, 1997, 1998 and 1999 was $234,778, $116,959 and $274,833, respectively. Under the amendment of April 1998, the Revolving Loans were for an amount of $15,000,000, which is payable in monthly principal installments of $312,500 through (i) the earlier of the date the Credit Agreement terminates, or is terminated, or (ii) April 2002. The Revolving Loans bear interest at the prime rate (8.5% at December 31, 1999) plus 2.0% per annum; however, the interest rate will not be less than 7.0% per annum. The outstanding balance of the Revolving Loans was $12,812,500 and $9,062,500 at December 31, 1998 and 1999, respectively. As part of the Credit Agreement, the Revolving Loans are collateralized by accounts receivable, equipment, inventory and other assets and is personally guaranteed by the shareholders of the Company. Under the amendment of June 1999, amounts borrowed under the Equipment Loans are to be repaid in 48 equal monthly payments of principal through the earlier of (i) the earlier of the date the Credit Agreement terminates, or is terminated or (ii) the date such Equipment Loans have been repaid in full. The Equipment Loans bear interest at the prime rate (8.5% at December 31, 1999) plus 2.0% per annum; however, the interest rate will not be less than 7.0% per annum. At December 31, 1999 no amounts had been borrowed under the Equipment Loans. Subsequent to the closing of the offering described in Note 11, the Company anticipates renegotiating the terms under the Credit Facility, including maturity dates, covenants, interest rates and personal guarantees. Future maturities of long-term debt are as follows: Year ended December 31: 2000........................................................... $ 3,757,697 2001........................................................... 3,758,480 2002........................................................... 1,568,627 ----------- $ 9,084,804 ===========
Interest expense incurred for long-term debt was $579,123, $1,142,893 and $1,125,167 for the years ended December 31, 1997, 1998 and 1999, respectively. The Company's weighted average interest rate on its debt was 10.5%, 10.4% and 10.1% for the years ended December 31, 1997, 1998 and 1999, respectively. F-12 FUTURE MEDIA PRODUCTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 7. Income Taxes The provision (benefit) for state income taxes is as follows:
Year Ended December 31 ---------------------------- 1997 1998 1999 --------- -------- --------- Current........................................ $ 102,900 $ 80,223 $ (72,500) Deferred....................................... 17,000 22,000 74,500 --------- -------- --------- $ 119,900 $102,223 $ 2,000 ========= ======== =========
As described in Note 1 to the financial statements, the Company is currently an S Corporation for federal income and California franchise tax purposes under Subchapter S of the Internal Revenue Code and the corresponding provisions of the California statute. In connection with the closing of the proposed public offering as discussed in Note 11, the Company's S Corporation status will terminate and the Company will be taxed as a C Corporation. This will result in the establishment of a provision for income taxes and deferred tax liability of approximately $2,700,000 (unaudited) upon the closing date. The following unaudited pro forma income tax information has been determined as if the Company operated as a C Corporation for the periods presented:
Year Ended December 31 -------------------------------- 1997 1998 1999 ---------- ---------- ---------- Federal tax provision..................... $2,460,000 $2,115,600 $4,598,935 State income taxes net of federal benefit.................................. 701,100 602,800 1,297,135 ---------- ---------- ---------- Total pro forma income tax provision...... $3,161,100 $2,718,400 $5,896,070 ========== ========== ==========
The difference between actual income tax expense and the U. S. Federal statutory income tax rate is as follows:
Year Ended December 31 --------------------------- 1997 1998 1999 ------- ------- ------- Statutory rate................................. 34.0 % 34.0 % 34.0 % State tax provision............................ 1.5 1.5 1.5 Manufacturers credit........................... -- -- (1.5) S Corporation status........................... (34.0) (34.0) (34.0) ------- ------- ------- Effective tax rate............................. 1.5 % 1.5 % 0.0 % ======= ======= =======
The difference between the unaudited pro forma income tax expense and the U.S. Federal statutory income tax rate is as follows:
Year Ended December 31 --------------------------- 1997 1998 1999 ------- ------- ------- Statutory rate................................. 34.0 % 34.0 % 34.0 % State tax provision............................ 6.0 6.0 6.0 Manufacturers credit........................... -- -- (1.3) Other.......................................... (0.1) -- 1.3 ------- ------- ------- Effective tax rate............................. 39.9 % 40.0 % 40.0 % ======= ======= =======
F-13 FUTURE MEDIA PRODUCTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 Deferred income tax assets and liabilities are computed for those differences having future tax consequences using the currently enacted tax laws and rates. Income tax expenses equal the current tax payable or refundable for the period, plus or minus the net change in the deferred tax asset and liabilities accounts. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:
December 31 -------------------- 1998 1999 --------- --------- Bad debt allowance..................................... $ 2,400 $ 4,000 Other.................................................. 5,600 9,000 Credit carryovers...................................... -- 43,000 --------- --------- Total deferred assets.................................. 8,000 56,000 Depreciation........................................... (90,000) (116,000) Other.................................................. -- (96,500) --------- --------- Total deferred liabilities............................. (90,000) (212,500) --------- --------- Net deferred tax liabilities........................... $ (82,000) (156,500) ========= ========= Balance sheet classification: Current deferred tax assets.......................... $ 8,000 $ -- Current deferred tax liabilities..................... -- 40,500 Long-term deferred tax liabilities................... 90,000 116,000
8. Commitments The Company leases two office and manufacturing facilities in Valencia, California, under operating leases. One of the leases expires in February 2002. The other lease expires in May 2007 and is with a company owned by the shareholders of the Company. Both leases provide for adjustments to the monthly base rent periodically, based on the Consumer Price Index. At December 31 1999, future minimum lease payments required under the lease arrangement are as follows:
Related Party Other Total ------------- -------- ---------- Year ended December 31: 2000..................................... $ 240,000 $276,638 $ 516,638 2001..................................... 240,000 273,358 513,358 2002..................................... 240,000 49,345 289,345 2003..................................... 240,000 570 240,570 2004..................................... 240,000 -- 240,000 Thereafter............................... 580,000 -- 580,000 ---------- -------- ---------- $1,780,000 $599,911 $2,379,911 ========== ======== ==========
F-14 FUTURE MEDIA PRODUCTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 Total rent expense pursuant to these leases was $395,672, $507,886 and $504,312 for the years ended December 31, 1997, 1998 and 1999, respectively. Rental payments to related parties were $140,000 for the year ended December 31, 1997 and $240,000 for both the years ended December 31, 1998 and 1999. Subsequent to December 31, 1999, the Company expects to enter into a multi- year lease agreement for a new production facility and negotiated a termination of its lease agreement for one of its existing facilities. The new lease is expected to be a multi-year operating lease with a company owned by the shareholders of the Company to be negotiated at rates commensurate with commercial terms charged for similar properties with periodic adjustments to the monthly base rent based on the Consumer Price Index. The Company does not expect to incur significant expenses in terminating its existing lease under the terms of the agreement with the current landlord. 9. Stockholders' Equity Stock Options In April 1998, the Company adopted a Stock Incentive Plan (Stock Plan). Each executive officer, employee, non-employee director or consultant of the Company or any of its future subsidiaries is eligible to be considered for the grant of awards under the Stock Plan. A maximum of 1,200,000 shares of common stock may be issued pursuant to awards granted under the Stock Plan, subject to certain adjustments to prevent dilution. Any shares of common stock subject to an award, which for any reason expires or terminates unexercised, are again available for issuance under the Stock Plan. The options vest generally at periods up to 5 years. The Stock Plan will be administered by the Company's Board of Directors or by a committee of two or more non-employee directors appointed by the Board of Directors. The Stock Plan authorizes the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock and stock bonuses. No stock appreciation rights are outstanding at December 31, 1999. A summary of the Company's stock option activity, and related information is as follows:
Outstanding Stock Options ----------------------------- Weighted Average Exercise Range of Number Price Exercise of Per Prices Per Options Share Share ------- -------- ------------ Outstanding at January 1, 1998................... -- $ -- $ -- Granted........................................ 828,000 11.35 11.20-11.90 ------- ------ ------------ Outstanding at December 31, 1998................. 828,000 11.35 11.20-11.90 ------- ------ ------------ Outstanding at December 31, 1999................. 828,000 $11.35 $11.20-11.90 ======= ====== ============ Exercisable at: December 31, 1998.............................. -- $ -- $ -- ======= ====== ============ December 31, 1999.............................. 214,500 $11.37 $11.20-11.90 ======= ====== ============
At December 31, 1999, 372,000 shares were available for future grant. The weighted average remaining contractual life for the outstanding options is 8.46 years at December 31, 1999. If the Company had elected to recognize compensation expense based on the fair value of the options granted at grant date for its stock-based compensation plans, the Company's net income would have been F-15 FUTURE MEDIA PRODUCTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 reduced by approximately $350,000 and $600,000 for the years ended December 31, 1998 and 1999, respectively, and basic and diluted earnings per share would have been $0.71 and $0.67, respectively, for the year ended December 31, 1998, and $1.57 and $1.37, respectively, for the year ended December 31, 1999. The fair value of the options is estimated using a minimum value option pricing model with the following weighted average assumptions for grants in 1998: dividend yield of 0.0%; risk free interest rate of 6.0%; and expected life of 5.0 years. Warrants On January 1, 1998, the Company granted to one of its officers warrants to purchase 366,600 shares of common stock. Each warrant provides for the purchase of one share of common stock at $0.0017 per share, resulting in stock warrant compensation expense of $3,055,000 for the year ended December 31, 1998, with the warrants expiring on December 31, 2007. These warrants have no voting rights, dividend rights or preferences until such time as they are exercised for shares of common stock. As of December 31, 1999 no warrants have been exercised. Stock Related Compensation Expense In 1999, the shareholders of the Company committed to give 30,000 shares of their stock to a director for services to the Company. For the year ended December 31, 1999, the Company has recorded stock related compensation expense of $720,000 for this commitment based on the estimated fair value of the shares given, and a contribution to capital for the same amount from the shareholders. 10. Fair Value of Financial Instruments In estimating its fair value disclosures for financial statements, the Company used the following methods and assumptions: Cash and cash equivalents: The carrying amount approximates fair value. Accounts receivable, other receivables, accounts payable and accounts payable-equipment: The carrying amount approximates fair value. The fair value of the note receivable from officer discounted at the Company's borrowing rate is approximately $1,096,000. Line of credit and long-term debt: The carrying amounts of the Company's borrowings under its short-term revolving credit arrangements approximate their fair value. The fair values of the Company's long-term debts are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts of long-term debts approximate their fair values. 11. Proposed Initial Public Offering On January 27, 2000, the Company's Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission, relating to an initial public offering of shares of the Company's unissued common stock and shares to be sold by selling shareholders. The S Corporation status of the Company will terminate upon the closing of the offering and, thereafter, the Company will be subject to federal and state income taxes. As a result of terminating its S Corporation status, the Company will pay a distribution of the retained earnings balance prior to closing to its shareholders. F-16 - ------------------------------------------------------------------------------- Until , all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------------------------------- [LOGO OF FUTURE MEDIA APPEARS HERE] Prudential Volpe Securities a unit of Prudential Securities CIBC World Markets - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table itemizes the expenses incurred by the Registrant in connection with the issuance and distribution of the Securities being registered, other than underwriting discounts. All the amounts shown are estimates except the Securities and Exchange Commission registration fee and the NASD filing fee. Registration fee--Securities and Exchange Commission................ $18,480 NASD filing fee..................................................... Nasdaq National Market fee.......................................... Accounting fees and expenses........................................ Legal fees and expenses (other than blue sky)....................... Blue sky fees and expenses, including legal fees.................... Printing; stock certificates........................................ Transfer agent and registrar fees................................... Consulting fees..................................................... Miscellaneous....................................................... ------- Total............................................................. $ =======
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant's Articles of Incorporation include a provision that eliminates the personal liability of its directors to the Registrant and its shareholders for monetary damages for breach of the directors' fiduciary duties in certain circumstances. This limitation has no effect on a director's liability (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the Registrant or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the Registrant or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of a serious injury to the Registrant or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrant or its shareholders, (vi) under Section 310 of the California Corporations Code (the "California Code") (concerning contracts or transactions between the Registrant and a director) or (vii) under Section 316 of the California Code (concerning directors' liability for improper dividends, loans and guarantees). The provision does not extend to acts or omissions of a director in his capacity as an officer. Further, the provision will not affect the availability of injunctions and other equitable remedies available to the Registrant's shareholders for any violation of a director's fiduciary duty to the Registrant or its shareholders. The Registrant's Articles of Incorporation also include an authorization for the Registrant to indemnify its agents (as defined in Section 317 of the California Code), through bylaw provisions, by agreement or otherwise, to the fullest extent permitted by law. Pursuant to this latter provision, the Registrant's Bylaws provide for indemnification of the Registrant's directors, officers and employees. In addition, the Registrant, at its discretion, may provide indemnification to persons whom the Registrant is not obligated to indemnify. The Bylaws also allow the Registrant to enter into indemnity agreements with individual directors, officers, employees and other agents. These indemnity agreements have been entered into with all directors and provide the maximum indemnification permitted by law. These agreements, together with the Registrant's Bylaws and Articles of Incorporation, may require the Registrant, among other things, to indemnify such directors against certain liabilities that may arise by reason of their status or service as directors (other than liabilities resulting II-1 from willful misconduct of a culpable nature), to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain directors' and officers' insurance if available on reasonable terms. The Company and certain of the Company's shareholders (the "Existing Shareholders") plan to enter into a tax indemnification agreement (the "Tax Agreement") relating to their respective income tax liabilities. Because the Company will be fully subject to corporate income taxation after the termination of the Company's S Corporation status, the reallocation of income and deductions between the period during which the Company was treated as an S Corporation and the period during which the Company will be subject to corporate income taxation may increase the taxable income of one party while decreasing that of another party. Accordingly, the Tax Agreement is intended to assure that taxes are borne by the Company on the one hand and the Existing Shareholders on the other only to the extent that such parties received the related income. The Tax Agreement generally provides that, if an adjustment is made to the taxable income of the Company for a year in which it was treated as an S Corporation, the Company will indemnify the Existing Shareholders and the Existing Shareholders will indemnify the Company against any increase in the indemnified party's income tax liability (including interest and penalties and related costs and expenses), with respect to any tax year to the extent such increase results in a related decrease in the income tax liability of the indemnifying party for that year. The Company will also indemnify the Existing Shareholders for all taxes imposed upon them as the result of their receipt of an indemnification payment under the Tax Agreement. Section 317 of the California Code and the Registrant's Bylaws make provision for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons, under certain circumstances, for liabilities (including reimbursement of expenses incurred) arising under the Securities Act of 1933 ("Securities Act"). Section of the Underwriting Agreement filed as Exhibit 1.1 hereto sets forth certain provisions with respect to the indemnification of certain controlling persons, directors and officers against certain losses and liabilities, including certain liabilities under the Securities Act. The Registrant maintains director and officer liability insurance. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
Exhibit Document Number -------- ------- Proposed form of Underwriting Agreement.............................. 1.1 Registrant's Amended and Restated Articles of Incorporation.......... 3.1 Registrant's Amended and Restated Bylaws............................. 3.2 Registrant's Form of Indemnification Agreement....................... 10.4 Tax Agreement........................................................ 10.5
Item 15. RECENT SALES OF UNREGISTERED SECURITIES. In August, 1998, the Company issued pursuant to its 1998 Stock Incentive Plan (the "Stock Plan") stock options to purchase an aggregate of 180,000 shares of common stock at $11.90 per share to four directors of the Company. The issuance and sale of these securities is exempt from the registration requirements of the II-2 Securities Act pursuant to Section 4(2) of the Securities Act as a transaction not involving any public offering, and also pursuant to Rule 701 because the offer and sale of the securities was pursuant to a compensatory benefit plan relating to compensation. In May 1998, pursuant to its 1998 Stock Plan the Company issued stock options to purchase an aggregate of 648,000 shares of common stock at $11.20 per share to 15 employees of the Company. The issuance and sale of these securities is exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act as a transaction not involving any public offering, and also pursuant Rule 701 because the offer and sale of the securities was pursuant to a compensatory benefit plan relating to compensation. The Company has agreed to issue to Averil Capital Markets Group, Inc. warrants to purchase shares of common stock equivalent to 0.25% of the gross proceeds raised in the Offering. The issuance of these warrants was exempt from registration pursuant to Section 4(2) of the Securities Act as a transaction not involving any public offering, and also pursuant to Rule 701 because the offer and sale of the securities was pursuant to a compensatory benefit plan relating to compensation. On January 1, 1998 the Company issued warrants to purchase 366,600 shares of common stock to David Moss, the Company's Vice President--Operations, for services which had been rendered by Mr. Moss. The issuance of these warrants was exempt from registration pursuant to Section 4(2) of the Securities Act as a transaction not involving any public offering, and also pursuant to Rule 701 because the offer and sale of the securities was pursuant to a compensatory benefit plan relating to compensation. Item 16. EXHIBITS.
Exhibit Number Exhibit Description ------- ------------------- 1.1 Form of Underwriting Agreement.* 3.1 Amended and Restated Articles of Incorporation of Registrant. 3.2 Amended and Restated Bylaws of Registrant. 4.1 Specimen Stock Certificate of Common Stock of Registrant.* 5.1 Opinion and Consent of Troop Steuber Pasich Reddick & Tobey, LLP.* 10.1 1998 Stock Incentive Plan. 10.2 Form of Registrant's Stock Option Certificate (Non-Statutory Stock Option). 10.3 Form of Registrant's Stock Option Certificate (Incentive Stock Option). 10.4 Form of Director and Officer Indemnification Agreement. 10.5 Form of Tax Indemnification Agreement to be entered into among Registrant and the Existing Shareholders.* 10.6 Employment Agreement, dated August 26, 1998, between the Registrant and David Moss. 10.7 Warrant Agreement, dated January 1, 1998, between the Registrant and David Moss. 10.8 Lease Agreement and Notice of Extension thereof, dated August 24, 1994 and June 13, 1996, respectively, between the Registrant and Hermann Rosen & Florence W. Rosen, Trustees. 10.9 Lease Agreement, dated May 1, 1997, between the Registrant and Bascal Properties. 10.10 Loan and Security Agreement dated February 26, 1997, between the Registrant and Greyrock Business Credit.
II-3
Exhibit Number Exhibit Description ------- ------------------- 10.11 Extension Agreement, dated January 16, 1998, between the Registrant and Greyrock Business Credit. 10.12 Amendment to Loan Agreement, dated April 29, 1998, between the Registrant and Greyrock Business Credit. 10.13 Extension Agreement, dated September 4, 1998, between the Registrant and Greyrock Business Credit. 10.14 Amendment to Loan Document, dated June 17, 1999 between the Registrant and Greyrock Business Capital. 10.15 Amendment to Loan Document, dated January 25, 2000, between the Registrant and Greyrock Business Capital. 10.16 Comprehensive CD Disc License Agreement, dated October 1, 1996, between the Registrant and U.S. Phillips Corporation. 10.17 Non-Exclusive Patent License Agreement for Disc Product Manufacturers, dated June 1, 1996, between the Registrant and Discovision Associates. 10.18 Letter Agreement, dated June 15, 1998, between the Registrant and Averil Capital Markets Group, Inc. 10.19 Engagement Agreement, dated June 15, 1998, between the Registrant and Averil Capital Markets Group, Inc. 10.20 DVD Format and Logo License, dated January 11, 2000, between the Registrant and Toshiba Corporation. 10.21 DVD Video Disc and DVD Rom Disc Patent License Agreement, dated October 1, 1999, between the Registrant and U.S. Philips Corporation. 10.22 Patent License Agreement for the Use of AC-3 Technology in the Manufacture of DVD Discs, dated October 1, 1999, between Registrant and U.S. Phillips Corporation. 10.23 Subscription Agreement, dated December 22, 1999, between the Registrant and Synthonics Technologies, Inc.* 10.24 Letter Agreement, between the Registrant and Lions Gate Entertainment Corp.* 23.1 Consent of Troop Steuber Pasich Reddick & Tobey, LLP (included in its opinion filed as Exhibit 5.1 hereto).* 23.2 Consent of Ernst & Young LLP. 24.1 Power of Attorney (included on signature page). 27.1 Financial Data Schedule.
- -------- *To be filed by Amendment. (b) Financial Statement Schedules Report of Independent Auditors. Schedule II Valuation and Qualifying Accounts II-4 Item 17. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer of controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For the purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on March 14, 2000. Future Media Productions, Inc. /s/ Alex Sandel By: _________________________________ Alex Sandel Chairman of the Board, Chief Executive Officer and President POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Alex Sandel and Louis Weiss, and each of them, as his true and lawful attorneys-in- fact and agents with full power of substitution and resubstitution, for him and his name, place and stead, in any and all capacities, to sign any or all amendments (including post effective amendments) to this Registration Statement and a new Registration Statement filed pursuant to Rule 462(b) of the Securities Act and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated.
Signature Title Date --------- ----- ---- /s/ Alex Sandel Chairman of the Board, March 14, 2000 ______________________________________ Chief Executive Officer Alex Sandel and President /s/ Louis Weiss Chief Financial Officer, March 14, 2000 ______________________________________ Principal Accounting Louis Weiss Officer and Secretary /s/ Sanford R. Cilman Director March 14, 2000 ______________________________________ Sanford R. Climan /s/ Mark Dyne Director March 14, 2000 ______________________________________ Mark Dyne /s/ Diana Maranon Director March 14, 2000 ______________________________________ Diana Maranon
II-6 REPORT OF INDEPENDENT AUDITORS The Board of Directors Future Media Productions, Inc. We have audited the financial statements of Future Media Productions, Inc. as of December 31, 1998 and 1999 and for each of the three years in the period ended December 31, 1999 and have issued our report thereon dated February 25, 2000 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. The schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above as of December 31, 1998 and 1999 and for each of the three years in the period ended December 31, 1999, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Los Angeles, California February 25, 2000 II-7 SCHEDULE II FUTURE MEDIA PRODUCTIONS, INC. VALUATION AND QUALIFYING ACCOUNTS ALLOWANCE FOR DOUBTFUL ACCOUNTS For the Years Ended December 31, 1997, 1998 and 1999
Charged Balance Balance at to Costs Charged at End Beginning and to Other of Description of Period Expenses Accounts Deductions(1) Period - ----------- ---------- -------- -------- ------------- -------- Column A Column B Column C Column D Column E - -------- ---------- ----------------- ------------- -------- Year Ended December 31, 1997..................... $298,439 $955,243 $ -- $1,003,682 $250,000 Year Ended December 31, 1998..................... 250,000 120,000 -- 207,000 163,000 Year Ended December 31, 1999..................... 163,000 120,000 -- 17,222 265,778
- -------- (1) Uncollectible accounts written off, net of recoveries. EXHIBIT INDEX
Exhibit Number Exhibit Description ------- ------------------- 1.1 Form of Underwriting Agreement.* 3.1 Amended and Restated Articles of Incorporation of Registrant. 3.2 Amended and Restated Bylaws of Registrant. 4.1 Specimen Stock Certificate of Common Stock of Registrant.* 5.1 Opinion and Consent of Troop Steuber Pasich Reddick & Tobey, LLP.* 10.1 1998 Stock Incentive Plan. 10.2 Form of Registrant's Stock Option Certificate (Non-Statutory Stock Option). 10.3 Form of Registrant's Stock Option Certificate (Incentive Stock Option). 10.4 Form of Director and Officer Indemnification Agreement. 10.5 Form of Tax Indemnification Agreement to be entered into among Registrant and the Existing Shareholders.* 10.6 Employment Agreement, dated August 26, 1998, between the Registrant and David Moss. 10.7 Warrant Agreement, dated January 1, 1998, between the Registrant and David Moss. 10.8 Lease Agreement and Notice of Extension thereof, dated August 24, 1994 and June 13, 1996, respectively, between the Registrant and Hermann Rosen & Florence W. Rosen, Trustees. 10.9 Lease Agreement, dated May 1, 1997, between the Registrant and Bascal Properties. 10.10 Loan and Security Agreement dated February 26, 1997, between the Registrant and Greyrock Business Credit. 10.11 Extension Agreement, dated January 16, 1998, between the Registrant and Greyrock Business Credit. 10.12 Amendment to Loan Agreement, dated April 29, 1998, between the Registrant and Greyrock Business Credit. 10.13 Extension Agreement, dated September 4, 1998, between the Registrant and Greyrock Business Credit. 10.14 Amendment to Loan Document, dated June 17, 1999 between the Registrant and Greyrock Business Capital. 10.15 Amendment to Loan Document, dated January 25, 2000, between the Registrant and Greyrock Business Capital. 10.16 Comprehensive CD Disc License Agreement, dated October 1, 1996, between the Registrant and U.S. Phillips Corporation. 10.17 Non-Exclusive Patent License Agreement for Disc Product Manufacturers, dated June 1, 1996, between the Registrant and Discovision Associates. 10.18 Letter Agreement, dated June 15, 1998, between the Registrant and Averil Capital Markets Group, Inc. 10.19 Engagement Agreement, dated June 15, 1998, between the Registrant and Averil Capital Markets Group, Inc. 10.20 DVD Format and Logo License, dated January 11, 2000, between the Registrant and Toshiba Corporation. 10.21 DVD Video Disc and DVD Rom Disc Patent License Agreement, dated October 1, 1999, between the Registrant and U.S. Philips Corporation.
Exhibit Number Exhibit Description ------- ------------------- 10.22 Patent License Agreement for the Use of AC-3 Technology in the Manufacture of DVD Discs, dated October 1, 1999, between Registrant and U.S. Phillips Corporation. 10.23 Subscription Agreement, dated December 22, 1999, between the Registrant and Synthonics Technologies, Inc.* 10.24 Letter Agreement, between the Registrant and Lions Gate Entertainment Corp.* 23.1 Consent of Troop Steuber Pasich Reddick & Tobey, LLP (included in its opinion filed as Exhibit 5.1 hereto).* 23.2 Consent of Ernst & Young LLP. 24.1 Power of Attorney (included on signature page). 27.1 Financial Data Schedule.
- -------- *To be filed by Amendment. EX-3.1 2 AMENDED AND RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF FUTURE MEDIA PRODUCTIONS, INC. The undersigned, Alex Sandel and Dawn Dodson, do hereby certify that: 1. They are the President and Secretary, respectively, of Future Media Productions, Inc., a California corporation (the "CORPORATION"). 2. The Articles of Incorporation of this Corporation are amended and restated to read as follows: I. The name of this Corporation is Future Media Productions, Inc. II. The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California ("GCL") other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the GCL. III. A. The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. B. This Corporation is authorized to provide for, whether by bylaw, agreement or otherwise, the indemnification of agents (as defined in Section 317 of the GCL) of this Corporation in excess of that expressly permitted by such Section 317 for those agents, for breach of duty to this Corporation and its shareholders to the extent permissible under California law (as now or hereafter in effect). In furtherance and not in limitation of the powers conferred by statute: 1. this Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of this Corporation, or is serving at the request of this Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not this Corporation would have the power to indemnify against such liability under the provisions of law; and 2. this Corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contracts providing indemnification to the fullest extent authorized or permitted by law and including as part thereof provisions with respect to any or all of the foregoing to ensure the payment of such amounts as may become necessary to effect indemnification as provided therein, or elsewhere. No such bylaw, agreement or other form of indemnification shall be interpreted as limiting in any manner the rights which such agents would have to indemnification in the absence of such bylaw, agreement or other form of indemnification. C. Any repeal or modification of the foregoing provisions of this Article III by the shareholders of this Corporation shall not adversely affect any right or protection of a director of this Corporation existing at the time of such repeal or modification. IV. A. This Corporation is authorized to issue 45,000,000 shares of Common Stock, no par value (hereinafter referred to as the "COMMON STOCK"), and 5,000,000 shares of Preferred Stock, no par value (hereinafter referred to as the "PREFERRED STOCK"). B. Such Preferred Stock may be issued from time to time in one or more series as shall be authorized by the Board of Directors of this Corporation. The Board of Directors of this Corporation shall, prior to the issuance of any such shares of any series of Preferred Stock, fix (i) the number of shares of each such series of Preferred Stock and (ii) such distinctive designation or title of each such series of Preferred Stock with such rights, privileges, powers and preferences thereof. C. Upon the filing of these amended and restated Articles of Incorporation, each outstanding share of Common Stock shall, without any further action on the part of the Corporation, be split and converted into 600 shares of Common Stock. V. Cumulative voting for the election of directors of this Corporation shall be eliminated effective upon the date this Corporation becomes, and for as long as this Corporation is, a "listed corporation" within the meaning of Section 301.5 of the GCL. 3. The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the Board of Directors of this Corporation. 4. The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the GCL. The total number of outstanding shares of this Corporation was 15,000 shares (prior to the stock split effected hereby) of Common Stock. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the Common Stock. 2 We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Executed at Los Angeles, California, on August 25, 1998. /s/ ALEX SANDEL --------------------------------------- Alex Sandel, President /s/ DAWN DODSON --------------------------------------- Secretary 3 EX-3.2 3 AMENDED AND RESTATED BYLAWS OF REGISTRANT EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF FUTURE MEDIA PRODUCTIONS, INC.. (a California corporation) ARTICLE I OFFICES Section 1. PRINCIPAL OFFICES. The principal executive office of the corporation shall be at such place within or outside the State of California as the board of directors from time to time shall designate. If the principal executive office of the corporation is located outside the State of California, and the corporation has one or more business offices in California, the board of directors shall designate a principal business office in California. Section 2. OTHER OFFICES. The board of directors may at any time establish branch or subordinate offices at any place or places as it may deem appropriate. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. PLACE OF MEETINGS. Meetings of the shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. Section 2. ANNUAL MEETING. The annual meeting of the shareholders shall be held each year on the FIRST MONDAY OF APRIL AT 10 O'CLOCK A.M. or on such other date and at such other time as may be designated by the board of directors. If the date for the annual meeting is designated by the board of directors, such date shall not be more than fifteen months after the date of the preceding annual meeting. At each annual meeting directors shall be elected and any other proper business may be transacted. Section 3. SPECIAL MEETING. A special meeting of the shareholders, for the purpose of taking any action permitted under the Corporations Code of California and the articles of incorporation of the corporation, may be called at any time by the board of directors or by the chairman of the board, or by the president or by one or more shareholders holding, in the aggregate, shares representing not less than 10% of the total number of votes which would be entitled to be cast at such meeting. If a special meeting is called by any person or persons other than the board of directors, such person or persons shall deliver to the chairman of the board, the president, any vice president or the secretary of the corporation a written demand that notice of such meeting be given to the shareholders of the corporation, specifying in such demand the general nature of the business proposed to be transacted thereat. Such demand shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission. The officer receiving such demand shall, in accordance with the provisions of Sections 4 and 5 of this Article II, cause notice to be promptly given to the shareholders entitled to vote that a special meeting will be held at the date and time requested by the person or persons calling the meeting, which date must be not less than thirty-five nor more than sixty days after the receipt of such demand. If such notice is not given within twenty days after receipt of the demand, the person or persons calling the meeting may cause the notice to be given. Every notice of a special meeting of the shareholders shall specify the general nature of the business to be transacted, and no other business may be transacted at such meeting. Nothing contained in this Section 3 shall be construed as limiting, fixing or affecting the date and time when a meeting of the shareholders called by action of the board of directors may be held. Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. Whenever the shareholders are required or permitted to take any action at a meeting, notice of the meeting shall be given in accordance with Section 5 of this Article II not less than ten nor more than sixty days before the date of the meeting. Such notice shall specify the place, date and time of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time the notice is given, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, (ii) an amendment of the articles of incorporation, (iii) a reorganization of the corporation as defined in the Corporations Code of California, (iv) a voluntary dissolution of the corporation or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any, the notice of such meeting shall also state the general nature of that proposal. Section 5. MANNER OF GIVING NOTICE. Notice of any meeting of the shareholders shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to each shareholder at his address 2 appearing on the books of the corporation or given by such shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or has been given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office or if published at least once in a newspaper of general circulation in the county where said principal executive office is located. Any notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to such shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to such shareholder on written demand of such shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice to the other shareholders of the corporation. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting which is executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice shall be PRIMA FACIE evidence of the giving of such notice. Section 6. QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of the shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 7. ADJOURNED MEETING; NOTICE. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 6 of this Article II. When any meeting of the shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the date, time and place at which the adjourned meeting is to be reconvened are announced at the meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed or unless the adjournment is for more than forty-five days from the date set for the original meeting, in which case the board of directors shall set a new record date. If notice of any 3 adjourned meeting is required to be given as indicated above, such notice shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 4 and 5 of this Article II. At any adjourned meeting the shareholders may transact any business which might have been transacted at the original meeting. Section 8. VOTING. The shareholders entitled to vote at any meeting of the shareholders shall be determined in accordance with the provisions of Section 11 of this Article II, subject to the provisions of Sections 702 to 704, inclusive, of the Corporations Code of California (relating to the voting of shares held by a fiduciary, in the name of a corporation or in joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder before the voting has begun. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (other than an election of directors with respect to which cumulative voting is applicable) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the Corporations Code of California or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes unless the names of the candidates for whom votes are sought to be cumulated have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of his intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate his votes for candidates whose names have been placed in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which his shares are entitled, or distribute his votes on the same principle among any or all of the candidates, as he thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The transactions of any meeting of the shareholders, either annual or special, however called and noticed and wherever held, shall be as valid as though taken at a meeting duly held after regular call and notice if a quorum was present either in person or by proxy and if, either before or after the meeting, each person entitled to vote who was not present in person or by proxy or who, though present, did expressly object to the consideration of particular matters of business as to which proper notice was not given or who, at the beginning of the meeting, did object to the transaction of any business thereat because the meeting was not lawfully called or convened, signs a written waiver of notice or a consent to a holding of the meeting or any approval of the minutes. Such waiver of notice or consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of the shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of the proposal. All 4 such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the meeting if the objection is expressly made at the meeting. Section 10. SHAREHOLDER ACTION WITHOUT A MEETING. Any action which may be taken at any annual or special meeting of the shareholders may be taken without a meeting and without prior notice, by consent in writing setting forth the action so taken. In the case of any action other than election of directors, such action shall be effective if signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a vacancy on the board of directors (other than a vacancy created by the removal of a director) that has not been filled by the directors may be filled at any time by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be filed with the secretary of the corporation and shall be maintained in the corporate records. Any shareholder giving a written consent or such shareholder's proxy holders or a transferee of the shares or a personal representative of such shareholder or their respective proxy holders may. revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing and if the written consent of all such shareholders shall not have been received, the secretary shall give to all shareholders entitled to vote whose written consent has not been received prompt notice of the corporate action approved by the shareholders without a meeting. Such notice must be given at least ten days before the consummation of such action in the event that such action consists of (i) entering into a contract or transaction in which a director has a direct or indirect financial interest, (ii) indemnification of an agent of the corporation, (iii) a reorganization of the corporation as defined in the Corporations Code of California or (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any. Such notice shall be given in the manner specified in Section 5 of this Article II. Section 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING CONSENTS. For purposes of determining the shareholders entitled to notice of and to vote at any meeting or entitled to give consent to corporate action without a meeting, 5 the board of directors may fix, in advance, a record date which shall not be more than sixty days nor less than ten days before the date of any such meeting nor more than sixty days before any such action without a meeting, and in this event only shareholders of record at the close of business on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Corporations Code of California. If the board of directors does not so fix a record date: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of the shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting shall be (i) when no resolution with respect to such action has yet been adopted by the board of directors, the day on which the first written consent is given or (ii) when a resolution with respect to such action has theretofore been adopted by the board of directors, at the close of business on the day on which the board adopted the resolution relating to such action or the sixtieth day before the date of the consummation of such action, whichever is later. Section 12. PROXIES. Every person entitled to vote or execute consents shall have the right to do so either in person or by one or more agents authorized by a written proxy dated and executed by such person or his attorney- in-fact and filed with the secretary of the corporation. A proxy shall be deemed executed if the name of the person making the same is placed thereon (whether by manual signature, typewriting, telegraphic transmission or otherwise) by such person or his attorney-infact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect until (i) an instrument revoking such proxy or a duly executed proxy bearing a later date is filed with the secretary of the corporation prior to the vote pursuant thereto, (ii) the person executing such proxy attends the meeting and votes in person or (iii) written notice of the death or incapacity of the maker of such proxy is received by the corporation before the vote pursuant thereto is counted; provided that no proxy shall be valid after the expiration of eleven months from the date thereof, unless the person executing the proxy specifies therein the length of time for which the same is to continue in force. The revocability of a proxy which states on its face that it is irrevocable shall be governed by Sections 705(e) and 705(f) of the Corporations Code of California. In the determination of the validity and effect of proxies, the dates contained on the forms of proxy shall presumptively determine the order of execution of the proxies, regardless of the postmark dates on the envelopes in which they are mailed. 6 Section 13. INSPECTORS OF ELECTION. Before any meeting of the shareholders, the board of directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or any adjournment thereof. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one or three. If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of the shares or their proxies present at the meeting shall determine whether one or three inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. The inspectors of election shall: (a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies; (b) Receive votes, ballots or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Determine when the polls shall close; (e) Count and tabulate all votes or consents; (f) Determine the result; and (g) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is PRIMA FACIE evidence of the facts stated therein. ARTICLE III DIRECTORS Section 1. POWERS. Subject to the provisions of the Corporations Code of California and any limitations in the articles of incorporation or these bylaws, the business and 7 affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Section 2. NUMBER OF DIRECTORS. The authorized number of directors shall be not less than 5 nor more than 9, with the exact number of directors to be fixed, within the limits specified, by approval of the board or the shareholders in the manner provided in these bylaws. The initial number of directors shall be 5. Subject to the provisions of the Corporations Code of California, the range of directors may be changed, or a definite number fixed without provision for a range, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the exact number or the minimum number of directors to a number less than five shall not be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of action by written consent, are equal to more than 16-2/3% of the outstanding shares entitled to vote; and provided further, that no amendment may change the stated maximum number of authorized directors to a number greater than two times the stated minimum of directors minus one. Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at the annual meeting of the shareholders, but if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. Each director, including a director elected to fill a vacancy, shall hold office until the next annual meeting of shareholders and until a successor has been elected. Section 4. VACANCIES. Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present or by the unanimous written consent of the holders of all outstanding shares entitled to vote. A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation or removal of any directors or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony or if the authorized number of directors is increased. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a 8 later time for the resignation to become effective. If the resignation of a director is effective at a future time, a successor may be elected to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director before such director's term of office expires. Section 5. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board shall be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another, and all such directors shall be deemed to be present in person at the meeting. Section 6. ORGANIZATION MEETING. Immediately following each annual meeting of shareholders, the board of directors shall hold a regular meeting for the purpose of organization, any desired election of officers and the transaction of other business. Notice of this meeting shall not be required. Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the board of directors shall be held without call at such time as shall from time to time be fixed by the board of directors. Such regular meetings may be held without notice. Section 8. SPECIAL MEETINGS. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally to each director or communicated to each director by telephone, telegraph or by mail, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation or, if it is not so shown on such records or is not readily ascertainable, at the place at which the meetings of the directors are regularly held. In case such notice is mailed, it shall be deposited in the United States mail at least four days before the time of the holding of the meeting. In case such notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the 9 person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting or, if the meeting is to be held at the principal executive office of the corporation, the location at which the meeting is to be held. Section 9. QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 11 of this Article III. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, unless a greater number is required by law, by the articles of incorporation or by these bylaws. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the directors required for a quorum for that meeting. Section 10. WAIVER OF NOTICE. The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum was present and if, either before or after the meeting, each of the directors not present or who, though present, did, prior to the meeting or at its commencement, protest the lack of proper notice to him signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed duly given to any director who attends the meeting without protesting, before or at its commencement, the lack of notice to that director. Section 11. ADJOURNMENT. A majority of the directors present at any directors' meeting, whether or not a quorum is present at such meeting, may adjourn such meeting to another time and place. Section 12. NOTICE OF ADJOURNMENT. If a meeting is adjourned for more than twenty-four hours, notice of the adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of adjournment. Otherwise notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned. Section 13. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the board of directors may be taken without a meeting if all members of the board shall individually or collectively consent in writing to such action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent or consents shall be filed with the minutes of the proceedings of the board. 10 Section 14. FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 14 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. ARTICLE IV COMMITTEES Section 1. COMMITTEES OF DIRECTORS. The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees (including an executive committee), each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Members and alternate members of committees shall be designated by the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the Corporations Code of California, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or on any committee; (d) the amendment or repeal of bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of these committees. Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of committees shall be governed by, and held and taken in accordance with, the 11 provisions of Article III of these bylaws relating to meetings and actions of the board of directors, with such changes therein as are necessary to substitute the committee and its members for the board of directors and its members, except that (i) the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee; (ii) special meetings of committees may also be called by resolution of the board of directors; and (iii) notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS Section 1. OFFICERS. The officers of the corporation shall be a president or a chairman of the board or both, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, one or more vice presidents and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article V. Any number of offices may be held by the same person. Section 2. ELECTION. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article V, shall be chosen by the board of directors. Each officer of the corporation shall serve at the pleasure of the board or until he shall resign or shall be removed. Section 3. SUBORDINATE OFFICERS. The board of directors may appoint or may confer upon any officer or officers of the corporation the power to appoint such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. Section 4. REMOVAL AND RESIGNATION. Any officer may be removed, either with or without cause, by the board of directors or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign (without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party) at any time by giving written notice to the corporation. Any resignation shall, take effect on the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of any resignation shall not be necessary to make it effective. 12 Section 5. VACANCIES. A vacancy in any office because of death, resignation, removal or any other cause shall be filled in the manner prescribed in these bylaws for regular election or appointment to such office. Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if the corporation shall have such an officer, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may be assigned to him from time to time by the board of directors or prescribed by these bylaws. If there is no president or if provided in the articles of incorporation or these bylaws, the chairman of the board shall in addition be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 7 of this Article V. Section 7. PRESIDENT. Subject to the control of the board of directors and to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if the corporation shall have such an officer, the president shall have general supervision, direction and control of the business and the officers of the corporation. Unless otherwise provided in the articles of incorporation or these bylaws, the president shall be the chief executive officer and general manager of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the chairman of the board or if there be none, at all meetings of the board of directors. He shall be ex-officio a member of all the standing committees, if any, of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. Subject to such limitations as may be imposed by the board of directors, any powers or duties vested in the president may be delegated by him to such subordinates as he may choose. Section 8. VICE PRESIDENT. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. Section 9. SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders, with the time and place of holding, whether regular or special and, if special, how authorized, the notice given, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar a share register or a duplicate share 13 register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required by these bylaws or by law to be given, and he shall keep the seal of the corporation, if the corporation shall adopt one, in safe custody, and he shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. Section 10. CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, and retained earnings, and records of the holders of its shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors and shall have the authority to execute and affix the endorsement of the corporation upon any negotiable instrument for the purpose of making any such deposit. He shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. Unless another person has been appointed treasurer of the corporation pursuant to Section 3 of this Article V, the chief financial officer shall also be known as the treasurer. Section 11. ASSISTANTS. If an assistant officer to any officer shall be appointed, such assistant officer may exercise any of the powers of his superior officer, as provided in these bylaws or as authorized by the board of directors, and shall perform such other duties as are imposed upon him by these bylaws or the board of directors. ARTICLE VI RECORDS AND REPORTS Section 1. MAINTENANCE OF SHARE REGISTER AND INSPECTION BY SHAREHOLDERS. The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar if either shall have been appointed, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. 14 A shareholder or shareholders of the corporation holding in the aggregate at least five percent of the outstanding voting shares of the corporation shall have the right (i) to inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours up on five business days' prior written demand on the corporation and (ii) to obtain from the transfer agent of the corporation (if one shall have been appointed) up on written demand and up on the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders entitled to vote for the election of directors and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by such shareholder after the date of demand. Such list shall be made available to any such shareholder by the transfer agent on or before five business days after the demand is received or the date specified in the demand as the date as of which such list is to be compiled, whichever is later. The record of shareholders shall also be open to inspection and copying up on the written demand of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours for a purpose reasonably related to such person's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. Section 2. MAINTENANCE OF BYLAWS AND INSPECTION BY SHAREHOLDERS. The corporation shall keep at its principal executive office, or if its principal executive office is not in California, at its principal business office in this state, the original or a copy of these bylaws as amended to date, which shall be open to inspection by the shareholders at any time during usual business hours. If the principal executive office of the corporation is outside California and the corporation has no principal business office in California, the secretary shall, upon the written request of any shareholder, furnish to such shareholder a copy of these bylaws as amended to date. Section 3. MAINTENANCE OF OTHER CORPORATE RECORDS AND INSPECTION BY SHAREHOLDERS. The minutes of proceedings of the shareholders, the board of directors and any committee or committees of the board of directors and the accounting books and records shall be kept at the principal executive office or such other place as the board of directors may direct. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and the accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours for a purpose reasonably related to such person's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate and shall include the right to copy and make extracts. The rights of inspection under this Section 3 shall extend to the records of any subsidiary corporation of the corporation. 15 Section 4. INSPECTION BY DIRECTORS. Every director shall have the absolute right to inspect at any reasonable time all books, records and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. Any inspection by a director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. Section 5. ANNUAL REPORT TO SHAREHOLDERS. The annual report to shareholders referred to in Section 1501 of the Corporations Code of California is expressly dispensed with, but nothing herein shall be interpreted as prohibiting the board of directors from issuing annual or other periodic reports to the shareholders of the corporation as it considers appropriate. The corporation shall, upon the written request of any shareholder made more than 120 days after the close of any fiscal year of the corporation, deliver or mail to the shareholder making the request within 30 days thereafter the financial statements which would be required to be included in the annual report for such year under subdivision (a) of Section 1501 of the Corporations Code of California. If financial statements are delivered or mailed upon the request of a shareholder pursuant to this Section 5, copies of the same shall be kept on file in the principal executive office of the corporation for a period of twelve months and shall be exhibited during usual business hours, a copy thereof mailed, to any shareholder demanding to examine the same. Section 6. SHAREHOLDER RIGHT TO REQUEST OTHER FINANCIAL STATEMENTS. A shareholder or shareholders holding in the aggregate at least five percent of the outstanding shares of any class of stock of the corporation may make a written request to the corporation for (i) an income statement of the corporation for any three-month, six-month or nine-month period (ended more than thirty days before the date of the request) of the then current fiscal year and a balance sheet of the corporation as of the end of such period and (ii) if no annual report for the last fiscal year of the corporation has been sent to the shareholders of the corporation, the financial statements for the last fiscal year which would have been required by the Corporations Code of California to have been included in such annual report. Such income statement and balance sheet shall be prepared and delivered personally or mailed by the corporation to such shareholder within thirty days after receipt of the request therefor. If an income statement and balance sheet is prepared upon the request of a shareholder or shareholders pursuant to this Section 6, copies of the same shall be kept on file in the principal executive office of the corporation for a period of twelve months and shall be exhibited during usual business hours, or a copy thereof mailed, to any shareholder demanding to examine the same. ARTICLE VII GENERAL CORPORATE MATTERS 16 Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix a time in the future as a record date, which shall not be more than sixty days before any such action, and in that case only shareholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Corporations Code of California. If the board of directors does not fix a record date, the record date for determining shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action shall be at the close of business on the date on which the board adopts the applicable resolution authorizing such action or the sixtieth day before the date of such action, whichever is later. Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts or other orders for payment of money or notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as shall be determined, from time to time, by resolution of the board of directors. Section 3. CORPORATE CONTRACTS, ETC., HOW EXECUTED. The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers or agent or agents to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. Section 4. FISCAL YEAR. The fiscal year of the corporation shall be such as shall be determined, from time to time, by resolution of the board of directors. Section 5. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of the board, the president or any vice president of the corporation or any other person authorized by resolution of the board of directors or by any of the foregoing designated officers is authorized to vote, represent and exercise on behalf of the corporation all rights incident to any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority granted to such persons to vote or represent on behalf of the corporation any and all shares held by the corporation in any other 17 corporation or corporations may be exercised by any of them in person or by any person authorized to do so by a proxy duly executed by any of them. ARTICLE VIII CAPITAL STOCK Section 1. CERTIFICATES FOR SHARES. A certificate or certificates for shares of the capital stock of the corporation, certifying the number of shares and the class or series of shares owned by a shareholder, shall be issued to each shareholder when such shares are fully, paid. Certificates may be issued prior to full payment under such restrictions and for such purposes as may be authorized by the board of directors; provided, however, that any certificate so issued prior to full payment shall state on the face thereof the total amount of the consideration to be paid for the shares represented thereby and the amount paid thereon. All certificates shall be signed in the name of the corporation by the chairman or vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or an assistant secretary. Any or all of the signatures on the certificate may be facsimile. If any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be such officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. Section 2. TRANSFER OF SHARES. Subject to the balance of this Article VIII, upon surrender to the corporation or its transfer agent of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, a new certificate shall be issued to the person entitled thereto, the old certificate shall be canceled and the transfer shall be recorded upon the books of the corporation. Section 3. LOST OR DESTROYED CERTIFICATES. In the event that any share certificate or certificate for any other security is, or is claimed to be, lost, stolen or destroyed, the corporation may authorize the issuance of a replacement certificate on such terms and conditions as the president, any vice president, the chief financial officer or the secretary may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it. 18 ARTICLE IX AMENDMENTS Section 1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, the authorized number of directors may be changed only by an amendment of the articles of incorporation. Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as provided in Section 1 of this Article IX to adopt, amend or repeal bylaws, bylaws may be adopted, amended or repealed by the board of directors; provided, however, that the board of directors may adopt a bylaw or amendment of a bylaw changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in the articles of incorporation or in Section 2 of Article III hereof. Section 3. RECORD OF AMENDMENTS. Whenever an amendment or new bylaw is adopted it shall be copied in the original bylaws in the appropriate place. If any bylaw is repealed, the fact of repeal and the date of the meeting at which the repeal was enacted or the date the written consent was effective shall be stated in the original bylaws. 19 CERTIFICATE OF SECRETARY I, the undersigned, do hereby certify: 1. That I am the duly elected and acting Secretary of FUTURE MEDIA PRODUCTIONS, INC., a California corporation; and 2. That the foregoing Amended and Restated Bylaws constitute the Bylaws of said corporation as duly adopted on August 25, 1998. IN WITNESS WHEREOF, I have executed this certificate on this 25th day of August, 1998. /s/ DAWN DODSON ----------------------------------- Secretary 20 EX-10.1 4 1998 STOCK INCENTIVE PLAN EXHIBIT 10.1 FUTURE MEDIA PRODUCTIONS, INC. 1998 STOCK INCENTIVE PLAN 1. PURPOSES. (a) The purpose of the 1998 Stock Incentive Plan (the "PLAN") is to provide a means by which Employees or Directors of or Consultants to Future Media Productions, Inc. (the "COMPANY"), and its Affiliates, may be given an opportunity to benefit from increases in value of the Common Stock of the Company through the granting of Stock Awards. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company. (c) The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to Section 3(c), be either (1) Options granted pursuant to Section 6 hereof, including Incentive Stock Options and Nonstatutory Stock Options, (2) stock bonuses or rights to purchase restricted stock granted pursuant to Section 7 hereof, or (3) Stock Appreciation Rights granted pursuant to Section 8 hereof. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant and a separate certificate or certificates will be issued for shares purchased upon exercise of each type of Option. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CCSL" means the California Corporate Securities Law of 1968, as amended. (d) "CODE" means the Internal Revenue Code of 1986, as amended. (e) "COMMITTEE" means a Committee appointed by the Board in accordance with Section 3(c) of the Plan. (f) "COMMON STOCK" means the Common Stock of the Company. (g) "COMPANY" means Future Media Productions, Inc., a California corporation. 1 (h) "CONCURRENT STOCK APPRECIATION RIGHT" or "CONCURRENT RIGHT" means a right granted pursuant to subsection 8(b)(ii) of the Plan. (i) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render bona fide consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (j) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the employment or relationship as a Director or Consultant is not interrupted or terminated by the Company or any Affiliate. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (1) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; PROVIDED, HOWEVER, that for purposes of Incentive Stock Options and Stock Appreciation Rights appurtenant thereto, any such leave may not exceed 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract (including certain Company policies) or statute; (2) transfers between locations of the Company or between the Company, Affiliates or its successor; or (3) a change in the status of the relationship from Employee to Director or Consultant, from Director to Employee or Consultant, or from Consultant to Employee or Director. (k) "COVERED EMPLOYEE" means the chief executive officer and the four other highest compensated officers of the Company for whom total compensation is required to be reported to shareholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (l) "DIRECTOR" means a member of the Board. (m) "DISABILITY" means total and permanent disability as defined in Section 22(e)(3) of the Code. (n) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (o) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (p) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; 2 (ii) If the Common Stock is quoted on the Nasdaq System (but not on the Nasdaq National Market) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the mean between the bid and asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Board, unless otherwise provided for in the Stock Award Agreement. (q) "INCENTIVE STOCK OPTION" means an Option intended by the Board at the time of grant to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (r) "INDEPENDENT STOCK APPRECIATION RIGHT" or "INDEPENDENT RIGHT" means a right granted under subsection 8(b)(iii) of the Plan. (s) "NON-EMPLOYEE DIRECTOR" means a Director (1) who is not currently an officer of the Company or any of its Affiliates or otherwise currently employed by the Company or any of its Affiliates; (2) does not receive compensation, either directly or indirectly from the Company or any of its Affiliates for services rendered as a consultant or in any capacity other than as a director, except for an amount that does not exceed the dollar amount for which disclosure would be required pursuant to Item 404(a) of Regulation S-K; (3) does not possess an interest in any other transaction for which disclosure would be required pursuant to Item 404(a) of Regulation S-K; or (4) is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K. (t) "NONSTATUTORY STOCK OPTION" means an Option not intended by the Board at the time of grant to qualify as an Incentive Stock Option. (u) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (v) "OPTION" means a stock option granted pursuant to the Plan. (w) "OPTIONEE" means an Employee, Director or Consultant who holds an outstanding Option. (x) "OUTSIDE DIRECTOR" means a Director who either (1) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an affiliated corporation who receives compensation for prior services (other than benefits under a tax qualified retirement plan) during the taxable year, was not an officer of the Company or an affiliated corporation at any time, and is not currently receiving remuneration from the Company or an affiliated corporation, directly 3 or indirectly, for services in any capacity other than as a Director, or (2) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (y) "PLAN" means this 1998 Stock Incentive Plan. (z) "RULE 16b-3" means Rule 16b-3 under the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (aa) "REGULATION S-K" means Regulation S-K of the Securities and Exchange Commission. (bb) "SECURITIES ACT" means the Securities Act of 1933, as amended. (cc) "STOCK APPRECIATION RIGHT" means any of the various types of rights which may be granted under Section 8 of the Plan. (dd) "STOCK AWARD" means any right granted under the Plan, including any Option, any stock bonus, any right to purchase restricted stock and any Stock Appreciation Right. (ee) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (ff) "TANDEM STOCK APPRECIATION RIGHT" or "TANDEM RIGHT" means a right granted under subsection 8(b)(i) of the Plan. (ff) "TERMINATION" means, with respect to any person, the termination for any reason of such person's Continuous Status as an Employee, Director or Consultant. 3. ADMINISTRATION. (a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in Section 3(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how Stock Awards shall be granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock, a Stock Appreciation Right, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including, without limitation, the time or times when a person shall be permitted to receive stock pursuant to a Stock Award; whether a person shall be permitted to receive stock upon exercise of an Independent Stock Appreciation Right; and the number of shares with respect to which Stock Awards shall be granted to each such person. 4 (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement and, subject to Section 14 hereof, otherwise amend the Plan in a manner and to the extent it shall deem necessary. (iii) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and which are not in conflict with the provisions of the Plan. (c) The Board may delegate administration of the Plan to a committee composed of not fewer than two members (the "COMMITTEE"), all of the members of which Committee shall be Non-Employee Directors and may also be, in the discretion of the Board, Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Notwithstanding anything in this Section 3 to the contrary, at any time the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Stock Awards to eligible persons who (1) are not then subject to Section 16 of the Exchange Act and/or (2) are either (i) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award or (ii) not persons with respect to whom the Company wishes to avoid the application of Section 162(m) of the Code. Any Non-Employee Director shall otherwise comply with the requirements of Rule 16b-3 and any Outside Director shall otherwise comply with the requirements of Section 162(m) of the Code. (d) Notwithstanding Section 3(c), any requirement that an administrator of the Plan be a Non-Employee Director or Outside Director shall not apply (1) prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, or (2) if the Board expressly declares that such requirement shall not apply. 4. SHARES SUBJECT TO THE PLAN. Subject to the provisions of Section 13 relating to adjustments upon changes in the Common Stock, the number of shares of Common Stock that may be issued pursuant to Stock Awards under the Plan shall not exceed in the aggregate 1,500 shares. If any Stock Award or option granted under the terms of the Plan shall for any reason expire or otherwise terminate without having been exercised in full, the Common Stock not purchased shall again become available for issuance under the Plan. Shares subject to Stock Appreciation Rights exercised in accordance with Section 8 of the Plan and Shares withheld by the Company to satisfy a federal, state and/or local tax withholding obligation of a participant relating to the exercise of a Stock Award shall not be available for subsequent issuance under the Plan. The 5 Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees. Stock Awards other than Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees, Directors or Consultants. (b) No person shall be eligible for the grant of an Incentive Stock Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Incentive Stock Option is at least 110% of the Fair Market Value of the Common Stock at the date of grant and such Incentive Stock Option is not exercisable after the expiration of five years from the date of its grant. (c) Subject to the provisions of Section 13 relating to adjustments upon changes in the Common Stock, no person shall be eligible to be granted in any calendar year Options and Stock Appreciation Rights covering more than 50% of the aggregate number of shares of the Common Stock that may be issued pursuant to the Plan; PROVIDED, HOWEVER, this Section 5(c) shall not apply (1) prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, or (2) if the Board expressly declares that such requirement shall not apply. (d) Notwithstanding the foregoing, so long as the Company maintains its election to be named as a "small business corporation" (an "S CORPORATION") under subchapter S of the Code, only natural persons, who are United States residents, are eligible for Stock Awards under the Plan. So long as the Company is an S Corporation, no person shall be eligible for a Stock Award under the Plan if such Person is a corporation, partnership or trust or if receipt by such person of an Award or shares upon exercise of an Award would result in the termination or revocation of the Company's taxable status as an S Corporation. (e) Notwithstanding the foregoing, no person that is a nonresident alien is eligible for a Stock Award under the Plan so long as the Company is an S Corporation. Moreover, no person whose spouse is a nonresident alien who would have a current ownership interest in any Stock Award under the Plan by reason of any applicable law, such as a state community property law or a foreign country's law is eligible for a Stock Award under the Plan. 6 6. OPTION PROVISIONS. Each Option shall be approved by the Board and be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option shall be exercisable after the expiration of ten years from the date it was granted. (b) PRICE. The exercise price of each Incentive Stock option shall be not less than 100% of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. The exercise price of each Nonstatutory Stock Option shall be established at the discretion of the Board; PROVIDED, HOWEVER, to the extent required to maintain S Corp status and to obtain an exemption from qualification under the CCSL, such exercise price shall be not less than 90% of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, to the extent required to obtain an exemption from qualification under the CCSL, an Option which is granted to a person who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its Affiliates, shall be at least 110% of the Fair Market Value of the Common Stock at the date of grant. (c) CONSIDERATION. The exercise price of Common Stock acquired pursuant to the exercise of an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (1) in cash at the time the Option is exercised, or (2) at the discretion of the Board, either at the time of the grant or exercise of the Option, (i) by delivery to the Company of other shares of Common Stock, (ii) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other shares of Common Stock) with the person to whom the Option is granted or to whom the Option is transferred pursuant to Section 6(d), or (iii) in any other form of legal consideration that may be acceptable to the Board. In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be payable at the minimum rate of interest necessary to avoid the imputation of interest, under the applicable provisions of the Code and Treasury Regulations. (d) TRANSFERABILITY. No Option shall be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person, or in the case of such person's disability by such person's legal representative or guardian. In the event of death, to the extent required to maintain S Corporation status, the Option cannot be transferred to any person who is not eligible to be an S Corporation shareholder as defined in Section 1361 of the Code, or to any person if such transfer would, in the opinion of the Company's counsel, result in the termination or revocation of the Company's taxable status as an S Corporation. (e) VESTING. The total number of shares of Common Stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option may provide 7 that from time to time during each of such installment periods, the Option may become exercisable ("VEST") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary; PROVIDED, HOWEVER, to the extent required to obtain an exemption from qualification under the CCSL, the vesting provisions of Options granted to Employees who are not Officers or Directors must provide for vesting of at least 20% per year of the total number of shares subject to the Option from the date the Option was granted. During the remainder of the term of the Option (if its term extends beyond the end of the installment periods), the option may be exercised from time to time with respect to any shares then remaining subject to the Option. The provisions of this Section 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or any person to whom an Option is transferred pursuant to Section 6(d), as a condition of exercising any such Option, (1) to give written assurances satisfactory to the Company as to the Optionee's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the option; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the Common Stock subject to the Option for such person's own account and not with any present intention of selling or otherwise distributing the Common Stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the Option has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. (g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or Disability), the Optionee may exercise his or her Option (to the extent that the Optionee is entitled to exercise it at the date of Termination), but only within such period of time as is determined by the Board, which period shall not be longer than 60 days from the date of Termination for an Incentive Stock Option, unless otherwise provided for in the Stock Award Agreement. To the extent required to obtain an exemption from qualification under the CCSL, such period shall not be less than 30 days from the date of Termination of an Option; PROVIDED, HOWEVER, that if an Optionee is terminated for cause, as defined in the applicable Stock Award Agreement, the Option may provide for an exercise period shorter than 30 days, or may provide for expiration concurrent with such Termination. In no event shall an Option be exercised later than the expiration of the term of such Option as set forth in the Stock Award Agreement. If, at the date of Termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after Termination, the Optionee does not exercise his or her Option within the time specified in the Stock 8 Award Agreement, the Option shall terminate, and the shares covered by such Option, to the extent unexercised, shall revert to the Plan. (h) DISABILITY OF OPTIONEE. If an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's Disability, the Optionee may exercise his or her Option at any time prior to the expiration of that period ending six months after the date of such Termination (or such longer period, not exceeding 12 months for Incentive Stock Options, as specified in the Option), and only to the extent that the Optionee was entitled to exercise the Option at the date of such Termination (but in no event later than the expiration of the term of such Option as set forth in the Stock Award Agreement). If, at the date of Termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after Termination, the Optionee does not exercise his or her Option within the time specified therein, the Option shall terminate, and the shares covered by such Option, to the extent unexercised, shall revert to the Plan. (i) DEATH OF OPTIONEE. In the event of the death of an Optionee, the Option may be exercised at any time prior to the expiration of that period ending six months after the date of death (or such longer period, not exceeding 12 months for Incentive Stock Options, as specified in the Option), but in no event later than the expiration of the term of such Option as set forth in the Stock Award Agreement, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee was entitled to exercise the Option at the date of death. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified therein, the Option shall terminate, and the shares covered by such Option, to the extent unexercised, shall revert to the Plan. (j) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased shall be subject to a right to repurchase in favor of the Company upon Termination of the Optionee, at a repurchase price equal to the exercise price of the Option, payable in cash or cancellation of purchase money indebtedness for the shares; PROVIDED, HOWEVER, to the extent required to obtain an exemption from qualification under the CCSL, the Company's right to repurchase at the exercise price of the Option shall lapse at a minimum rate of 20% per year over five years from the date the Option was granted and such right shall terminate to the extent not exercised within 90 days following Termination of the Optionee. (k) WITHHOLDING. To the extent provided by the terms of an Option, the Optionee may satisfy any federal, state or local tax withholding obligation relating to the exercise of such Option by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the Optionee as a result of the exercise of the Option; or (3) delivering to the Company owned and unencumbered shares of Common Stock. 9 (l) RE-LOAD OPTIONS. Without in any way limiting the authority of the Board to make or not to make grants of Options hereunder, the Board shall have the authority (but not an obligation) to include as part of any Option a provision entitling the Optionee to a further Option (a "RE-LOAD OPTION") in the event the Optionee exercises the Option, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Stock Award Agreement. Any such Re-Load Option (1) shall be for a number of shares equal to the number of shares surrendered as part or all of the exercise price of such Option; (2) shall have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (3) in the case of a Re-Load Option which is granted to a 10% shareholder (as described in Section 5(c)), and which is an Incentive Stock Option or requires an exemption from qualification under the CCSL, shall have an exercise price which is equal to 110% of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option and, with respect to Incentive Stock Options, shall have a term which is no longer than five years. Any such Re-Load Option may be an Incentive Stock Option or a Nonqualified Stock Option, as the Board may designate at the time of the grant of the original Option; PROVIDED, HOWEVER, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the $100,000 annual limitation on exercisability of Incentive Stock Options described in Section 12(d) of the Plan and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares under Section 4(a) and shall be subject to such other terms and conditions as the Board may determine which are not inconsistent with the express provisions of the Plan regarding the terms of the Options. (m) REPURCHASE RIGHTS AND FIRST REFUSAL RIGHTS. (i) Each Option may provide that the Company shall have the right (the "REPURCHASE RIGHT"), exercisable following Termination of an Optionee, to repurchase (1) all of the Common Stock purchased by the Optionee upon exercise of the Option (the "PURCHASED SHARES") at the Fair Market Value on the date of Termination, and (2) the unexercised portion of the Option (to the extent that such Option had vested prior to the date of Termination) at the price equal to the amount by which the Fair Market Value of the Common Stock underlying such Option (or portion thereof) exceeds the exercise price of the Option, in each case for cash or cash equivalents (including the cancellation of any purchase- money indebtedness). Such Repurchase Right shall terminate to the extent not exercised by the Company within 90 days following the date of Termination (or if later, 90 days after the exercise of the option). (ii) Each Option may provide that the Company shall have the right of first refusal (the "FIRST REFUSAL RIGHT"), exercisable in connection with any proposed sale, hypothecation or other disposition of the Purchased Shares; and that in the event the holder of the Purchased Shares desires to accept a bona fide third-party offer for any or all of the Purchased Shares, such shares shall first be offered to the Company at the same terms and conditions as are set forth in the bona fide offer. To exercise this First Refusal Right, the Company must elect to purchase such Purchased Shares within 30 days after receipt of notice of the related proposed sale, and upon such election the Company must purchase such Purchased Shares within 60 days of the receipt of notice of the proposed sale. 10 (iii) The Repurchase Rights and First Refusal Rights shall lapse and cease to have effect upon the earlier to occur of (1) the first date on which shares of the Company's Common Stock are held of record by more than five hundred persons, (2) a determination by the Company's Board of Directors that a public market exists for the outstanding shares of the Company's Common Stock or (3) a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act, covering the offer and sale of the Company's Common Stock in the aggregate amount of at least $5,000,000. 7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK. Each stock bonus or restricted stock purchase agreement shall be approved by the Board and be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of stock bonus or restricted stock purchase agreements may change from time to time, and the terms and conditions of separate agreements need not be identical, but each stock bonus or restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions, as appropriate: (a) PURCHASE PRICE. The purchase price under each stock purchase agreement shall be such amount as the Board shall determine and designate in such agreement. Additionally, the Board may determine that eligible participants in the Plan may be awarded stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. Notwithstanding the foregoing, to the extent required to obtain an exemption from qualification under the CCSL, the purchase price of shares of Common Stock shall be at least 90% of the Fair Market Value of the Common Stock at the date of the grant or the sale and if such shares of Common Stock are granted or sold to a person who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its Affiliates, the purchase price shall be at least 100% of the Fair Market Value of the Common Stock at the date of grant or sale. (b) TRANSFERABILITY. No rights under a stock bonus or restricted stock purchase agreement shall be assignable by any participant under the Plan, either voluntarily or by operation of law, except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the rights are granted only by such person. The person to whom such rights are granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of such person, shall thereafter be entitled to exercise the rights held by such person under the stock bonus or restricted stock purchase agreement. Notwithstanding the foregoing, for so long as the Company maintains its taxable status as an S Corporation, in the event of death, rights under a stock bonus or restricted stock purchase agreement cannot be transferred to any person who is not eligible to be an S Corporation shareholder as defined in Section 1361 of the Code, or to any person if such transfer would, in the opinion of the Company's counsel, result in the termination or revocation of the Company's taxable status as an S Corporation (c) CONSIDERATION. The purchase price of Common Stock acquired pursuant to a stock purchase agreement shall be paid either: (1) in cash at the time of purchase; (2) at the discretion of the Board, according to a deferred payment or other arrangement with the person to whom the Common 11 Stock is sold; or (3) in any other form of legal consideration that may be acceptable to the Board in its discretion. Notwithstanding the foregoing, the Board may award stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (d) VESTING. Shares of Common Stock sold or awarded under the Plan may, but need not, be subject to a right to repurchase in favor of the Company upon Termination of the person to whom such shares have been sold or awarded at a repurchase price equal to the original purchase price (or such higher price as the Board may determine to be appropriate) payable in cash or cancellation of purchase money indebtedness. The Board shall provided that such rights to repurchase lapse with respect to such purchased shares (or that such purchased shares vest) pursuant to a schedule determined by the Board; PROVIDED, HOWEVER, to the extent required to obtain an exemption from qualification under the CCSL, the Company's right to repurchase at the original purchase price shall lapse (or the purchased shares shall vest) at a minimum rate of 20% per year over five years from the date the stock bonus or restricted stock purchase right was granted and such right shall terminate to the extent not exercised within 90 days following Termination of the purchaser. (e) REPURCHASE RIGHTS AND FIRST REFUSAL RIGHTS. (i) In addition to Section 7(d) above, each stock bonus or restricted stock purchase agreement may provide that the Company shall have a Repurchase Right exercisable following Termination of a purchaser, to repurchase all of the shares (vested or unvested) of Common Stock purchased by the purchaser pursuant to the stock bonus or restricted stock purchase agreement (the "PURCHASED SHARES") at the Fair Market Value on the date of Termination for cash or cash equivalents (including the cancellation of any purchase-money indebtedness). Such Repurchase Right shall terminate to the extent not exercised by the Company within 90 days following the date of Termination. (ii) Each stock bonus or restricted stock purchase agreement may provide that the Company shall have a First Refusal Right, exercisable in connection with any proposed sale, hypothecation or other disposition of the Purchased Shares; and that in the event the holder of the Purchased Shares desires to accept a bona fide third-party offer for any or all of the Purchased Shares, such shares shall first be offered to the Company at the same terms and conditions as are set forth in the bona fide offer. To exercise this First Refusal Right, the Company must elect to purchase such Purchased Shares within 30 days after receipt of notice of the related proposed sale, and upon such election the Company must purchase such Purchased Shares within 60 days of the receipt of notice of the proposed sale. (iii) Each stock bonus or restricted stock purchase agreement shall provide that the Repurchase Rights and First Refusal Rights shall lapse and cease to have effect upon the earlier to occur of (1) the first date on which shares of the Company's Common Stock are held of record by more than five hundred persons, (2) a determination by the Company's Board of Directors that a public market exists for the outstanding shares of the Company's Common Stock or (3) a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act, covering the offer and sale of the Company's Common Stock in the aggregate amount of at least $5,000,000. 12 8. STOCK APPRECIATION RIGHTS. (a) The Board shall have full power and authority, exercisable in its sole discretion, to grant Stock Appreciation Rights to Employees or Directors of, or Consultants to, the Company or its Affiliates under the Plan. Each such right shall entitle the holder to a distribution based on the appreciation in the Fair Market Value per share of a designated amount of Common Stock. (b) Three types of Stock Appreciation Rights shall be authorized for issuance under the Plan, Tandem Rights, Concurrent Rights and Independent Rights, and the terms and conditions applicable to each shall be as follows: (i) TANDEM STOCK APPRECIATION RIGHTS. Tandem Rights will be granted appurtenant to an Option and will require the holder to elect between the exercise of such Option for shares of Common Stock and the surrender, in whole or in part, of such Option for an appreciation distribution payable in cash in an amount equal to (1) the aggregate Fair Market Value (on the date of Option surrender) of the number of vested shares of Common Stock under the Option (or portion thereof) being surrendered on such date, less (2) the aggregate exercise price of such vested shares of Common Stock. Tandem Rights may be tied to either Incentive Stock Options or Nonstatutory Stock Options. Each such right shall, except as specifically set forth below, be subject to the same terms and conditions applicable to the particular Option to which it pertains. (ii) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights will be granted appurtenant to an Option and may apply to all or any portion of the shares of Common Stock subject to such Option and will be automatically exercised at the same time such Option is exercised with respect to the particular shares of Common Stock to which the Concurrent Right pertains. The appreciation distribution, payable in cash, to which the holder of such Concurrent Rights shall be entitled upon exercise of the related Option shall be an amount equal to (1) the aggregate Fair Market Value (on the date of Option exercise) of the number of vested shares of Common Stock under the Option (or portion thereof) being exercised on such date and with respect to which such Concurrent Rights apply, less (2) the aggregate exercise price paid for such vested shares of Common Stock. Concurrent Rights may be tied to any or all of the shares of Common Stock under any Incentive Stock Option or Nonstatutory Stock Option. A Concurrent Right shall, except as specifically set forth below, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. (iii) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights shall be granted independently of any Option and will entitle the holder upon exercise thereof to an appreciation distribution payable in cash in an amount equal to (1) the aggregate Fair Market Value (on the date of the exercise of the Independent Right) of a number of shares of Common Stock equal to the number of vested share equivalents with respect to which the holder is exercising the Independent Right on such date, less (2) the aggregate Fair Market Value (on the date of the grant of the Independent Right) of such number of shares of Common Stock. Independent Rights shall, except as specifically set forth below, be subject to the same terms and conditions applicable to Nonstatutory Stock Options as set forth in Section 6. They shall be denominated in share equivalents. 13 (iv) TERMS APPLICABLE TO STOCK APPRECIATION RIGHTS GENERALLY. (A) To exercise any outstanding Stock Appreciation Right, the holder must provide written notice of exercise to the Company in compliance with the provisions of the instrument evidencing such right. (B) If a Stock Appreciation Right is granted to an individual who is at the time subject to Section 16(b) of the Exchange Act, the instrument of grant shall incorporate all the terms and conditions at the time necessary to assure that the subsequent exercise of such right shall qualify for the safe- harbor exemption from short-swing profit liability provided by Rule 16b-3 promulgated under the Exchange Act (or any successor role or regulation). (C) No limitation shall exist on the aggregate amount of cash payments the Company may make under the Plan in connection with the exercise of Stock Appreciation Rights. 9. CANCELLATION AND REGRANT OF OPTIONS. (a) The Board shall have the authority to effect, at any time and from time to time, with the consent of the affected holders of Options and/or Stock Appreciation Rights, (1) the repricing of any outstanding Options and/or any Stock Appreciation Rights under the Plan and/or (2) the cancellation of any outstanding Options and/or any Stock Appreciation Rights under the Plan and the grant in substitution therefor of new Options and/or Stock Appreciation Rights under the Plan covering the same or different numbers of shares of Common Stock, but having an exercise price per share not less than 90% of the Fair Market Value (100% of the Fair Market Value in the case of an Incentive Stock Option or, in the case of an Incentive Stock Option granted to a 10% shareholder as described in Section 5(c), not less than 110% of the Fair Market Value) per share of Common Stock on the new grant date. Notwithstanding the forgoing, the Board may grant an Option and/or Stock Appreciation Right with an exercise price lower than that set forth above if such Option and/or Stock Appreciation Right is granted as part of a transaction to which Section 424(a) of the Code applies. (b) Shares subject to an Option or Stock Appreciation Right canceled under this Section 9 shall continue to be counted against the maximum award of Options and Stock Appreciation Rights permitted to be granted to a person pursuant to Section 5(c) of the Plan. The repricing of an Option and/or Stock Appreciation Right under this Section 9, resulting in a reduction of the exercise price, shall be deemed to be a cancellation of the original Option and/or Stock Appreciation Right and the grant of a substitute Option and/or Stock Appreciation Right; in the event of such repricing, both the original and the substituted Options and Stock Appreciation Rights shall be counted against the maximum awards of Options and Stock Appreciation Rights permitted to be granted to a person pursuant to Section 5(c) of the Plan. The provisions of this Section 9(b) shall be applicable only to the extent required by Section 162(m) of the Code. 14 10. COVENANTS OF THE COMPANY. (a) During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards up to the number of shares of Common Stock authorized under the Plan. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to effect any Stock Award, and to issue and sell shares of Common Stock under the Stock Awards; PROVIDED, HOWEVER, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock under such Stock Awards unless and until such authority is obtained. 11. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to Stock Awards shall constitute general funds of the Company. 12. MISCELLANEOUS. (a) The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) Neither an Optionee nor any person to whom an Option is transferred under Section 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Option unless and until such person has satisfied all requirements for exercise of the Option pursuant to its terms. (c) Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Director, Consultant, Optionee, or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment or relationship as a Director or Consultant of any Employee, Director, Consultant or Optionee, with or without cause. (d) To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its affiliates exceeds $100,000, 15 the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) The Company shall deliver to the holders of Stock Awards, not later than 120 days after the close of each of the Company's fiscal years, a balance sheet and an income statement. This Section shall not apply when the issuance of Stock Awards is limited to key employees whose duties in connection with the Company assure them access to equivalent information. 13. ADJUSTMENTS UPON CHANGES IN THE COMMON STOCK. (a) Subject to the provisions of Section 13(b), if any change is made in the Common Stock subject to the Plan, or subject to any Stock Award, without receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, conversion pursuant to the provisions of the Company's Articles of Incorporation, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company) the Plan will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan pursuant to Section 4(a) and the maximum number of shares subject to Options and Stock Appreciation Rights pursuant to Section 5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Stock Awards. Such adjustments shall be made by the Board, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction of not involving the receipt of consideration by the Company".) (b) In the event of: (1) a dissolution, liquidation or sale of substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; or (3) a reverse merger in which the Company is the surviving corporation but the shares of the Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then, at the sole discretion of the Board (unless otherwise provided for in the Stock Award Agreement) and to the extent permitted by applicable law, such Stock Awards shall (i) terminate upon such event and may be exercised prior thereto to the extent such Stock Awards are then exercisable or (ii) continue in full force and effect and, if applicable, the surviving corporation or an Affiliate of such surviving corporation shall assume any Stock Awards outstanding under the Plan and/or shall substitute similar Stock Awards for those outstanding under the Plan. 14. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 13 relating to adjustments upon changes in the Common Stock, no amendment shall be effective unless approved by the shareholders of the Company within 12 months before or after the adoption of the amendment, where the amendment will: 16 (i) Increase the number of shares of Common Stock reserved for Stock Awards under the Plan; (ii) Modify the requirements as to eligibility for participation in the Plan to the extent such modification requires shareholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code; or (iii) Modify the Plan in any other way if such modification requires shareholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3. Rights and obligations under any Stock Award granted before amendment of the Plan shall not be altered or impaired by any amendment of the Plan unless (1) the Company requests the consent of the person to whom the Stock Award was granted and (2) such person consents thereto in writing. (b) The Board at any time, and from time to time, may amend the terms of any one or more Stock Award; PROVIDED, HOWEVER, that the rights and obligations under any Stock Award shall not be impaired by any such amendment unless (1) the Company requests the consent of the person to whom the Stock Award was granted and (2) such person consents thereto in writing. 15. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on May 7, 2008. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Stock Award granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the written consent of the person to whom the Stock Award was granted. 16. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Stock Awards granted under the Plan shall be exercisable unless and until the Plan has been approved by the shareholders of the Company (and such approval by the shareholders must be obtained within 12 months of the Plan being adopted by the Board). 17 EX-10.2 5 REGISTRANT'S STOCK OPTION CERTIFICATE (NON-STATUTORY) EXHIBIT 10.2 OPTION CERTIFICATE (NON-STATUTORY STOCK OPTION) THIS IS TO CERTIFY that Future Media Productions, Inc., a California corporation (the "COMPANY"), has granted to the person named below a non- statutory stock option (the "OPTION") to purchase shares (the "SHARES") of the Company's Common Stock, without par value (the "COMMON STOCK"), under its 1998 Stock Incentive Plan, as follows: Name of Optionee: --------------------------------- Address of Optionee: --------------------------------- --------------------------------- --------------------------------- Number of Shares: --------------------------------- --------------------------------- Option Exercise Price: --------------------------------- Date of Grant: --------------------------------- Option Expiration Date: --------------------------------- EXERCISE SCHEDULE: The Option shall become exercisable as follows: SUMMARY OF OTHER TERMS: This Option is defined in the Stock Option Agreement (Non-Statutory Stock Option) (the "OPTION AGREEMENT") which is attached to this Option Certificate (this "CERTIFICATE") as Annex I. This Certificate summarizes certain of the provisions of the Option Agreement for your information, but is not complete. Your rights are governed by the Option Agreement, NOT by this summary. The Company strongly suggests that you carefully review the full Option Agreement prior to signing this Certificate or exercising the Option. Among the terms of the Option Agreement are the following: EMPLOYMENT: The Option Agreement does not obligate the Company to retain you for any period of time. Unless otherwise agreed IN WRITING, the Company reserves the right to terminate any employee at any time, with or without cause. TERMINATION OF EMPLOYMENT: While the Option terminates on the Option Expiration Date, it will terminate earlier if you cease to be employed by the Company (or to hold office if you are a director). If your employment ends due to death or permanent disability, the Option terminates six months after the date of death or permanent disability, and is exercisable during such six month period as to the portion of the Option which has vested prior to the date of termination of employment. If your employment ends "for cause," the Option terminates immediately upon termination of your employment. In all other cases, the Option terminates 30 days after the date of termination of employment, and is exercisable during such 30 day period as to the portion of the Option which had vested prior to the date of termination of employment. See Section 5 of the Option Agreement. TRANSFER: The Option is personal to you, and cannot be sold, transferred, assigned or otherwise disposed of to any other person, except on your death. For so long as the Company maintains its taxable status as an S Corporation, in the event of death, the Option cannot be transferred to any person who is not eligible to be an S Corporation shareholder as defined in Section 1361 of the Code, or to any person if such transfer, or the exercise of the Option by the transferee, would, in the opinion of the Company's counsel, result in the termination or revocation of the Company's taxable status as an S Corporation. EXERCISE: You can exercise the Option (once it is exercisable), in whole or in part, by delivering to the Company a Notice of Exercise identical to Exhibit "A" attached to the Option Agreement, accompanied by payment of the Option Exercise Price, set forth above, for the Shares to be purchased. The Company will then issue a certificate to you for the Shares you have purchased. You are under no obligation to exercise the Option. See Section 4 of the Option Agreement. REPURCHASE RIGHTS: The Company has the right exercisable following termination of your employment to repurchase (x) all of the Shares purchased by you upon exercise of the Option at fair market value on the date of your termination, and (y) the unexercised portion of the Option (to the extent that the Option had vested prior to the date of your termination) at the price equal to the amount by which the fair market value of the Shares underlying the Option (or portion thereof) exceeds the exercise price of the Option, in each case for cash or cash equivalents (including the cancellation of any purchase-money indebtedness). Those Shares are also subject to the Company's right of first refusal, which provides that in the event you desire to accept a bona fide third-party offer for any of the Shares you acquire upon exercise of your Option, you must first offer those shares to the Company or its designee on the same terms and conditions as are set forth in the bona fide offer. The Repurchase Rights and First Refusal Rights lapse and cease to have affect upon the earlier to occur of (1) the first date on which shares of the Company's Common Stock are held of record by more than 500 persons, (2) a determination by the Company's Board of Directors that a public market exists for the outstanding shares of the 2 Company's Common Stock or (3) a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the Company's Common Stock in the aggregate amount of at least $5,000,000. See Section 6 of the Option Agreement. FIRST REFUSAL RIGHTS: The Option provides that the Company shall have the right of first refusal, exercisable in connection with any proposed sale, hypothecation or other disposition of the Shares; and that in the event you desire to accept a bona fide third-party offer for any or all of the Shares, such shares shall first be offered to the Company at the same terms and conditions as are set forth in the bona fide offer. To exercise this first refusal right, the Company must elect to purchase the Shares within 30 days after receipt of notice from you of the related proposed sale, and upon such election the Company must purchase the Shares within 60 days of the receipt of notice of the proposed sale. See Section 6 of the Option Agreement. MARKET STAND-OFF: The Option provides that in connection with any underwritten public offering by the Company, you may not sell or transfer any of your Shares without the prior written consent of the Company or its underwriters for such period of time from and after the effective date of such offering as may be reasonably requested by the Company or such underwriters. See Section 6 of the Option Agreement. S CORPORATION RESTRICTIONS: No Optionee may sell, transfer, grant proxies with respect to, assign, pledge, encumber or otherwise dispose of any Shares acquired upon the exercise of an Option, to any person who is not eligible to be an S Corporation shareholder as defined in Section 1361 of the Internal Revenue Code of 1986, as amended (the "CODE"), or to any person if such transfer would, in the opinion of the Company's counsel, result in the termination or revocation of the Company's taxable status as an S Corporation. See Section 6(h) of the Option Agreement. ANTI-DILUTION PROVISIONS: The Option contains provisions which adjust your Option to reflect stock splits, stock dividends, mergers and other major corporate reorganizations which would change the nature of the Shares underlying your Option. See Section 7 of the Option Agreement. WAIVER: By signing this Certificate, you will be agreeing to all of the terms of the Option Agreement, including those not summarized in this Certificate. You will waive your rights to any other options or stock which may have heretofore been promised to you, other than any rights you may have pursuant to the agreements (the "RESERVED AGREEMENTS"), if any, identified below. See Section 8 of the Option Agreement. RESERVED AGREEMENTS:[INDICATE "NONE," OR IDENTIFY AGREEMENT BY EXECUTION DATE, TYPE OF AGREEMENT AND IDENTITIES OF PARTIES] - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- 3 WITHHOLDING: The Company may require you to make any arrangements necessary to insure the proper withholding of any amount of tax, if any, required to be withheld by the Company as a result of the exercise of the Option. See Section 13 of the Option Agreement. COPYRIGHT OWNERSHIP AND NONDISCLOSURE: By signing this certificate you will be agreeing that (i) you will not disclose to any person outside the Company any non-public information and/or trade secrets of the Company, and (ii) that all inventions, ideas, concepts and other intellectual property devised, developed, conceived or created by you relating to your employment by the Company are the sole and exclusive property of the Company. See Section 15 of the Agreement. 4 AGREEMENT Future Media Productions, Inc., a California corporation (the "COMPANY"), and the above-named person ("OPTIONEE") each hereby agrees to be bound by all of the terms and conditions of the Stock Option Agreement (Non-Statutory Stock Option) which is attached hereto as Annex I and incorporated herein by this reference as if set forth in full in this document. DATED: Future Media Productions, Inc. By: -------------------------------- Its: ------------------------------- OPTIONEE ----------------------------------- (Signature) ----------------------------------- (Please print your name exactly as you wish it to appear on any stock certificates issued to you upon exercise of the Option) 5 ANNEX I STOCK OPTION AGREEMENT (NON-STATUTORY STOCK OPTION) This STOCK OPTION AGREEMENT (this "OPTION AGREEMENT") is made and entered into on the execution date of the Option Certificate to which it is attached (the "CERTIFICATE"), by and between Future Media Productions, Inc., a California corporation (the "COMPANY"), and the director, consultant or employee named in the Certificate ("OPTIONEE"). Pursuant to the Future Media Production, Inc. 1998 Stock Incentive Plan (the "PLAN"), the Board of Directors of the Company (the "BOARD") has authorized the grant to Optionee of a non-statutory stock option to purchase shares of the Company's Common Stock, without par value (the "COMMON STOCK"), upon the terms and subject to the conditions set forth in this Option Agreement and in the Plan. The Company and Optionee agree as follows: 1. GRANT OF OPTION. The Company hereby grants to Optionee the right and option (the "OPTION"), upon the terms and subject to the conditions set forth in this Option Agreement, to purchase all or any portion of that number of shares of the Common Stock (the "SHARES") set forth in the Certificate, at the Option Exercise Price set forth in the Certificate (the "EXERCISE PRICE"). 2. TERM OF OPTION. The Option shall terminate and expire on the Option Expiration Date set forth in the Certificate, unless sooner terminated as provided herein. 3. EXERCISE PERIOD. (a) Subject to the provisions of Sections 3, 5, and 7 of this Option Agreement, the Option shall become exercisable (in whole or in part) upon and after the dates set forth under the caption "Exercise Schedule" in the Certificate. The installments shall be cumulative; I.E., the Option may be exercised, as to any or all Shares covered by an installment, at any time or times after the installment first becomes exercisable and until expiration or termination of the Option. (b) Notwithstanding anything to the contrary contained in this Option Agreement, the Option may not be exercised, in whole or in part, unless and until any then-applicable requirements of all federal, state and local laws and regulatory agencies shall have been fully complied with to the satisfaction of the Company and its counsel. 4. EXERCISE OF OPTION. (a) There is no obligation to exercise the Option, in whole or in part. The Option may be exercised, in whole or in part, only by delivery to the Company of: (i) written notice of exercise in form and substance identical to Exhibit "A" attached to this Option Agreement stating the number of Shares then being purchased (the "PURCHASED SHARES"); (ii) payment of the Exercise Price of the Purchased Shares, either in cash, by check, by cancellation of any indebtedness of the Company to Optionee for accrued and unpaid salary or, with the consent of the Board, by transfer to the Company of issued and outstanding shares of Common Stock which, to the extent required to avoid liability under Section 16(b) of the Securities and Exchange Act of 1934, as amended, have been held by Optionee for a period of at least six calendar months preceding the date of surrender, or by any combination of the above methods of payment. If payment is made, in whole or in part, by transfer to the Company of issued and outstanding shares of Common Stock, the value (the "FAIR MARKET VALUE") of such shares shall be determined as follows: (1) if the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (2) if the Common Stock is quoted on the Nasdaq System (but not on the Nasdaq National Market) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the mean between the bid and asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; and (3) in the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Board; and (iii) if requested by the Company, a letter of investment intent in such form and containing such provisions as the Company may reasonably require. (b) Following receipt of the notice and payment referred to above, the Company shall issue and deliver to Optionee a stock certificate or stock certificates evidencing the Purchased Shares; PROVIDED, HOWEVER, that the Company shall not be obligated to issue a fraction or fractions of a share of its Common Stock, and may pay to Optionee, in cash or by check, the Fair Market Value of any fraction or fractions of a share exercised by Optionee, which Fair Market Value shall be determined as set forth in this Section 4. 2 5. TERMINATION OF EMPLOYMENT. (a) If Optionee shall cease to be a director of the Company, or to be in the employ of, or a consultant to the Company, any Subsidiary or any Parent for any reason other than Optionee's death or permanent disability (a "SPECIAL TERMINATING EVENT"), Optionee shall have the right, subject to the provisions of Section 5(c) below, to exercise the Option at any time within 30 days after the date Optionee ceased to be a director of the Company, or to be employed by, or to be a consultant to the Company, but in no case later than the Option Expiration Date. The Option may be exercised during such period only with respect to the Shares that were vested as of the date Optionee's employment terminated and only to the extent the Option had not previously been exercised. To the extent the Option remains unexercised at the end of such period, the Option shall terminate. The Board, in its sole and absolute discretion, shall determine whether or not authorized leaves of absence shall constitute termination of employment for purposes of this Option Agreement. (b) If a Special Terminating Event occurs while Optionee is a director of the Company, or in the employ of, or a consultant to the Company, any Subsidiary or any Parent, then Optionee, Optionee's executors or administrators or any person or persons acquiring the Option directly from Optionee by bequest or inheritance, shall have the right to exercise the Option at any time within six months after the Special Terminating Event, but in no case later than the Option Expiration Date. The Option may be exercised during such period only with respect to the Shares that were vested as of the Special Terminating Event and only to the extent the Option had not previously been exercised. To the extent the Option remains unexercised at the end of such period, the Option shall terminate. (c) If Optionee shall be terminated "for cause" by the Company, any Subsidiary or any Parent, the Option shall terminate immediately. For purposes of this Option Agreement, "for cause" shall mean: (i) with respect to employees or directors of the Company: (A) the failure or refusal by such person to perform his or her duties to the Company; or (B) Such person's willful disobedience of any orders or directives of the Board or any officers thereof acting under the authority thereof or such person's deliberate interference with the compliance by other employees of the Company with any such orders or directives; or (C) the failure or refusal of such person to abide by or comply with the written policies, standard procedures or regulations of the Company; or (D) any willful or continued act or course of conduct by such person which the Board in good faith determines might reasonably be expected to have a material detrimental effect on the Company or the business, operations, affairs or financial position thereof; or 3 (E) the committing by such person of any fraud, theft, embezzlement or other dishonest act against the Company; or (F) the determination by the Board, in good faith and in the exercise of reasonable discretion, that such person is not competent to perform his or her duties of employment; and (ii) with respect to consultants, any material breach of their consulting agreement with the Company. (d) For purposes of this Option Agreement, "permanent disability" shall mean permanent and total disability as defined by the Board. Optionee shall not be considered permanently disabled unless he furnishes proof of such disability in such form and manner, and at such times, as the Board may from time to time require. 6. RESTRICTIONS ON PURCHASED SHARES. (a) MARKET STAND-OFF. (i) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act of 1933, as amended (the "SECURITIES ACT"), including the Company's initial public offering, Optionee shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to any Purchased Shares without the prior written consent of the Company or its underwriters, for such period of time from and after the effective date of such registration statement as may be reasonably requested by the Company or such underwriters. This Section 6(a)(i) shall only remain in effect for the two-year period immediately following the effective date of the Company's initial public offering and shall thereafter terminate and cease to be in force or effect. Optionee agrees to execute and deliver to the Company such further documents or instruments as the Company reasonably determines to be necessary or appropriate to effect the provisions of this Section 6(a). (ii) In the event of any stock dividend, stock split, recapitalization, or other change affecting the Company's outstanding Common Stock effected without receipt of consideration, then any new, substituted, or additional securities distributed with respect to the Purchased Shares shall be immediately subject to the provisions of this Section 6(a), to the same extent the Purchased Share are at such time covered by such provisions. (iii) In order to enforce the provisions of Section 6(a), the corporation may impose stop-transfer instructions with respect to the Purchased Shares until the end of the applicable stand-off period. 4 (b) RESTRICTION ON TRANSFER. (i) Optionee shall not sell, transfer, grant proxies with respect to, assign, pledge, encumber or otherwise dispose of (each a "TRANSFER") any of the Purchased Shares that are subject to the Company's Repurchase Right under Section 6(c). In addition, Purchased Shares that are released from the Repurchase Right shall not be Transferred in contravention of the Company's First Refusal Right under Section 6(d) or the provisions of Sections 6(g) or 6(h). The restrictions contained in Section 6(c) and Section 6(d) shall NOT be applicable to (1) a transfer of the Purchased Shares made without consideration to Optionee's spouse or issue, including adopted children, (2) a transfer of title to the Purchased Shares effected pursuant to Optionee's will or the laws of intestate succession or (3) a transfer to the Company in pledge as security for any purchase-money indebtedness incurred by Optionee in connection with the acquisition of the Purchased Shares; provided Optionee shall have first obtained the written consent of the Company to such Transfer. Any Transfer of Purchased Shares permitted hereunder shall be subject to the Securities Law Restrictions set forth in Section 6(g) and the S Corporation Restrictions set forth in Section 6(h). (ii) Each person (other than the Company) to whom the Purchased Shares are transferred by means of one of the permitted transfers specified in Section 6(b)(i) must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Company that such person is bound by the provisions of this Agreement and that the transferred shares are subject to (1) both the Company's Repurchase Right and the Company's First Refusal Right granted hereunder, (2) the market stand-off provisions of Section 6(a) and, (3) the restrictions set forth in Sections 6(g) and 6(h), to the same extent such shares would be so subject if retained by Optionee. (iii) For purposes of Sections 6(b), 6(c) and 6(d) of this Agreement, the term "Owner" shall include Optionee and all subsequent holders of the Purchased Shares who derive their ownership through a permitted Transfer from Optionee in accordance with Section 6(b)(i). (c) REPURCHASE RIGHT. (i) GRANT. The Company is hereby granted the right (the "REPURCHASE RIGHT") exercisable within the 90 day period following termination of Optionee's employment with the Company, or in the case of stock issued upon exercise of options after the date of termination, within 90 days after the date of exercise, to repurchase all of the Purchased Shares at the Fair Market Value on the date of termination of employment and Shares underlying vested Options which have not been fully exercised prior to termination of Optionee's employment at the price equal to the amount by which the Fair Market Value of the Shares underlying such Options (or portion thereof) exceeds the exercise price of the Options on the date of termination of employment. (ii) EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be exercisable by written notice delivered to the Owner of the Purchased Shares prior to the expiration of the applicable period specified in Section 6(c)(i). The notice shall indicate the number of Purchased Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not more than 30 days after the date of notice. Owner shall, prior to the 5 close of business on the date specified for the repurchase, deliver to the Secretary of the Company the certificates representing the Purchased Shares to be repurchased, each certificate to be properly endorsed for transfer. The Company shall, concurrently with the receipt of such stock certificates from Owner, pay to Owner in cash or cash equivalents (including the cancellation of any purchase-money indebtedness), the amount determined pursuant to Section 6(c)(i) above. (iii) TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right under this Section 6(c) shall lapse and cease to have effect upon the EARLIEST to occur of (A) failure by the Company to timely exercise the Repurchase Right under Section 6(c)(i), (B) the first date on which shares of the Company's Common Stock are held of record by more than 500 persons, (C) a determination by the Company's Board of Directors that a public market exists for the outstanding shares of the Company's Common Stock or (D) a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act, covering the offer and sale of the Company's Common Stock in the aggregate amount of at least $5,000,000. (d) RIGHT OF FIRST REFUSAL (i) GRANT. The Company is hereby granted the right of first refusal (the "FIRST REFUSAL RIGHT"), exercisable in connection with any proposed Transfer of the Purchased Shares. For purposes of this Section 6(d), the term "Transfer" shall not include any of the permitted transfers under Section 6(b)(i). (ii) NOTICE OF INTENDED DISPOSITION. In the event the Owner desires to accept a bona fide third-party offer for any or all of the Purchased Shares (the shares subject to such offer to be hereinafter called, solely for the purposes of this Section 6(d), the "TARGET SHARES"), Owner shall promptly (1) deliver to the Secretary of the Company written notice (the "DISPOSITION NOTICE") of the offer and the basic terms and conditions thereof, including the proposed purchase price, and (2) provide satisfactory proof that the disposition of the Target Shares to the third-party offeror would not be in contravention of the provisions set forth in Sections 6(b), 6(c), 6(g) and 6(h) of this Agreement. (iii) EXERCISE OF RIGHT. The Company (or its assignees) shall, for a period of 30 days following receipt of the Disposition Notice, have the right to repurchase any or all of the Target Shares specified in the Disposition Notice upon substantially the same terms and conditions specified therein. Such right shall be exercisable by written notice (the "EXERCISE NOTICE") delivered to Owner prior to the expiration of the 30 day exercise period. If such right is exercised with respect to all the Target Shares specified in the Disposition Notice, then the Company (or its assignees) shall effect the repurchase of the Target Shares, including payment of the purchase price, not more than 30 days after delivery of the Exercise Notice; and at such time Owner shall deliver to the Company the certificates representing the Target Shares to be repurchased, each certificate to be properly endorsed for transfer. Should the purchase price specified in the Disposition Notice be payable in property other than cash or evidences of indebtedness, the Company (or its assignees) shall have the right to pay the purchase price in the form of cash equal in amount to the value of such 6 property. If the Owner and the Company (or its assignees) cannot agree on such cash value within ten days after the Company's receipt of the Disposition Notice, the valuation shall be made by an appraiser of recognized standing selected by the Owner and the Company (or its assignees), or, if they cannot agree on an appraiser within 20 days after the Company's receipt of the Disposition Notice, each shall select an appraiser of recognized standing and the two appraisers shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of such value. The cost of such appraisal shall be shared equally by the Owner and the Company. The closing shall then be held on the LATTER of (1) the 30th business day following delivery of the Exercise Notice or (2) the 15th day after such cash valuation shall have been made. (iv) NON-EXERCISE OF RIGHT. In the event the Exercise Notice is not given to Owner within 30 days following the date of the Company's receipt of the Disposition Notice, Owner shall have a period of 30 days thereafter, in which to sell or otherwise dispose of the Target Shares upon terms and conditions (including the purchase price) no more favorable to the third-party purchaser than those specified in the Disposition Notice; PROVIDED, HOWEVER, that any such sale or disposition must not be effected in contravention of the provisions of Sections 6(g) or 6(h) of this Agreement. The third-party purchaser shall acquire the Target Shares free and clear of all the terms and provisions of this Agreement (including the Company's Repurchase Right under Section 6(c) and the Company's First Refusal Right hereunder). In the event Owner does not sell or otherwise dispose of the Target Shares within the specified 30 day period, the Company's First Refusal Right shall continue to be applicable to any subsequent disposition of the Target Shares by Owner until such right lapses in accordance with Section 6(d)(vi). (v) PARTIAL EXERCISE OF RIGHT. In the event the Company (or its assignees) makes a timely exercise of the First Refusal Right with respect to a portion, but not all, of the Target Shares specified in the Disposition Notice, Owner shall have the option, exercisable by written notice to the Company delivered within 30 days after the date of the Disposition Notice, to effect the sale of the Target Shares pursuant to one of the following alternatives: (A) sale or other disposition of all the Target Shares to a third-party purchaser in compliance with the requirements of section 6(d)(iv), as if the Company did not exercise the First Refusal Right hereunder; or (B) sale to the Company (or its assignees) of the portion of the Target Shares which the Company (or its assignees) has elected to purchase, such sale to be effected in substantial conformity with the provisions of Section 6(d)(iii). Failure of Owner to deliver timely notification to the Company under this Section 6(d)(v) shall be deemed to be an election by Owner to sell the Target Shares pursuant to alternative (A) above. (vi) TERMINATION OF THE FIRST REFUSAL RIGHT. The First Refusal Right under this Section 6(d) shall lapse and cease to have effect upon the EARLIEST to occur of (1) the first date on which shares of the Company's Common Stock are held of record by more than 500 persons, (2) a determination is made by the Company's Board of Directors that a public market exists for the outstanding shares of the Company's Common Stock or (3) a firm commitment 7 underwritten public offering pursuant to an effective registration statement under the Securities Act, covering the offer and sale of the Company's Common Stock in the aggregate amount of at least $5,000,000. (e) RECAPITALIZATION. In the event of any stock dividend, stock split, recapitalization or other transaction resulting in an adjustment under Section 7 hereof, then any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to or in exchange for the Purchased Shares shall be immediately subject to the Company's Repurchase Right and First Refusal Right, but only to the extent the Purchased Shares are at that time covered by such right. (f) LEGEND. All certificates representing Purchased Shares subject to the First Refusal Rights and Repurchase Rights shall be endorsed with the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN REPURCHASE RIGHTS AND RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES. THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE." (g) SECURITIES LAW RESTRICTIONS. None of the Purchased Shares shall be Transferred (with or without consideration) and the Company shall not be required to register any such Transfer and the Company may instruct its transfer agent not to register any such Transfer, unless and until all of the following events shall have occurred: (i) the Purchased Shares are Transferred pursuant to and in conformity with (1) (x) an effective registration statement filed with the Securities and Exchange Commission (the "COMMISSION") pursuant to the Securities Act, or (y) an exemption from registration under the Securities Act, and (2) the securities laws of any state of the United States; and (ii) Optionee has, prior to the Transfer of such Purchased Shares, and if requested by the Company, provided all relevant information to Company's counsel so that upon Company's request, Company's counsel is able to, and actually prepares and delivers to the Company a written opinion that the proposed Transfer (1) (x) is pursuant to a registration statement which has been filed with the Commission and is then effective, or (y) is exempt from registration under the Securities Act as then in effect, and the Rules and Regulations of the Commission thereunder, and (2) is either qualified or registered under any applicable state securities laws, or exempt from such qualification or registration. The Company shall bear all reasonable costs of preparing such opinion. (h) S CORPORATION RESTRICTIONS. For so long as the Company maintains its taxable status as an S Corporation, none of the Purchased Shares shall be Transferred (with or 8 without consideration) and the Company shall not be required to register any such Transfer and the Company may instruct its transfer agent not to register any such Transfer to any person who is not eligible to be an S Corporation shareholder as defined in Section 1361 of the Code, or to any person if such transfer would, in the opinion of the Company's counsel, result in the termination or revocation of the Company's taxable status as an S Corporation. (i) NONCOMPLYING TRANSFERS INVALID. Any attempted Transfer which is not in full compliance with this Section 6 shall be null and void AB INITIO, and of no force or effect. 7. ADJUSTMENTS UPON RECAPITALIZATION. (a) Subject to the provisions of Section 7(b), if any change is made in the Common Stock, without receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company) the Option will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to the Option. Such adjustments shall be made by the Board (excluding the Optionee), the determination of which shall be final, binding and conclusive. The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company." (b) In the event of: (1) a dissolution, liquidation or sale of substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; or (3) a reverse merger in which the Company is the surviving corporation but the shares of the Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then, at the sole discretion of the Board (excluding the Optionee) and to the extent permitted by applicable law, the Option shall (i) terminate upon such event and may be exercised prior thereto to the extent the Option is then exercisable or (ii) continue in full force and effect and, if applicable, the surviving corporation or an Affiliate of such surviving corporation shall assume the Option and/or shall substitute a similar option or award in place of the Option. (c) To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Board (excluding the Optionee), and its determination shall be final, binding and conclusive. (d) The provisions of this Section 7 are intended to be exclusive, and Optionee shall have no other rights upon the occurrence of any of the events described in this Section 7. (e) The grant of the Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes in its capital or business structure, or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 9 8. WAIVER OF RIGHTS TO PURCHASE STOCK. By signing this Option Agreement, Optionee acknowledges and agrees that neither the Company nor any other person or entity is under any obligation to sell or transfer to Optionee any option or equity security of the Company, other than only (i) the shares of Common Stock subject to the Option, and (ii) those rights or options, if any, (the "RESERVED AGREEMENTS") to purchase Common Stock previously granted in writing to Optionee by the Board (or a committee thereof) and specifically identified on the Certificate under the caption, "WAIVER." By signing this Option Agreement, Optionee specifically waives all rights which he or she may have had prior to the date of this Option Agreement to receive any option or equity security of the Company, including, without limitation, those which arise out of or are in any manner whatsoever, directly or indirectly, related to any stock option agreement or any other right or agreement relating directly or indirectly to the acquisition by Optionee of securities of the Company, excluding the Reserved Agreements, if any. 9. INVESTMENT INTENT. Optionee represents and agrees that if he or she exercises the Option in whole or in part, and if at the time of such exercise the Plan and/or the Purchased Shares have not been registered under the Securities Act, he or she will acquire the Shares upon such exercise for the purpose of investment and not with a view to the distribution of such Shares, and that upon each exercise of the Option he or she will furnish to the Company a written statement to such effect. 10. LEGEND ON STOCK CERTIFICATES. Optionee agrees that all certificates representing the Purchased Shares will be subject to such stock transfer orders and other restrictions (if any) as the Company may deem advisable under the rules, regulations and other requirements of the Commission, any stock exchange upon which the Common Stock is then listed and any applicable federal or state securities laws, and the Company may cause a legend or legends to be put on such certificates to make appropriate reference to such restrictions. 11. NO RIGHTS AS SHAREHOLDER. Optionee shall have no rights as a shareholder with respect to the Shares until the date of the issuance to Optionee of a stock certificate or stock certificates evidencing such Shares. Except as may be provided in Section 7 of this Option Agreement, no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued. 10 12. MODIFICATION. Subject to the terms and conditions and within the limitations of the Plan, the Board (or a committee thereof) may modify, extend or renew the Option or accept the surrender of, and authorize the grant of a new option in substitution for, the Option (to the extent not previously exercised). No modification of the Option shall be made which, without the consent of Optionee, would alter or impair any rights of Optionee under the Option. 13. WITHHOLDING. (a) The Company shall be entitled to require as a condition of delivery of any Purchased Shares upon exercise of this Option that the Optionee agree to remit, at the time of such delivery or at such later date as the Company may determine, an amount sufficient to satisfy all federal, state and local withholding tax requirements relating thereto, and Optionee agrees to take such other action required by the Company to satisfy such withholding requirements. (b) With the consent of the Board, and in accordance with any rules and procedures from time to time adopted by the Board, Optionee may elect to satisfy his or her obligations under Section 13(a) above by (i) directing the Company to withhold a portion of the Shares otherwise deliverable; or (ii) tendering other shares of the Common Stock of the Company which are already owned by Optionee which in all cases have a fair market value on the date as of which the amount of tax to be withheld is determined (the "TAX DATE") equal to the amount of taxes to be paid by such method (each, a "WITHHOLDING RIGHT"). (c) To exercise a Withholding Right, the Optionee must follow the election procedures set forth below, together with such additional procedures and conditions set forth in this Option Agreement or otherwise adopted by the Board: (i) the Optionee must deliver to the Company his or her written notice of election (the "ELECTION") and specify whether all or a stated percentage of the applicable taxes will be paid in accordance with Section 13(b) above and whether the amount so paid shall be made in accordance with the "flat" withholding rates for supplemental wages or as determined in accordance with Optionee's form W-4 (or comparable state or local form); (ii) unless disapproved by the Board as provided in Subsection (iii) below, the Election once made will be irrevocable; and (iii) no Election is valid unless the Board approves such Election, and such Election may be disapproved by the Board, in its sole discretion, with or without cause or reason therefor; provided, if the Board has not approved or disapproved the Election on or prior to the Tax Date, the Election will be deemed approved. 14. CHARACTER OF OPTION. The Option is NOT intended to qualify as an "incentive stock option" as that term is defined in Section 422 of the Code. 11 15. NONDISCLOSURE AND INTELLECTUAL PROPERTY OWNERSHIP. (a) Optionee agrees to assign to the Company or its nominees, all Optionee's rights to ideas, concepts, business plans and strategies, computer programs, inventions, discoveries, improvements, and developments ("DEVELOPMENTS"), whether or not copyrightable, patentable, or subject to trade secret protection, which, during the period of Optionee's employment by the Company, Optionee has made, conceived, or conducted, or hereafter may make or conceive or conduct, either solely or jointly with others: (i) with the use of the Company's time, materials, or facilities; or (ii) resulting from or suggested by Optionee's work for the Company; or (iii) in any way pertaining to any subject matter related to the Company's existing or contemplated business, products, and services. Notwithstanding anything to the contrary herein, pursuant to Section 2870 of the California Labor Code, this Agreement does not apply to any Development for which no equipment, supplies, facilities or trade secret information of the Company was used and which was developed entirely on Optionee's own time, and (1) which does not relate at the time of conception or reduction to practice of the Development either to the business of the Company or to the Company's actual or demonstrably anticipated business, or (2) which does not result from any work performed by Optionee for the Company. (b) At any time requested by the Company, either during employment or after termination thereof, and without charge to the Company, but at its expense, Optionee agrees to execute, acknowledge, and deliver all such further papers, including applications for registrations of copyrights, and to perform such other lawful acts as, in the opinion of said Company, are necessary to obtain, maintain, or register copyrights or patents for such Development in any and all countries and to vest title thereto in the Company or its nominees. (c) Optionee realizes that in the course of Optionee's employment the Company will necessarily reveal to Optionee or Optionee may develop proprietary, secret, or confidential information, and in addition to all other obligations with respect to the observance of federal and state statutes and U.S. Government security regulations, Optionee hereby agrees as follows: (i) Optionee agrees to keep in strictest confidence during and subsequent to Optionee's employment all information identified as secret or confidential or which, from the circumstances, in good faith and good conscience ought to be treated as confidential, regarding the business plans and strategies, concepts, inventions, discoveries, or trade secrets or secret processes, reports, client lists, profit margins, or any other information of the business or affairs of the Company (hereinafter collectively referred to as "INFORMATION") which Optionee may acquire or develop in connection with or as a result of Optionee's employment. (ii) Optionee covenants and agrees that, except as instructed by Company during Optionee's employment, Optionee will not use any Information and without the prior written consent of Company, Optionee will not directly or indirectly publish, communicate, divulge, or describe to any unauthorized person, nor patent or register a copyright for, any Information during the period of Optionee's employment or at any time subsequent thereto. (iii) This covenant shall not apply to Information already in the public domain or Information which has been dedicated to or released to the public by the Company. 12 EX-10.3 6 REGISTRANT'S STOCK OPTION CERTIFICATE (INCENTIVE) EXHIBIT 10.3 OPTION CERTIFICATE (INCENTIVE STOCK OPTION) THIS IS TO CERTIFY that Future Media Productions, Inc., a California corporation (the "COMPANY"), has granted to the employee named below an incentive stock option (the "OPTION") to purchase shares (the "SHARES") of the Company's Common Stock, without par value (the "COMMON STOCK"), under its 1998 Stock Incentive Plan, as follows: Name of Optionee: -------------------------------------------------- Address of Optionee: -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- Number of Shares: -------------------------------------------------- -------------------------------------------------- Option Exercise Price: -------------------------------------------------- Date of Grant: -------------------------------------------------- Option Expiration Date: -------------------------------------------------- EXERCISE SCHEDULE: The Option shall become exercisable as follows: SUMMARY OF OTHER TERMS: This Option is defined in the Stock Option Agreement (Incentive Stock Option) (the "OPTION AGREEMENT") which is attached to this Option Certificate (this "CERTIFICATE") as Annex I. This Certificate summarizes certain of the provisions of the Option Agreement for your information, but is not complete. Your rights are governed by the Option Agreement, NOT by this summary. The Company strongly suggests that you carefully review the full Option Agreement prior to signing this Certificate or exercising the Option. Among the terms of the Option Agreement are the following: EMPLOYMENT: The Option Agreement does not obligate the Company to retain you for any period of time. Unless otherwise agreed IN WRITING, the Company reserves the right to terminate any employee at any time, with or without cause. TERMINATION OF EMPLOYMENT: While the Option terminates on the Option Expiration Date, it will terminate earlier if you cease to be employed by the Company. If your employment ends due to death or permanent disability, the Option terminates six months after the date of death or permanent disability, and is exercisable during such six month period as to the portion of the Option which has vested prior to the date of termination of employment. If your employment ends "for cause," the Option terminates immediately upon termination of your employment. In all other cases, the Option terminates 30 days after the date of termination of employment, and is exercisable during such 30 day period as to the portion of the Option which had vested prior to the date of termination of employment. See Section 5 of the Option Agreement. TRANSFER: The Option is personal to you, and cannot be sold, transferred, assigned or otherwise disposed of to any other person, except on your death. For so long as the Company maintains its taxable status as an S Corporation, in the event of death, the Option cannot be transferred to any person who is not eligible to be an S Corporation shareholder as defined in Section 1361 of the Code, or to any person if such transfer, or the exercise of the Option by the transferee, would, in the opinion of the Company's counsel, result in the termination or revocation of the Company's taxable status as an S Corporation. See Section 16(d) of the Option Agreement. EXERCISE: You can exercise the Option (once it is exercisable), in whole or in part, by delivering to the Company a Notice of Exercise identical to Exhibit "A" attached to the Option Agreement, accompanied by payment of the Option Exercise Price, set forth above, for the Shares to be purchased. The Company will then issue a certificate to you for the Shares you have purchased. You are under no obligation to exercise the Option. See Section 4 of the Option Agreement. REPURCHASE RIGHTS; FIRST REFUSAL RIGHTS: The Company has the right exercisable following termination of your employment to repurchase (x) all of the Shares purchased by you upon exercise of the Option at fair market value on the date of your termination, and (y) the unexercised portion of the Option (to the extent that the Option had vested prior to the date of your termination) at the price equal to the amount by which the fair market value of the Shares underlying the Option (or portion thereof) exceeds the exercise price of the Option, in each case for cash or cash equivalents (including the cancellation of any purchase-money indebtedness). Those Shares are also subject to the Company's right of first refusal, which provides that in the event you desire to accept a bona fide third-party offer for any of the Shares you acquire upon exercise of your Option, you must first offer those shares to the Company or its designee on the same terms and conditions as are set forth in the bona fide offer. The Repurchase Rights and First Refusal Rights lapse and cease to have affect upon the earlier to occur of (1) the first date on 2 which shares of the Company's Common Stock are held of record by more than 500 persons, (2) a determination by the Company's Board of Directors that a public market exists for the outstanding shares of the Company's Common Stock or (3) a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the Company's Common Stock in the aggregate amount of at least $5,000,000. See Section 6 of the Option Agreement. FIRST REFUSAL RIGHTS: The Option provides that the Company shall have the right of first refusal, exercisable in connection with any proposed sale, hypothecation or other disposition of the Shares; and that in the event you desire to accept a bona fide third-party offer for any or all of the Shares, such shares shall first be offered to the Company at the same terms and conditions as are set forth in the bona fide offer. To exercise this first refusal right, the Company must elect to purchase the Shares within 30 days after receipt of notice from you of the related proposed sale, and upon such election the Company must purchase the Shares within 60 days of the receipt of notice of the proposed sale. See Section 6 of the Option Agreement. MARKET STAND-OFF: The Option provides that in connection with any underwritten public offering by the Company, you may not sell or transfer any of your Shares without the prior written consent of the Company or its underwriters for such period of time from and after the effective date of such offering as may be reasonably requested by the Company or such underwriters. See Section 6 of the Option Agreement. S CORPORATION RESTRICTIONS: No Optionee may sell, transfer, grant proxies with respect to, assign, pledge, encumber or otherwise dispose of any Shares acquired upon the exercise of an Option, to any person who is not eligible to be an S Corporation shareholder as defined in Section 1361 of the Internal Revenue Code of 1986, as amended (the "CODE"), or to any person if such transfer would, in the opinion of the Company's counsel, result in the termination or revocation of the Company's taxable status as an S Corporation. See Section 6(h) of the Option Agreement. ANTI-DILUTION PROVISIONS: The Option contains provisions which adjust your Option to reflect stock splits, stock dividends, mergers and other major corporate reorganizations which would change the nature of the Shares underlying your Option. See Section 7 of the Option Agreement. 3 WAIVER: By signing this Certificate, you will be agreeing to all of the terms of the Option Agreement, including those not summarized in this Certificate. You will waive your rights to any other options or stock which may have heretofore been promised to you, other than any rights you may have pursuant to the agreements (the "RESERVED AGREEMENTS"), if any, identified below. See Section 8 of the Option Agreement. RESERVED AGREEMENTS:[INDICATE "NONE," OR IDENTIFY AGREEMENT BY EXECUTION DATE, TYPE OF AGREEMENT AND IDENTITIES OF PARTIES] --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- --------------------------------------------------------------------------- WITHHOLDING: The Company may require you to make any arrangements necessary to insure the proper withholding of any amount of tax, if any, required to be withheld by the Company as a result of the exercise of the Option. See Section 13 of the Option Agreement. COPYRIGHT OWNERSHIP AND NONDISCLOSURE: By signing this certificate you will be agreeing that (i) you will not disclose to any person outside the Company any non-public information and/or trade secrets of the Company, and (ii) that all inventions, ideas, concepts and other intellectual property devised, developed, conceived or created by you relating to your employment by the Company are the sole and exclusive property of the Company. See Section 15 of the Agreement. 4 AGREEMENT Future Media Productions, Inc., a California corporation (the "COMPANY"), and the above-named employee ("OPTIONEE") each hereby agrees to be bound by all of the terms and conditions of the Stock Option Agreement (Incentive Stock Option) which is attached hereto as Annex I and incorporated herein by this reference as if set forth in full in this document. DATED: ------------------------- Future Media Productions, Inc. By: ------------------------------- Its: ------------------------------- OPTIONEE ----------------------------------- (Signature) ----------------------------------- (Please print your name exactly as you wish it to appear on any stock certificates issued to you upon exercise of the Option) 5 ANNEX I STOCK OPTION AGREEMENT (INCENTIVE STOCK OPTION) This STOCK OPTION AGREEMENT (this "OPTION AGREEMENT") is made and entered into on the execution date of the Option Certificate to which it is attached (the "CERTIFICATE"), by and between Future Media Productions, Inc., a California corporation (the "COMPANY"), and the employee named in the Certificate ("OPTIONEE"). Pursuant to the Future Media Productions, Inc. 1998 Stock Incentive Plan (the "PLAN"), the Board of Directors of the Company (the "BOARD") has authorized the grant to Optionee of an incentive stock option to purchase shares of the Company's Common Stock, without par value (the "COMMON STOCK"), upon the terms and subject to the conditions set forth in this Option Agreement and in the Plan. The Company and Optionee agree as follows: 1. GRANT OF OPTION. The Company hereby grants to Optionee the right and option (the "OPTION"), upon the terms and subject to the conditions set forth in this Option Agreement, to purchase all or any portion of that number of shares of the Common Stock (the "SHARES") set forth in the Certificate, at the Option Exercise Price set forth in the Certificate (the "EXERCISE PRICE"). 2. TERM OF OPTION. The Option shall terminate and expire on the Option Expiration Date set forth in the Certificate, unless sooner terminated as provided herein. 3. EXERCISE PERIOD. (a) Subject to the provisions of Sections 3, 5, and 7 of this Option Agreement, the Option shall become exercisable (in whole or in part) upon and after the dates set forth under the caption "Exercise Schedule" in the Certificate. The installments shall be cumulative; I.E., the Option may be exercised, as to any or all Shares covered by an installment, at any time or times after the installment first becomes exercisable and until expiration or termination of the Option. (b) Notwithstanding anything to the contrary contained in this Option Agreement, the Option may not be exercised, in whole or in part, unless and until any then- applicable requirements of all federal, state and local laws and regulatory agencies shall have been fully complied with to the satisfaction of the Company and its counsel. 4. EXERCISE OF OPTION. (a) There is no obligation to exercise the Option, in whole or in part. The Option may be exercised, in whole or in part, only by delivery to the Company of: (i) written notice of exercise in form and substance identical to Exhibit "A" attached to this Option Agreement stating the number of Shares then being purchased (the "Purchased Shares"); (ii) payment of the Exercise Price of the Purchased Shares, either in cash, by check, by cancellation of any indebtedness of the Company to Optionee for accrued and unpaid salary or, with the consent of the Board, by transfer to the Company of issued and outstanding shares of Common Stock which, to the extent required to avoid liability under Section 16(b) of the Securities and Exchange Act of 1934, as amended, have been held by Optionee for a period of at least six calendar months preceding the date of surrender, or by any combination of the above methods of payment. If payment is made, in whole or in part, by transfer to the Company of issued and outstanding shares of Common Stock, the value (the "FAIR MARKET VALUE") of such shares shall be determined as follows: (1) if the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; (2) if the Common Stock is quoted on the Nasdaq System (but not on the Nasdaq National Market) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the mean between the bid and asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; and (3) in the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Board; and (iii) if requested by the Company, a letter of investment intent in such form and containing such provisions as the Company may reasonably require. (b) Following receipt of the notice and payment referred to above, the Company shall issue and deliver to Optionee a stock certificate or stock certificates evidencing the Purchased Shares; PROVIDED, HOWEVER, that the Company shall not be obligated to issue a fraction or fractions of a share of its Common Stock, and may pay to Optionee, in cash or by check, the Fair Market Value of any fraction or fractions of a share exercised by Optionee, which Fair Market Value shall be determined as set forth in this Section 4. 2 5. TERMINATION OF EMPLOYMENT. (a) If Optionee shall cease to be in the employ of the Company, any Subsidiary or any Parent for any reason other than Optionee's death or permanent disability (a "SPECIAL TERMINATING EVENT"), Optionee shall have the right, subject to the provisions of Section 5(c) below, to exercise the Option at any time within 30 days after the date Optionee ceased to be employed by the Company, but in no case later than the Option Expiration Date. The Option may be exercised during such period only with respect to the Shares that were vested as of the date Optionee's employment terminated and only to the extent the Option had not previously been exercised. To the extent the Option remains unexercised at the end of such period, the Option shall terminate. The Board, in its sole and absolute discretion, shall determine whether or not authorized leaves of absence shall constitute termination of employment for purposes of this Option Agreement. (b) If a Special Terminating Event occurs while Optionee is in the employ of the Company, any Subsidiary or any Parent, then Optionee, Optionee's executors or administrators or any person or persons acquiring the Option directly from Optionee by bequest or inheritance, shall have the right to exercise the Option at any time within six months after the Special Terminating Event, but in no case later than the Option Expiration Date. The Option may be exercised during such period only with respect to the Shares that were vested as of the Special Terminating Event and only to the extent the Option had not previously been exercised. To the extent the Option remains unexercised at the end of such period, the Option shall terminate. (c) If Optionee shall be terminated "for cause" by the Company, any Subsidiary or any Parent, the Option shall terminate immediately. For purposes of this Option Agreement, "for cause" shall mean: (A) the failure or refusal by such person to perform his or her duties to the Company; or (B) Such person's willful disobedience of any orders or directives of the Board or any officers thereof acting under the authority thereof or such person's deliberate interference with the compliance by other employees of the Company with any such orders or directives; or (C) the failure or refusal of such person to abide by or comply with the written policies, standard procedures or regulations of the Company; or (D) any willful or continued act or course of conduct by such person which the Board in good faith determines might reasonably be expected to have a material detrimental effect on the Company or the business, operations, affairs or financial position thereof; or 3 (E) the committing by such person of any fraud, theft, embezzlement or other dishonest act against the Company; or (F) the determination by the Board, in good faith and in the exercise of reasonable discretion, that such person is not competent to perform his or her duties of employment; and (d) For purposes of this Option Agreement, "permanent disability" shall mean permanent and total disability as defined by the Board. Optionee shall not be considered permanently disabled unless he furnishes proof of such disability in such form and manner, and at such times, as the Board may from time to time require. 6. RESTRICTIONS ON PURCHASED SHARES. (a) MARKET STAND-OFF. (i) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act of 1933, as amended (the "SECURITIES ACT"), including the Company's initial public offering, Optionee shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to any Purchased Shares without the prior written consent of the Company or its underwriters, for such period of time from and after the effective date of such registration statement as may be reasonably requested by the Company or such underwriters. This Section 6(a)(i) shall only remain in effect for the two-year period immediately following the effective date of the Company's initial public offering and shall thereafter terminate and cease to be in force or effect. Optionee agrees to execute and deliver to the Company such further documents or instruments as the Company reasonably determines to be necessary or appropriate to effect the provisions of this Section 6(a). (ii) In the event of any stock dividend, stock split, recapitalization, or other change affecting the Company's outstanding Common Stock effected without receipt of consideration, then any new, substituted, or additional securities distributed with respect to the Purchased Shares shall be immediately subject to the provisions of this Section 6(a), to the same extent the Purchased Share are at such time covered by such provisions. (iii) In order to enforce the provisions of Section 6(a), the corporation may impose stop-transfer instructions with respect to the Purchased Shares until the end of the applicable stand-off period. 4 (b) RESTRICTION ON TRANSFER. (i) Optionee shall not sell, transfer, grant proxies with respect to, assign, pledge, encumber or otherwise dispose of (each a "TRANSFER") any of the Purchased Shares that are subject to the Company's Repurchase Right under Section 6(c). In addition, Purchased Shares that are released from the Repurchase Right shall not be Transferred in contravention of the Company's First Refusal Right under Section 6(d) or the provisions of Sections 6(g) or 6(h). The restrictions contained in Section 6(c) and Section 6(d) shall NOT be applicable to (1) a transfer of the Purchased Shares made without consideration to Optionee's spouse or issue, including adopted children, or to a trust for the exclusive benefit of Optionee or Optionee's spouse or issue, (2) a transfer of title to the Purchased Shares effected pursuant to Optionee's will or the laws of intestate succession or (3) a transfer to the Company in pledge as security for any purchase-money indebtedness incurred by Optionee in connection with the acquisition of the Purchased Shares; provided Optionee shall have first obtained the written consent of the Company to such Transfer. Any Transfer of Purchased Shares permitted hereunder shall be subject to the Securities Law Restrictions set forth in Section 6(g) and the S Corporation Restrictions set forth in Section 6(h). (ii) Each person (other than the Company) to whom the Purchased Shares are transferred by means of one of the permitted transfers specified in Section 6(b)(i) must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Company that such person is bound by the provisions of this Agreement and that the transferred shares are subject to (1) both the Company's Repurchase Right and the Company's First Refusal Right granted hereunder, (2) the market stand-off provisions of Section 6(a) and (3) the restrictions set forth in Sections 6(g) and 6(h), to the same extent such shares would be so subject if retained by Optionee. (iii) For purposes of Sections 6(b), 6(c) and 6(d) of this Agreement, the term "Owner" shall include Optionee and all subsequent holders of the Purchased Shares who derive their ownership through a permitted Transfer from Optionee in accordance with Section 6(b)(i). (c) REPURCHASE RIGHT. (i) GRANT. The Company is hereby granted the right (the "REPURCHASE RIGHT") exercisable within the 90 day period following termination of Optionee's employment with the Company, or in the case of stock issued upon exercise of options after the date of termination, within 90 days after the date of exercise, to repurchase all of the Purchased Shares at the Fair Market Value on the date of termination of employment and Shares underlying vested Options which have not been fully exercised prior to termination of Optionee's employment at the price equal to the amount by which the Fair Market Value of the Shares underlying such Options (or portion thereof) exceeds the exercise price of the Options on the date of termination of employment. (ii) EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be exercisable by written notice delivered to the Owner of the Purchased Shares prior to the 5 expiration of the applicable period specified in Section 6(c)(i). The notice shall indicate the number of Purchased Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not more than 30 days after the date of notice. Owner shall, prior to the close of business on the date specified for the repurchase, deliver to the Secretary of the Company the certificates representing the Purchased Shares to be repurchased, each certificate to be properly endorsed for transfer. The Company shall, concurrently with the receipt of such stock certificates from Owner, pay to Owner in cash or cash equivalents (including the cancellation of any purchase-money indebtedness), the amount determined pursuant to Section 6(c)(i) above. (iii) TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right under this Section 6(c) shall lapse and cease to have effect upon the EARLIEST to occur of (A) failure by the Company to timely exercise the Repurchase Right under Section 6(c)(i), (B) the first date on which shares of the Company's Common Stock are held of record by more than 500 persons, (C) a determination by the Company's Board of Directors that a public market exists for the outstanding shares of the Company's Common Stock or (D) a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act, covering the offer and sale of the Company's Common Stock in the aggregate amount of at least $5,000,000. (d) RIGHT OF FIRST REFUSAL (i) GRANT. The Company is hereby granted the right of first refusal (the "FIRST REFUSAL RIGHT"), exercisable in connection with any proposed Transfer of the Purchased Shares. For purposes of this Section 6(d), the term "Transfer" shall not include any of the permitted transfers under Section 6(b)(i). (ii) NOTICE OF INTENDED DISPOSITION. In the event the Owner desires to accept a bona fide third-party offer for any or all of the Purchased Shares (the shares subject to such offer to be hereinafter called, solely for the purposes of this Section 6(d), the "TARGET SHARES"), Owner shall promptly (1) deliver to the Secretary of the Company written notice (the "DISPOSITION NOTICE") of the offer and the basic terms and conditions thereof, including the proposed purchase price, and (2) provide satisfactory proof that the disposition of the Target Shares to the third-party offeror would not be in contravention of the provisions set forth in Sections 6(b), 6(c), 6(g) and 6(h) of this Agreement. (iii) EXERCISE OF RIGHT. The Company (or its assignees) shall, for a period of 30 days following receipt of the Disposition Notice, have the right to repurchase any or all of the Target Shares specified in the Disposition Notice upon substantially the same terms and conditions specified therein. Such right shall be exercisable by written notice (the "EXERCISE NOTICE") delivered to Owner prior to the expiration of the 30 day exercise period. If such right is exercised with respect to all the Target Shares specified in the Disposition Notice, then the Company (or its assignees) shall effect the repurchase of the Target Shares, including payment of the purchase price, not more than 30 days after delivery of the Exercise Notice; and at such 6 time Owner shall deliver to the Company the certificates representing the Target Shares to be repurchased, each certificate to be properly endorsed for transfer. Should the purchase price specified in the Disposition Notice be payable in property other than cash or evidences of indebtedness, the Company (or its assignees) shall have the right to pay the purchase price in the form of cash equal in amount to the value of such property. If the Owner and the Company (or its assignees) cannot agree on such cash value within ten days after the Company's receipt of the Disposition Notice, the valuation shall be made by an appraiser of recognized standing selected by the Owner and the Company (or its assignees), or, if they cannot agree on an appraiser within 20 days after the Company's receipt of the Disposition Notice, each shall select an appraiser of recognized standing and the two appraisers shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of such value. The cost of such appraisal shall be shared equally by the Owner and the Company. The closing shall then be held on the LATTER of (1) the 30th business day following delivery of the Exercise Notice or (2) the 15th day after such cash valuation shall have been made. (iv) NON-EXERCISE OF RIGHT. In the event the Exercise Notice is not given to Owner within 30 days following the date of the Company's receipt of the Disposition Notice, Owner shall have a period of 30 days thereafter, in which to sell or otherwise dispose of the Target Shares upon terms and conditions (including the purchase price) no more favorable to the third-party purchaser than those specified in the Disposition Notice; PROVIDED, HOWEVER, that any such sale or disposition must not be effected in contravention of the provisions of Sections 6(g) or 6(h) of this Agreement. The third-party purchaser shall acquire the Target Shares free and clear of all the terms and provisions of this Agreement (including the Company's Repurchase Right under Section 6(c) and the Company's First Refusal Right hereunder). In the event Owner does not sell or otherwise dispose of the Target Shares within the specified 30 day period, the Company's First Refusal Right shall continue to be applicable to any subsequent disposition of the Target Shares by Owner until such right lapses in accordance with Section 6(d)(vi). (v) PARTIAL EXERCISE OF RIGHT. In the event the Company (or its assignees) makes a timely exercise of the First Refusal Right with respect to a portion, but not all, of the Target Shares specified in the Disposition Notice, Owner shall have the option, exercisable by written notice to the Company delivered within 30 days after the date of the Disposition Notice, to effect the sale of the Target Shares pursuant to one of the following alternatives: (A) sale or other disposition of all the Target Shares to a third-party purchaser in compliance with the requirements of section 6(d)(iv), as if the Company did not exercise the First Refusal Right hereunder; or (B) sale to the Company (or its assignees) of the portion of the Target Shares which the Company (or its assignees) has elected to purchase, such sale to be effected in substantial conformity with the provisions of Section 6(d)(iii). 7 Failure of Owner to deliver timely notification to the Company under this Section 6(d)(v) shall be deemed to be an election by Owner to sell the Target Shares pursuant to alternative (A) above. (vi) TERMINATION OF THE FIRST REFUSAL RIGHT. The First Refusal Right under this Section 6(d) shall lapse and cease to have effect upon the EARLIEST to occur of (1) the first date on which shares of the Company's Common Stock are held of record by more than 500 persons, (2) a determination is made by the Company's Board of Directors that a public market exists for the outstanding shares of the Company's Common Stock or (3) a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act, covering the offer and sale of the Company's Common Stock in the aggregate amount of at least $5,000,000. (e) RECAPITALIZATION. In the event of any stock dividend, stock split, recapitalization or other transaction resulting in an adjustment under Section 7 hereof, then any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to or in exchange for the Purchased Shares shall be immediately subject to the Company's Repurchase Right and First Refusal Right, but only to the extent the Purchased Shares are at that time covered by such right. (f) LEGEND. All certificates representing Purchased Shares subject to the First Refusal Rights and Repurchase Rights shall be endorsed with the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO THE COMPANY CERTAIN REPURCHASE RIGHTS AND RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER OF THE SHARES. THE SECRETARY OF THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE." (g) SECURITIES LAW RESTRICTIONS. None of the Purchased Shares shall be Transferred (with or without consideration) and the Company shall not be required to register any such Transfer and the Company may instruct its transfer agent not to register any such Transfer, unless and until all of the following events shall have occurred: 8 (i) the Purchased Shares are Transferred pursuant to and in conformity with (1) (x) an effective registration statement filed with the Securities and Exchange Commission (the "COMMISSION") pursuant to the Securities Act, or (y) an exemption from registration under the Securities Act, and (2) the securities laws of any state of the United States; and (ii) Optionee has, prior to the Transfer of such Purchased Shares, and if requested by the Company, provided all relevant information to Company's counsel so that upon Company's request, Company's counsel is able to, and actually prepares and delivers to the Company a written opinion that the proposed Transfer (1) (x) is pursuant to a registration statement which has been filed with the Commission and is then effective, or (y) is exempt from registration under the Securities Act as then in effect, and the Rules and Regulations of the Commission thereunder, and (2) is either qualified or registered under any applicable state securities laws, or exempt from such qualification or registration. The Company shall bear all reasonable costs of preparing such opinion. (h) S CORPORATION RESTRICTIONS. For so long as the Company maintains its taxable status as an S Corporation, none of the Purchased Shares shall be Transferred (with or without consideration) and the Company shall not be required to register any such Transfer and the Company may instruct its transfer agent not to register any such Transfer to any person who is not eligible to be an S Corporation shareholder as defined in Section 1361 of the Code, or to any person if such transfer would, in the opinion of the Company's counsel, result in the termination or revocation of the Company's taxable status as an S Corporation. (i) NONCOMPLYING TRANSFERS INVALID. Any attempted Transfer which is not in full compliance with this Section 6 shall be null and void AB INITIO, and of no force or effect. 7. ADJUSTMENTS UPON RECAPITALIZATION. (a) Subject to the provisions of Section 7(b), if any change is made in the Common Stock, without receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company) the Option will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to the Option. Such adjustments shall be made by the Board (excluding the Optionee), the determination of which shall be final, binding and conclusive. The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company." (b) In the event of: (1) a dissolution, liquidation or sale of substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; or (3) a reverse merger in which the Company is the surviving corporation 9 but the shares of the Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then, at the sole discretion of the Board (excluding the Optionee) and to the extent permitted by applicable law, the Option shall (i) terminate upon such event and may be exercised prior thereto to the extent the Option is then exercisable or (ii) continue in full force and effect and, if applicable, the surviving corporation or an Affiliate of such surviving corporation shall assume the Option and/or shall substitute a similar option or award in place of the Option. (c) To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Board (excluding the Optionee), and its determination shall be final, binding and conclusive. (d) The provisions of this Section 7 are intended to be exclusive, and Optionee shall have no other rights upon the occurrence of any of the events described in this Section 7. (e) The grant of the Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes in its capital or business structure, or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 8. WAIVER OF RIGHTS TO PURCHASE STOCK. By signing this Option Agreement, Optionee acknowledges and agrees that neither the Company nor any other person or entity is under any obligation to sell or transfer to Optionee any option or equity security of the Company, other than only (i) the shares of Common Stock subject to the Option, and (ii) those rights or options, if any, (the "RESERVED AGREEMENTS") to purchase Common Stock previously granted in writing to Optionee by the Board (or a committee thereof) and specifically identified on the Certificate under the caption, "WAIVER." By signing this Option Agreement, Optionee specifically waives all rights which he or she may have had prior to the date of this Option Agreement to receive any option or equity security of the Company, including, without limitation, those which arise out of or are in any manner whatsoever, directly or indirectly, related to any stock option agreement or any other right or agreement relating directly or indirectly to the acquisition by Optionee of securities of the Company, excluding the Reserved Agreements, if any. 9. INVESTMENT INTENT. Optionee represents and agrees that if he or she exercises the Option in whole or in part, and if at the time of such exercise the Plan and/or the Purchased Shares have not been registered under the Securities Act, he or she will acquire the Shares upon such exercise for the purpose of investment and not with a view to the distribution of such Shares, and that upon each exercise of the Option he or she will furnish to the Company a written statement to such effect. 10 10. LEGEND ON STOCK CERTIFICATES. Optionee agrees that all certificates representing the Purchased Shares will be subject to such stock transfer orders and other restrictions (if any) as the Company may deem advisable under the rules, regulations and other requirements of the Commission, any stock exchange upon which the Common Stock is then listed and any applicable federal or state securities laws, and the Company may cause a legend or legends to be put on such certificates to make appropriate reference to such restrictions. 11. NO RIGHTS AS SHAREHOLDER. Optionee shall have no rights as a shareholder with respect to the Shares until the date of the issuance to Optionee of a stock certificate or stock certificates evidencing such Shares. Except as may be provided in Section 7 of this Option Agreement, no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued. 12. MODIFICATION. Subject to the terms and conditions and within the limitations of the Plan, the Board (or a committee thereof) may modify, extend or renew the Option or accept the surrender of, and authorize the grant of a new option in substitution for, the Option (to the extent not previously exercised). No modification of the Option shall be made which, without the consent of Optionee, would cause the Option to fail to continue to qualify as an incentive stock option within the meaning of Section 422 of the Code or alter or impair any rights of Optionee under the Option. 13. WITHHOLDING. (a) Optionee agrees that should he or she make a "disposition" (as defined in Section 424(c) of the Code) of all or any of the Purchased Shares within two years from the date of the grant of the Option or within one year after the issuance of such Purchased Shares, he or she shall immediately advise the Company in writing as to the occurrence of the sale and the price realized upon the sale of such Purchased Shares. Optionee agrees that he or she shall maintain all Purchased Shares in his or her name so long as he or she maintains beneficial ownership of such Shares. (b) The Company shall be entitled to require as a condition of delivery of any Purchased Shares upon exercise of this Option that the Optionee agree to remit, at the time of such delivery or at such later date as the Company may determine, an amount sufficient to satisfy all federal, state and local withholding tax requirements relating thereto, and Optionee agrees to take such other action required by the Company to satisfy such withholding requirements. 11 (c) With the consent of the Board, and in accordance with any rules and procedures from time to time adopted by the Board, Optionee may elect to satisfy his or her obligations under Section 13(b) above by (i) directing the Company to withhold a portion of the Shares otherwise deliverable; or (ii) tendering other shares of the Common Stock of the Company which are already owned by Optionee which in all cases have a fair market value on the date as of which the amount of tax to be withheld is determined (the "TAX DATE") equal to the amount of taxes to be paid by such method (each, a "Withholding Right"). (d) To exercise a Withholding Right, the Optionee must follow the election procedures set forth below, together with such additional procedures and conditions set forth in this Option Agreement or otherwise adopted by the Board: (i) the Optionee must deliver to the Company his or her written notice of election (the "ELECTION") and specify whether all or a stated percentage of the applicable taxes will be paid in accordance with Section 13(c) above and whether the amount so paid shall be made in accordance with the "flat" withholding rates for supplemental wages or as determined in accordance with Optionee's form W-4 (or comparable state or local form); (ii) unless disapproved by the Board as provided in Subsection (iii) below, the Election once made will be irrevocable; and (iii) no Election is valid unless the Board approves such Election, and such Election may be disapproved by the Board, in its sole discretion, with or without cause or reason therefor; provided, if the Board has not approved or disapproved the Election on or prior to the Tax Date, the Election will be deemed approved. 14. CHARACTER OF OPTION. The Option is intended to qualify as an "incentive stock option" as that term is defined in Section 422 of the Code. 15. NONDISCLOSURE AND INTELLECTUAL PROPERTY OWNERSHIP. (a) Optionee agrees to assign to the Company or its nominees, all Optionee's rights to ideas, concepts, business plans and strategies, computer programs, inventions, discoveries, improvements, and developments ("DEVELOPMENTS"), whether or not copyrightable, patentable, or subject to trade secret protection, which, during the period of Optionee's employment by the Company, Optionee has made, conceived, or conducted, or hereafter may make or conceive or conduct, either solely or jointly with others: (i) with the use of the Company's time, materials, or facilities; or (ii) resulting from or suggested by Optionee's work for the Company; or (iii) in any way pertaining to any subject matter related to the Company's existing or contemplated business, products, and services. Notwithstanding anything to the contrary herein, pursuant to Section 2870 of the California Labor Code, this Agreement does not 12 apply to any Development for which no equipment, supplies, facilities or trade secret information of the Company was used and which was developed entirely on Optionee's own time, and (1) which does not relate at the time of conception or reduction to practice of the Development either to the business of the Company or to the Company's actual or demonstrably anticipated business, or (2) which does not result from any work performed by Optionee for the Company. (b) At any time requested by the Company, either during employment or after termination thereof, and without charge to the Company, but at its expense, Optionee agrees to execute, acknowledge, and deliver all such further papers, including applications for registrations of copyrights, and to perform such other lawful acts as, in the opinion of said Company, are necessary to obtain, maintain, or register copyrights or patents for such Development in any and all countries and to vest title thereto in the Company or its nominees. (c) Optionee realizes that in the course of Optionee's employment the Company will necessarily reveal to Optionee or Optionee may develop proprietary, secret, or confidential information, and in addition to all other obligations with respect to the observance of federal and state statutes and U.S. Government security regulations, Optionee hereby agrees as follows: (i) Optionee agrees to keep in strictest confidence during and subsequent to Optionee's employment all information identified as secret or confidential or which, from the circumstances, in good faith and good conscience ought to be treated as confidential, relating to the business plans and strategies, concepts, inventions, discoveries, or trade secrets or secret processes, reports, client lists, profit margins, or any other information of the business or affairs of the Company (hereinafter collectively referred to as "INFORMATION") which Optionee may acquire or develop in connection with or as a result of Optionee's employment. (ii) Optionee covenants and agrees that, except as instructed by Company during Optionee's employment, Optionee will not use any Information and without the prior written consent of Company, Optionee will not directly or indirectly publish, communicate, divulge, or describe to any unauthorized person, nor patent or register a copyright for, any Information during the period of Optionee's employment or at any time subsequent thereto. (iii) This covenant shall not apply to Information already in the public domain or Information which has been dedicated to or released to the public by the Company. (d) During the period of Optionee's employment, Optionee agrees to abide by Company's policies, including but not limited to employment policies, confidentiality policies, and policies prohibiting sexual harassment and discrimination, as such policies may exist and be made known to Optionee from time to time. 13 16. GENERAL PROVISIONS. (a) FURTHER ASSURANCES. Optionee shall promptly take all actions and execute all documents requested by the Company which the Company deems to be reasonably necessary to effectuate the terms and intent of this Option Agreement. (b) NOTICES. All notices, requests, demands and other communications under this Option Agreement shall be in writing and shall be given to the parties hereto as follows: (i) If to the Company, to: Future Media Production, Inc. 25136 Anza Dr. Valencia, CA 91355 Fax No: (805) 294-5582 Attn.: Alex Sandel (ii) If to Optionee, to the address set forth in the records of the Company, or at such other address or addresses as may have been furnished by either party in writing to the other party hereto. Any such notice, request, demand or other communication shall be effective (1) if given by mail, 72 hours after such communication is deposited in the mail by first-class certified mail, return receipt requested, postage prepaid, addressed as aforesaid, or (2) if given by any other means, when delivered at the address specified in this subsection (b). (c) TRANSFER OF RIGHTS UNDER THIS OPTION AGREEMENT. The Company may at any time transfer and assign its rights and delegate its obligations under this Option Agreement to any other person, corporation, firm or entity, including its officers, directors and shareholders, with or without consideration. (d) OPTION NON-TRANSFERABLE. Optionee may not sell, transfer, assign or otherwise dispose of the Option except by will or the laws of descent and distribution, and the Option may be exercised during the lifetime of Optionee only by Optionee or by his or her guardian or legal representative. For so long as the Company maintains its taxable status as an S Corporation, in the event of death, the Option cannot be transferred to any person who is not eligible to be an S Corporation shareholder as defined in Section 1361 of the Code, or to any person if such transfer, or the exercise of the Option by the transferee, would, in the opinion of the Company's counsel, result in the termination or revocation of the Company's taxable status as an S Corporation. (e) SUCCESSORS AND ASSIGNS. Except to the extent specifically limited by the terms and provisions of this Option Agreement, this Option Agreement shall be binding upon and 14 inure to the benefit of the parties hereto and their respective successors, assigns, heirs and personal representatives. (f) GOVERNING LAW. THIS OPTION AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE IN, AND TO BE PERFORMED WITHIN, THAT STATE. (g) THE PLAN. This Option Agreement is made pursuant to the Plan, and it is intended, and shall be interpreted in a manner, to comply therewith. Any provision of this Option Agreement inconsistent with the Plan shall be superseded and governed by the Plan. All capitalized terms not defined herein shall have the same meaning as set forth in the Plan. (h) INJUNCTIVE RELIEF. Optionee agrees that the Company may suffer irreparable harm in the event that Optionee fails or threatens not to comply with any terms of this Agreement, and that monetary damages may be inadequate to compensate the Company in such event. Accordingly, Optionee agrees that the Company, in addition to any other remedies available to it at law or in equity, including the right to monetary damages, will be entitled to injunctive relief, without the posting of bond or other security, to enforce this Agreement. (i) MISCELLANEOUS. Titles and captions contained in this Option Agreement are inserted for convenience of reference only and do not constitute a part of this Option Agreement for any other purpose. The Signature Page to this Option Agreement consists of the last page of the Certificate. 15 Exhibit "A" NOTICE OF EXERCISE (To be signed only upon exercise of the Option) TO: FUTURE MEDIA PRODUCTIONS, INC. The undersigned, the holder of the enclosed Stock Option Agreement (Incentive Stock Option), hereby irrevocably elects to exercise the purchase rights represented by the Option and to purchase thereunder _________ * shares of Common Stock of FUTURE MEDIA PRODUCTION, INC. (the "COMPANY"), and herewith encloses payment of $_______ and/or _________ shares of the Company's Common Stock in full payment of the purchase price of such shares being purchased. Dated:_________________ ______________________________ (Signature must conform in all respects to name of holder as specified on the face of the Option) ______________________________ (Please Print Name) ______________________________ (Address) * Insert here the number of shares called for on the face of the Option (or, in the case of a partial exercise, the number of shares being exercised), in either case without making any adjustment for additional Common Stock of the Company, other securities or property which, pursuant to the adjustment provisions of the Option, may be deliverable upon exercise. EX-10.4 7 FORM OF DIRECTOR AND OFFICER INDEMNIFICATION AGREEMENT EXHIBIT 10.4 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (this "AGREEMENT") is made as of this ___ day of _____________, 1998, by and between FUTURE MEDIA PRODUCTIONS, INC., a California corporation (the "COMPANY"), and ______________, an individual ("INDEMNITEE"). RECITALS A. The Company and Indemnitee recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, and agents to expensive litigation risk at the same time that the availability and coverage of liability insurance has been severely limited. B. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other directors, officers, employers and agents of the Company may not be willing to continue to serve as directors, officers, employees and agents without additional protection. C. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as directors, officers, employees and agents of the Company and to indemnify its directors, officers, employees and agents so as to provide them with the maximum protection permitted by law. AGREEMENT The Company and Indemnitee hereby agree as follows: 1. AGREEMENT TO SERVE. Indemnitee agrees to serve and/or continue to serve the Company, at the Company's will (or under separate written agreement approved by the Board of Directors of the Company (the "BOARD"), if such agreement exists), in the capacity Indemnitee currently serves the Company, as long as Indemnitee is duly appointed or elected and qualified in accordance with the applicable provisions of the Bylaws of the Company or any subsidiary of the Company or (subject to any employment agreement between Indemnitee and the Company) until such time as Indemnitee, in his sole discretion, tenders a written resignation or is removed in accordance with the Bylaws; PROVIDED, HOWEVER, that nothing contained in this Agreement is intended to or shall create any right (express or implied) to continued employment by Indemnitee. 2. INDEMNIFICATION. a. THIRD PARTY PROCEEDINGS. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason in whole or in part of: (i) the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, (ii) any action or inaction on the part of Indemnitee while a director, officer, employee or agent, or (iii) the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all expenses (including, without limitation, attorneys' fees, disbursements and retainers, accounting and witness fees, travel and deposition costs, and expenses of investigations), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company which approval shall not be unreasonably withheld) and other amounts actually incurred by Indemnitee in connection with such action, suit or proceeding to the fullest extent permissible under California Law as currently in effect and as may be expanded in the future. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that indemnification is unavailable under this Agreement. b. PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company or any subsidiary of the Company arising in whole or in part out of (i) the fact that Indemnitee is or was a director, officer, employee or agent of the Company or any subsidiary of the Company, (ii) any action or inaction on the part of Indemnitee while a director, officer, employee or agent, or (iii) the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including, without limitation, attorneys' fees, disbursements and retainers, accounting and witness fees, travel and deposition costs, and expenses of investigations) and amounts paid in settlement, in each case to the extent actually incurred by Indemnitee in connection with such action or suit, to the fullest extent permissible under California Law as currently in effect and as may be expanded in the future. For purposes of this Section 2(b), indemnification shall include, to the extent not prohibited by law, indemnification against all judgments, fines and amounts paid in settlement actually incurred by Indemnitee in connection with such action, suit or proceeding. c. MANDATORY PAYMENT OF EXPENSES. Notwithstanding any limitations or conditions upon the Company's indemnification obligations set forth in Sections 1(a) and (b) above, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 2(a) or (b) or in defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including, without limitation, attorneys' fees, disbursements and retainers, accounting and witness fees, travel and deposition costs, and expenses of investigations) actually incurred by Indemnitee in connection therewith. d. INDEMNIFICATION FOR SERVING AS A WITNESS. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of Indemnitee's status as a director, officer, employee or agent of the Company, a witness in any action, suit or proceeding, whether civil, criminal, administrative or investigative, Indemnitee shall be indemnified against expenses actually incurred by Indemnitee in connection therewith. 2 3. EXPENSES; INDEMNIFICATION PROCEDURE. a. ADVANCEMENT OF EXPENSES. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil, criminal, administrative or investigative action, suit or proceeding referenced in Sections 2(a) or (b) hereof. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within 30 days following delivery of a written request therefor by Indemnitee to the Company. b. NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give the Company notice, in accordance with Section 14 hereof, of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the principal executive offices of the Company. In addition, Indemnitee shall give the Company, at the Company's expense, such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. c. PROCEDURE. Any indemnification and advances provided for in Section 2 and this Section 3 shall be made no later than 30 days after receipt of the written request of Indemnitee. If a claim under this Agreement is not paid in full by the Company within 30 days after a written request for payment therefor has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 13 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the intention of the parties that if the Company contests Indemnitee's right to indemnification under this Agreement or applicable law, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its officers, its Board, any committee or subgroup of its Board, independent legal counsel, or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by this Agreement or by applicable law, nor an actual determination by the Company (including its officers, its Board, any committee or subgroup of its Board, independent legal counsel, or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has not met the applicable standard of conduct. 3 d. NOTICE TO INSURERS. If, at the time of the receipt of a notice of a claim pursuant to Section 3(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. e. SELECTION OF COUNSEL. In the event the Company shall be obligated under Section 3(a) hereof to pay the expenses of any proceedings against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do, provided, however, that (i) the Company shall have no right to assume the defense of any claim, action or other matter which seeks, in whole or in part, any remedy other than monetary damages (e.g., injunction, specific performance, criminal sanctions) or which could, if Indemnitee were not to prevail therein, materially damage Indemnitee's personal or business reputation, and (ii) the Company shall have no right to assume the defense of any claim, action or other matter unless the Company first agrees fully and unconditionally, in writing, that the Company is obligated to indemnify Indemnitee in full with respect thereto, and waives any and all defenses, counterclaims or set-offs which might otherwise be asserted in limitation or mitigation of such indemnification obligation. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ separate counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY. a. SCOPE. Notwithstanding any other provision of this Agreement, in the event of any change in any applicable law, statute or rule which narrows the right of the Company to indemnify Indemnitee, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. b. NONEXCLUSIVITY. The indemnification rights provided to Indemnitee by this Agreement shall be in addition to, and not in lieu of, any rights to which Indemnitee may be entitled under the Company's Articles of Incorporation, its Bylaws, any agreement, any vote of shareholders or disinterested directors, applicable law or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee with respect to (i) any action taken or not taken while serving in an indemnified capacity and (ii) any claim, 4 action or other matter arising out of or relating to the period prior to the date upon which Indemnitee ceased to serve in an indemnified capacity, even though he may have ceased to serve in such capacity at the time of any action, suit or other covered proceeding. 5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge that in certain instances, Federal or state law or regulation may prohibit the Company from indemnifying Indemnitee under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under law to indemnify Indemnitee. The Company agrees to assert vigorously, in any such action pertaining to the Company's right to indemnify Indemnitee, the position that the Company has the full and unfettered right to so indemnify Indemnitee, and further agrees that Indemnitee may, at any time and in Indemnitee's sole discretion, assume control of the Company's defense of such right (including without limitation selection of counsel and determination of strategy), with such defense nonetheless being conducted at the Company's expense. 7. LIABILITY INSURANCE. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the directors, officers, employees and agents of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all such policies of liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's employees, if Indemnitee is not a director or officer but is an employee; or of the Company's agents, if Indemnitee is not a director, officer or employee but is an agent. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company. 8. SEVERABILITY. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to law, regulation or court order, to perform its obligations under 5 this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this entire Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 9. EXCEPTIONS. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: a. CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or otherwise but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board has approved the initiation or bringing of such suit; b. FRIVOLOUS PROCEEDINGS. To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceedings were frivolous; c. INSURED CLAIMS. To make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise received payment (under any insurance policy, the Articles of Incorporation or Bylaws of the Company, contract or otherwise) of the amounts otherwise indemnifiable hereunder. If the Company makes any indemnification payment to Indemnitee in connection with any particular expense indemnified hereunder and Indemnitee has already received or thereafter receives, and is entitled to retain, duplicate payments in reimbursement of the same particular expense, then Indemnitee shall reimburse the Company in an amount equal to the lesser of (i) the amount of such duplicate payment and (ii) the full amount of such indemnification payment made by the Company; d. CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute; e. UNLAWFUL CLAIMS. To indemnify Indemnitee in any manner which a court of competent jurisdiction has finally determined to be unlawful; f. FAILURE TO SETTLE PROCEEDING. In the event that Indemnitee Fails to Pursue a Recommended Settlement of a Qualifying Claim, to indemnify Indemnitee (i) for amounts paid or payable in settlement of such Qualifying Claim in excess of the amount of such Recommended Settlement thereof, or (ii) for any cost and/or expenses directly related to such Qualifying Claim incurred by Indemnitee following the date upon which Indemnitee Fails To Pursue such Recommended Settlement. For purposes of this clause, "Qualifying Claim" shall 6 mean any claim the defense of which may be assumed by the Company under SECTION 3(e) above (i.e., any claim that (A) is not described in clause (i) of said SECTION 3(e) and (B) with respect to which the Company has acknowledged its unconditional duty to indemnify as described in clause (ii) of said SECTION 3(e)), "Recommended Settlement" shall mean a reasonable written settlement proposal, in full and final executable form in all material respects, and "Fails To Pursue" shall mean either (i) Indemnitee's failure to communicate a Recommended Settlement to the principal adverse party in the subject matter within 30 days after Indemnitee' receipt thereof from the Company, or (ii) Indemnitee's failure to agree to any Recommended Settlement that has been accepted by all adverse parties in the subject matter within 30 days after receipt thereof, provided the Company has (A) irrevocably deposited all funds necessary to satisfy all of Indemnitee's obligations under such Recommended Settlement in an account subject to Indemnitee's or a third party's control and (B) irrevocably taken all actions and given all instructions necessary or appropriate to permit such funds to be applied in satisfaction of such obligations of Indemnitee. g. BREACH OF EMPLOYMENT AGREEMENT. To indemnify Indemnitee for any breach by Indemnitee of any employment agreement between Indemnitee and the Company or any of its subsidiaries. 10. CONSTRUCTION OF CERTAIN PHRASES. For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees and/or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company or any subsidiary of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries. 11. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns. 7 13. ATTORNEYS' FEES. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were frivolous. 14. NOTICE. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked if addressed as provided for on the signature page of this Agreement, unless sooner received, or as subsequently modified by written notice. 15. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of California for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of California, or in Federal courts located in such State. 16. CHOICE OF LAW. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of California. 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. FUTURE MEDIA PRODUCTIONS, INC. a California corporation, as the Company By: ______________________________________ Name:_________________________________ Title:________________________________ Notice Address: Future Media Productions, Inc. 25136 Anza Drive Valencia, CA 91355 AGREED TO AND ACCEPTED: INDEMNITEE: ______________________________ ______________________________ Notice Address: ______________________________ ______________________________ ______________________________ 9 EX-10.6 8 EMPLOYMENT AGREEMENT - DAVID MOSS EXHIBIT 10.6 EMPLOYMENT AGREEMENT This Employment Agreement (this "AGREEMENT") is made and entered into as of the 26th day of August, 1998, by and between Future Media Productions, Inc., a California corporation (the "COMPANY"), and David Moss ("EXECUTIVE"). 1. ENGAGEMENT AND DUTIES. (a) Upon the terms and subject to the conditions set forth in this Agreement, the Company hereby engages and employs Executive as an officer of the Company, with the title and designation "Executive Vice President - Operations." Executive hereby accepts such engagement and employment. (b) During the term of this Agreement, Executive, as Vice President - Operations of the Company, shall report to the President, Chief Executive Officer and/or Board. Subject to the direction and control of the President, Chief Executive Officer and/or Board, Executive shall have active control of the day to day operations of the Company and shall perform all duties and enjoy all powers commonly incident to the position Vice President - Operations and otherwise as may be delegated to him from time to time by the President, Chief Executive Officer and/or Board. (c) Executive agrees to devote his full-time business time, energy and efforts to the business of the Company and will use his best efforts and abilities faithfully and diligently to promote the Company's business interests. (d) For so long as Executive is employed by the Company or is receiving severance under Section 5(a) or Section 5(c) of this Agreement, Executive shall not, directly or indirectly, as owner, partner, joint venturer, shareholder, employee, broker, agent, principal, trustee, corporate officer, director, licensor, or in any capacity whatsoever (i) engage in, become financially interested in, be employed by, render any consultation or business advice with respect to, or have any connection with, any business engaged in the development, design, manufacture, sale, marketing, utilization or exploitation of any products or services which are designed for the same purpose as, are similar to, or are otherwise competitive with, current, proposed or anticipated products or services of the Company, in any geographic area where, prior to or at the time of the termination of his employment, the business of the Company was being conducted or was proposed to be conducted in any manner whatsoever; provided, however, that the Executive may own any securities of any corporation which is engaged in such business and is publicly owned and traded but in an amount not to exceed at any one time five percent (5%) of any class of stock or securities of such corporation, or (ii) prepare or agree to undertake any action or conduct not permitted to be engaged in by Executive pursuant to the preceding clause (i). Notwithstanding the foregoing, the Company expressly acknowledges that Executive may: 1 (i) make and manage personal business investments of Executive's choice without consulting the Board; (ii) serve in any capacity with any civic, educational, charitable or trade organization; and (iii) serve as a member of the board of directors of other companies or businesses with the approval of the Board, which approval will not be unreasonably withheld. 2. DEFINITIONS. For the purposes of this Agreement, the following terms shall have the meanings set forth below: "BOARD" shall mean the Board of Directors of the Company, not including Executive. "COMPENSATION COMMITTEE" shall mean the members of the Board who have been appointed by the Board to determine compensation issues relating to the Company. "EMPLOYMENT COMMENCEMENT DATE" shall mean August 26, 1998. "EMPLOYMENT TERM" shall mean August 26, 1998 through August 26, 2003; provided, the term shall be extended through August 26, 2006 upon the mutual written consent of the Company and Executive and if so extended, "Employment Term" shall mean August 26, 1998 through August 26, 2006. "FOR CAUSE" shall mean, in the context of a basis for termination of Executive's employment with the Company, that: (a) Executive materially breaches any obligation, duty or agreement under this Agreement, which breach is not cured or corrected within 30 days of written notice thereof from the Company (except for breaches of Sections 1(d), 6 or 7 of this Agreement, which cannot be cured and for which the Executive shall have no opportunity to cure); (b) Executive is grossly negligent in the course of providing services to the Company, or commits any act of personal dishonesty, fraud or breach of fiduciary duty or trust against the Company; (c) Executive is convicted of, or pleads guilty or nolo contendere with respect to, theft, fraud or felony under federal or applicable state law; (d) Executive commits any act or acts of personal conduct that, following due investigation and determination by the Board of probable cause, gives rise to a likelihood of liability under federal or applicable state law for discrimination or sexual or other forms of harassment or other similar liabilities with respect to subordinate employees; or 2 (e) Executive commits continued and repeated material violations of specific directions of the Board, which directions are consistent with past practices of the Board with respect to governance matters, with this Agreement and with Executive's position, or continued and repeated substantive failure to perform duties assigned by or pursuant to this Agreement; provided that no termination shall be deemed For Cause under this subsection (e) unless Executive first receives written notice from the Company advising him of the specific acts or omissions alleged to constitute violations of written directions or a material failure to perform his duties, and such violations or material failure continue after he shall have had a reasonable opportunity to correct the acts or omissions so complained of, which opportunity shall in no event be less than 30 days. "PERSON" shall mean an individual or a partnership, corporation, trust, association, limited liability company, governmental authority or other entity. 3. COMPENSATION; EXECUTIVE BENEFIT PLANS. (a) BASE SALARY. The Company shall pay to Executive a base salary (the "BASE SALARY") at an annual rate of $395,000 during the Employment Term. The Base Salary shall be payable in installments throughout the year in the same manner and at the same times the Company pays base salaries to other executive officers of the Company. The Base Salary shall be automatically increased by 6% at each anniversary of the date of this agreement, subject to further upward adjustment in the sole discretion of the Compensation Committee. (b) BONUSES AND STOCK OPTIONS. Executive may be paid a bonus or bonuses in the sole discretion of the Compensation Committee of the Board. Also, it shall be within the sole discretion of the Compensation Committee of the Board whether to grant to Executive an option or options to purchase shares of Common Stock of the Company under any Company stock option plans and, if granted, the number of shares subject to such option(s) and the terms and conditions of such option(s). (c) REIMBURSEMENT. Executive shall be entitled to reimbursement from the Company for the reasonable costs and expenses that he incurs in connection with the performance of his duties and obligations under this Agreement in a manner consistent with the Company's practices and policies for reimbursements for executive officers. (d) ADDITIONAL BENEFITS. During the Term of this Agreement and on a basis comparable to the current practice of the Company, the Company shall provide Executive with, or reimburse Executive for, a cellular telephone and home office equipment for his use in performing his employment duties and obligations under this Agreement. In addition, during the Term of this Agreement, the Company shall pay to Executive an automobile allowance of $1,200 per month. (e) INSURANCE. During the term of this Agreement, the Company shall pay 100% of the premiums on term life insurance having a face value payable on death of Executive of no less than $1 million, net of all loans or encumbrances, to a beneficiary designated by the Executive. 3 (f) GROUP BENEFIT PLANS. The Company shall provide and pay for 100% of the cost of group health and dental plans for Executive and his dependents and Executive shall be eligible to participate in group life, disability, retirement and pension benefit plans the Company may provide to its employees from time to time, subject to the terms, conditions and limitations contained in the applicable plan documents and insurance policies; PROVIDED, HOWEVER, Executive's group health, dental, life, disability, retirement and pensions benefits shall in no case be less favorable than they are as of the Employment Commencement Date. (g) VACATION. Executive shall be entitled to four weeks of paid vacation each year during the term of this Agreement. Any vacation time shall be scheduled to minimize interference with the exercise of Executive's duties under this Agreement. (h) WITHHOLDING. The Company may deduct from any compensation payable to Executive the minimum amounts sufficient to cover applicable federal, state and/or local income tax withholding, old-age and survivors' and other social security payments, state disability and other insurance premiums and payments. 4. TERMINATION OF EMPLOYMENT. Executive's employment pursuant to this Agreement shall commence on the Employment Commencement Date and shall terminate upon the earlier of (i) the expiration of the Employment Term or (ii) on the earliest to occur of the following: (a) upon the death of Executive; (b) upon delivery to Executive of written notice of termination by the Company if Executive shall suffer a physical or mental disability which renders Executive unable to perform his duties and obligations under this Agreement for at least 120 days, whether or not consecutive, in any 12-month period; (c) upon delivery to Executive of written notice of termination by the Company For Cause; or (d) upon delivery to Executive of written notice of termination by the Company Other Than For Cause. 5. SEVERANCE COMPENSATION. (a) If Executive's employment is terminated pursuant to Section 4(a) (death), the Company shall pay to the Executive or his estate his full Base Salary through the end of the month of Executive's death, and Executive or his estate shall be entitled to a prorated share of any bonus or benefits as provided under Section 3 hereof for the calendar year during which his death occurred. If Executive's employment is terminated pursuant to Section 4(b) (disability), Executive shall be entitled to continue to receive 50% of his then current Base Salary from the Company in accordance with Section 3(a) of this Agreement, payable at the same time and in the same manner 4 as if Executive's employment had not terminated, through the later of (i) the end of the Employment Term or (ii) that date which is one year after the date Executive's employment was terminated. Any disability benefits that Executive does receive shall be offset against any amounts payable to Executive pursuant to this Section. Executive agrees to cooperate fully with the Company and any disability insurance carrier with respect to any claim for disability benefits. In addition to the foregoing, if Executive's employment is terminated due to death or disability, the Company shall continue to provide group health and dental insurance to Executive and his immediate family, at the same levels as such insurance was provided prior to termination, through the end of the Employment Term. (b) If Executive's employment is terminated pursuant to Section 4(c) (by the Company For Cause), Executive's Base Salary and all benefits under Section 3 shall cease as of the date of termination, and Executive shall not be entitled to any bonus for the calendar year during which his employment shall be terminated or at any time thereafter. In the event of termination of Executive's employment pursuant to Section 4(c) (by the Company For Cause), and subject to applicable law and regulations, the Company shall be entitled to offset against any payments due Executive the loss and damage, if any, which shall have been suffered by the Company as a result of the acts or omissions of Executive giving rise to termination under Section 4(c). The foregoing shall not be construed to limit any cause of action, claim or other rights which the Company may have against Executive in connection with such acts or omissions. (c) If Executive's employment is terminated pursuant to Section 4(d) (by the Company Other Than For Cause) prior to the end of the Employment Term, Executive shall be entitled to receive a lump sum of $1,000,000 payable in full no later than 30 days after the date of termination. In addition, Executive shall continue to receive his Base Salary (including the automatic increases) in accordance with Section 3(a) of this Agreement through the end of the Employment Term payable at the same time and in the same manner as if Executive's employment had not terminated. Executive shall have no duty to seek other employment upon such termination. Executive acknowledges that the Company has the right to terminate Executive's employment Other Than For Cause and that such termination shall not be a breach of this Agreement or any other express or implied agreement between the Company and Executive. Accordingly, in the event of such termination, Executive shall be entitled only to the compensation and benefits specifically provided for in this Agreement in the event of such termination, and shall not have any other rights to any compensation or damages from the Company for breach of contract. 6. COVENANT NOT TO SOLICIT. (a) During the period Executive is employed by the Company and through the first anniversary of the date Executive's employment with the Company is terminated, Executive will not directly or indirectly, either alone or by action in concert with others: (i) induce any employee of the Company to engage in any activity in which Executive is prohibited from engaging by Section 1(d) of this Agreement or to terminate his or her employment with the Company; or (ii) employ or offer employment or induce any Person to employ or offer employment to anyone who is or was within the 12 months prior to the date of the proscribed action employed by the 5 Company; or (iii) induce or attempt to induce any customer, supplier, licensee, licensor or other business relationship of the Company to discontinue or reduce its business with the Company, or in any way interfere with the relationship between any such customer, supplier, licensee or business relationship and the Company (provided, this prohibition shall not prevent Executive from doing business with such supplier, licensee or other business relationship of the Company in a manner which is not adverse to the Company); or (iv) solicit or accept any business whatsoever from any of the customers with which the Company did business during the Executive's engagement or employment by the Company. All of the provisions of this Section 6(a) shall continue to apply through the first anniversary of the termination of Executive's employment with the Company (the "POST-EMPLOYMENT PERIOD"), except that during the Post-Employment Period, Executive may work with or for, or solicit or accept business from suppliers or licensees of the Company so long as such business activity by the Executive is not detrimental to the Company and such actions do not otherwise interfere with Executive's other obligations under this Agreement. (b) Executive acknowledges that the Company conducts business on a world- wide basis, that its sales and marketing prospects are for continued expansion into world markets and that, therefore, the territorial and time limitations set forth in Section 1(d) and in this Section 6 are reasonable and properly required for the adequate protection of the business of the Company. In the event any such territorial or time limitation is deemed to be unreasonable by a court of competent jurisdiction, Executive agrees to the reduction of the territorial or time limitation to the area or period which such court deems reasonable. (c) If any portion of the restrictions set forth in Section 1(d) and in this Section 6 should, for any reason whatsoever, be declared invalid by a court of competent jurisdiction, the validity or enforceability of the remainder of such restrictions shall not thereby be adversely affected. (d) The existence of any claim or cause of action by Executive against the Company shall not constitute a defense to the enforcement by the Company of the restrictive covenants set forth in Section 1(d) and in this Section 6, but such claim or cause of action shall be litigated separately. 7. CONFIDENTIALITY. Executive will not at any time (whether during or after his employment with the Company) disclose or use for his own benefit or purposes or the benefit or purposes of any other Person, other than the Company, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, financial methods, plans, or the business and affairs of the Company generally. Executive agrees that upon termination for any reason of his employment by the Company, he will immediately return to the Company all memoranda, books, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company; provided, however, that Executive may retain such materials as in the reasonable discretion of the Board are required to fulfill his duties, if 6 applicable, as a director of the Company (retention being permitted by Executive until such time as the Board requests the return of such materials). Executive further agrees that he will not retain or use at any time any trade name, trademark or other proprietary business designation used or owned in connection with the business of the Company. 8. COPYRIGHT AND TRADEMARKS. (a) All right, title and interest, of every kind whatsoever, in the United States and throughout the world, in (i) any work, including the copyright thereof (for the full terms and extensions thereof in every jurisdiction), created by the Executive at any time during the term of this Agreement and all material embodiments of the work subject to such rights; and (ii) all inventions, ideas, discoveries, designs and improvements, patentable or not, made or conceived by the Executive at any time during the term of this Agreement, shall be and remain the sole property of the Company without payment of any further consideration to the Executive other than as set forth herein, and each such work shall, for purposes of United States copyright law, be deemed created by the Executive pursuant to his duties under this Agreement and within the scope of his employment and shall be deemed a work made for hire; and Executive agrees to assign, at the Company's expense, and the Executive does hereby assign, all of his right, title and interest in and to all such works, copyrights, materials, inventions, ideas, discoveries, designs and improvements, patentable or not, and any copyrights, letters patent, trademarks, trade secrets, and similar rights, and the applications therefor, which may exist or be issued with respect thereto. For the purposes of this Section 8, "WORKS" shall include all materials created during the term of this Agreement, whether or not ever used by or submitted to the Company, including, without limitation, any work which may be the subject matter of a copyright under the United States copyright law. In addition to its other rights, the Company may copyright any such work in its name in the United States in accordance with the requirements of the United States copyright law and the Universal Copyright Convention and any other convention or treaty to which the United States is or may become a party. In accordance with California Labor Code Sections 2870 and 2872, the provisions of this Section 8(a) shall not apply to any works that Executive developed entirely on his own time without using the Company's equipment, supplies, facilities or proprietary information, except for those works that either: (i) relate at the time of conception or reduction to practice of the work to the Company's business, or actual or demonstrably anticipated research or development of the Company; or (2) result from any work performed by Executive for the Company. (b) Whenever the Company shall so request, whether during or after the term of this Agreement, the Executive shall execute, acknowledge and deliver all applications, assignments or other instruments; make or cause to be made all rightful oaths; testify in all legal proceedings; communicate all known facts which relate to such works, copyrights, inventions, ideas, discoveries, designs and improvements; perform all lawful acts and otherwise render all such assistance as the Company may deem necessary to apply for, obtain, register, enforce and maintain any copyrights, letters patent and trademark registrations of the United States or any foreign jurisdiction or under the Universal Copyright Convention (or any other convention or treaty to which the United States is or may become a party), or otherwise to protect the Company's interests therein, including any which the Company shall deem necessary in 7 connection with any proceeding or litigation involving the same. The Company shall reimburse the Executive for all reasonable out-of-pocket costs incurred by the Executive in testifying at the Company's request or in rendering any other assistance requested by the Company pursuant to this Section 8. All registration and filing fees and similar expenses shall be paid by the Company. 9. SPECIFIC PERFORMANCE. Executive acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Sections 1(d), 6 or 7 would be inadequate and, in recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. In addition, the Executive recognizes that the services to be rendered by him under this Agreement are of a special, unique, unusual, extraordinary and intellectual character involving skill of the highest order and giving them peculiar value, the loss of which cannot be adequately compensated in damages. Consequently, in the event of a breach of this Agreement by the Executive, the Company shall be entitled to injunctive relief or any other legal or equitable remedies. The Executive agrees that the Company also may recover by appropriate action the amount of the actual damage caused the Company by any failure, refusal or neglect of the Executive to perform his agreements, representations and warranties contained in this Agreement. The remedies provided in this Agreement shall be deemed cumulative and the exercise of one shall not preclude the exercise of any other remedy at law or in equity for the same event or any other event. 10. RESOLUTION OF DISPUTES. (a) Except as provided in subsection (c) below, any controversy or claim between or among the parties, relating to Executive's employment with the Company, including but not limited to those arising out of or relating to this Agreement or any agreements or instruments relating hereto or delivered in connection herewith and any claim based on or arising from an alleged tort, shall at the request of any party be determined by arbitration. The arbitration shall be conducted in Los Angeles, California, in accordance with the United States Arbitration Act (Title 9 of the United States Code), notwithstanding any choice of law provision in this Agreement, and under the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA"). The parties shall have the right to review and approve a panel of prospective arbitrators supplied by AAA, but the arbitration shall be conducted by a single arbitrator selected from the approved panel by AAA or by stipulation of the parties. The arbitrator shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator. The arbitrator shall be entitled to order specific performance of the obligations imposed by this Agreement. Judgment upon the arbitration award may be entered in any court having jurisdiction. (b) All decisions of the arbitrator shall be final, conclusive and binding on all parties and shall not be subject to judicial review. All costs of the arbitration shall be borne by the party which is not the Prevailing Party (as defined in Section 11(h) of this Agreement). If required, each 8 party shall advance 50% of any costs of the arbitration required to be advanced, subject to the right of the non-Prevailing Party to reimbursement. (c) Subsection (a) above does not prohibit a party from seeking and obtaining injunctive relief from a court of competent jurisdiction pending the outcome of arbitration. A party bringing an action for injunctive relief shall not be deemed to have waived its right to demand arbitration of all disputes. (d) If Executive resigns, Executive agrees that he will not assert that the Company breached this Agreement unless prior to such resignation Executive provides written notice to the Chairman of the Company describing the alleged breach and the Company does not cure, or take appropriate steps to cure, such breach within 30 days of receipt of such notice. 11. MISCELLANEOUS. (a) NOTICES. All notices, requests, demands and other communications (collectively, "NOTICES") given pursuant to this Agreement shall be in writing, and shall be delivered by personal service, courier, facsimile transmission or by United States first class, registered or certified mail, addressed to the following addresses: (i) If to the Company, to: Future Media Productions, Inc. 25136 Anza Drive Valencia, California 91355 Attn: President (ii) If to Executive, to: Attn: David Moss Future Media Productions, Inc. 25136 Anza Drive Valencia, California 91355 Any Notice, other than a Notice sent by registered or certified mail, shall be effective when received; a Notice sent by registered or certified mail, postage prepaid return receipt requested, shall be effective on the earlier of when received or the third day following deposit in the United States mails (or on the seventh day if sent to or from an address outside the United States). Any party may from time to time change its address for further Notices hereunder by giving notice to the other party in the manner prescribed in this Section. (b) ENTIRE AGREEMENT. This Agreement contains the sole and entire agreement and understanding of the parties with respect to the entire subject matter hereof, and any and all prior discussions, negotiations, commitments and understandings, whether oral, written or implied, related to the subject matter hereof are hereby extinguished and superseded. No representations, 9 oral or otherwise, express or implied, other than those contained in this Agreement have been relied upon by either party to this Agreement. (c) SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. (d) GOVERNING LAW. This Agreement has been made and entered into in the State of California and shall be construed in accordance with the laws of the State of California. (e) CAPTIONS. The various captions of this Agreement are for reference only and shall not be considered or referred to in resolving questions of interpretation of this Agreement. (f) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. (g) BUSINESS DAY. If the last day permissible for delivery of any notice under any provision of this Agreement, or for the performance of any obligation under this Agreement, shall be other than a business day, such last day for such notice or performance shall be extended to the next following business day (provided, however, under no circumstances shall this provision be construed to extend the date of termination of this Agreement). (h) ATTORNEYS' FEES. If any action, proceeding or arbitration is brought to enforce or interpret any provision of this Agreement, the Prevailing Party shall be entitled to recover as an element of its costs, and not its damages, its reasonable attorneys' fees, costs and expenses. The "PREVAILING PARTY" is the party who would have been entitled to recover its costs under the California Code of Civil Procedure had the action been maintained in the Superior Court of California regardless of whether there is final judgment. A party not entitled to recover its costs may not recover attorneys' fees. No sum for attorneys' fees shall be counted in calculating the amount of a judgment for purposes of determining whether a party is entitled to recover its costs or attorneys' fees. (i) ADVICE FROM INDEPENDENT COUNSEL. The parties hereto understand that this Agreement is legally binding and may affect such party's rights. Each party represents to the other that it has received legal advice from counsel of its choice regarding the meaning and legal significance of this Agreement. (j) INTERPRETATION. Should any provision of this Agreement require interpretation, it is agreed that any court or arbitrator interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against any Person by reason of the rule of construction that a document is to be construed more strictly against the Person who itself or through its agent prepared the same, it being agreed that all Parties have participated in the preparation of this Agreement. 10 (k) SURVIVAL. The termination of the Executive's employment hereunder shall not affect the enforceability of Sections 1(d), 6, 7 and 8. (l) WAIVER OF JURY TRIAL. IF NOTWITHSTANDING THE AGREEMENT THAT ALL DISPUTES BE SUBMITTED TO BINDING ARBITRATION, A DISPUTE IS SUBMITTED TO A COURT, EACH PARTY HERETO WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY DISPUTE IN CONNECTION WITH OR RELATING TO THIS AGREEMENT, ANY RELATED AGREEMENT OR ANY MATTERS DESCRIBED OR CONTEMPLATED HEREIN OR THEREIN, AND AGREE TO TAKE ANY AND ALL ACTION NECESSARY OR APPROPRIATE TO EFFECT SUCH WAIVER. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS WRITTEN CONSENT TO A TRIAL BY THE COURT. 11 IN WITNESS WHEREOF, the undersigned parties hereby execute this Agreement as of the date first set forth above. Company: FUTURE MEDIA PRODUCTIONS, INC. By: /s/ ALEX SANDEL ------------------------------- Its: President ------------------------------ EXECUTIVE: /s/ DAVID MOSS ---------------------------------- David Moss 12 EX-10.7 9 WARRANT AGREEMENT DATED JANUARY 1, 1998 EXHIBIT 10.7 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED OR OTHERWISE HYPOTHECATED WITHOUT REGISTRATION UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION THEREFROM. WARRANT AGREEMENT This WARRANT AGREEMENT (the "AGREEMENT") is made and entered into as of January 1, 1998, by and between Future Media Productions, Inc., a California corporation (the "COMPANY"), and David Moss ("HOLDER"). In consideration of these premises and the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the Company and Holder agree as follows: 1. GRANT OF WARRANT. For good and valuable consideration, receipt of which is hereby acknowledged, the Company hereby grants to Holder the right and option (the "WARRANT"), upon the terms and subject to the conditions set forth in this Agreement, to purchase all or any portion of 611 shares of the common stock of the Company (the "WARRANT SHARES") at an exercise price of $1 per share (the "EXERCISE PRICE"). 2. TERM OF WARRANT. (a) The Warrant shall terminate and expire at 5:00 p.m., Los Angeles time, on December 31, 2007 (the "WARRANT EXPIRATION DATE"), unless sooner terminated as provided herein. (b) If Holder shall cease to be in the employ of the Company for any reason other than Holder's death or permanent disability (a "SPECIAL TERMINATING EVENT"), Holder shall have the right, subject to the provisions of Section 2(d) below, to exercise the Warrant at any time within 30 days after the date Holder ceased to be employed by the Company, but in no case later than the Warrant Expiration Date. The Warrant may be exercised during such period only with respect to the Warrant Shares that were vested as of the date Holder's employment terminated and only to the extent the Warrant had not previously been exercised. To the extent the Warrant remains unexercised at the end of such period, the Warrant shall terminate. The Board, in its sole and absolute discretion, shall determine whether or not authorized leaves of absence shall constitute termination of employment for purposes of this Agreement. (c) If a Special Terminating Event occurs while Holder is in the employ of the Company, then Holder, Holder's executors or administrators or any person or persons acquiring the Warrant directly from Holder by bequest or inheritance, shall have the right to exercise the Warrant at any time within six months after the Special Terminating Event, but in no case later than the Warrant Expiration Date. The Warrant may be exercised during such period only with respect to the Warrant Shares that were vested as of the Special Terminating Event and only to the extent the Warrant had not previously been exercised. To the extent the Warrant remains unexercised at the end of such period, the Warrant shall terminate. (d) If Holder shall be terminated "for cause" by the Company, the Warrant shall terminate immediately. For purposes of this Agreement, "for cause" shall mean: (i) the failure or refusal by Holder to perform his or her duties to the Company; or (ii) Holder's willful disobedience of any orders or directives of the Board or any officers thereof acting under the authority thereof or such person's deliberate interference with the compliance by other employees of the Company with any such orders or directives; or (iii) the failure or refusal of Holder to abide by or comply with the written policies, standard procedures or regulations of the Company; or (iv) any willful or continued act or course of conduct by Holder which the Board in good faith determines might reasonably be expected to have a material detrimental effect on the Company or the business, operations, affairs or financial position thereof; or (v) the committing by Holder of any fraud, theft, embezzlement or other dishonest act against the Company; or (vi) the determination by the Board, in good faith and in the exercise of reasonable discretion, that Holder is not competent to perform his or her duties of employment. (e) For purposes of this Agreement, "permanent disability" shall mean permanent and total disability as defined by the Board. Holder shall not be considered permanently disabled unless he furnishes proof of such disability in such form and manner, and at such times, as the Board may from time to time require. 3. VESTING. (a) The Warrant is fully vested and all of the Warrant Shares may be immediately exercised. (b) Notwithstanding anything to the contrary contained in this Agreement, the Warrant may not be exercised, in whole or in part, unless and until any then-applicable requirements of all state and federal laws and regulatory agencies shall have been fully complied with to the satisfaction of the Company and its counsel. 4. EXERCISE OF WARRANT. There is no obligation to exercise the Warrant, in whole or in part. The Warrant may be exercised, in whole or in part, only by delivery to the Company of: 2 (a) written notice of exercise in form and substance identical to EXHIBIT "A" attached to this Agreement stating the number of Warrant Shares then being purchased (the "PURCHASED SHARES"); and (b) payment of the Exercise Price of the Purchased Shares in cash, by check or by wire transfer. Upon receipt of the foregoing, the Company shall promptly issue in the name of the Holder a stock certificate evidencing the Purchased Shares by such exercise and deliver such certificate to the Holder. 5. RESTRICTIONS ON TRANSFER. (a) HOLDER AGREES THAT THE WARRANT MAY NOT BE TRANSFERRED, SOLD, ASSIGNED OR HYPOTHECATED EXCEPT BY OPERATION OF LAW. HOLDER FURTHER AGREES THAT THE COMPANY SHALL HAVE NO OBLIGATION TO EFFECT ANY TRANSFER OF THE WARRANTS UNLESS THE TRANSFEREE SHALL HAVE EXECUTED AN AGREEMENT OBLIGATING THE TRANSFEREE TO COMPLY WITH ALL TERMS AND CONDITIONS OF THIS AGREEMENT APPLICABLE TO THE TRANSFEROR. (b) Prior to any exercise of the Warrants or any transfer or attempted transfer of any of the Warrants, Warrant Shares, or Purchased Shares (the "SECURITIES"), the Holder shall give the Company written notice of Holder's intention so to do, describing briefly the manner of any such proposed exercise, sale or transfer. The Holder may effect such exercise or transfer, provided that such exercise or transfer is not prohibited by this Section 5 and such exercise or transfer complies with all applicable federal and state securities laws and regulations. If in the reasonable opinion of counsel for the Company, notwithstanding the opinion of counsel to a Holder to the contrary, if any, the proposed exercise or transfer of such Securities may not be effected without registration thereof under the Securities Act and such registration has not been accomplished, the Company shall, as promptly as practicable, so notify the Holder and the Holder shall not consummate the proposed transfer. (c) Each certificate for Purchased Shares initially issued upon the exercise of the Warrants, shall be stamped or otherwise imprinted with a legend in substantially the following form: "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE CONDITIONS SPECIFIED IN THAT CERTAIN WARRANT AGREEMENT DATED JANUARY 1, 1998. NO TRANSFER, SALE, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR OTHER DISPOSITION OF THE SHARES REPRESENTED BY THIS CERTIFICATE SHALL BE VALID OR EFFECTIVE UNLESS SUCH TRANSFER, SALE, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR OTHER DISPOSITION IS IN COMPLIANCE WITH THE PROVISIONS OF THE WARRANT AGREEMENT AND UNTIL REGISTERED OR THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO IT, THAT THE TRANSACTION IS EXEMPT FROM REGISTRATION, AND UNTIL SUCH CONDITIONS AS ARE CONTAINED IN THE WARRANT AGREEMENT HAVE BEEN FULFILLED. A COPY OF THE FORM OF THE WARRANT AGREEMENT IS ON FILE AT THE OFFICES OF FUTURE MEDIA PRODUCTIONS, INC. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE 3 OF THIS CERTIFICATE, AGREES TO BE BOUND BY THE PROVISIONS OF THE WARRANT AGREEMENT." Subject to the provisions of Section 5(e) below, if the Purchased Shares are no longer subject to the transfer restrictions imposed by applicable state and Federal securities law because either (i) the Purchased Shares or the resale of the Purchased Shares has been registered on a registration statement declared effective by the Commission, or (ii) in the reasonable opinion of counsel for the Company, or the opinion of counsel for Holder, which opinion is reasonably satisfactory to counsel for the Company, all future dispositions of any of the Purchased Shares by the contemplated transferee would be exempt from or would satisfy the registration and prospectus delivery requirements of the Securities Act and the qualification requirements of the applicable state securities laws, then the restrictions on transfer of such securities contained in this Section 5(c) shall not apply to any subsequent transfer thereof and the Company shall, promptly upon request by Holder, remove the legend set forth above and shall promptly issue, in exchange for the certificate bearing such legend, a certificate without such legend to Holder. (d) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Company's initial public offering, Holder shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to the Securities without the prior written consent of the Company or its underwriters, for such period of time from and after the effective date of such registration statement as may be requested by the Company or such underwriters; PROVIDED, HOWEVER, that in no event shall such period exceed 180 days. This Section 5(d) shall only remain in effect for the two-year period immediately following the effective date of the Company's initial public offering and shall thereafter terminate and cease to be in force or effect. Holder agrees to execute and deliver to the Company such further documents or instruments as the Company reasonably determines to be necessary or appropriate to effect the provisions of this Section 5(d). In order to enforce the provisions of this Section 5(d), the Company may impose stop-transfer instructions with respect to the Securities until the end of the applicable stand-off period. (e) So long as the Company is an S Corporation, none of the Securities shall be transferred, sold, assigned or hypothecated (with or without consideration) and the Company shall not be required to register any such transfer and the Company may instruct its transfer agent not to register any such transfer to any person who is not eligible to be an S Corporation shareholder as defined in Section 1361 of the Internal Revenue Code, or to any person if such transfer would, in the opinion of the Company's counsel, result in the termination or revocation of the Company's taxable status as an S Corporation. (f) In the event of any stock dividend, stock split, recapitalization or other transaction resulting in an adjustment under Section 6 hereof, then any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to or in exchange for the Securities or shall be immediately subject to the provisions of this Section 5, to the same extent such Securities are at such time covered by such provisions. 4 6. ADJUSTMENTS UPON RECAPITALIZATION. (a) In the event the Company should at any time or from time to time after the date of this Warrant (the "ISSUANCE DATE") fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock (hereinafter referred to as "COMMON STOCK EQUIVALENTS") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend, distribution, split or subdivision if no record date is fixed), the number of Warrant Shares shall be increased in proportion to such increase in the aggregate number of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents and the Exercise Price shall be appropriately decreased (i.e., the per share Exercise Price shall be adjusted such that the aggregate exercise price for all Warrant Shares issuable upon exercise of the Warrants in full, as adjusted, shall remain the same). (b) If the number of shares of Common Stock outstanding at any time after the Issuance Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the number of Warrant Shares shall be decreased in proportion to such decrease in the aggregate number of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents and the Exercise Price shall be appropriately increased (i.e., the per share Exercise Price shall be adjusted such that the aggregate exercise price for all Warrant Shares issuable upon exercise of the Warrants in full, as adjusted, shall remain the same). (c) In case of any capital reorganization, any reclassification of the Common Stock (other than a change in par value or a recapitalization described in Section 6(a) or 6(b) of this Agreement), or the consolidation of the Company with, or a sale of substantially all of the assets of the Company to (which sale is followed by a liquidation or dissolution of the Company), or merger of the Company with, another person, the Holder shall thereafter be entitled upon exercise of the Warrant to purchase the kind and number of shares of stock or other securities or the amount or value of any cash, assets or other property receivable upon such event by a holder of the number of shares of the Common Stock which the Warrant entitles the holder of the Warrant to purchase from the Company immediately prior to such event; and in any such case, appropriate adjustment shall be made in the application of the provisions set forth in this Agreement with respect to the Holder's rights and interests thereafter, to the end that the provisions set forth in this Agreement (including the specified changes and other adjustments to the Exercise Price) shall thereafter be applicable in relation to any shares or other property thereafter purchasable upon exercise of the Warrant. (d) In the event the Company should at any time or from time to time after the Issuance Date fix a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in securities or rights convertible into, or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock or the 5 securities or such rights of any other corporation (other than Common Stock Equivalents covered be Section 6(a) hereof), the Holder shall thereafter be entitled upon exercise of the Warrant to receive, in addition to the Purchased Shares being purchased upon such exercise, the securities or rights convertible into securities receivable upon such event by a holder of the number of shares of the Common Stock which the Holder is purchasing upon such exercise. (e) If it is expected that there will occur any event described in Section 6(c) or 6(d) hereof, the Company shall give the holder of the Warrants notice thereof, which notice shall be given at such time or times as notice is given to the holders of the Company's Common Stock. (f) The provisions of this Section 6 are intended to be exclusive, and the holder of the Warrant shall have no rights other than as set forth in this Agreement (and the rights of a stockholder upon exercise of the Warrant) upon the occurrence of any of the events described in this Section 6. (g) The grant of the Warrant shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes in its capital or business structure, or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 7. REPRESENTATIONS AND WARRANTIES OF HOLDER. Holder makes the following representations and warranties: (a) Holder is acquiring the Warrants for its own account with the present intention of holding such securities for investment purposes only and not with a view to, or for sale in connection with, any distribution of such securities (other than a distribution in compliance with all applicable federal and state securities laws). (b) Holder is an experienced and sophisticated investor and has such knowledge and experience in financial and business matters that it is capable of evaluating the relative merits and the risks of an investment in the Warrants and in the Warrant Shares and of protecting its own interests in connection with this transaction. (c) Holder is willing to bear and is capable of bearing the economic risk of an investment in the Warrants and the Warrant Shares. (d) The Company has made available, prior to the date of this Agreement, to Holder the opportunity to ask questions of the Company and its officers, and to receive from the Company and its officers information concerning the terms and conditions of the Warrants and this Agreement and to obtain any additional information with respect to the Company, its business, operations and prospects, as reasonably requested by Holder. (e) Holder is an "accredited investor" as that term is defined under Rule 501(a) of Regulation D promulgated by the Securities and Exchange Commission under the Act. 6 (f) For purposes of the application of federal and state securities laws, Holder acknowledges that the offer and sale of the Warrants to such Holder occurred in the State of California and that such Holder is a resident of the State of California. 8. LEGEND ON STOCK CERTIFICATES. Holder agrees that all certificates representing the Securities will be subject to such stock transfer orders and other restrictions as the Company may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission (the "COMMISSION"), any stock exchange upon which the Common Stock is then listed and any applicable federal or state securities laws, and the Company may cause the following legend, or such other legend as the Company may deem appropriate, to be put on such certificates to make appropriate reference to such restrictions: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED OR OTHERWISE HYPOTHECATED WITHOUT REGISTRATION UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION THEREFROM. 9. NO RIGHTS AS STOCKHOLDER. Holder shall have no rights as a stockholder of the Company with respect to the Securities until the date of the issuance to Holder of a stock certificate or stock certificates evidencing such Securities. Except as may be provided in Paragraph 6 of this Agreement, no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued. 10. MODIFICATION. The Board or a committee thereof may modify, extend or renew the Warrant or accept the surrender of, and authorize the grant of a new option in substitution for, the Warrant (to the extent not previously exercised). No modification of the Warrant shall be made without the consent of Holder which would alter or impair any rights of Holder under the Warrant. 11. COVENANTS OF HOLDER AND THE COMPANY. (a) PIGGYBACK REGISTRATION OF WARRANT SHARES. If, at any time during the period commencing on the date that is 180 days from the date upon which any initial public offering ("IPO") is declared effective by the Commission and on or before December 31, 2002, the Company shall propose to register any shares of Common Stock (but excluding any shares or securities being registered pursuant to Form S-8 or Form S-4 or any successor form thereto), the Company shall (i) give the Holder written notice, or telegraphic, telecopy or telephonic notice followed as soon as practicable by written confirmation thereof, of such proposed registration at least 20 business days prior to the filing of such registration statement and, (ii) upon written 7 notice, or telegraphic or telephonic notice followed as soon as practicable by written confirmation thereof, given to the Company by the Holder within 15 days after the giving of such written confirmation or written notice by the Company, the Company shall include or cause to be included in any such registration statement all or such portion of the Warrant Shares as the Holder may request; PROVIDED, HOWEVER, that the Company may at any time withdraw or cease proceeding with any such registration if it shall at the same time withdraw or cease proceeding with the registration of the Common Stock originally proposed to be registered; and PROVIDED FURTHER, that in connection with any registered public offering involving an underwriting, the managing underwriter may (if in its reasonable opinion marketing factors so require) limit the number of securities (including any Warrant Shares) included in such offering (other than securities of the Company). In the event of any such limitation, the total number of Warrant Shares to be offered for the account of the Holder in the registration shall be reduced in proportion to the respective number of shares requested to be included therein by all holders of the Company's Common Stock (other than the Company) entitled to include shares of Common Stock in the registration to the extent necessary to reduce the total number of shares proposed to be registered to the number of shares recommended by the managing underwriter. (b) COMPANY'S OBLIGATIONS IN REGISTRATION. The following provisions shall also be applicable at the sole cost and expense of the Company in the case of registrations under Section 11: i) Following the effective date of such registration statement, the Company shall, upon the request of the Holder, forthwith supply such number of prospectuses meeting the requirements of the Securities Act as shall be requested by the Holder to permit it to make a public distribution of all of its Warrant Shares, provided that the Holder shall from time to time furnish the Company with such appropriate information (relating to the intentions of the Holder) in connection therewith as the Company shall request in writing. ii) the Company shall bear the entire cost and expense of the registration of securities provided for in this Section (but not the selling expenses of the Holder). iii) the Company shall indemnify and hold harmless the Holder from and against any and all losses, claims, damages and liabilities (including reasonable fees and expenses of counsel) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement or any prospectus included therein required to be filed or furnished by reason of this Section or otherwise or in any application or other filing under, the Securities Act or any other applicable Federal or state securities law, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein (i.e., in any such registration statement, prospectus, application or other filing) or necessary to make the statements therein not misleading, to which such person may become subject, or any violation or alleged violation by the Company to which such Person may become subject, under the Securities Act, the Exchange Act, or other Federal or state laws or regulations, at common law or otherwise, except to the extent that such losses, claims, damages or liabilities are caused by any such untrue statement or alleged untrue statement or omission or alleged omission based upon and in strict conformity with written information furnished to the Company by such person expressly for use therein; PROVIDED HOWEVER, that the Holder shall at the same time 8 indemnify the Company, its directors, each officer signing the related registration statement, and each person, if any, who controls the Company within the meaning of the Securities Act, from and against any and all losses, claims, damages and liabilities (including reasonable fees and expenses of counsel) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement or any prospectus included therein required to be filed or furnished by reason of this Section, or otherwise or in any application or other filing under, the Securities Act or any other applicable Federal or state securities law, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein (i.e., in any such registration statement, prospectus, application or other filing) or necessary to make the statements therein not misleading, to which such person may become subject, or any violation or alleged violation by the Holder to which the Company, its directors, each officer signing the related registration statement, and each person, if any, who controls the Company within the meaning of the Securities Act, may become subject, under the Securities Act, the Exchange Act, or other Federal or state laws or regulations, at common law or otherwise, to the extent that such losses, claims, damages or liabilities are caused by any such untrue statement or alleged untrue statement or omission or alleged omission based upon and in strict conformity with written information furnished to the Company by the Holder expressly for use therein. (c) In the event any person entitled to indemnification hereunder receives in writing a complaint, claim or other written notice of any loss, claim, damage, liability or action giving rise to a claim for indemnification under Section 11(b)(iii), the person claiming indemnification under Section 11(b)(iii) shall promptly notify the person or persons against whom indemnification is sought (the "INDEMNITOR") of such complaint, notice, claim or action, and the Indemnitor shall have the right to investigate and defend any such loss, claim, damage, liability or action. The person claiming indemnification shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall not be at the expense of the Indemnitor. In no event shall the Indemnitor be obligated to indemnify any person for any settlement of any claim or action effected without the Indemnitor's consent, which consent shall not be unreasonably withheld. 12. DISPUTES. (a) ARBITRATION. All disputes arising in connection with this Agreement shall be finally settled by arbitration in Los Angeles, California, in accordance with the rules of the American Arbitration Association (the "RULES OF ARBITRATION") and judgment on the award rendered by the arbitration panel (the "ARBITRATION PANEL") may be entered in any court or tribunal of competent jurisdiction. (b) Any party which desires to initiate arbitration proceedings as provided in Section 12(a) above may do so by delivering written notice to the other party (the "ARBITRATION NOTICE") specifying (A) the nature of the dispute or controversy to be arbitrated, (B) the name and address of the arbitrator appointed by the party initiating such arbitration and (C) such other matters as may be required by the Rules of Arbitration. 9 (c) The Parties shall appoint a single arbitrator who shall constitute the Arbitration Panel hereunder. Should the parties not agree upon the appointment of the arbitrator within 30 days of delivery of the Arbitration Notice, the Arbitrator shall be appointed in accordance with the Rules of Arbitration. (d) In any arbitration proceeding conducted pursuant to the provisions of this Section 12, both parties shall have the right to discovery, to call witnesses and to cross-examine the opposing party's witnesses, either through legal counsel, expert witnesses or both. (e) FINALITY OF DECISION. All decisions of the Arbitration Panel shall be final, conclusive and binding on all parties and shall not be subject to judicial review. The arbitrator shall divide all costs (other than fees of counsel) incurred in conducting the arbitration proceeding and the final award in accordance with what they deem just and equitable under the circumstances. (f) LIMITATIONS. Notwithstanding anything to the contrary contained in Sections 12(a) and 12(b) above, any claim by either party for injunctive or other equitable relief, including specific performance, may be brought in any court of competent jurisdiction and any judgment, order or decree relating thereto shall have precedence over any arbitral award or proceeding. 13. GENERAL PROVISIONS. (a) FURTHER ASSURANCES. Holder shall promptly take all actions and execute all documents requested by the Company which the Company deems to be reasonably necessary to effectuate the terms and intent of this Agreement. (b) NOTICES. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be given to the parties hereto as follows: If to the Company, to: Future Media Productions, Inc. 2536 Anza Drive Valencia, California 91355 Attention: Chief Executive Officer If to Holder, to the address set forth in the records of the Company, or at such other address or addresses as may have been furnished by either party in writing to the other party hereto. Any such notice, request, demand or other communication shall be effective (i) if given by mail, two days after such communication is deposited in the mail by first-class certified mail, return receipt requested, postage prepaid, addressed as aforesaid, or (ii) if given by any other means, when delivered at the address specified in this subparagraph (b). 10 (c) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE IN, AND TO BE PERFORMED WITHIN, THAT STATE. JURISDICTION AND VENUE OVER ANY LEGAL ACTION BROUGHT HEREUNDER SHALL RESIDE EXCLUSIVELY IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA. EACH OF THE PARTIES HERETO WAIVE THEIR RIGHT TO A JURY TRIAL WITH RESPECT TO ANY SUCH LEGAL ACTIONS. (d) ATTORNEYS' FEES. In the event that any action, suit or arbitration or other proceeding is instituted upon any breach of this Agreement, the prevailing party shall be paid by the other party thereto an amount equal to all of the prevailing party's costs and expenses, including attorneys' fees incurred in each and every such action, suit or proceeding (including any and all appeals or petitions therefrom). As used in this Agreement, "attorneys' fees" shall mean the full and actual cost of any legal services actually performed in connection with the matter involved calculated on the basis of the usual fee charged by the attorney performing such services and shall not be limited to "reasonable attorneys' fees" as defined in any statute or rule of court. (e) AMENDMENT; WAIVER. This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors, heirs and personal representatives. No provision of this Agreement may be amended or waived unless in writing signed by all of the parties to this Agreement. Waiver of any one provision of this Agreement shall not be deemed to be a waiver of any other provision. (f) NO FINDERS. The parties each agree to indemnify and hold harmless the other against any expense incurred by reason of any consulting, brokerage commission or finder's fee alleged to be payable to any person in connection with the transactions contemplated hereby because of any act, omission or statement of indemnifying party or any dealings by the indemnifying party with any consultant, broker or finder. (g) EXPENSES. Each of the parties shall pay its own expenses incurred in connection with the preparation of this Agreement and the consummation of the transactions contemplated hereby. (h) SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be or become prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. (i) COUNTERPARTS. This Agreement may be executed in several counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all of the parties have not signed the same counterpart. (j) ENTIRE AGREEMENT. This Agreement constitutes and embodies the entire understanding and agreement of the parties hereto relating to the subject matter hereof and there 11 are no other agreements or understandings, written or oral, in effect between the parties relating to such subject matter except as expressly referred to herein. (k) MISCELLANEOUS. Titles and captions contained in this Agreement are inserted for convenience of reference only and do not constitute a part of this Agreement for any other purpose. Except as specifically provided herein, neither this Agreement nor any right pursuant hereto or interest herein shall be assignable by any of the parties hereto without the prior written consent of the other party hereto. 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. Future Media Productions Inc. By: /s/ ALEX SANDEL ------------------------- Alex Sandel Its: President /s/ DAVID MOSS ------------------------------ David Moss 13 EXHIBIT "A" NOTICE OF EXERCISE (TO BE SIGNED ONLY UPON EXERCISE OF THE WARRANT) TO: Future Media Productions Inc. The undersigned hereby irrevocably elects (to the extent indicated herein) to exercise the purchase right represented by the Warrant granted to the undersigned on January 1, 1998 and to purchase thereunder ___________ shares of Common Stock of Future Media Productions Inc., a California corporation (the "COMPANY"). The closing of the exercise of the purchase right shall take place at _____ on _________________, ____ at the principal executive office of the Company located at 2536 Anza Drive, Valencia, California 91355. HOLDER ------------------------------- 14 EX-10.8 10 LEASE AGREEMENT AND NOTICE OF EXTENSION - 8/24/94 EXHIBIT 10.8 [LETTERHEAD] June 13, 1996 Howard Rosen 2759 Casinno Road Los Angeles, Ca. 90077-1525 Dear Howard, This notice is given pursuant to section 50 of the lease Agreement dated August 24, 1994, between Future Media Productions, Inc. as Lessee and Herman Rosen & Florence W. Rosen, Trustees, etc., as Lessors. Future Media does hereby exercise its option to extend the original term of the Lease for a period of five (5) years commencing March 1, 1997 and ending February 28, 2002. Pursuant to the terms of paragraph 50(a) and Howard Rosen's letter of June 5, 1996, this option is exercised early. Please acknowledge your acceptance. Very truly yours, /s/ Alex Sandel Alex Sandel Future Media Productions, Inc. Accepted: /s/ Howard Rosen 8/20/96 - ----------------------------------- Howard Rosen [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET (DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY) 1. BASIC PROVISIONS ("BASIC PROVISIONS") 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, August 24, 1994 is made by and between Herman Rosen and Florence W. Rosen, Trustees of the Herman and Florence W. Rosen Family Trust Dated December 21, 1988 and Howard N. Rosen and Carol L. Rosen,* ("LESSOR") and Future Media Productions, Inc., a California corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 25136 Anza Drive, Valencia, located in the County of Los Angeles, State of California and generally described as (describe briefly the nature of the property) an industrial tilt-up building of approximately 44,460 square feet (including mezzanine) situated on approximately 84,506 square feet of land. See attached Exhibit "A". ("PREMISES"). (See Paragraph 2 for further provisions.) 1.3 TERM: 2 years and 6+ months ("ORIGINAL TERM") commencing August 29, 1994 ("COMMENCEMENT DATE") and ending February 28, 1997 ("EXPIRATION DATE"). (See Paragraph 3 for further provisions.) 1.4 EARLY POSSESSION: [OMITTED] 1.5 BASE RENT: $20,451.60 per month ("BASE RENT"), payable on the 1st day of each month commencing August 29, 1994. See Addendum attached hereto. (See Paragraph 4 for further provisions.) / / If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID UPON EXECUTION: $22,430.79 as Base Rent for the period August 29-31, 1994 and November 1994 1.7 SECURITY DEPOSIT: $20,451.60 ("SECURITY DEPOSIT"). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: corporate offices, assembly, manufacturing, distribution and warehousing of electronic and computer products. (See Paragraph 6 for further provisions.) 1.9 INSURING PARTY: Lessee is the "INSURING PARTY" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 REAL ESTATE BROKERS: The following real estate brokers (collectively, the "BROKERS") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): CB Commercial Real Estate Group, Inc. represents /X/ Lessor exclusively ("LESSOR'S BROKER"); / / both Lessor and Lessee, and CB Commercial Real Estate Group, Inc. represents /X/ Lessee exclusively ("LESSEE'S BROKER"); / / both Lessee and Lessor. (See Paragraph 15 for further provisions.) 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by Alex Sandel pursuant to separate Guaranty of Lease dated concurrently herewith ("GUARANTOR"). (See Paragraph 37 for further provisions.) 1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of Paragraphs 1.5, 2.3, 6.2(b), 6.2(c), 6.3, 6.4, 7.2, 8.3(a), 9.1(b) and 9.4, 10.1(a), 12.4, 15, 30.5, and 49 through 56 and Exhibits A, B and C, all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITION: Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non- compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within fifteen (15) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. See Addendum attached hereto. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non- compliance with this warranty within three (3) months following the Commencement Date, corrections of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 LESSEE PRIOR OWNER/OCCUPANT. [OMITTED] 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. [OMITTED] *Trustees of the Howard and Carol Rosen Trust Dated April 8, 1975. Initials [ILLEGIBLE] ----------- PAGE 1 ----------- 3.3 DELAY IN POSSESSION. [OMITTED] 4. RENT. 4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessees assignees or subtenants, and by prospective assignees and subtenants of the Lessee, its assignees and subtenants, for a modification of said permitted purpose for which the premises may be used or occupied, so long as the same will not impair the structural integrity of the improvements on the Premises, the mechanical or electrical systems therein, is not significantly more burdensome to the Premises and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. See Addendum attached hereto. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on or about the Premises, included but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) INDEMNIFICATION. See Addendum attached hereto. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 LESSEE'S COMPLIANCE WITH LAW. See Addendum attached hereto. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 INSPECTION; COMPLIANCE. See Addendum attached hereto. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc., Initials [ILLEGIBLE] ----------- PAGE 2 ----------- 7.2 (Lessor's obligations to repair), 9 (damage and destruction), 14 (condemnation), and 7.2 (Lessor's Obligations) Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, structural and non-structural (whether or not such portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, window, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt, and parking lot maintenance. 7.2 LESSOR'S OBLIGATIONS. Except as provided in the Addendum attached hereto and except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of any needed repairs. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative costs thereof during the term of this Lease as extended does not exceed $25,000. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by installation, maintenance or removal of Lessee's Trade Fixtures, furnishing, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good service practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $3,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. Initials [ILLEGIBLE] ----------- PAGE 3 ----------- 8.3 PROPERTY INSURANCE--BUILDING, IMPROVEMENTS AND RENTAL VALUE. See Addendum attached hereto (a) BUILDING AND IMPROVEMENTS.* The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $10,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancellable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable to Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. See Addendum attached hereto. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE--INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for Initials [ILLEGIBLE] ----------- [ILLEGIBLE] ----------- NET PAGE 4 any funds contributed by Lessee to repair any such damage or destruction. 9.3 PARTIAL DAMAGE--UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. See Addendum attached hereto. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of damage described in Paragraph 9.2 (Partial Damage--Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "COMMENCE" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve (12) months. 9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 (a) PAYMENT OF TAXES. See Addendum attached hereto. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. 10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations Initials [ILLEGIBLE] ----------- [ILLEGIBLE] ----------- NET PAGE 5 assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not; (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.1(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased to an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the amount required to establish such Security Deposit a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment structure of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment structure for property similar to the Premises as then constituted. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublease, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 12.4 ADDITIONAL PROVISIONS REGARDING SUBLETTING AND ASSIGNMENT. See Addendum attached hereto 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" Initials -------- PAGE 6 RJJ -------- is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "CONDEMNATION"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes Initials -------- PAGE 7 RJJ -------- title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. BROKER'S FEE. 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in See Addendum attached hereto for brokerage services rendered by said Brokers to Lessor in this transaction. 15.3 15.4 Any buyer or transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a third party beneficiary of the provisions of this Paragraph 15 to the extent of its interest in any commission arising from this Lease and may enforce that right directly against Lessor and its successors. 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorney's fees reasonably incurred with respect thereto. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. TENANCY STATEMENT. 16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years or for such lesser period during which Lessee has been in business. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor provided that the new Lessor assumes the Lessor's obligations under this Lease. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. Initials ---------- [ILLEGIBLE] ---------- PAGE 8 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 30.5 See Addendum attached hereto 31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the roof, as do not unreasonably interfere with the conduct of Lessee's business. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. GUARANTOR. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signature of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. OPTIONS. 39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to leave the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. Initials ----------- [ILLEGIBLE] ----------- PAGE 9 39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at Los Angeles Executed at 8/25/84 ------------------------------- ------------------------ on 8/25/94 on ---------------------------------------- --------------------------------- By LESSOR: By LESSEE: Herman and Florence W. Rosen Family Trust Future Media Productions, Inc. - ------------------------------------------ ----------------------------------- Dated December 21, 1988 and the Howard and a California corporation - ------------------------------------------ ----------------------------------- Carol Rosen Trust Dated April 8, 1975 By /s/ Herman Rosen By /s/ Alex Sandel --------------------------------------- -------------------------------- Name Printed: Herman Rosen and Florence W. Name Printed: Alex Sandel ----------------------------- ------------------------------- Rosen ----------------------------- Title: Trustees Title: President ------------------------------------ ----------------------------- By By --------------------------------------- -------------------------------- Name Printed: Howard N. Rosen Name Printed: ----------------------------- ------------------------------- and Carol L. Rosen Title: ----------------------------- ----------------------------- Title: Trustees ------------------------------------ Address: 2759 Casiano Road Address: ---------------------------------- --------------------------- Los Angeles, CA 90077 - ------------------------------------------ ----------------------------------- Tel. No.(310)471-5305 Fax No.(310)471-7015 Tel. No.(818)704-9100 Fax No. ------------- ------------- (818)713-0146 -------------- PAGE 10 ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE TENANT LEASE - NET DATED AS OF AUGUST 24, 1994 ("LEASE") BY AND AMONG HERMAN ROSEN AND FLORENCE W. ROSEN, TRUSTEES OF THE HERMAN AND FLORENCE W. ROSEN FAMILY TRUST DATED DECEMBER 21, 1998 AND HOWARD N. ROSEN AND CAROL L. ROSEN, TRUSTEES OF THE HOWARD AND CAROL ROSEN TRUST DATED APRIL 8, 1975 AS THE "LESSOR" AND FUTURE MEDIA PRODUCTIONS, INC., A CALIFORNIA CORPORATION AS THE "LESSEE" This Addendum is attached to and made a part of the Lease between Lessor and Lessee (all as described in the above title) for the Premises therein described. In the event there is any conflict between the provisions of this Addendum and the provisions of the Lease to which it is attached, the provisions of this Addendum shall control. A. CONTINUED PROVISIONS. The following provisions are a continuation of certain of the provisions of the Lease as indicated by the applicable paragraph number set forth below: 1.5 BASE RENT - ABATEMENT. Base Rent payable for the first two (2) full months of the Original Term (i.e., for September, 1994 and October, 1994) at the rate of Twenty Thousand Four Hundred Fifty-One and 60/100ths Dollars ($20,451.60) per month shall be fully abated and waived. 2.3 COMPLIANCE WITH COVENANTS, ETC.. Notwithstanding the foregoing provisions of this Paragraph 2.3, no warranty or representation is made by Lessor related to the compliance of the improvements of the Premises with the provisions of the Americans with Disabilities Act, a federal law codified at 42 USC Section 12101 et. seq. ("ADA") and accordingly the provisions of Paragraph 2.3 shall not extend to any ADA compliance matters. 6.2(b) DUTY TO INFORM LANDLORD. Lessee hereby represents, warrants and covenants that, except as (i) permitted under Paragraph 6.2(a), (ii) provided in the Paragraph 6.2(b), and (iii) disclosed on Exhibit "C" attached hereto, Lessee's business operations in or about the Premises do not and will not involve the use, manufacture, storage, handling, generation, transportation or other release of Hazardous Substances (individually and collectively, "Permitted Uses"). The reporting requirements of Paragraph 6.2(b) shall not apply to any Permitted Uses described on Exhibit "C", provided the same do not constitute a Reportable Use. Permitted Uses shall also include Hazardous Substances which are proposed to be used by Lessee and which are substantially similar to those described on Exhibit "C" related to Lessee's business operations, provided Lessee submits to Lessor a list of the same, and certifies to Lessor that such proposed Permitted Uses are consistent with the existing Permitted Uses and do not constitute a Reportable Use. 6.2(c) LESSOR'S INDEMNIFICATION. Lessor shall indemnify, protect, defend and hold Lessee, its agents, employees, and lenders, if any, and the Premises, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessor or under Lessor's control prior to the Commencement Date. Lessor's obligations under this Paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or inquiry to person, property or the environment created or suffered by Lessor, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by the Lessor and Lessee shall release Lessor from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessee in writing at the time of such agreement. 6.3 COMPLIANCE WITH LAW. In connection with the definition of Applicable Law under this Paragraph 6.3 (and without in any way limiting the definition of Applicable Law), Lessee acknowledges that the Premises and this Lease are subject to all of the provisions contained in the Valencia Industrial Initials [Illegible] Addendum - Page 1 Initials [Illegible] -------------- -------------- Center Declaration of Covenants, Conditions and Restrictions dated July 11, 1985, as may be amended from time to time, a copy of which is attached to this Lease as Exhibit "B". 6.4 INSPECTION. Except in the case of an emergency, Lessor shall give Lessee at least 24-hours advance notice (written or oral) prior to undertaking any such inspections. Lessor shall use commercially reasonable efforts to minimize any interference with Lessee's business operations during any such inspections. 7.2 LESSOR'S OBLIGATIONS -- STRUCTURAL REPAIRS. Subject to the provisions of Paragraphs 9 (damage and destruction) and 14 (condemnation), Lessor shall, at Lessor's expense, keep the foundations, structural membranes of the exterior roof and other structural aspects of the Premises in good order, condition and repair (collectively, "Structural Repair"). Lessor shall not, however, be obligated to (i) paint the exterior surface of the exterior walls, (ii) maintain or repair any other aspect of the roof, (iii) maintain or repair the windows, doors or plate glass or the interior surface of exterior walls, or (iv) undertake the Structural Repairs to the extent any such Structural Repairs are required to be done by reason of the acts, omissions or negligence of Lessee and/or its officers, directors, employees, agents, contractors or invitees not otherwise an Insured Loss (as defined in Paragraph 9.1(c) below) for which insurance proceeds and deductible amounts are actually received by Lessor, all of which maintenance and repair shall be the obligation of Lessee under Paragraph 7.1(a) of the Lease. Lessor shall not, in any event, have any obligation to make any Structural Repairs until Lessor receives written notice from Lessee of the need for such Structural Repairs and thereafter shall commence to make and complete the Structural Repairs in a commercially reasonable manner. 8.3(a) PROPERTY INSURANCE -- ALL RISKS. The Insuring Party shall insure against all perils and risks of direct physical loss or damage, including flood and earthquake insurance. The deductible amount of any insurance policy maintained pursuant to this Paragraph 8.3(a) shall not exceed $10,000, except that the deductible amount of a flood and/or earthquake policy shall not exceed five percent (5%) of the policy coverage amount. In the event of any Insured Loss (as defined in Paragraph 9.1(c) of the Lease), Lessee shall pay to Lessor the full deductible amount under the insurance applicable to the Insured Loss within ten (10) days after the date of the Insured Loss. Lessor's obligation to undertake any repairs under Paragraph 9 of the Lease and Lessee's right to receive any abatement of rent under Paragraph 9.6 of the Lease are specifically conditioned upon Lessee's prompt payment of the said deductible amount to Lessor. 9.1(b) AND 9.4 DEFINITION AND EFFECT OF "PREMISES TOTAL DESTRUCTION". "Premises Total Destruction" shall also mean damage or destruction to the Premises to such an extent that (i) as to an Insured Loss, Lessee is unable to conduct its business operations in at least fifty percent (50%) of the Premises for a consecutive period following the damage of more than one hundred and eighty (180) days or (ii) as to damage which is not an Insured Loss, Lessee is unable to conduct its business operations in at least fifty percent (50%) of the Premises for a consecutive period following the damage of more than one hundred twenty (120) days (individually and collectively, an "Impaired Use"). In the event of Premises Total Destruction by reason of an Impaired Use, and notwithstanding anything in Paragraph 9.4 of the Lease to the contrary, this Lease shall terminate the next day following the last day of the Impaired Use period; provided, however, Lessee may elect by written notice to Lessor given within thirty (30) days after the date of damage which otherwise might give rise to an Impaired Use to elect not to terminate this Lease if an Impaired Use were to arise respecting such damage (in which event this Lease shall not terminate even if such damage gives rise to an Impaired Use). 10.1(a) PAYMENT OF TAXES. During the Original Term, Lessee shall not be obligated to pay any portion of the Real Property Taxes applicable to the Premises which arises by reason of an increase in the Real Property Taxes as a result of a sale or exchange of the Premises by Lessor. 12.4 ADDITIONAL PROVISIONS REGARDING SUBLETTING AND ASSIGNMENT. (a) ADDITIONAL CONDITIONS TO ASSIGNMENT. Notwithstanding any contrary provision of the Lease (including any contrary provision of Paragraphs 12 or 36), Lessor may withhold its consent to any proposed sublease or assignment of the Lease (as used in this Addendum, an "Assignment") if the following conditions have not been met: (i) In connection with Paragraph 12.2(e) of the Lease, Lessee shall notify Lessor of its desire to enter into the Assignment and of all relevant facts in connection therewith, including (1) the name of the sublessee or assignee, (2) the nature of the sublessee's or assignee's business to be carried on in the Premises, (3) the terms of the sublease or assignment and all other Initials [Illegible] Addendum - Page 2 Initials [Illegible] -------------- -------------- contracts, instruments and agreements relating to the Assignment, and (iv) such other information as Lessor may reasonably request concerning the Assignment. (ii) The use to be made of the Premises by the proposed assignee or sublessee is generally consistent with the character and nature of the Premises and the permitted use under Paragraphs 1.8 and 6 of the Lease. (iii) The character, moral stability, reputation and financial condition of the proposed assignee or sublessee are satisfactory to Lessor in its sole discretion and, as to an assignment, the proposed assignee's net worth is acceptable to Lessor in its sole discretion. (iv) As to any Assignment other than a sublease of less than twenty percent (20%) of the improvements of the Premises, Lessee shall have agreed to assign and pay to Lessor as additional rent hereunder fifty percent (50%) of all Transfer Consideration (as defined in Paragraph 12.4(v) below). (v) "Transfer Consideration" shall mean and include all consideration paid or given, directly or indirectly, by the sublessee or assignee to Lessee in exchange for entering into the Assignment other than reimbursement for the security deposit, reimbursement of the depreciated value of any improvements, fixtures or furnishings installed in the Premises by Lessee and payment for merchandise or inventory of Lessee not in excess of Lessee's cost thereof and, if the Assignment is a sublease, all consideration paid or given, directly or indirectly, by the sublessee to Lessee over and above monthly rent and all additional rent payable by Lessee to Lessor allocable to the portion of the Premises subject to such sublease as determined by Lessor in any reasonable manner. Transfer Consideration shall include consideration in any form, including money, property, assumption of liabilities and any other item or thing of value. Notwithstanding the form of the Transfer Consideration, Lessee shall pay the same to Lessor in cash in an amount equal to the sum of the cash portion of the Transfer Consideration plus the fair market value of any non-cash Transfer Consideration; provided, however, that Lessee may pay any Transfer Consideration which is payable in cash installments to Lessor as it receives each such installment. (b) PERMITTED ASSIGNMENT. Lessor's consent shall not be required, and the provisions of Paragraph 12.4(a) above shall not apply, to any Assignment of the Lease to an entity (a "Permitted Assignee") which meets one of the following requirements as of the date of Assignment and provided that the use to be made of the Premises by the assignee is generally consistent with the character and nature of the Premises and the permitted use under Paragraphs 1.8 and 6 of the Lease: (i) the entity owns or controls at least fifty percent (50%) of the assets, stock and/or voting rights of Lessee; (ii) at least fifty percent (50%) of the assets, stock and/or voting rights of such entity is owned or controlled by Lessee; or (iii) the entity is under common control with Lessee such that the controlling party owns at least fifty percent (50%) of the assets, stock and/or voting rights of both Lessee and such entity. In the event of any Assignment to a Permitted Assignee, Lessee shall promptly provide Lessor with notice thereof and reasonable evidence of compliance with the above requirements. 15. BROKER'S FEES. The total brokerage commissions payable under Paragraph 15 of the Lease by reason of the execution and performance under this Lease shall be Thirty Four Thousand Six Hundred Sixty-Four and 05/100 Dollars ($34,664.05), payable as follows: (i) $17,529.94 upon the later of (i) Lessee taking possession of the Premises, (ii) the date the cash portion of the Security Deposit is received by Lessor in good funds, or (iii) the date of compliance with the conditions of Paragraph 52 below. (ii) $571.14 per month for thirty (30) months commencing on October 1, 1994 and continuing thereafter on the first day of each month through February 1, 1997. 30.5 LANDLORD WAIVER. Within thirty (30) days after written request by Lessee, Lessor will execute any commercially reasonable form of a so-called "Landlord Waiver" requested by a lender of Lessee with respect to Lessee's financing of its equipment, inventory and other items of personal property. Lessor shall have the right to negotiate directly with the Lessee's lender with respect to any objections to the proposed form of Landlord Waiver. Lessee shall reimburse Lessor for its reasonable attorneys fees and costs incurred with respect to the review and negotiation of each requested Landlord Waiver prior to the date Lessor is required to execute the same. Initials [Illegible] Addendum - Page 3 Initials [Illegible] -------------- -------------- B. NEW PROVISIONS. The following provisions are additional provisions of the Lease as indicated by the applicable paragraph number set forth below: 49. "AS IS". Except as otherwise specifically provided in the Lease, Lessee acknowledges and agrees that no additional work shall be required with respect to the Premises by Lessor as a result of this Lease, that it has inspected the Premises as of the date of the Lease and is fully satisfied with the physical condition thereof, including all Utility Installations, and that it hereby accepts possession of the Premises as of the commencement of the Original Term strictly in its "as is" condition and hereby waives all rights and remedies it may at any time have against Lessor under this Lease or otherwise as a result of any latent or patent deficiency in the Premises as of such date. Notwithstanding the foregoing, Lessee is hereby advised that (i) certain damages were caused to the Premises as a result of the January 17, 1994 Northridge earthquake and subsequent after shocks (the "Earthquake Damages") and (ii) to the knowledge of Lessor, Lessor and/or its existing tenant of the Premises, BE Aerospace ("Exiting Tenant"), have repaired all Earthquake Damages of which the Lessor has been made aware. 50. OPTION. Lessee shall have one (1) option (each such option is herein referred to as an "Option") to extend the Original Term of the Lease for a period of five (5) years commencing March 1, 1997 and ending February 28, 2002 (herein referred to as the "Option Period"). (a) MANNER OF EXERCISE. Lessee shall exercise the Option only by delivering written notice to the Lessor identifying the Option being exercised, provided that the Option may not be exercised any earlier than eight (8) months nor later than six (6) months prior to the expiration of the Original Term of the Lease, time being of the strictest essence. If Lessee fails to timely exercise the Option in the manner herein specified, then all of the terms contained in this Paragraph 50 as to the Option shall immediately and automatically terminate and be of no further force or effect. (b) LEASE TERMS. Except as otherwise provided in this Addendum, all provisions of the Lease shall continue in full force and effect during the Option Period and the Option Period shall be considered part of the Term of this Lease. (c) CONDITIONS. The provisions of Paragraph 39 of the Lease, including those relating to a Default of Lessee as set forth in Paragraph 39.4 of the Lease, are all conditions to the exercise of the Option. (d) ADJUSTMENTS TO BASE RENT DURING OPTION PERIOD. (i) The amount of Base Rent payable commencing on March 1, 1997, on March 1, 1999 and on March 1, 2001 shall be adjusted as of said dates (the "Rent Adjustment Date") in accordance with this Paragraph 50(d). As of each Rent Adjustment Date, the Base Rent shall be equal the greater of (1) the Base Rent in effect immediately preceding the Rent Adjustment Date, or (2) the product of the Base Rent in effect immediately preceding the Rent Adjustment Date multiplied by the percentage obtained by dividing the Index (defined below) for the third month preceding the Rent Adjustment Date by the Index for the third month preceding the Comparison Month. The "Comparison Month" for each Rent Adjustment Date is as follows: For March 1, 1997, the Comparison Month is August 1994; for March 1, 1999, the Comparison Month is March 1997; for March 2001, the Comparison Month is March 1999. (ii) When the Base Rent for a Rent Adjustment Date is determined, Lessor shall give Lessee notice setting forth that figure and describing how it was computed; provided, however that Lessor's failure to timely determine such adjustments or to notify Lessee of the same shall not relieve Lessee of its obligation to pay such adjusted Base Rent. Within five (5) days after Lessor has notified Lessee of any such adjustment, Lessee shall pay to Lessor the excess of (1) the aggregate Base Rent due hereunder from and after such Rent Adjustment Date computed at such adjusted amount, over (2) the actual payments of Base Rent which have been previously made by Lessee for the period from and after such Rent Adjustment Date. (iii) The "Index" shall be the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index for all Urban Consumers, Los Angeles-Anaheim-Riverside, California, All Items, 1982-84=100. In the event the base of the Index is changed, the new base shall be converted to the base of the Index in accordance with the tables issued by the Bureau of Labor Statistics and the base so converted shall continue to be used. In the event the Index otherwise ceases to exist in its current format, the parties shall substitute any official index published by the Bureau of Labor Statistics or successor or similar governmental agency as may then be in existence which is most nearly Initials [ILLEGIBLE] Addendum - Page 4 Initials [ILLEGIBLE] ---------------- ------------- equivalent to the Index. If the parties are unable to agree upon a successor Index, either party may refer the determination thereof to arbitration in accordance with the then applicable rules of the American Arbitration Association. 51. ARBITRATION. In the event any dispute (other than an Excluded Matter as defined in Paragraph 51 (a) below) should hereafter arise between Lessor and Lessee regarding the duties, rights and obligations of each with respect to the matters covered by this Lease or regarding the validity, construction, enforceability or performance of this Lease or any of its provisions, then such dispute shall be settled by arbitration in accordance with the Rules of the American Arbitration Association, except to the extent modified below, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Arbitration between the parties shall be conducted in Los Angeles, California and shall be guided by the following principles: (a) EXCLUDED MATTERS. The provisions of this Paragraph 51 shall not apply to the following matters, which may be brought in a court of competent jurisdiction (the "Excluded Matters"): (i) any summary proceeding brought by Lessor under any of California's unlawful detainer, eviction or any similar statutes which give a landlord the right to obtain possession of premises and/or to remove parties and/or property from premises or (ii) any immediate remedy of a temporary restraining order, preliminary injunction or such other form of injunctive or equitable relief as may be issued by any court of competent jurisdiction to (1) restrain or enjoin any of the parties hereto from breaching any covenant, representation, warranty or provision of this Lease or from frustrating the attainment of any of the purposes of this Lease, (2) specifically enforce the provisions hereof, and/or (3) mandate and require a party to this Lease to perform the obligations of such party hereunder (including the obligation to execute, acknowledge and deliver such instructions, documents and instruments as may be required pursuant to the provisions of this Lease) or (iii) any provisional relief contemplated under Paragraph 50(c) below. (b) SELECTION OF ARBITRATOR. The arbitration proceedings shall be conducted before a panel of three neutral arbitrators, all of whom shall be members of the Bar of the State of California, actively engaged in the practice of law for at least ten years, with expertise in deciding disputes and interpreting contracts relating to industrial and/or commercial leases. Each of the parties shall have the right to appoint one arbitrator. The two arbitrators appointed by the parties shall appoint a third arbitrator, who shall serve as the chairperson of the tribunal. The written decision of any two of the three appointed arbitrators shall be binding and conclusive on both parties to this Agreement. In lieu thereof, the parties may agree upon one arbitrator to serve as the sole arbitrator. (c) PROVISIONAL RELIEF PENDING COMPLETION OF ARBITRATION. Any party may seek from a court of competent jurisdiction any interim or provisional relief that may be necessary to protect the rights or property of that party, pending the arbitration tribunal's determination of the merits of the controversy. (d) DISCOVERY. The parties shall allow and participate in discovery in accordance with the Federal Rules of Civil Procedure for a period of ninety (90) days after the filing of the answer or other responsive pleading. Unresolved discovery disputes may be brought to the attention of the chairperson of the arbitration panel and may be disposed of by such chairperson. (e) ATTORNEYS FEES. The unsuccessful party to such arbitration shall pay to the successful party all costs and expenses, including arbitration filing fees and actual fees and costs of attorneys', accountants, experts and consultants incurred with respect to the arbitration proceedings by such successful party. Regardless of the outcome of the arbitration, there shall be but one successful party as determined by the arbitrators. (f) DETERMINATION OF ARBITRATOR. In rendering the award the arbitrator shall determine the rights and obligations of the parties according to the substantive and procedural laws of the State of California. The award may be limited to a statement that one party pay the other a sum of money. However, upon the request of a party, the arbitrators' award shall include findings of fact and conclusions of law. The arbitrators do not exceed their powers (per California Code of Civil Procedure Section 1286.2 or 1286.6) by committing an error of law or legal reasoning. The decision of the arbitrators shall be final and unreviewable for errors of law or legal reasoning of any kind. The arbitrators shall have the power to grant all legal and equitable remedies and award compensatory damages provided by California law, including punitive damages, with respect to the disputes covered by these arbitration provisions. Initials [ILLEGIBLE] Addendum - Page 5 Initials [ILLEGIBLE] ---------------- ------------- NOTICE: BY INITIALLING IN THE SPACE BELOW EACH PARTY IS AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND IS GIVING UP ANY RIGHTS SUCH PARTY MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALLING IN THE SPACE BELOW EACH PARTY IS GIVING UP ITS JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF A PARTY REFUSES TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, SUCH PARTY MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. EACH PARTY'S AGREEMENT TO THE ARBITRATION PROVISION IS VOLUNTARY. THE UNDERSIGNED PARTIES HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION. Lessor: [ILLEGIBLE] Lessee: [ILLEGIBLE] --------------- -------------- 52. CONDITIONS OF LEASE. In addition to any other conditions contained in this Lease, Lessor's obligations under this Lease are specifically conditioned upon (i) its ability to enter into an agreement with the Existing Tenant, in a form acceptable to Lessor in its sole discretion, to terminate the Existing Tenant's lease (the Existing Tenant has previously vacated the Premises), (ii) Lessor's approval of the financial condition, including a recent financial statement, of Alex Sandel (who will be executing a Guaranty of this Lease covering damages not to exceed $120,000.00), (iii) the execution by Alex Sandel of such Guaranty of Lease, and (iv) Lessee providing Lessor with a Certificate of Secretary and Incumbency Certificate indicating the authorization by the Board of Directors of Lessee to enter into this Lease and the authority of the person executing the same. 53. ADA DISCLOSURE. Lessor hereby advises Lessee that a tenant of real property may be subject to the ADA. Among other requirements of the ADA that could apply to the Premises, Title III of the ADA requires tenants of "public accommodations" to remove barriers to access by disabled persons and provide auxiliary aids and services for hearing, vision or speech impaired persons. The regulations under Title III of the ADA are codified at 28 CFR Part 36. The Brokers have recommended that Lessee and Lessee's attorneys, engineers and/or architects review the ADA and the regulations, to determine if and how the ADA may apply to Lessee after the Commencement Date, and the nature of the requirements. 54. DRIVEWAY EASEMENT. Lessee acknowledges and agrees that (i) its right to use the western driveway is nonexclusive and occupants of the contiguous building thereto have the same nonexclusive rights and (ii) the easement for said driveway prohibits Lessee from constructing any fence or wall, or otherwise doing any act, which in any way may restrict or block the use of said driveway by the neighboring property occupants. 55. FLOOR WEIGHT LIMITS. Lessee hereby acknowledges and agrees that (i) the designed weight limit of the main and mezzanine floors are eight hundred (800) pounds per square foot and one hundred twenty-five (125) pounds per square foot, respectively and (ii) Lessee shall not use the Premises in any way which would allow these limits to be exceeded. 56. FAX SIGNATURE OF HOWARD ROSEN. The parties acknowledge that Howard Rosen, the signator for one of the trusts composing Lessor, is currently in Alaska and will not return to Los Angeles until about September 1, 1994. Accordingly, this Lease shall be effective as to Howard Rosen's execution if he signs the signature page only by facsimile transmission. However, Lessor agrees that upon his return, Howard Rosen will initial where required and sign all signature copies of this Lease. Initials [ILLEGIBLE] Addendum - Page 6 Initials [ILLEGIBLE] ---------------- ------------- INDUSTRIAL REAL ESTATE LEASE - EXHIBIT "A" DESCRIPTION OF PROPERTY Property Address: 25136 West Anza Drive, Santa Clarita, CA 91355 Legal Description: Parcel A: Parcel 18 in the County of Los Angeles, State of California, as shown upon Parcel Map No. 12009 filed in Book 182 Pages 47 to 54 inclusive of Parcel Maps, in the office of the County Recorder of said County. Parcel B: A non-exclusive easement for purposes of ingress and egress over the easterly 13 feet of Parcel 17 of said Parcel Map No. 12009, filed in Book 182 pages 47 to 54 inclusive of Parcel Maps, extending from the most northerly terminus of the easterly line of said Parcel 17 a distance of 356.00 feet in a southerly direction. [GRAPHIC] Initials [ILLEGIBLE] Exhibit "A" Initials [ILLEGIBLE] ---------------- ------------- [STAMP] VALENCIA INDUSTRIAL CENTER -------------------------- DECLARATION OF COVENANTS, CONDITIONS, AND RESTRICTIONS ------------------------------------------------------ PREAMBLE -------- This DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS is made and entered into as of this 11 day of July, 1985, by VALENCIA COMPANY, a division of The Newhall Land and Farming Company (a California Limited Partnership), as owner of that certain real property located in the County of Los Angeles, State of California, as more particularly described in Exhibit "A" attached hereto and incorporated herein by this reference. The real property described in Exhibit "A" is a part of a larger land area owned by VALENCIA COMPANY, which is being developed as a planned community, named Valencia. The real property which is the subject of this DECLARATION OF COVENANTS, CONDITIONS, AND RESTRICTIONS is known as VALENCIA INDUSTRIAL CENTER. VALENCIA INDUSTRIAL CENTER is being developed as a planned industrial complex which will provide employment opportunities for the residents of Los Angeles County and the surrounding areas. VALENCIA COMPANY intends that the design and development as well as the continuing use and operation of the EXHIBIT "B" real property subject to this DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS shall be consistent with the aims and ideals of Valencia. It is the purpose of this DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS to provide the means for maintaining and controlling such development and use so that the design and integrity and amicable environment of Valencia will be maintained. This DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS, is designed to compliment local government and municipal regulations and where conflicts occur, it is intended that the most rigid requirements shall prevail. It is assumed that the owners and users of industrial sites in the VALENCIA INDUSTRIAL CENTER will be motivated to preserve these qualities through mutual cooperation and by enforcing not only the letter but the spirit of this DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS. IN WITNESS WHEREOF, VALENCIA COMPANY, has executed this DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS the day and year first above written. VALENCIA COMPANY, A division of The Newhall Land and Farming Company (a California Limited Partnership), By /s/ Thomas E. Dierckman ----------------------------------- Authorized Agent By /s/ Donald L. Puente ----------------------------------- Authorized Agent -2- STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On this 11th Day of July, 1985, before the undersigned a notary public in and for the State of California personally appeared Thomas E. Dierckman and Donald L. Puente, the authorized agents, respectively, of VALENCIA COMPANY a Division of THE NEWHALL LAND AND FARMING COMPANY (a California Limited Partnership), personally known to be (or proved to me on the basis of satisfactory evidence) to be the persons who executed the within instrument on behalf of VALENCIA COMPANY, the division that executed the within instrument on behalf of said partnership, and acknowledged to me that VALENCIA COMPANY executed the same on behalf of said partnership and acknowledged to me that said VALENCIA COMPANY and said partnership executed the same pursuant to the Limited Partnership Agreement of said partnership. WITNESS MY HAND AND OFFICIAL SEAL [STAMP] /s/ Debbie Landaker ----------------------------------- NOTARY PUBLIC IN AND FOR SAID STATE -3- ARTICLE I DEFINITIONS ----------- Unless the context otherwise specifies or requires, the terms defined in this Article I shall, for all purposes of this DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS have the meanings herein specified. ARCHITECT The term "Architect" shall mean a person holding a certificate to practice architecture in the State of California under authority of Division 3, Chapter 3 of the Business and Professions Code of the State of California, or under such other sections as may hereafter regulate the practice of architecture in the State of California. BENEFICIARY The term "Beneficiary" shall mean a mortgagee under a mortgage, as well as a beneficiary under a deed of trust. DECLARANT The term "Declarant" shall mean VALENCIA COMPANY, a division of The Newhall Land and Farming Company (a California Limited Partnership), and all of its successors, assigns, or designees who shall assume the obligations provided for herein, and to whom Declarant shall specifically assign in writing the right to enforce these restrictions provided for herein. -4- DECLARATION The term "Declaration" shall mean this DECLARATION OF COVENANTS, CONDITIONS, AND RESTRICTIONS. DEED OF TRUST The term "Deed of Trust" or "Trust Deed" shall mean a mortgage as well as a deed of trust. FILE The term "File" shall mean, with reference to any subdivision map, the filing of said map in the Office of the Recorder of the County of Los Angeles, State of California. IMPROVEMENTS The term "Improvements" shall include buildings, outbuildings, roads, driveways, parking areas, fences, screening walls and barriers, retaining walls, stairs, decks, hedges, windbreaks, plantings, planted trees and shrubs, poles, signs, loading areas and all other structures or landscaping improvements of every type and kind, and any replacements, additions, repairs or alterations thereto of any kind whatsoever. OWNER The term owner shall mean each and every owner of the real property or any portion thereof or interest therein during the term of its ownership and each lessee or other occupant in possession thereof as may be appropriate under the context. MORTGAGEE The term "Mortgagee" shall mean a beneficiary under, or a holder of a deed of trust as well as a mortgage. -5- OFFICE BUILDING(S) AND HIGH-TECH BUILDING(S) The Term "Office Building(s) and High-Tech Buildings(s)" shall mean buildings improved with a high percentage of offices and/or suites, used primarily for non-warehousing types of purposes and requiring a substantially greater amount of parking than building(s) used primarily for warehousing types of purposes. REAL PROPERTY The Term "Real Property" shall mean all or any portion of the property subject to the terms and provisions of the Declaration, including the real property described in Exhibit "A" attached hereto and such additional property that shall from time to time hereafter become subject to the Declaration, in accordance with the provisions contained in Section 2.2 hereafter. RECORD; RECORDED The term "Record" shall mean, with respect to any document, the recordation of said document in the Office of the County Recorder of the County of Los Angeles, State of California. SITE The term "Site" shall mean an area of land shown as one lot on a recorded subdivision map or so designated in a deed or lease in which Declarant is the grantor or lessor included within the real property described in Exhibit A or added thereto pursuant to Article II hereafter. If an easement or easements over any portion or portions of a Site established by recorded plan or recorded instrument is or are reserved by -6- Declarant for any purpose whatsoever, the area of such portion or portions shall be included in computing the area of that Site. If subsequent to the establishment of a Site by recorded plan or recorded instrument, any portion or portions thereof are, for railroad, street, highway, utility or public purpose, taken by right of eminent domain, or deed in lieu thereof, or dedicated or conveyed pursuant to reservation by Declarant, the area of such portion or portions shall continue to be included thereafter in computing the area of that Site. SUBDIVISION The term "Subdivision" shall mean the division of any Site or Sites of improved or unimproved property, or any portion thereof, shown on the latest equalized county assessment roll as a unit or as contiguous units, for the purpose of sale, lease, or financing whether immediate or future, in accordance with the terms and provisions of the Subdivision Map Act contained in Section 66410 et seq of the California Government Code, and the Los Angeles County Subdivision Ordinance enacted pursuant thereto. VISIBLE FROM NEIGHBORING SITES The term "Visible from Neighboring Sites" shall mean, with respect to any given object, that such object is or would be visible to a person six feet tall, standing on any part of such neighboring Sites at an elevation no greater than the elevation of the base of the object being viewed. -7- VALENCIA INDUSTRIAL CENTER The term "Valencia Industrial Center" shall mean all of the real property now or hereafter made subject to the DECLARATION. VALENCIA INDUSTRIAL CENTER RESTRICTIONS The term "Valencia Industrial Center Restrictions" shall mean the covenants, conditions, and restrictions set forth in this DECLARATION, as it may from time to time be amended and supplemented. ARTICLE II PROPERTY SUBJECT TO THE VALENCIA INDUSTRIAL CENTER RESTRICTIONS SECTION 2.1 GENERAL DECLARATION CREATING VALENCIA INDUSTRIAL CENTER DECLARANT hereby declares that all of the real property located in the County of Los Angeles, State of California, described in Exhibit A, which is attached hereto and incorporated herein by this reference, is and shall be, conveyed, hypothecated, encumbered, leased, occupied, built upon or otherwise used, improved or transferred in whole or in part subject to the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, meaning the covenants conditions and restrictions set forth in this DECLARATION. All of said covenants, conditions and restrictions are declared and agreed to be in furtherance of a general plan -8- for the subdivision, improvement and sale of said real property and are established for the purpose of enhancing and perfecting the value, desirability and attractiveness of said real property and every part thereof. ALL OF THE VALENCIA INDUSTRIAL CENTER RESTRICTIONS SHALL RUN WITH ALL OF SAID REAL PROPERTY FOR ALL PURPOSES AND SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF DECLARANT AND ALL OWNERS, LESSEES, LICENSEES, OCCUPANTS AND THEIR SUCCESSORS IN INTEREST AS SET FORTH IN THIS DECLARATION. SECTION 2.2 ADDITION OF OTHER PROPERTY OWNED BY DECLARANT A. DECLARANT'S POWER Declarant may at any time during the pendency of this DECLARATION add all or any portion of any property now or hereafter owned by DECLARANT to the real property which is covered by this DECLARATION, AND UPON RECORDING OF A NOTICE OF ADDITION OF PROPERTY CONTAINING AT LEAST THE PROVISIONS SET FORTH IN SECTION 2.2B OF THIS ARTICLE II, THE PROVISIONS OF THIS DECLARATION specified in said notice shall apply to such added property in the same manner as if it were originally covered by this DECLARATION. Thereafter, to the extent this DECLARATION is made applicable thereto, the rights, powers and responsibilities of DECLARANT and the owners, lessees, licensees and occupants of Sites within such added property shall be the same as in the case of the real property described in Exhibit "A". -9- B NOTICE OF ADDITION OF PROPERTY The notice of addition of real property referred to in Section 2.2A above shall contain at least the following provisions: 1. A reference to this DECLARATION stating the date of recording hereof and the book or books of the records of Los Angeles County, California, and the page numbers where this DECLARATION is recorded; 2. A statement that the provisions of this DECLARATION, or some specified part thereof, shall apply to such added property; 3. An exact description of such added property; and 4. Such other or different covenants, conditions and restrictions as DECLARANT shall, in its discretion, specify to regulate and control the use, occupancy and improvement of such added property. SECTION 2.3 SUBDIVISION OF SITES There shall be no subdivision of any Site subject to the Valencia Industrial Center Restrictions without the prior written consent of Declarant which consent Declarant may withhold for any reason Declarant in its sole discretion deems reasonable. In addition, further subdivision or division of any Site shall not -10- serve to make the parts into which such Site is subdivided themselves Sites for the purpose hereof in such instances where the prior written approval of the DECLARANT has not been received. The restrictions contained in the Valencia Industrial Center Restrictions shall, in such events, remain applicable to the entire Site as originally defined for the duration hereof. ARTICLE III REGULATION OF IMPROVEMENTS -------------------------- SECTION 3.1 APPROVAL OF PLANS ----------------- No Improvements of any nature whatsoever (including but not limited to any alteration or addition to any Improvements existing from time to time) shall be constructed, erected, placed, altered, maintained or permitted to remain on any Site subject to this DECLARATION until final plans and specifications showing the plot layout, all ingress and egress for persons and vehicles, all vehicle parking, all exterior elevations with materials and colors therefor, exterior signs; exterior hardscape, landscape, and irrigation, walls and fences, shall have first been submitted to and approved in writing by DECLARANT. Such final plans and specifications shall be submitted in writing in duplicate over the authorized signature of the owner, lessee, licensee or other occupant of the Site or -11- his authorized agent. Under no circumstances shall the DECLARANT approve metal- clad buildings of any type or design. All roof equipment including but not limited to heating, air-conditioning and ventilation equipment, antennas and communication equipment shall be so located or screened so as not to be visible from neighboring sites and or adjacent streets. Changes in approved plans which materially affect building size, placement or external appearance shall similarly be submitted to and approved by DECLARANT. SECTION 3.2 BASIS FOR APPROVAL ------------------ Architectual Guidelines as may be amended from time to time to assist in the design and development of an individual Site within Valencia Industrial Center shall be made available from Declarant. Approval by Declarant of Plans and Specifications shall be based, among other things on Site plot plan dimensions, landscaped areas, and building design in conformity and harmony of external design with neighboring structures; effect of location and use of proposed improvements on neighboring Sites; the nature of improvements on neighboring Sites and the types of operations and uses thereof; relation of topography, grade and finish ground elevation of the Site being approved to that of neighboring Sites; proper facing of main elevation with respect to nearby streets and conformity of the plans and specifications to the purpose and general plan and -12- intent of this DECLARATION. DECLARANT shall not arbitrarily or unreasonably withhold its approval of such plans and specifications. SECTION 3.3 RESULT OF INACTION If DECLARANT fails either to approve or disapprove such plans and specifications within thirty (30) days after the same have been submitted to it, it shall be conclusively presumed that DECLARANT has approved said plans and specifications; provided, however, that if within said thirty (30) day period, DECLARANT gives written notice of the fact that a reasonable additional period is required for the approval of such plans and specifications, there shall be no presumption that the same are approved until the expiration of the extended period set forth in said notice. SECTION 3.4 PROCEEDING WITH WORK Upon receipt of approval of plans and specifications from DECLARANT pursuant to this section, the owner or lessee to whom the same is given shall, as soon as practicable, satisfy all conditions thereof and diligently proceed with the commencement and completion of all approved construction, refinishing, alterations and excavations. In all cases work shall be commenced within one year from the date of such approval. If there is a failure to comply with this paragraph, then the approval given -13- pursuant to this section shall be deemed revoked unless DECLARANT upon request made prior to the expiration of said one year period extends the time for commencing work. SECTION 3.5 COMPLETION OF WORK In any event completion, reconstruction, refinishing or alteration of any such improvement shall be within two years after the commencement thereof except for so long as such completion is rendered impossible or would result in great hardship due to strikes, fires, national emergencies, natural calamities or other supervening forces beyond the control of the owner, lessee, licensee or occupant or his agents and of a non-financial nature. Failure to comply with this paragraph shall constitute a breach of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS and subject the defaulting party or parties to all enforcement procedures set forth in this DECLARATION and any other remedies provided by law or in equity. SECTION 3.6 ESTOPPEL CERTIFICATE Within thirty (30) days after written demand is delivered to the DECLARANT and upon payment of a reasonable fee established by DECLARANT, there shall be recorded an estoppel certificate executed by DECLARANT and certifying that as of the date thereof either (a) all improvements made or other work done on or within a Site complies with the VALENCIA INDUSTRIAL CENTER -14- RESTRICTIONS or (b) such improvements or work do not so comply in which event the certificate shall identify the non-complying improvements or work and set forth with particularity the cause or causes for such non-compliance. Any lessee, purchaser or encumbrancer in good faith for value shall be entitled to rely on said certificate with respect to the matters set forth therein, such matters being conclusive as between the DECLARANT and all such subsequent parties in interest. SECTION 3.7 LIABILITY DECLARANT shall not be liable for any damage, loss or prejudice suffered or claimed on account of (a) the approval or disapproval of any plans, drawings and specifications whether or not defective; (b) the construction or performance of any work whether or not pursuant to approved plans, drawings and specifications; (c) the development of any Site within the VALENCIA INDUSTRIAL CENTER; or (d) the execution and filing of an estoppel certificate pursuant to the preceding paragraph whether or not the facts therein are correct, provided that DECLARANT has acted in good faith. In addition to the foregoing, Declarant makes no representation, warranty or guarantee of any kind whatsoever as to the propriety, feasibility or integrity of any plans, drawings and specifications approved by Declarant pursuant to the provisions contained herein. -15- SECTION 3.8 REVIEW FEE A reasonable architectural review fee shall be paid to DECLARANT at such time as plans and specifications are submitted to it for approval. The determination of the exact amount of such fee shall be made from time to time by Declarant. ARTICLE IV LIMITATIONS ON IMPROVEMENTS SECTION 4.1 MINIMUM SETBACK LINES AND BUILDING TYPES No building or parking (except as expressly provided for in Sections 4.2 and 4.3 below) shall be maintained upon any Site within forty (40) feet of any street, and no building shall be maintained within fifteen (15) feet of the property line of any other Site, nor have exterior walls constructed of other than substantial construction including concrete and masonry, nor shall more than fifty percent (50%) of the area of any Site be built upon; nor shall any building be constructed upon any Site with a roof having a difference in elevation of more than two (2) feet unless approved in the manner hereinafter provided. -16- SECTION 4.2 OFFICE BUILDING(S) AND "HIGH TECH" BUILDING(S) Notwithstanding anything to the contrary contained in Section 4.1 above, any office building(s) and "high-tech" building(s) requiring a greater parking ratio than standard industrial buildings and whose location on the Site has a substantial setback from the street, may request a variance of the parking restriction within the forty (40') feet setback area from any street, provided a minimum of twenty-five (25') feet from the street curb is mounded or bermed to a height of not less than four (4') feet and landscaped so as to assure that all automobile parking within the forty (40') feet setback area is hidden from view from the street. Similarly, owners of Sites bordering dedicated streets on two sides may likewise request a variance of the forty (40') feet setback area on one street frontage (that being the street away from the building(s) or improvement(s) front) provided a minimum of twenty-five (25') feet from the street curb is mounded or bermed to a height of not less than four (4') feet and landscaped so as to assure that all automobile parking within the forty (40') feet setback area is hidden from view from the street. Nothing indicated herein shall be construed so to permit the granting of a variance providing for a landscaped setback area of less than twenty-five (25') feet within the Valencia Industrial Center. -17- SECTION 4.3 USE OF SETBACK AREAS Within the required setback area from streets there shall be maintained on each Site only paved walkways, paved driveways (hardscape), and lawns and landscaping, with the surface of each Site not covered by improvements being at all times maintained so as to be dust free. At least two-thirds (2/3) of the surface of the required setback area from streets shall be maintained in landscaping. SECTION 4.4 LANDSCAPING Every Site on which a building shall have been placed shall have landscape and exterior hardscape constructed in accordance with plans and specifications submitted to and approved by DECLARANT pursuant to Section 3.1 above. With the exception of those areas planted in shrubs or trees, the landscaped areas shall be maintained in grass lawn or approved ground cover. Landscaping and hardscape as approved by DECLARANT shall be installed within thirty (30) days of occupancy or completion of the building, whichever occurs first, unless DECLARANT approved in writing another completion date. After completion such landscaping and hardscape shall at all times be maintained in an attractive and well-kept condition. -18- SECTION 4.5 DRAINAGE No water shall be drained or discharged from any Site or Improvements thereon, and no Owner shall interfere with the drainage established as of the date of this Declaration, in or over the remainder of the real property or any other property adjacent to such Site, except in accordance with plans therefor approved by all public agencies having jurisdiction; provided that no water shall be drained or discharged at any time onto or diverted from any adjacent properties owned by Declarant. SECTION 4.6 SIGNS A. No signs projecting above the highest point on the roof line of any building or employing letters exceeding four (4) feet in height shall be used. No more than two business identification signs shall be used on any Site and no signs shall be painted on any structure. No flashing or moving lights shall be used. B. No signs shall be permitted other than those identifying the name, business and products of the person or firm occupying the premises constructed on any Site and those offering the premises for sale or for lease. The size and style of sale or lease signs shall first be approved by DECLARANT in writing. No more than one sign relating to the sale or leasing of the Site -19- may be used, and such sign shall not exceed fifteen (15) square feet. Monument signs identifying each building shall be encouraged however, the design, colors, materials and size shall first be approved by DECLARANT. C. Notwithstanding anything to the contrary contained in this Section 4.6, multi-tenant buildings shall be permitted one Tenant Directory Sign for each building. Said sign shall not exceed twelve (12) square feet and shall be approved by DECLARANT in writing as to design, color, and location of the sign on each Site. D. The location of all signs shall first be approved by DECLARANT. E. Signs and identifying markings on buildings or building Sites shall only be of such size, design and color as is first specifically approved by DECLARANT in writing. SECTION 4.7 PARKING AREAS Adequate off-street parking shall at all times be provided to accommodate all parking needs for employee, visitor and company vehicles on the Site. The intent of this provision is to eliminate the need for any on-street parking. No use shall be made of any Site at anytime which will attract parking in excess of the parking spaces then available thereon. -20- SECTION 4.8 STORAGE AND LOADING AREAS A. Unless specifically approved by DECLARANT in writing, no materials, supplies or equipment, including company-owned or operated trucks, mobile homes, boats, trailers, or recreation vehicles, shall at any time be stored in any area on a Site except inside a closed building, or behind a visual barrier screening such areas so that they are not visible from the neighboring Sites or public streets. Visual barrier screening to a height of not more than eight (8) feet shall be permitted only with the prior written approval of DECLARANT. B. Loading areas shall not encroach into setback areas. C. Loading docks shall be set back and screened to minimize the effect of their appearance from the street and so as not be visible from neighboring Sites. Docks shall not be closer than seventy (70) feet to the street property line, unless specifically approved by DECLARANT in writing. Loading shall be permitted to the rear of the setback line from that portion of a structure not fronting a street. SECTION 4.9 FENCING AND SCREENING OF STORAGE AREAS All areas requiring fencing shall be enclosed with a minimum six foot (6') high and maximum eight foot (8') high masonry wall, such as slumpstone, split face block wall with cap -21- or brick. Chain link fence shall be prohibited throughout the VALENCIA INDUSTRIAL CENTER. Gate construction shall be of wrought iron or other materials first approved by DECLARANT. SECTION 4.10 SCREENING - TRASH AREAS All trash areas shall be enclosed with a minimum six foot (6') high masonry wall, such as slumpstone, split face block wall with cap, or brick. All trash enclosures shall have blinds or gates. Chainlink gates shall only be permitted if faced with wooden slats so as to obscure view of trash containers. No trash containers or bins shall be maintained on any Site unless contained within a masonry trash enclosure. ARTICLE V REGULATION OF OPERATIONS AND USES SECTION 5.1 PERMITTED USES Each Site shall only be used for manufacturing, processing, storage, wholesale, office, laboratory, professional, research and development activities and/or other like uses which are permitted by the applicable zoning designation; No junk or salvage yard or any other use offensive to the neighborhood by reason of odor, fumes, dust, smoke, noise, or pollution or hazardous by reason of danger of fire or explosion, radiation, -22- electro-magnetic disturbances, toxic or non-toxic matter shall be permitted regardless of whether or not permitted by applicable zoning laws or ordinances. SECTION 5.2 RESTRICTIONS AND PROHIBITED USES A. PROHIBITED USES The following are examples of operations and uses which shall specifically not be permitted on any Site subject to the Valencia Industrial Center Restrictions 1. Residential 2. Commercial 3. Restaurants of all types 4. Trailer Courts 5. Labor Camps 6. Junk Yards 7. Drilling for and/or the removal of oil, gas or other hydrocarbon substances (except that this provision shall not be deemed to prohibit the entry of subject property below a depth of 500 feet for such purposes) 8. Commercial excavation of building or construction materials 9. Distillation of bones 10. Dumping, disposal, incineration or reduction of garbage, sewage, offal, dead animals or refuse 11. Fat Rendering 12. Stockyard or Slaughter of Animals -23- 13. Refining of Petroleum or of its Products 14. Smelting of Iron, Tin, Zinc or other Ores 15. Cemetaries 16. Jail or Honor Farms 17. Any and all operations and uses not compatible or harmonious with the establishment and maintenance of a high quality industrial park. B. NUISANCES No rubbish or debris of any kind shall be placed or permitted to accumulate upon or adjacent to any Site, and no odors shall be permitted to arise therefrom so as to render any Site or portion thereof unsanitary, unsightly, offensive or detrimental to any Site or property in the vicinity thereof or to the occupants thereof. No nuisance shall be permitted to exist or operate upon any Site so as to be offensive or detrimental to any property in the vicinity thereof or to its occupants. C. MAINTENANCE AND REPAIRS OF IMPROVEMENTS Each Site and all Improvements thereon shall at all times be constructed, kept and maintained in first class condition, repair and appearance similar to that maintained by DECLARANT and other owners of high-class properties of similar class and construction in Los Angeles County, ordinary wear and tear excepted. All repairs, alterations, replacements, or additions to Improvements shall be at least equal to the original work in class and quality. The -24- necessity and adequacy of such repairs shall be measured by the same standard as set forth above for the original construction and maintenance. Each owner shall also be responsible at all times for determining that all Improvements and the plans and specifications therefor shall conform and comply in all respects with the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, all other restrictions of record, all applicable governmental regulations, and all exterior architectural design, location and color specifications as may be approved by DECLARANT. Each Owner shall also adopt and maintain such standards of property space maintenance, appearance, and housekeeping as shall be reasonable and customary for similar operations or enterprises and shall enforce compliance with such standards by all tenants, occupants, or users of space. On request, DECLARANT shall be entitled receive copies of all such standards or similar rules or regulations in effect from time to time. Notwithstanding anything to the contrary contained in the foregoing all exterior surfaces shall be maintained in first-class condition and shall be repainted at least once in every four (4) years. D. MAINTENANCE OF UNIMPROVED SITES. Each and every Site shall be maintained at all times in a weed-free, clean, and presentable condition prior to such Site being improved with buildings and landscaping. -25- E. RIGHT OF ENTRY During reasonable hours, and subject to reasonable security requirements, DECLARANT, or its authorized representatives, shall have the right to enter upon and inspect any Site and the improvements thereon embraced for the purpose of ascertaining whether or not the provisions of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS have been or are presently being complied with and shall not be deemed guilty of trespass by reason of such entry. SECTION 5.3 OTHER OPERATIONS AND USES Operations and uses which are neither specifically prohibited nor specifically authorized by the VALENCIA INDUSTRIAL CENTER RESTRICTIONS shall be permitted in a specific case only if operational plans and specifications are first submitted to and approved in writing by DECLARANT. Approval or disapproval of such operational plans and specifications shall be based upon the effect of such operations or uses on other Sites subject to these restrictions or upon the occupants thereof, but shall be in the sole discretion of DECLARANT. -26- ARTICLE VI DURATION, MODIFICATION AND REPEAL SECTION 6.1 DURATION OF RESTRICTIONS The VALENCIA INDUSTRIAL CENTER RESTRICTIONS shall continue and remain in full force and effect at all times with respect to all Sites included in the VALENCIA INDUSTRIAL CENTER and each part thereof, now or hereafter made subject thereto (subject, however, to the right to amend and repeal as provided for herein) until January 1, 2015. However, unless within one year prior to January 1, 2015, there shall be recorded an instrument directing the termination of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS signed by owners of not less than two- thirds of the area of the real property then subject to the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, (based on the number of square feet of real property subject to the VALENCIA INDUSTRIAL CENTER RESTRICTIONS), the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, as in effect immediately prior to the expiration date shall be continued automatically without any further notice for an additional period of ten (10) years and thereafter for successive periods of ten (10) years unless within one (1) year prior to the expiration of any such period the VALENCIA INDUSTRIAL CENTER RESTRICTIONS are terminated as set forth above in this Section. -27- SECTION 6.2 TERMINATION AND MODIFICATION This DECLARATION, or any provision hereof, or any covenant, condition or restriction contained herein, may be terminated, extended, modified or amended, as to the whole of the real property or any portion thereof, with the written consent of the owners of seventy-five percent (75%) of the area of the real property subject to the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, based on the number of square feet of real property owned as compared to the total number of square feet of real property subject to the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, provided, however, that so long as DECLARANT owns at least twenty- five percent (25%) of the real property subject to the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, or for a period of fifteen (15) years from the effective date hereof, whichever period is longer, no such termination, extension, modification or amendment shall be effective without the written approval of DECLARANT thereto. No such termination, extension, modification or amendment shall be effective until a proper instrument in writing has been executed and acknowledged and recorded in the County where the real property affected thereby is situated. -28- ARTICLE VII ENFORCEMENT SECTION 7.1 ABATEMENT AND SUIT The conditions, convenants, restrictions and reservations herein contained shall run with the real property, and shall be binding upon and inure to the benefit of the DECLARANT, and the Owners of every Site on the real property. These conditions, convenants, reservations and restrictions may be enforced as provided hereinafter by DECLARANT acting for itself or as DECLARANT acting as trustee, on behalf of all of the Owners of Sites. Each Owner by acquiring an interest in a Site shall appoint irrevocably the DECLARANT as its attorney-in-fact for such purposes; provided, however that if an Owner of a Site notifies DECLARANT of a claimed violation of these conditions, convenants, restrictions and reservations in writing and DECLARANT fails to act within sixty (60) days after receipt of such notification, then, and in that event only, an Owner may separately, at its own cost and expense, enforce the conditions, covenants, restrictions and reservations herein contained and have all of the remedies provided for in Section 7.2 hereafter. SECTION 7.2 DEFAULT AND REMEDIES In the event of any breach, violation of failure to perform or satisfy any of the VALENCIA INDISTRIAL CENTER -29- RESTRICTIONS which has not been cured within thirty (30) days after written notice from DECLARANT to do so, DECLARANT in its sole option and discretion may enforce any one or more of the following remedies or any other rights or remedies to which DECLARANT may be entitled by law or equity, whether or not set forth herein. All remedies provided for herein or by law or in equity shall be cumulative and not mutually exclusive. A. DAMAGES DECLARANT may bring a suit for damages for any compensable breach of or noncompliance with any of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, or declaratory relief to determine the enforceability of any of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS. B. EQUITY It is recognized that a violation by an Owner of one or more of the foregoing restrictions may cause DECLARANT to suffer material injury or damage not compensable in money and that DECLARANT shall be entitled to bring an action in equity or otherwise for specific performance to enforce compliance with the VALENCIA INDUSTRIAL CENTER RESTRICTIONS or an injunction to enjoin the continuance of any such breach or violation thereof. C. ABATEMENT AND LIEN RIGHTS Any such breach or violation of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS or any provision hereof is hereby declared to be a nuisance, and DECLARANT shall be entitled to enter the Site or any portion -30- thereof as to which the breach or violation exists and summarily abate and remove, without further legal process to the maximum extent permitted by law, any structure, thing or condition that may exist in violation of any of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, or to prosecute any remedy allowed by law or equity for the abatement of such nuisance against any person or entity acting or failing to act in violation of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, all at the sole cost and expense of Owner or any person having possession under Owner. Any costs or expenses paid or incurred by DECLARANT in abating such nuisance or prosecuting any such remedy (including all reasonable attorneys' fees and costs of collection), together with interest thereon at the maximum rate permitted by law shall be a charge against the Site or any portion thereof as to which the breach or violation exists, shall be a continuing lien thereon until paid, and shall also be the personal obligation of that person or entity who was Owner when such charges became due and committed such breach or violation. In addition to any other rights or remedies hereunder, DECLARANT may deliver to Owner and record with the Los Angeles County Recorder a certificate or notice of claim of lien (which, among other things, may but need not recite the nature of the violation, the legal description of the Site or portion thereof affected by such violation, the record or reputed Owner thereof, DECLARANT'S name and address, and the remedies being pursued or the amount of any such claim being changed). If the -31- violation recited in such lien claim has not been cured to DECLARANT'S satisfaction and any recited amounts so charged have not been paid within 30 days thereafter, DECLARANT or DECLARANT'S authorized representatives may foreclose such lien by a sale conducted pursuant to Sections 2924, 2924b, and 2924c of the California Civil Code, as amended from time to time, or such other statutes applicable to the exercise of powers of sale in mortgages or deeds of trust, or in any other manner permitted by law. DECLARANT, through its authorized representatives, may bid on and acquire any Site or portion thereof subject to such lien at any such foreclosure sale. If the violations recited in such lien claim are timely cured and any recited amounts timely paid as provided above, an appropriate release of such lien shall be recorded by DECLARANT at Owner's sole cost and expense. SECTION 7.3 WAIVER No waiver by DECLARANT of a breach of any of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS and no delay or failure to enforce any of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS shall be construed or held to be a waiver of any succeeding or preceding breach of the same or any other of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS by that Owner or any other Owner of the Site, or any other Site. No waiver by DECLARANT of and breach or default hereunder shall be implied from any omission by DECLARANT to take any action on account of such breach or default -32- if such breach or default persists or is repeated, and no express waiver shall affect a breach or default other than as specified in said waiver. The consent or approval by DECLARANT to or of any act by an Owner requiring DECLARANT'S consent or approval shall not be deemed to waive or render unnecessary DECLARANT'S consent or approval to or of any subsequent similar acts by Owner. SECTION 7.4 COSTS OF ENFORCEMENT In the event any legal or equitable action or proceeding shall be instituted to enforce any provision of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS, the party prevailing in such action shall be entitled to recover from the losing party all of its costs, including court costs and reasonable attorney's fees. SECTION 7.5 RIGHTS OF LENDERS No breach or violation of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS shall defeat or render invalid the lien of any mortgage, deed of trust or similar instrument securing a loan made in good faith and for value with respect to the development or permanent financing of and Site or portion thereof; provided, however, all of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS shall be binding upon and effective against any subsequent Owner of the Site or any portion thereof whose title is acquired by foreclosure, trustee's sale, deed in lieu of foreclosure or -33- otherwise pursuant to such lien rights, but such subsequent Owner shall take title free and clear of any violations of the VALENCIA INDUSTRIAL CENTER RESTRICTIONS occurring prior to such transfer of title. ARTICLE VIII MISCELLANEOUS PROVISIONS SECTION 8.1 ASSIGNMENT OF RIGHTS AND DUTIES Any and all of the rights, powers and reservations of DECLARANT herein contained may be assigned to any person, corporation or association which will assume the duties of DECLARANT pertaining to the particular rights, powers and reservations assigned, and upon any such person, corporation or association's evidencing its consent in writing to accept such assignment and assume such duties, he or it shall, to the extent of such assignment, have the same rights and powers and be subject to the same obligations and duties as are given to and assumed by DECLARANT herein. The term DECLARANT as used herein includes all such assignees and their heirs, successors and assigns. If at any time DECLARANT ceases to exist and has not made such an assignment, a successor DECLARANT may be appointed in the same manner as the VALENCIA INDUSTRIAL CENTER RESTRICTIONS may be terminated, extended, modified or amended under Section 6.2 of Article VI. Any assignment or appointment made under this section shall be in record- -34- able form and shall be recorded in the County where the real property affected is situated. SECTION 8.2 CONSTRUCTIVE NOTICE AND ACCEPTANCE Every person or other entity who now or hereafter owns or acquires any right, title or interest in or to any portion of the real property made subject to the VALENCIA INDUSTRIAL CENTER RESTRICTIONS is and shall be conclusively deemed to have consented and agreed to every covenant, condition and restriction contained herein, whether or not any reference to this DECLARATION is contained in the instrument by which such person or entity acquired an interest in said real property. SECTION 8.3 WAIVER Neither DECLARANT nor its successors or assigns shall be liable to any owner, lessee, licensee, or occupant of a Site or of any portion of the real property subject to the VALENCIA INDUSTRIAL CENTER RESTRICTIONS by reason of any mistake in judgment, negligence, nonfeasance, action or inaction or for the enforcement or failure to enforce any provision of this DECLARATION. Every owner, lessee, licensee or occupant of any of Sites or any portion of the real property by acquiring his interest therein agrees that he will not bring any action or suit against DECLARANT to recover any such damages or to seek equitable relief. -35- SECTION 8.4 MUTUALITY, RECIPROCITY: RUNS WITH LAND All covenants, conditions, restrictions and agreements contained herein are made for the direct, mutual and reciprocal benefit of each and every Site and portion of the real property now or hereafter made subject to this DECLARATION; shall create mutual, equitable servitudes upon each Site and portion of the real property in favor of every other Site and portion of the real property; shall create reciprocal rights and obligations between the respective owners of all Sites and portions of the real property and privity of contract and estate between all grantees of said Sites and portions of the real property, their heirs, successors and assigns; and shall, as to the owner of each Site and portions of the real property, his heirs, successors and assigns, operate as covenants running with the land, for the benefit of all other Sites and portion of the real property. SECTION 8.5 NOTICES All notices, consents, requests, demands and other communications provided for herein shall be in writing and shall be deemed to have been duly given if and when personally served or 24 hours after being sent by United States registered or certified mail, return receipt requested, postage prepaid, to the intended party at its last known address. -36- SECTION 8.6 PARAGRAPH HEADINGS Paragraph headings, where used herein, are inserted for convenience only and are not intended to be a part of this DECLARATION or in any way to define, limit or describe the scope and intent of the particular paragraphs to which they refer. SECTION 8.7 EFFECT OF INVALIDATION If any provision of this DECLARATION is held to be invalid by any court, the invalidity of such provision shall not affect the validity of the remaining provisions hereof. -37- PERMITTED USES - HAZARDOUS SUBSTANCES 1. Not more than 10 gallons of 9% caustic soda solution. 2. Not more than 5 gallons of 3% hydrochloric acid solution. ------- ------- ------- ------- INITIAL INITIAL HERE EXHIBIT "C" HERE NR JJ ------- ------- ------- ------- GUARANTY OF LEASE The undersigned, ALEX SANDEL ("Guarantor"), whose address for notice and other purposes is 10445 Wilshire Boulevard, Apartment No. 1605, Los Angeles, California, 90024 in order to induce HERMAN ROSEN AND FLORENCE W. ROSEN, TRUSTEES OF THE HERMAN AND FLORENCE W. ROSEN FAMILY TRUST DATED DECEMBER 21, 1988, and HOWARD N. ROSEN AND CAROL L. ROSEN, TRUSTEES OF THE HOWARD AND CAROL ROSEN TRUST DATED APRIL 8, 1975 (individually and collectively, "Landlord"), to enter into that certain Standard Industrial/Commercial Single Tenant Lease-Net of even date herewith (the "Lease Agreement") pursuant to which Landlord has leased certain premises in the County of Los Angeles, State of California, located at 25136 Anza Drive, Valencia, California 91355 to FUTURE MEDIA PRODUCTIONS, INC., a California corporation ("Tenant"), does hereby covenant and agree as follows: 1. Guarantor hereby absolutely and unconditionally guarantees to Landlord the timely payment of all amounts that Tenant may at any time owe under the Lease Agreement or any extensions, holdovers, renewals or modifications thereof (collectively, the "Lease") and further guarantees to Landlord the full, faithful and timely performance by Tenant of all of the covenants, terms and conditions of the Lease. In the event Tenant shall default at any time in the payment of any rent or other sum whatsoever or in the performance of any of other covenant or obligation of Tenant under the Lease, then Guarantor, at its expense, shall on demand by Landlord (a) fully and promptly pay all such rent and sums (including, without limitation, all late charges and interest owing as a result of past due obligations of Tenant) and perform or cause to be performed all such covenants and obligations, and (b) pay to Landlord all costs and expenses reasonably incurred by Landlord (including, without limitation, court costs and actual attorneys' fees) as a result of or in connection with Tenant's default. Notwithstanding the foregoing, the total liability of Guarantor pursuant to this Guaranty shall not exceed One Hundred Twenty Thousand Dollars ($120,000.00), plus fees and costs (including attorneys fees and court costs) incurred by Landlord in the enforcement of this Guaranty. Guaranty agrees that the provisions of Paragraph 51 of the Lease dealing with arbitration of disputes shall be applicable to any disputes under this Guaranty. 2. Guarantor hereby authorizes Landlord, without notice or demand and without affecting Guarantor's liability hereunder, to from time to time (a) consent to any extension, acceleration or other modification in the time for any payment required under the Lease or consent to any other alteration of or otherwise waive the performance of any covenant, term or condition of the Lease in any respect; (b) consent to any act or event requiring Landlord's approval under the Lease, including, without limitation, any assignment or sublease thereof; (c) take and hold security for any payment or the performance of any covenant, term or condition of the Lease or exchange, waive or release any such security; and (d) apply such security or direct the order or manner of sale thereof in any fashion. Notwithstanding any termination of the Lease, this Guaranty of Lease shall survive and continue until all covenants and obligations of Tenant have been fully satisfied and Guarantor shall not be released from any obligation or liability hereunder, nor shall Guarantor have any right of subrogation against Tenant or any right to participate in any security held on Tenant's behalf, so long as Landlord shall have any claim against Tenant (including, without limitation, claims for future rent and other charges under the Lease) arising out of the Lease that has not been settled or discharged in full, except to the extent the amount of such security exceeds the amount of all such claims. 3. Guarantor hereby acknowledges that its obligations under this Guaranty of Lease are independent of and may exceed the obligations of Tenant under the Lease. Accordingly, Guarantor agrees that Landlord may bring a separate action against Guarantor, whether or not any action has been previously or will be subsequently brought against Tenant or Tenant is joined in such action, and may join Guarantor in any action or proceeding between Landlord against Tenant relating to the Lease. In addition, Guarantor waives all rights it may otherwise have to (a) require Landlord to proceed against Tenant or any other person or pursue any other remedy whatsoever; (b) complain of any delay in the enforcement of Landlord's rights under the Lease; or (c) require Landlord to proceed against or exhaust any security held on Tenant's or Guarantor's behalf. Guarantor further waives all defenses it may otherwise have arising by reason of any disability, defense or cessation of liability of Tenant (excluding, however, the defense of due performance under the Lease). Guarantor further waives the benefit of any statute of limitations affecting Guarantor's liability under this Guaranty of Lease. 4. Until all Tenant's obligations to Landlord have been discharged in full, Guarantor has no right of subrogation against Tenant. Guarantor waives its right to enforce any remedies that Landlord now has, or later may have, against Tenant. Guarantor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance of this Guaranty of Lease, and waives all notices of the existence, creation, or incurring of new or additional obligations. 5. Guarantor agrees that the term "Tenant" hereunder shall mean and include all licensees, assignees, subtenants and other persons directly or indirectly leasing or occupying any part of the premises under the Lease or operating or conducting any business in or from such premises; excluding, however, business invitees. If Landlord disposes of its interest in the lease, "Landlord", as used in this Guaranty of Lease, shall mean Landlord's successors. Without limiting the generality of the foregoing, Guarantor further agrees that Landlord, without notice to Guarantor, may assign or transfer the Lease, the right to receive rents or other sums payable under the Lease and/or this Guaranty of Lease, and no such assignment or transfer shall extinguish or diminish the liability of Guarantor, under this Guaranty of Lease. 6. Guarantor hereby assumes full responsibility for monitoring and making all necessary inquiries regarding all circumstances affecting Tenant's ability to perform its obligations under the Lease and releases Landlord from any duty it may otherwise have to make disclosures to Guarantor in this or any other regard. 7. Guarantor agrees that in the event Tenant, during the term of this Guaranty of Lease, shall become insolvent or shall be adjudicated a bankrupt, or shall file a petition for reorganization, arrangement or similar relief under any present or future provision of any federal or state bankruptcy laws or act, or if such a petition filed by creditors of Tenant shall be approved by court, or if Tenant shall seek a judicial readjustment of the rights of its creditors under any present or future federal or state law or if a receiver of all or part of its property and assets is appointed by any federal or state court, and in any such proceeding the lease shall be terminated or rejected, or the obligations of Tenant thereunder shall be modified, the liability of the Guarantor hereunder shall not be impaired, modified, changed or released. 8. If Guarantor is more than one person, Guarantor's obligations are joint and several and are independent of Tenant's obligations. A separate action may be brought or prosecuted against any Guarantor whether the action is brought or prosecuted against any other Guarantor or Tenant, or all, or whether any other Guarantor or Tenant, or all, are joined in the action. The release or limitation of liability of any Guarantor hereunder shall not release or limit the liability of any other Guarantor hereunder. 9. The provisions of the Lease may be changed by agreement between Landlord and Tenant at any time, or by course of conduct, without the consent of or without notice to Guarantor. This Guaranty of Lease shall guarantee the performance of the lease as changed. Assignment of the Lease (as permitted by the Lease) shall not affect this Guaranty of Lease. 10. This Guaranty of Lease shall not be affected by Landlord's failure or delay to enforce any of its rights. 11. This Guaranty of Lease shall be binding upon Guarantor and its successors, heirs, personal representatives and assigns and shall inure to the benefit of Landlord and its successors, heirs, personal representatives and assigns. 12. In the event of any action or proceeding between Guarantor and Landlord arising out of or relating to this Guaranty of Lease, the unsuccessful party thereto shall pay to the successful party all costs and expenses, including, without limitation court costs and reasonable attorneys' fees, incurred by it therein and if such successful party shall recover judgment in any such action or proceeding, such costs, expenses and attorneys' fees may be included in and as part of such judgment. The successful party shall be the party who is entitled to recover its costs of suit, whether or not the suit proceeds to final judgment. 13. This Guaranty of Lease shall be deemed to be made under and shall be governed by the laws of the State of California in all respects, including matters of construction, validity and performance, and the terms and provisions hereunder may not be waived, altered, modified or amended except in a writing duly signed by both Landlord and Guarantor. 14. If any of the provisions of this Guaranty of Lease shall contravene or be held invalid for any reason, this Guaranty of Lease shall be construed as if it did not contain those provisions and the rights and obligations of the parties hereof shall be enforced accordingly. IN WITNESS WHEREOF, Guarantor has executed this Guaranty of Lease as of August 24, 1994. /s/ ALEX SANDEL --------------------------------------- ALEX SANDEL 2. FUTURE MEDIA PRODUCTIONS, INC. SECRETARY'S CERTIFICATE OF BOARD OF DIRECTORS RESOLUTIONS I, Mike Lev, do hereby certify that I am the Secretary of Future Media Productions, Inc. ("Corporation"), a corporation duly organized and existing under and by virtue of the laws of the State of California and am keeper of the records and seal thereof; that the following is true, correct and complete copy of the resolution duly adopted by the unanimous consent of all of the members of the Board of Directors of said Corporation on August 24, 1994, and that said resolutions are still in full force and effect. WHEREAS, the Corporation has negotiated for lease of premises at 25136 Anza Drive, Valencia, California and; WHEREAS, it has been determined by the Directors that execution of said lease is in the best interest of the Corporation. THEREFORE, BE IT RESOLVED that Alex Sandel, President of the Corporation and Mike Lev, Secretary of the Corporation are hereby authorized to execute on behalf of the Corporation a lease agreement in accordance with Exhibit "A", a copy of which is attached hereto, and made a part hereof. RESOLVED further that the foregoing officers are hereby authorized to take any and all actions necessary to carry out the purpose of the said lease agreement. The foregoing action is taken by the unanimous written consent of the directors of the Corporation acting without a meeting pursuant to the provisions of Section 307 (b) of the California Corporation Code, and such action shall be deemed taken as of the 24th day of August, 1994. I DO CERTIFY, that the transactions contemplated by this resolution has been authorized by the unanimous consent of the Board of Directors of the Corporation, which authorization is still in full force and effect. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Seal of the Corporation at Woodland Hills, California this 24th day of August 1994. /s/ Mike Lev ------------------------- Mike Lev, Secretary AFFIX CORPORATE SEAL INDUSTRIAL REAL ESTATE LEASE - EXHIBIT "A" DESCRIPTION OF PROPERTY Property Address: 25136 West Anza Drive, Santa Clarita, CA 91355 Legal Description: Parcel A: Parcel 18 in the County of Los Angeles, State of California, as shown upon Parcel Map No. 12009 filed in Book 182 Pages 47 to 54 inclusive of Parcel Maps, in the office of the County Recorder of said County. Parcel B: A non-exclusive easement for purposes of ingress and egress over the easterly 13 feet of Parcel 17 of said Parcel Map No. 12009, filed in Book 182 pages 47 to 54 inclusive of Parcel Maps, extending from the most northerly terminus of the easterly line of said Parcel 17 a distance of 356.00 feet in a southerly direction. [SITE AND ROOF PLAN GRAPHIC] SITE AND ROOF PLAN ----------------------------------------------------[LOGO] Initials Exhibit "A" Initials: --------- ----------- EX-10.9 11 LEASE AGREEMENT DATED MAY 1, 1997 EXHIBIT 10.9 [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET (DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS) 1. BASIC PROVISIONS ("BASIC PROVISIONS") 1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only, May 1, 1997, is made by and between Bascal Properties II, 9314 Eton Ave., Chatsworth, CA 91311 ("Lessor") and Future Media Productions, 25136 Anza Dr., Valencia, CA 91355, ("Lessee") (collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 24833 Anza Dr., Valencia, CA 91355 located in the County of Los Angeles, State of California and generally described as (describe briefly the nature of the property and, if applicable, the "PROJECT", if the property is located within a Project) 28,495 square foot concrete tilt-up building situated on approximately 58,256 square feet on BP zoned land. (PREMISES). (See also Paragraph 2) 1.3 TERM: Ten years and No months ("ORIGINAL TERM") commencing June 1, 1997 ("COMMENCEMENT DATE" and ending May 31, 2007 ("EXPIRATION DATE"). (See also Paragraph 3) 1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). See also Paragraphs 3.2 and 3.3) 1.5 BASE RENT: $ 20,000 per month ("BASE RENT"), payable on the 26th day of each month commencing see addendum Paragraph 50 (See also Paragraph 4) / / if this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID UPON EXECUTION: $20,000 as Base Rent for the period June 1997. 1.7 SECURITY DEPOSIT: $20,000 upon execution ("SECURITY DEPOSIT"). (See also Paragraph 5) 1.8 AGREED USE: Any legal purpose. (See also Paragraph 6) 1.9 INSURING PARTY. Lessor is the "INSURING PARTY" unless otherwise stated herein. (See also Paragraph 8) 1.10 REAL ESTATE BROKERS: (See also Paragraph 15) (a) REPRESENTATION: The following real estate brokers (collectively, the "BROKERS") and brokerage relationships exist in this transaction (check applicable boxes): / / N/A represents Lessor exclusively ("LESSOR'S BROKER"); / / N/A represents Lessee exclusively ("LESSEE'S BROKER"); or / / N/A represents both Lessor and Lessee ("DUAL AGENCY"). (b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their separate written agreement (or if there is no such agreement, the sum of N/A % of the total Base Rent for the brokerage services rendered by said Broker). 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed N/A ("GUARANTOR"). (See also Paragraph 37). 2.23 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda consisting of Paragraphs 50 through ______ and Exhibit N/A, all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided therein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon is not subject to revision whether or not the actual size is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("START DATE"), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee within thirty (30) days following the Start Date, warrants that existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, if any, all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the "BUILDING") shall be free of material defects. If a non-compliance with said warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If, after the start Date, Lessee does not give Lessor written notice of any non-compliance with this warranty within: (i) one year as to the surface of the roof and the structural portions of the roof, foundations and bearing walls, (ii) six (6) months as to the HVAC systems, (iii) sixty (6) days as to the remaining systems and other elements of the Building, correction of such non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. SEE ADDENDUM 51 2.3 COMPLIANCE. Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations and ordinances ("APPLICABLE REQUIREMENTS") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning is appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty. Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Start Date, correction of the non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("CAPITAL EXPENDITURE"), Lessor and Lessee shall allocate the cost of such work as follows: PAGE 1 (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notion that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to six (6) months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) if such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(c); provided, however, that if such Capital Expenditure is required during the last two years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and falls to tender its shares of any such Capital Expenditure, Lessee may advance such funds and deduct same, with interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon thirty (30) days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in the that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4 ACKNOWLEDGMENTS. Lessee acknowledges that: (a) it has been advised by Lessor to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor's agents has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: and (b) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receive possession of the Premises. If possession is not delivered within sixty (60) days after the Commencement Date. Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee when required and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within four (4) months after the Commencement Date. (this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. 3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. RENT. 4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("RENT"). 4.2 PAYMENT. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due. Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution thereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request thereof deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increaseth Security Deposit to the extent necessary, in Lessor's reasonable judgement, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit be at a commercially reasonable level based on said change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold PAGE 2 or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (c) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT ENTERED INTO BY LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS UNDER THIS LEASE WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO AGREED BY LESSOR IN WRITING AT THE TIME OF SUCH AGREEMENT. (e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by the gross negligence, or intentional acts of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. (g) LANDLORD TERMINATION OPTION. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination. 7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) IN GENERAL. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep PAGE 3 Initials ---- ---- the Premises, Utility Installations, and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, HVAC, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building. (b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, ("BASIC ELEMENTS"), if any, as and when installed on the Premises: (i) HVAC equipment, (iii) fire protection systems, (iv) landscaping, (v) and (viii) any other equipment, if reasonably required by Lessor. (c) REPLACEMENT. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if the Basic Elements described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such Basic Elements, then such Basic Elements shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then commercially reasonable in the judgment of Lessor's accountants), with Lessee reserving the right to prepay its obligation at any time. 7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. SEE ADDENDUM PARAGRAPH 52 (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10,000 in any one year. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) REMOVAL. By delivery to Lessee of written notice from Lessor not later than ninety (90) days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. 8. INSURANCE; INDEMNITY. SEE ADDENDUM PARAGRAPH 53 8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee PAGE 4 Initials ---- ---- and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor and to any Lender insuring loss or damage to Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in not event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss. (b) RENTAL VALUE. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of Rent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. 8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE. (a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) BUSINESS INTERRUPTION. If reasonably available, and if Lessor requests Lessee to do so in writing, Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 INSURANCE POLICIES. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 INDEMNITY. Except for Lessor's sole negligence, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY UNLESS CAUSED BY THE NEGLIGENCE OR INTENTIONALLY WRONGFUL ACTS OR OMISSIONS OF LESSOR OR ITS AGENTS. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in three (3) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations, which cannot reasonably be repaired in three (3) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total. PAGE 5 Initials ________ _______ (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and with deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not an insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the uninsured loss exceeds $500,000 terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as provided in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving a written termination notice to Lessee within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) ABATEMENT. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) REMEDIES. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect. "COMMENCE" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises. Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, but not including, a change in the ownership of the Premises. 10.2 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes applicable to the Premises during the term of this Lease. Subject to Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior to any delinquency date. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes shall cover any period of time prior to or after the expiration or PAGE 6 Initials ________ _______ termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment. If Lessee shall fail to pay any required Real Property Taxes, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In the event Lessee incurs a late charge on any Rent payment, Lessor may, at Lessor's option, estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of Its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may at the option of Lessor, be treated as an additional Security Deposit. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement. 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered. 12. ASSIGNMENT AND SUBLETTING. SEE ADDENDUM PARAGRAPH 54 12.1 LESSOR'S CONSENT REQUIRED. PAGE 7 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the Lessee to comply with or perform any of the material terms, covenants, conditions or rules under this Lease. A "BREACH" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period: (a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee. (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice to Lessee. (d) A Default by Lessee as to the material terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a),(b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. PAGE 8 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten percent (10%) of each such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.6 BREACH BY LESSOR. (a) NOTICE OF BREACH. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more the thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "CONDEMNATION"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of any building, or more than twenty-five percent(25%) of the land area not occupied by any building, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder in connection with this Lease, and that no one is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fee reasonably incurred with respect thereto. 16. TENANCY STATEMENT/ESTOPPEL CERTIFICATE. 16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party an estoppel certificate in writing, in form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. DEFINITION OF LESSOR. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises of this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15 upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. PAGE 9 19. DAYS. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. LIMITATION ON LIABILITY. Except with respect to Lessor's fraud, gross negligence or willful misconduct, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against and rents, issues, and profits there from the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. NO PRIOR OR OTHER ARRANGEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Paries with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with 23. NOTICES. 23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2 DATE OF NOTICE. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver of the Default or Breach of any term, covenant or condition hereof shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damage due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to one hundred twenty-five percent (125%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the parties, but rather according to its fair meaning as a whole, as if both parties had prepared it. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device, by giving written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within sixty (60) days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non- Disturbance Agreement within said sixty (60) days, then Lessee's option, directly contact Lessor's lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises. Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein. 31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or PAGE 10 judgment. The term, "Prevailing Party" shall include, without limitation, a Party who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times upon reasonable advance notice for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "For Sale" signs and Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "For Lease" signs. Lessee may at any time place on or about the Premises any ordinary "For Sublease" sign. 33. AUCTIONS. Lessee shall not conduct, not permit to be conducted, any auction upon the Premises without Lessor's reasonable prior written consent. 34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request. 38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. OPTIONS. SEE ADDENDUM PARAGRAPH 55 39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the term of; (b) the right of first refusal or first offer to lease either the Premises; (c) the right to purchase or the right of first refusal to purchase the Premises. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given three (3) or more notices of Default, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. 44. AUTHORITY. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall, within thirty (30) days after request, deliver to the other party satisfactory evidence of such authority. PAGE 11 Initials ____ ___ 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 48. MULTIPLE PARTIES. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease / / is / / is not attached to this Lease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. - -------------------------------------------------------------------------------- ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES, THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED. - -------------------------------------------------------------------------------- The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: Executed at: _________________________ ___________________________ on: on: __________________________________ _____________________________________ By LESSOR: By LESSOR: BASCAL PROPERTIES II a FUTURE MEDIA PRODUCTIONS - ------------------------------------- ------------------------------------- California general partnership - ------------------------------------- _____________________________________ By: /s/ ALEX SANDEL /s/ ALEX SANDEL ---------------------------------- ------------------------------------- Name Printed: Alex Sandel Name Printed: Alex Sandel ----------------------- ----------------------- Title: General Partner Title: President ------------------------------- ------------------------------ By: __________________________________ _____________________________________ Name Printed: Name Printed: ________________________ ________________________ Title: Title: _______________________________ _______________________________ Address: 9314 Eton Ave. Address: 25136 Anza Dr. ----------------------------- ----------------------------- Chatsworth, CA 91311 Valencia, CA 91355 ----------------------------- ----------------------------- Telephone: (818) 773-5530 Telephone: (805) 294-5575 --------------------- --------------------- Facsimile: ( ) Facsimile: ( ) _____________________ _____________________ Federal ID No. Federal ID No. _______________________ _______________________ PAGE 12 ADDENDUM to STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET, dated as of May 1, 1997, by and between BASCAL PROPERTIES II, a California general partnership, as a Lessor, and Future Media corporation, as Lessee, for Premises commonly known as 24833 Anza Drive, Valencia, CA 91355 - ------------------------------------------------------------------------------- 50. BASE RENT. Base Rent is to be paid, in advance, on the twenty-sixth day of the preceding month. A ten percent (10%) penalty shall be paid by Lessee to Lessor if Base Rent is received by the Lessor later than the twenty-sixth (26th) day of the month. The initial $20,000 Base Rent shall increase or decrease annually, commencing June 1, 1998, by the annual change in the Consumer Price Index for the prior calendar year, provided, however, in no event shall the Base Rent be less than $20,000 per month. "Consumer Price Index" shall mean the Consumer Price Index published by the Bureau of Labor Statistics of the United States Department of Labor for urban consumers in the Los Angeles metropolitan area. 51. CONDITION. Time periods for notices in this Paragraph 2.2 shall run from the date of discovery of a defect if the defect was not readily discoverable as of the Start Date. 52. UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. Notwithstanding Paragraph 7.3, at all times prior to June 1, 1997 Lessee may make Utility Installations and Alterations and install Trade Fixture without the consent of Lessor being required, and any such actions by Lessee shall be deemed consented to by Lessor. Notwithstanding Paragraph 7.4, such installations or alterations by Lessee shall not be subject to the removal or restoration requirements of Paragraph 7.4. 53. INSURANCE; INDEMNITY. The Insuring Party under this Lease shall be the Lessee. 54. ASSIGNMENT AND SUBLETTING. Lessee may voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in this Lease or in the Premises, without Lessor's prior written consent. No mortgage, subletting, assignment or other transfer or encumbrance shall release Lessee or Lessee's obligations or alter the primary liability of Lessee to pay the rent and to perform all other obligations to be performed by Lessee hereunder. The acceptance of rent by Lessor from any other person shall not be deemed to be a waiver by Lessor of any provision hereof. In the event of default by an assignee of Lessee or any successor of Lessee, in the performance of any of the terms hereof, Lessor may proceed directly against Lessee without the necessity of exhausting remedies against said assignee. 55. OPTION. Lessor hereby grants to Lessee two (2) consecutive five (5) year Option to extend the term of this Lease from June 1, 2007 through and including May 31, 2012, the first option, and June 1, 2012 through and including May 31, 2017, the second option. The Base Rent shall continue being adjusted each year as though the Option periods were part of the original term. Lessee may exercise the Option by giving Lessor written notice of Lessee's election to do so no later than September 31, 2006, the first option, and no later than September 31, 2011 for the second option. Bascal Properties II (Lessor) Future Media (Lessee) By: , Partner By: __________________ ____________________ By: , Partner Title: __________________ _________________ By: , Partner __________________ EX-10.10 12 LOAN AND SECURITY AGREEMENT DATED FEBRUARY 26, 1997 EXHIBIT 10.10 [LOGO] LOAN AND SECURITY AGREEMENT BORROWER: FUTURE MEDIA PRODUCTIONS, INC. ADDRESS: 25136 ANZA DRIVE VALENCIA, CALIFORNIA 91355 DATE: FEBRUARY 26, 1997 This Loan and Security Agreement is entered into on the above date between GREYROCK BUSINESS CREDIT, a Division of NationsCredit Commercial Corporation ("GBC"), whose address is 10880 Wilshire Blvd. Suite 950, Los Angeles, CA 90024 and the borrower named above ("Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). The Schedule to this Agreement (the "Schedule") being signed concurrently is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 8 below.) 1. LOANS. 1.1 LOANS. GBC will make loans to Borrower (the "Loans"), in amounts determined by GBC in its sole discretion, up to the amounts (the "Credit Limit") shown on the Schedule, provided no Default or Event of Default has occurred and is continuing. If at any time or for any reason the total of all outstanding Loans and all other Obligations exceeds the Credit Limit, Borrower shall immediately pay the amount of the excess to GBC, without notice or demand. 1.2 INTEREST. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement or in another written agreement signed by GBC and Borrower. Interest shall be payable monthly, on the last day of the month. Interest may, in GBC's discretion, be charged to Borrower's loan account, and the same shall thereafter bear interest at the same rate as the other Loans. 1.3 FEES. Borrower shall pay GBC the fee(s) shown on the Schedule, which are in addition to all interest and other sums payable to GBC and are not refundable. 2. SECURITY INTEREST. 2.1 SECURITY INTEREST. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to GBC a security interest in all of Borrower's interest in the following, whether now owned or hereafter acquired, and wherever located (collectively, the "Collateral"): All Inventory, Equipment, Receivables, and General Intangibles, including, without limitation, all of Borrower's Deposit Accounts, all money, all collateral in which GBC is granted a security interest pursuant to any other present or future agreement, all property now or at any time in the future in GBC's possession, and all proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties), all products of the foregoing, and all books and records related to any of the foregoing. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. In order to induce GBC to enter into this Agreement and to make Loans, Borrower represents and warrants to GBC as follows, and Borrower covenants that the following representations will continue to be true, and that Borrower will at all times comply with all of the following covenants: 3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a material adverse effect on Borrower. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), (iii) do not violate Borrower's articles or certificate of incorporation, or Borrower's by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (iv) do not constitute grounds for acceleration of any material indebtedness or obligation under any material agreement or instrument which is binding upon Borrower or its property. 3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed on the Schedule are all prior names of Borrower and all of Borrower's present and prior trade names. Borrower shall give GBC 30 days' prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name. -1- 3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Borrower will give GBC at least 30 days prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower's Address or one of the locations set forth on the Schedule. 3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased by Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. GBC now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend GBC and the Collateral against all claims of others. So long as any Loan is outstanding which is a term loan, none of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever requested by GBC, use its best efforts to cause such third party to execute and deliver to GBC, in form acceptable to GBC, such waivers and subordinations as GBC shall specify, so as to ensure that GBC's rights in the Collateral are, and will continue to be, superior to the rights of any such third party. Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. 3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good working condition, ordinary wear and tear excepted, and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise GBC in writing of any material loss or damage to the Collateral. 3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with generally accepted accounting principles. 3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now or in the future delivered to GBC have been, and will be, prepared in conformity with generally accepted accounting principles and now and in the future will completely and fairly reflect the financial condition of Borrower, at the times and for the periods therein stated. Between the last date covered by any such statement provided to GBC and the date hereof, there has been no material adverse change in the financial condition or business of Borrower. Borrower is now and will continue to be solvent. 3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely filed, and will timely file, all tax returns and reports required by applicable law, and Borrower has timely paid, and will timely pay, all applicable taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies GBC in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or any other governmental agency. Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic deposit of all payroll taxes payable by Borrower. 3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all material respects, with all provisions of all applicable laws and regulations, including, but not limited to, those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and all environmental matters. 3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which may result, either separately or in the aggregate, in any material adverse change in the financial condition or business of Borrower, or in any material impairment in the ability of Borrower to carry on its business in substantially the same manner as it is now being conducted. Borrower will promptly inform GBC in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of $50,000 or more, or involving $100,000 or more in the aggregate. 3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for lawful business purposes. 4. RECEIVABLES. 4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and warrants to GBC as follows: Each Receivable with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, represent an undisputed, bona fide, existing, unconditional obligation of the Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services, in the ordinary course of Borrower's business. -2- 4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower represents and warrants to GBC as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower's books and records are and shall be genuine and in all respects what they purport to be, and all signatories and endorsers have the capacity to contract. All sales and other transactions underlying or giving rise to each Receivable shall comply with all applicable laws and governmental rules and regulations. All signatures and indorsements on all documents, instruments, and agreements relating to all Receivables are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms. 4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver to GBC transaction reports and loan requests, schedules and assignments of all Receivables, and schedules of collections, all on GBC's standard forms; provided, however, that Borrower's failure to execute and deliver the same shall not affect or limit GBC's security interest and other rights in all of Borrower's Receivables, nor shall GBC's failure to advance or lend against a specific Receivable affect or limit GBC's security interest and other rights therein. Together with each such schedule and assignment, or later if requested by GBC, Borrower shall furnish GBC with copies (or, at GBC's request, originals) of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to GBC an aged accounts receivable trial balance in such form and at such intervals as GBC shall request. In addition, Borrower shall deliver to GBC the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables, immediately upon receipt thereof and in the same form as received, with all necessary indorsements. 4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all Receivables, unless and until a Default or an Event of Default has occurred. Borrower shall hold all payments on, and proceeds of, Receivables in trust for GBC, and Borrower shall deliver all such payments and proceeds to GBC, within one business day after receipt of the same, in their original form, duly endorsed, to be applied to the Obligations in such order as GBC shall determine. 4.5 DISPUTES. Borrower shall notify GBC promptly of all disputes or claims relating to Receivables on the regular reports to GBC. Borrower shall not forgive, or settle any Receivable for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm's length transactions, which are reported to GBC on the regular reports provided to GBC; (ii) no Default or Event of Default has occurred and is continuing; and (iii) taking into account all such settlements and forgiveness, the total outstanding Loans and other Obligations will not exceed the Credit Limit. 4.6 RETURNS. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower in the ordinary course of its business, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount (sending a copy to GBC). In the event any attempted return occurs after the occurrence of any Event of Default, Borrower shall (i) not accept any return without GBC's prior written consent, (ii) hold the returned Inventory in trust for GBC, (iii) segregate all returned Inventory from all of Borrower's other property, (iv) conspicuously label the returned Inventory as GBC's property, and (v) immediately notify GBC of the return of any Inventory, specifying the reason for such return, the location and condition of the returned Inventory, and on GBC's request deliver such returned Inventory to GBC. 4.7 VERIFICATION. GBC may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of Borrower or GBC or such other name as GBC may choose, and GBC or its designee may, at any time, notify Account Debtors that it has a security interest in the Receivables. 4.8 NO LIABILITY. GBC shall not under any circumstances be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall GBC be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to a Receivable. Nothing herein shall, however, relieve GBC from liability for its own gross negligence or willful misconduct. 5. ADDITIONAL DUTIES OF THE BORROWER. 5.1 INSURANCE. Borrower shall, at all times, insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to GBC, in such form and amounts as GBC may reasonably require, and Borrower shall provide evidence of such insurance to GBC, so that GBC is satisfied that such insurance is, at all times, in full force and effect. All such insurance policies shall name GBC as an additional loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to GBC. Upon receipt of the proceeds of any such insurance, GBC shall apply such proceeds in reduction of the Obligations as GBC shall determine in its sole discretion, except that, provided no Default or Event of Default has occurred and is continuing, GBC shall release to Borrower insurance proceeds with respect to Equipment totaling less than $100,000, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the insurance proceeds were paid. GBC may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, GBC may, but is not obligated to, obtain the same at Borrower's expense. Borrower shall promptly deliver to GBC copies of all reports made to insurance companies. -3- 5.2 REPORTS. Borrower, at its expense, shall provide GBC with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as GBC shall from time to time reasonably specify. 5.3 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one business day's notice, GBC, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower's books and records. GBC shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but GBC shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The foregoing inspections and audits shall be at Borrower's expense and the charge therefor shall be $600 per person per day (or such higher amount as shall represent GBC's then current standard charge for the same), plus reasonable out-of-pockets expenses. Borrower shall not be charged more than $3,000 per audit (plus reasonable out-of-pockets expenses), nor shall audits be done more frequently than four times per calendar year, provided that the foregoing limits shall not apply after the occurrence of a Default or Event of Default, nor shall they restrict GBC's right to conduct audits at its own expense (whether or not a Default or Event of Default has occurred). Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower's books or records at any location other than Borrower's Address, without first obtaining GBC's written consent, which may be conditioned upon such accounting firm, service bureau or other third party agreeing to give GBC the same rights with respect to access to books and records and related rights as GBC has under this Agreement. 5.4 REMITTANCE OF PROCEEDS. All proceeds arising from the sale or other disposition of any Collateral shall be delivered, in kind, by Borrower to GBC in the original form in which received by Borrower not later than the following business day after receipt by Borrower, to be applied to the Obligations in such order as GBC shall determine; provided that, if no Default or Event of Default has occurred and is continuing, and if no term loan is outstanding hereunder, then Borrower shall not be obligated to remit to GBC the proceeds of the sale of Equipment which is sold in the ordinary course of business, in a good-faith arm's length transaction. Except for the proceeds of the sale of Equipment as set forth above, Borrower shall not commingle proceeds of Collateral with any of Borrower's other funds or property, and shall hold such proceeds separate and apart from such other funds and property and in an express trust for GBC. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. 5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule, Borrower shall not, without GBC's prior written consent, do any of the following: (i) merge or consolidate with another corporation or entity; (ii) acquire any assets, except in the ordinary course of business; (iii) enter into any other transaction outside the ordinary course of business; (iv) sell or transfer any Collateral, except that, provided no Default or Event of Default has occurred and is continuing, Borrower may (a) sell finished Inventory in the ordinary course of Borrower's business, and (b) if no term loan is outstanding hereunder, sell Equipment in the ordinary course of business, in good-faith arm's length transactions; (v) store any Inventory or other Collateral with any warehouseman or other third party; (vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; (vii) make any loans of any money or other assets; (viii) incur any debts, outside the ordinary course of business, which would have a material, adverse effect on Borrower or on the prospect of repayment of the Obligations; (ix) guarantee or otherwise become liable with respect to the obligations of another party or entity; (x) pay or declare any dividends on Borrower's stock (except for dividends payable solely in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock; (xii) make any change in Borrower's capital structure which would have a material adverse effect on Borrower or on the prospect of repayment of the Obligations; or (xiii) dissolve or elect to dissolve; or (xiv) agree to do any of the foregoing. 5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be instituted by or against GBC with respect to any Collateral or in any manner relating to Borrower, Borrower shall, without expense to GBC, make available Borrower and its officers, employees and agents, and Borrower's books and records, without charge, to the extent that GBC may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 5.7 NOTIFICATION OF CHANGES. Borrower will promptly notify GBC in writing of any change in its officers or directors, the opening of any new bank account or other deposit account, and any material adverse change in the business or financial affairs of Borrower. 5.8 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by GBC, to execute all documents and take all actions, as GBC may deem reasonably necessary or useful in order to perfect and maintain GBC's perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement. 5.9 INDEMNITY. Borrower hereby agrees to indemnify GBC and hold GBC harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties, costs and expenses (including attorneys' fees), of every nature, character and description, which GBC may sustain or incur based upon or arising out of any of the Obligations, any actual or alleged failure to collect and pay over any withholding or other tax relating to Borrower or its employees, any relationship or agreement between GBC and Borrower, any actual or alleged failure of GBC to comply with any writ of attachment or other legal process relating to Borrower or any of its property, or any other matter, cause or thing whatsoever occurred, done, omitted or suffered to be done by GBC relating to Borrower or the Obligations (except any such amounts sustained or incurred as the result of the gross negligence or willful misconduct of GBC or any of its directors, officers, employees, agents, attorneys, or any other person affiliated with or representing GBC). Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect. -4- 6. TERM. 6.1 MATURITY DATE. This Agreement shall continue in effect until the maturity date set forth on the Schedule (the "Maturity Date"); provided that the Maturity Date shall automatically be extended, and this Agreement shall automatically and continuously renew, for successive additional terms of one year each, unless one party gives written notice to the other, not less than sixty days prior to the next Maturity Date, that such party elects to terminate this Agreement effective on the next Maturity Date. 6.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity Date as follows: (i) by Borrower, effective three business days after written notice of termination is given to GBC; or (ii) by GBC at any time after the occurrence of an Event of Default, without notice, effective immediately. If this Agreement is terminated by Borrower or by GBC under this Section 6.2, Borrower shall pay to GBC a termination fee (the "Termination Fee") in the amount shown on the Schedule. The Termination Fee shall be due and payable on the effective date of termination and thereafter shall bear interest at a rate equal to the highest rate applicable to any of the Obligations. 6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Without limiting the generality of the foregoing, if on the Maturity Date, or on any earlier effective date of termination, there are any outstanding letters of credit issued based upon an application, guarantee, indemnity or similar agreement on the part of GBC, then on such date Borrower shall provide to GBC cash collateral in an amount equal to 110% of the face amount of all such letters of credit plus all interest, fees and costs due or (in GBC's estimation) likely to become due in connection therewith, to secure all of the Obligations relating to said letters of credit, pursuant to GBC's then standard form cash pledge agreement. Notwithstanding any termination of this Agreement, all of GBC's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that, without limiting the fact that Loans are subject to the discretion of GBC, GBC may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of GBC, nor shall any such termination relieve Borrower of any Obligation to GBC, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, GBC shall promptly deliver to Borrower termination statements, requests for reconveyances and such other documents as may be reasonably required to terminate GBC's security interests. 7. EVENTS OF DEFAULT AND REMEDIES. 7.1 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and Borrower shall give GBC immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to GBC by Borrower or any of Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading in a material respect; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit; or (d) Borrower shall fail to perform any non-monetary Obligation which by its nature cannot be cured; or (e) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within 5 business days after the date performance is due; or (f) any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within 10 days after the occurrence of the same; or (g) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (h) Borrower breaches any material contract or obligation, which has or may reasonably be expected to have a material adverse effect on Borrower's business or financial condition; or (i) dissolution, termination of existence, insolvency or business failure of Borrower or any Guarantor; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower or any Guarantor under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (j) the commencement of any proceeding against Borrower or any Guarantor under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within 45 days after the date commenced; or (k) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing; or (l) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (m) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits or terminates its subordination agreement; or (n) there shall be a change in the record or beneficial ownership of an aggregate of more than 20% of the outstanding shares of stock of Borrower, in one or more transactions, compared to the ownership of outstanding shares of stock of Borrower in effect on the date hereof, without the prior written consent of GBC; or (o) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (p) there shall be a material adverse change in Borrower's business or financial condition. GBC may cease making any Loans -5- hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred. 7.2 REMEDIES. Upon the occurrence and during the continuance of any Event of Default, and at any time thereafter, GBC, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes GBC without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as GBC deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should GBC seek to take possession of any of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that GBC retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to GBC at places designated by GBC which are reasonably convenient to GBC and Borrower, and to remove the Collateral to such locations as GBC may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, GBC shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time GBC obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. GBC shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as GBC deems reasonable, or on GBC's premises, or elsewhere and the Collateral need not be located at the place of disposition. GBC may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes GBC to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in GBC's sole discretion, to grant extensions of time to pay, compromise claims and settle Receivables, General Intangibles and the like for less than face value; and (h) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities and obligations incurred by GBC with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. 7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and GBC agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i) Notice of the sale is given to Borrower at least seven days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by GBC, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price in cash or by cashier's check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, GBC may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. GBC shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. 7.4 POWER OF ATTORNEY. Upon the occurrence and during the continuance of any Event of Default, without limiting GBC's other rights and remedies, Borrower grants to GBC an irrevocable power of attorney coupled with an interest, authorizing and permitting GBC (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but GBC agrees to exercise the following powers in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that GBC may, in its sole discretion, deem advisable in order to perfect and maintain GBC's security interest in the Collateral, or in order to exercise a right of Borrower or GBC, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements; (b) Execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of GBC's Collateral or in which GBC has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim -6- in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into GBC's possession; (e) Endorse all checks and other forms of remittances received by GBC; (f) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) Grant extensions of time to pay, compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give GBC the same rights of access and other rights with respect thereto as GBC has under this Agreement; and (k) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other present or future agreements. Any and all reasonable sums paid and any and all reasonable costs, expenses, liabilities, obligations and reasonable attorneys' fees incurred by GBC with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall GBC's rights under the foregoing power of attorney or any of GBC's other rights under this Agreement be deemed to indicate that GBC is in control of the business, management or properties of Borrower. 7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale or other disposition of the Collateral shall be applied by GBC first to the reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by GBC in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as GBC shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to GBC for any deficiency. If GBC, in its sole discretion, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, GBC shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by GBC of the cash therefor. 7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Agreement, GBC shall have all the other rights and remedies accorded a secured party under the California Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between GBC and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by GBC of one or more of its rights or remedies shall not be deemed an election, nor bar GBC from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of GBC to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. 8. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "ACCOUNT DEBTOR" means the obligor on a Receivable. "AFFILIATE" means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. "AGREEMENT" and "THIS AGREEMENT" means this Loan and Security Agreement and all modifications and amendments thereto, extensions thereof, and replacements therefor. "BUSINESS DAY" means a day on which GBC is open for business. "CODE" means the Uniform Commercial Code as adopted and in effect in the State of California from time to time. "COLLATERAL" has the meaning set forth in Section 2.1 above. "DEFAULT" means any event which with notice or passage of time or both, would constitute an Event of Default. "DEPOSIT ACCOUNT" has the meaning set forth in Section 9105 of the Code. "ELIGIBLE RECEIVABLES" means Receivables arising in the ordinary course of Borrower's business from the completed sale of goods or rendition of services, which GBC, in its sole judgment, shall deem eligible for borrowing, based on such considerations as GBC may from time to time deem appropriate. "EQUIPMENT" means all of Borrower's present and hereafter acquired machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible personal property (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located. "EVENT OF DEFAULT" means any of the events set forth in Section 7.1 of this Agreement. "GENERAL INTANGIBLES" means all general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, Deposit Accounts, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim -7- (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against GBC, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). "GUARANTOR" means any Person who has guaranteed any of the Obligations. "INVENTORY" means all of Borrower's now owned and hereafter acquired goods, merchandise or other personal property, wherever located, to be furnished under any contract of service or held for sale or lease (including all raw materials, work in process, finished goods and goods in transit), and all materials and supplies of every kind, nature and description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, documents of title and other documents representing any of the foregoing. "LIBOR RATE" means (i) the one-month London Interbank Offered Rate for deposits in U.S. dollars, as shown each day in The Wall Street Journal (Eastern Edition) under the caption "Money Rates - London Interbank Offered Rates (LIBOR)"; or (ii) if the Wall Street Journal does not publish such rate, the offered one-month rate for deposits in U.S. dollars which appears on the Reuters Screen LIBO Page as of 10:00 a.m., New York time, each day, PROVIDED that if at least two rates appear on the Reuters Screen LIBO Page on any day, the "LIBOR Rate" for such day shall be the arithmetic mean of such rates; or (iii) if the Wall Street Journal does not publish such rate on a particular day and no such rate appears on the Reuters Screen LIBO Page on such day, the rate per annum at which deposits in U.S. dollars are offered to the principal London office of The Chase Manhattan Bank, in the London interbank market at approximately 11:00 A.M., London time, on such day in an amount approximately equal to the outstanding principal amount of the Loans, for a period of one month, in each of the foregoing cases as determined in good faith by GBC, which determination shall be conclusive absent manifest error. "OBLIGATIONS" means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to GBC, whether evidenced by this Agreement or any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by GBC in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney's fees, expert witness fees, audit fees, letter of credit fees, loan fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agreement between Borrower and GBC. "PERMITTED LIENS" means the following: (i) purchase money security interests in specific items of Equipment; (ii) leases of specific items of Equipment; (iii) liens for taxes not yet payable; (iv) additional security interests and liens which are subordinate to the security interest in favor of GBC and are consented to in writing by GBC (which consent shall not be unreasonably withheld); (v) security interests being terminated substantially concurrently with this Agreement; (vi) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent; (vii) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (i) or (ii) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; (viii) Liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods. GBC will have the right to require, as a condition to its consent under subparagraph (iv) above, that the holder of the additional security interest or lien sign an intercreditor agreement on GBC's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of GBC, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement. "PERSON" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. "RECEIVABLES" means all of Borrower's now owned and hereafter acquired accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, documents and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party. OTHER TERMS. All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with generally accepted accounting principles, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 9. GENERAL PROVISIONS. 9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all checks, wire transfers and other items of payment received by GBC (including proceeds of Receivables and payment of the Obligations in full) shall -8- be deemed applied by GBC on account of the Obligations three Business Days after receipt by GBC of immediately available funds. GBC shall not, however, be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to GBC in its discretion, and GBC may charge Borrower's Loan account for the amount of any item of payment which is returned to GBC unpaid. 9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations may be applied, and in GBC's sole discretion reversed and re-applied, to the Obligations, in such order and manner as GBC shall determine in its sole discretion. 9.3 CHARGES TO ACCOUNT. GBC may, in its discretion, require that Borrower pay monetary Obligations in cash to GBC, or charge them to Borrower's Loan account, in which event they will bear interest at the same rate applicable to the Loans. 9.4 MONTHLY ACCOUNTINGS. GBC shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by GBC), unless Borrower notifies GBC in writing to the contrary within sixty days after each account is rendered, describing the nature of any alleged errors or admissions. 9.5 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, or certified mail return receipt requested, addressed to GBC or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one business day following delivery to the private delivery service, or two business days following the deposit thereof in the United States mail, with postage prepaid. 9.6 SEVERABILITY. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 9.7 INTEGRATION. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and GBC and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. THERE ARE NO ORAL UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE PARTIES WHICH ARE NOT SET FORTH IN THIS AGREEMENT OR IN OTHER WRITTEN AGREEMENTS SIGNED BY THE PARTIES IN CONNECTION HEREWITH. 9.8 WAIVERS. The failure of GBC at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between Borrower and GBC shall not waive or diminish any right of GBC later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to GBC shall be deemed to have been waived by any act or knowledge of GBC or its agents or employees, but only by a specific written waiver signed by an authorized officer of GBC and delivered to Borrower. Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by GBC on which Borrower is or may in any way be liable, and notice of any action taken by GBC, unless expressly required by this Agreement. 9.9 AMENDMENT. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of GBC. 9.10 TIME OF ESSENCE. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement. 9.11 ATTORNEYS FEES AND COSTS. Borrower shall reimburse GBC for all reasonable attorneys' fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by GBC, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys' fees and costs GBC incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce GBC's security interest in, the Collateral; and otherwise represent GBC in any litigation relating to Borrower. If either GBC or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys' fees, including (but not limited to) reasonable attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys' fees and costs to which GBC may be entitled pursuant to this Paragraph shall immediately become part of Borrower's Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. 9.12 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and GBC; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of GBC, and any prohibited assignment shall be -9- void. No consent by GBC to any assignment shall release Borrower from its liability for the Obligations. 9.13 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. 9.14 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against GBC, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other present or future document or agreement, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by GBC, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within one year after the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of GBC, or on any other person authorized to accept service on behalf of GBC, within thirty (30) days thereafter. Borrower agrees that such one-year period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The one-year period provided herein shall not be waived, tolled, or extended except by the written consent of GBC in its sole discretion. This provision shall survive any termination of this Loan Agreement or any other present or future agreement. 9.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in this Agreement for convenience. Borrower and GBC acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. The term "including", whenever used in this Agreement, shall mean "including (but not limited to)". This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against GBC or Borrower under any rule of construction or otherwise. 9.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all rights and obligations of GBC and Borrower shall be governed by the laws of the State of California. As a material part of the consideration to GBC to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at GBC's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Los Angeles County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 9.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND GBC EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN GBC AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF GBC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH GBC OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWER: FUTURE MEDIA PRODUCTIONS, INC. BY /s/ ALEX SANDEL ------------------------------- PRESIDENT OR VICE PRESIDENT BY ------------------------------- SECRETARY OR ASS'T SECRETARY GBC: GREYROCK BUSINESS CREDIT, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION BY /s/ {Illegible} ------------------------------- TITLE ------------------------------ 44,553-1 -10- SCHEDULE TO LOAN AND SECURITY AGREEMENT -.S. -1- [LOGO] SCHEDULE TO LOAN AND SECURITY AGREEMENT BORROWER: FUTURE MEDIA PRODUCTIONS, INC. ADDRESS: 25136 ANZA DRIVE VALENCIA, CALIFORNIA 91355 DATE: FEBRUARY 26, 1997 This Schedule is an integral part of the Loan and Security Agreement between GREYROCK BUSINESS CREDIT, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION ("GBC") and the above-borrower ("Borrower") of even date. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1. CREDIT LIMIT (Section 1.1): An amount not to exceed the lesser of (1) or (2) below: (1) $12,000,000 at any one time outstanding; or (2) an amount equal to (i) RECEIVABLE LOANS. 80% of the amount of Borrower's Eligible Receivables (as defined in Section 8 above) (the "Receivable Loans") (provided that the maximum amount of Receivable Loans outstanding at any time with respect to Receivables owing from Packard Bell NEC, Inc. shall be $2,000,000, and said Receivables shall be on terms of no more than 60 days after invoice date); plus (ii) ADDITIONAL REVOLVING LOANS. The unpaid principal balance of additional revolving Loans (the "Additional Revolving Loans"); provided that the unpaid principal balance of the Additional Revolving Loans shall not exceed the following (the "Additional Revolving Loan Limit"): the sum of $6,500,000, effective on the date hereof, reducing by $217,000 on March 31, 1997 and by $217,000 on the last day of each succeeding month, until the earlier of (i) the date this Agreement terminates or is terminated, or (ii) August 31, 1999. At the earlier of said dates the Additional Revolving Loan Limit shall be reduced to zero, and after said date no further Additional Revolving Loans will be made. -1- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2. INTEREST. INTEREST RATE (Section 1.2): A rate equal to the "Prime Rate" plus 2% per annum, calculated on the basis of a 360-day year for the actual number of days elapsed. The interest rate applicable to all Loans shall be adjusted monthly as of the first day of each month, and the interest to be charged for each month shall be based on the highest "Prime Rate" in effect during said month, but in no event shall the rate of interest charged on any Loans in any month be less than 7% per annum. "Prime Rate" means the actual "Reference Rate" or the substitute therefor of the Bank of America NT & SA whether or not that rate is the lowest interest rate charged by said bank. If the Prime Rate, as defined, is unavailable, "Prime Rate" shall mean the highest of the prime rates published in the Wall Street Journal on the first business day of the month, as the base rate on corporate loans at large U.S. money center commercial banks. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3. FEES (Section 1.3/Section 6.2): Loan Fee: $60,000, payable $5,000 per month, commencing March 1, 1997 and continuing on the first day of each succeeding month, until the earlier of (i) the date this Agreement terminates or is terminated, or (ii) said fee is paid in full. Termination Fee: --0-- NSF Check Charge: $15.00 per item. Wire Transfers: $15.00 per transfer. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4. MATURITY DATE (Section 6.1): FEBRUARY 28, 1998, subject to automatic renewal as provided in Section 6.1 above, and early termination as provided in Section 6.2 above. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 5. REPORTING. (Section 5.2): Borrower shall provide GBC with the following: 1. Annual financial statements, as soon as available, and in any event within 90 days following the end of Borrower's fiscal year, certified by independent certified public accountants acceptable to GBC. 2. Quarterly unaudited financial statements, as soon as available, and in any event within 30 days after the end of each fiscal quarter of Borrower. 3. Monthly unaudited financial statements, as soon as available, and in any event within 30 days after the end of each month. 4. Monthly Receivable agings, aged by invoice date, within 10 days after the end of each month. -2- 5. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers within 10 days after the end of each month. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 6. BORROWER INFORMATION: PRIOR NAMES OF BORROWER (Section 3.2): None PRIOR TRADE NAMES OF BORROWER (Section 3.2): None EXISTING TRADE NAMES OF BORROWER (Section 3.2): None OTHER LOCATIONS AND Addresses (Section 3.3): None MATERIAL ADVERSE LITIGATION (Section 3.10): None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 7. OTHER COVENANTS: Borrower shall at all times comply with all of the following additional covenants: (1) GUARANTY. Borrower shall concurrently cause Alex Sandel, Beny Alagem, and Jason Barzilay to execute and deliver to GBC a Continuing Guaranty, on GBC's standard form, with respect to all of the Obligations, and Borrower shall cause such Guaranty to continue in full force and effect throughout the term of this Loan Agreement and so long as any portion of the Obligations remains outstanding. Borrower: GBC: FUTURE MEDIA PRODUCTIONS, INC. GREYROCK BUSINESS CREDIT, a Division of NationsCredit Commercial Corporation By /s/ ALEX SANDEL By /s/ {Illegible} ------------------------------------ --------------------------------- President or Vice President Title ----------------------------- By ------------------------------------ Secretary or Ass't Secretary -3- EX-10.11 13 EXTENSION AGREEMENT DATED JANUARY 16, 1998 EXHIBIT 10.11 EXTENSION AGREEMENT BORROWER: FUTURE MEDIA PRODUCTIONS, INC. ADDRESS: 25136 ANZA DRIVE VALENCIA, CALIFORNIA 91355 DATE: JANUARY 16, 1998 THIS EXTENSION AGREEMENT is entered into between GREYROCK BUSINESS CREDIT, a Division of NationsCredit Commercial Corporation ("GBC"), whose address is 10880 Wilshire Blvd., Suite 950, Los Angeles, CA 90024 and the borrower named above ("Borrower"). The Parties agree to amend the Loan and Security Agreement between them, dated February 26, 1997 (the "Loan Agreement"), as follows. (This Amendment, the Loan Agreement, any prior written amendments to said agreements signed by GBC and the Borrower, and all other written documents and agreements between GBC and the Borrower are referred to herein collectively as the "Loan Documents". Capitalized terms used but not defined in this Amendment, shall have the meanings set forth in the Loan Agreement.) 1. EXTENSION. The Maturity Date, "February 28, 1998", set forth in the Schedule to the Loan Agreement, is hereby amended by replacing said date with the date "April 30, 1998". 2. REPRESENTATIONS TRUE. Borrower represents and warrants to GBC that all representations and warranties set forth in the Loan Agreement, as amended hereby, are true and correct. 3. GENERAL PROVISIONS. This Amendment, the Loan Agreement, and the other Loan Documents set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, representations, agreements and understandings between the parties with respect to the subject hereof. Except as herein expressly amended, all of the terms and provisions of -1- the Loan Agreement and the other Loan Documents shall continue in full force and effect and the same are hereby ratified and confirmed. BORROWER: GBC: FUTURE MEDIA PRODUCTIONS, INC. GREYROCK BUSINESS CREDIT, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION BY /s/ ALEX SANDEL ------------------------------- BY /s/ {Illegible} PRESIDENT OR VICE PRESIDENT ------------------------------- TITLE BY /s/ DAWN DODSON -------------------------- ------------------------------- SECRETARY OR ASS'T SECRETARY CONSENT The undersigned, guarantors, acknowledge that their consent to the foregoing Agreement is not required, but the undersigned nevertheless do hereby consent to the foregoing Agreement and to the documents and agreements referred to therein and to all future modifications and amendments thereto, and any termination thereof, and to any and all other present and future documents and agreements between or among the foregoing parties. Nothing herein shall in any way limit any of the terms or provisions of the Continuing Guarantees of the undersigned, all of which are hereby ratified and affirmed. This Consent may be executed in counterparts. The signatures of the undersigned shall be fully effective even if other persons named below fail to sign this Consent. /s/ ALEX SANDEL /s/ BENY ALAGEM ------------------------------- ------------------------------- Alex Sandel Beny Alagem /s/ JASON BARZILAY ------------------------------- Jason Barzilay -2- EX-10.12 14 AMENDMENT TO LOAN AGREEMENT DATED APRIL 29, 1998 EXHIBIT 10.12 AMENDMENT TO LOAN AGREEMENT BORROWER: FUTURE MEDIA PRODUCTIONS, INC. ADDRESS: 25136 ANZA DRIVE VALENCIA, CALIFORNIA 91355 DATE: APRIL 29, 1998 THIS AMENDMENT TO LOAN AGREEMENT is entered into between GREYROCK BUSINESS CREDIT, a Division of NationsCredit Commercial Corporation ("GBC"), whose address is 10880 Wilshire Blvd., Suite 950, Los Angeles, CA 90024 and the borrower named above ("Borrower"). The Parties agree to amend the Loan and Security Agreement between them, dated February 26, 1997 (as amended, the "Loan Agreement"), as follows, effective on the date hereof. (This Amendment, the Loan Agreement, any prior written amendments to said agreements signed by GBC and the Borrower, and all other written documents and agreements between GBC and the Borrower are referred to herein collectively as the "Loan Documents". Capitalized terms used but not defined in this Amendment, shall have the meanings set forth in the Loan Agreement.) 1. INCREASE CREDIT LIMIT. Section 1(1) of the Schedule, which presently reads as follows: "(1) $12,000,000 at any one time outstanding; or" is amended to read as follows: "(1) $20,000,000 at any one time outstanding; or" 2. INCREASE IN ADDITIONAL REVOLVING LOAN. Section 1(2)(ii) of the Schedule, which presently reads as follows: "(ii) ADDITIONAL REVOLVING LOANS. The unpaid principal balance of additional revolving Loans (the 'Additional Revolving Loans'); provided that the unpaid principal balance of the Additional Revolving Loans shall not exceed the following (the 'Additional Revolving Loan Limit'): the sum of $6,500,000, effective on the date hereof, reducing by $217,000 on March 31, 1997 and by $217,000 on the last day of each succeeding month, until the earlier of (i) the date this Agreement terminates or is terminated, or (ii) August 31, 1999. At the earlier of said dates the Additional Revolving Loan Limit shall be reduced to zero, and after said date no further Additional Revolving Loans will be made." -1- is amended to read as follows: "(ii) Additional REVOLVING LOANS. The unpaid principal balance of additional revolving Loans (the 'Additional Revolving Loans'); provided that the unpaid principal balance of the Additional Revolving Loans shall not exceed the following (the 'Additional Revolving Loan Limit'): the sum of $15,000,000, effective on April 29, 1998, reducing by $312,500 on June 30, 1998 and by $312,500 on the last day of each succeeding month, until the earlier of (i) the date this Agreement terminates or is terminated, or (ii) the fourth anniversary of the date hereof. At the earlier of said dates the Additional Revolving Loan Limit shall be reduced to zero, and after said date no further Additional Revolving Loans will be made." 3. EXTENSION. The Maturity Date, "April 30, 1998", set forth in the Schedule to the Loan Agreement, is hereby amended by replacing said date with the date "May 31, 1999". 4. CREDIT BALANCE. To the extent GBC at any time or from time to time is holding collected funds of the Borrower, which are not to be applied to the Obligations under the Loan Agreement or other Loan Documents, GBC agrees to pay Borrower interest on such funds at a rate equal to the Prime Rate minus 2% per annum, which interest shall be credited to Borrower's account monthly for each month as of the first day of the following month. GBC shall have the right, in its discretion to pay any such collected funds to Borrower at any time. 5. DIVIDENDS. Without limiting any of the covenants or provisions in the Loan Agreement, without GBC's prior written consent, Borrower shall not pay or declare, directly or indirectly, any dividends on Borrower's stock (except for (i) dividends payable solely in stock of Borrower and (ii) dividends to Borrower's shareholders, in an amount not greater than the amount of the federal income tax payable by them as a result of their being taxed on all or a portion of the Borrower's net income, by reason of the fact that the Borrower is a Subchapter S corporation for federal income tax purposes, provided that no such dividend shall be paid if, at the time it is to be paid and after giving effect thereto, an Event of Default, or an event which, with notice or passage of time or both, would constitute an Event of Default has occurred), and Borrower shall not make any other payments, distributions, or transfers of assets, of any kind or description, directly or indirectly, for any reason or in any transaction, to any shareholders of Borrower, or any Affiliates of such shareholders, except for payment of reasonable salaries in the ordinary course of business to shareholders of Borrower who are full-time employees of Borrower. 6. REPRESENTATIONS TRUE. Borrower represents and warrants to GBC that all representations and warranties set forth in the Loan Agreement, as amended hereby, are true and correct. 7. GENERAL PROVISIONS. This Amendment, the Loan Agreement, and the other Loan Documents set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, representations, agreements and understandings between the parties with respect to the subject hereof. Except as herein expressly amended, all of the terms and provisions of the Loan Agreement and the other Loan Documents shall continue in full force and effect and the same are hereby ratified and confirmed. -2- BORROWER: GBC: FUTURE MEDIA PRODUCTIONS, INC. GREYROCK BUSINESS CREDIT, A DIVISION OF NATIONSCREDIT COMMERCIAL CORPORATION BY /s/ ALEX SANDEL ----------------------------- PRESIDENT OR VICE PRESIDENT BY /s/ {Illegible} ----------------------------- TITLE -------------------------- BY /s/ DAWN DODSON ------------------------------- SECRETARY OR ASS'T SECRETARY CONSENT The undersigned, guarantors, acknowledge that their consent to the foregoing Agreement is not required, but the undersigned nevertheless do hereby consent to the foregoing Agreement and to the documents and agreements referred to therein and to all future modifications and amendments thereto, and any termination thereof, and to any and all other present and future documents and agreements between or among the foregoing parties. Nothing herein shall in any way limit any of the terms or provisions of the Continuing Guarantees of the undersigned, all of which are hereby ratified and affirmed. This Consent may be executed in counterparts. The signatures of the undersigned shall be fully effective even if other persons named below fail to sign this Consent. /s/ ALEX SANDEL /s/ BENY ALAGEM - -------------------------------- --------------------------------- Alex Sandel Beny Alagem /s/ JASON BARZILAY - -------------------------------- Jason Barzilay EX-10.13 15 EXTENSION AGREEMENT DATED SEPTEMBER 4, 1998 EXHIBIT 10.13 EXTENSION AGREEMENT BORROWER: FUTURE MEDIA PRODUCTIONS, INC. ADDRESS: 25136 ANZA DRIVE VALENCIA, CALIFORNIA 91355 DATE: SEPTEMBER 4, 1998 This Extension Agreement is entered into between Greyrock Capital, a Division of NationsCredit Commercial Corporation (formerly Greyrock Business Credit) ("GBC"), whose address is 10880 Wilshire Blvd., Suite 950, Los Angeles, CA 90024 and the borrower named above ("Borrower"). The Parties agree to amend the Loan and Security Agreement between them, dated February 26, 1997 (the "Loan Agreement"), as follows. (This Amendment, the Loan Agreement, any prior written amendments to said agreements signed by GBC and the Borrower, and all other written documents and agreements between GBC and the Borrower are referred to herein collectively as the "Loan Documents". Capitalized terms used but not defined in this Amendment, shall have the meanings set forth in the Loan Agreement.) 1. EXTENSION. The Maturity Date, "May 31, 1999", set forth in the Schedule to the Loan Agreement, is hereby amended by replacing said date with the date "May 31, 2000". 2. REPRESENTATIONS TRUE. Borrower represents and warrants to GBC that all representations and warranties set forth in the Loan Agreement, as amended hereby, are true and correct. 3. GENERAL PROVISIONS. This Amendment, the Loan Agreement, and the other Loan Documents set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, representations, agreements and understandings between the parties with respect to the subject hereof. Except as herein expressly amended, all of the terms and provisions of the Loan Agreement and the other Loan Documents shall continue in full force and effect and the same are hereby ratified and confirmed. Borrower: GBC: FUTURE MEDIA PRODUCTIONS, INC. GREYROCK CAPITAL, a Division of NationsCredit Commercial Corporation By /s/ [ILLEGIBLE] ---------------------------- President or Vice President By /s/ [ILLEGIBLE] -------------------------------- By /s/ [ILLEGIBLE] Title [ILLEGIBLE] ------------------------------- ------------------------------ Secretary or Ass't Secretary CONSENT The undersigned, guarantors, acknowledge that their consent to the foregoing Agreement is not required, but the undersigned nevertheless do hereby consent to the foregoing Agreement and to the documents and agreements referred to therein and to all future modifications and amendments thereto, and any termination thereof, and to any and all other present and future documents and agreements between or among the foregoing parties. Nothing herein shall in any way limit any of the terms or provisions of the Continuing Guarantees of the undersigned, all of which are hereby ratified and affirmed. This Consent may be executed in counterparts. The signatures of the undersigned shall be fully effective even if other persons named below fail to sign this Consent. /s/ ALEX SANDEL - -------------------------------- ___________________________________ Alex Sandel Beny Alagem ________________________________ Jason Barzilay EX-10.14 16 AMENDMENT TO LOAN DOCUMENT DATED JUNE 17, 1999 EXHIBIT 10.14 [LOGO] Amendment to Loan Documents Borrower: Future Media Productions, Inc. Address: 25136 Anza Drive Valencia, California 91355 Date: June 17, 1999 THIS AMENDMENT TO LOAN DOCUMENTS is entered into between Greyrock Capital, a Division of NationsCredit Commercial Corporation (formerly Greyrock Business Credit) ("Greyrock"), whose address is 10880 Wilshire Blvd., Suite 1850, Los Angeles, CA 90024 and the borrower named above ("Borrower"). The Parties agree to amend the Loan and Security Agreement between them, dated February 26, 1997 (as amended, the "Loan Agreement"), as follows, effective on the date hereof. (This Amendment, the Loan Agreement, any prior written amendments to said agreements signed by Greyrock and Borrower, and all other written documents and agreements between Greyrock and Borrower are referred to herein collectively as the "Loan Documents". Capitalized terms used but not defined in this Amendment, shall have the meanings set forth in the Loan Agreement.) 1. Increase Credit Limit. Section 1(1) of the Schedule, which presently --------------------- reads as follows: "(1) $20,000,000 at any one time outstanding; or" is amended to read as follows: "(1) $30,000,000 at any one time outstanding; or" 2. Equipment Loans. The following Section 1(2)(iii) is hereby added --------------- to the Schedule, immediately following Section 1(2)(ii): -1- Greyrock Capital Amendment To Loan Documents --------------------------------------------------------------- "(iii) Equipment Loans. --------------- (1) Greyrock will make Loans (the "Equipment Loans") to Borrower in an amount equal to 90% of the net purchase price of new equipment purchased and delivered to Borrower after the date hereof and acceptable to Greyrock in its discretion (provided that not more than $15,000,000 in Equipment Loans shall be made hereunder). (2) The "net purchase price" of Equipment means the purchase price thereof, as shown on the applicable invoice, net of all charges for taxes, freight, delivery, insurance, set-up, training, manuals, fees, service charges and other similar items. (3) Equipment Loans shall be made in disbursements of not less than $1,500,000 each. (4) Each Equipment Loan shall be repaid by Borrower to Greyrock in 48 equal monthly payments of principal, commencing on the last day of the first month after such Equipment Loan was disbursed and continuing until the earlier of the date such Equipment Loan has been paid in full or the date this Agreement terminates by its terms or is terminated, as provided in Sections 6.1 - 6.2 above, at which date the entire unpaid principal balance of the Equipment Loans, plus all accrued and unpaid interest thereon, shall be due and payable. (5) Accrued interest on the Equipment Loans shall be paid monthly on the last day of each month as provided in Section 1.2 above. (6) Equipment Loans may not be repaid and reborrowed." 3. Extension. The Maturity Date, "May 31, 2000", set forth in the --------- Schedule to the Loan Agreement, is hereby amended by replacing said date with the date "June 30, 2000". 4. Representations True. Borrower represents and warrants to Greyrock -------------------- that all representations and warranties set forth in the Loan Agreement, as amended hereby, are true and correct. 5. General Provisions. This Amendment, the Loan Agreement, and the other ------------------ Loan Documents set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, representations, agreements and understandings between the parties with respect to the subject hereof. Except as herein expressly amended, all of the terms and provisions -2- of the Loan Agreement and the other Loan Documents shall continue in full force and effect and the same are hereby ratified and confirmed. Borrower: Greyrock: FUTURE MEDIA PRODUCTIONS GREYROCK CAPITAL, INC. a Division of NationsCredit Commercial Corporation By /s/ [ILLEGIBLE]^^ ----------------------------- President or Vice President By /s/ [ILLEGIBLE]^^ -------------------------- Title SVP ----------------------- By /s/ [ILLEGIBLE]^^ ----------------------------- Secretary or Ass't Secretary CONSENT The undersigned, guarantors, acknowledge that their consent to the foregoing Agreement is not required, but the undersigned nevertheless do hereby consent to the foregoing Agreement and to the documents and agreements referred to therein and to all future modifications and amendments thereto, and any termination thereof, and to any and all other present and future documents and agreements between or among the foregoing parties. Nothing herein shall in any way limit any of the terms or provisions of the Continuing Guarantees of the undersigned, all of which are hereby ratified and affirmed. This Consent may be executed in counterparts. This Consent, and the foregoing Agreement, shall be fully effective notwithstanding the fact that Beny Alagem, another guarantor, is not signing this Consent, regardless of any effect his failure to sign may have on his guaranty with respect to Borrower. /s/ Alex Sandel /s/ Jason Brazilay - ---------------------------- --------------------------- Alex Sandel Jason Brazilay -3- EX-10.15 17 AMENDMENT TO LOAN DOCUMENT DATED JANUARY 25, 2000 EXHIBIT 10.15 - -------------------------------------------------------------------------------- [LOGO] Amendment to Loan Documents Borrower: Future Media Productions, Inc. Address: 25136 Anza Drive Valencia, California 91355 Date: January 25, 2000 THIS AMENDMENT TO LOAN DOCUMENTS is entered into between Greyrock Capital, a Division of Banc of America Commercial Finance Corporation (formerly Greyrock Business Credit) ("Greyrock"), whose address is 10880 Wilshire Blvd., Suite 1850, Los Angeles, CA 90024, and the borrower named above ("Borrower"). The Parties agree to amend the Loan and Security Agreement between them, dated February 26, 1997 (as amended, the "Loan Agreement"), as follows, effective on the date hereof. (This Amendment, the Loan Agreement, any prior written amendments to said agreements signed by Greyrock and Borrower, and all other written documents and agreements between Greyrock and Borrower are referred to herein collectively as the "Loan Documents". Capitalized terms used but not defined in this Amendment shall have the meanings set forth in the Loan Agreement.) 1. Extension. The Maturity Date, "June 30, 2000", set forth in the --------- Schedule to the Loan Agreement, is hereby amended by replacing said date with the date "June 30, 2001". 2. Representations True. Borrower represents and warrants to -------------------- Greyrock that all representations and warranties set forth in the Loan Agreement, as amended hereby, are true and correct. 3. General Provisions. This Amendment, the Loan Agreement, and the ------------------ other Loan Documents set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, -1- Greyrock Capital Amendment To Loan Documents - -------------------------------------------------------------------------------- representations, agreements and understandings between the parties with respect to the subject hereof. Except as herein expressly amended, all of the terms and provisions of the Loan Agreement and the other Loan Documents shall continue in full force and effect and the same are hereby ratified and confirmed. Borrower: Greyrock: FUTURE MEDIA PRODUCTIONS, GREYROCK CAPITAL, INC. a Division of NationsCredit Commercial Corporation By /s/ Alex Sander ----------------------------- By /s/ Lisa Nagano President or Vice President ----------------------------- Title LISA NAGANO By /s/ [ILLEGIBLE] -------------------------- ----------------------------- SR. VICE PRESIDENT Secretary or Ass't Secretary CONSENT The undersigned, guarantors, acknowledge that their consent to the foregoing Amendment is not required, but the undersigned nevertheless do hereby consent to the foregoing Amendment and to the documents and agreements referred to therein and to all future modifications and amendments thereto, and any termination thereof, and to any and all other present and future documents and agreements between or among the foregoing parties. Nothing herein shall in any way limit any of the terms or provisions of the Continuing Guarantees of the undersigned, all of which are hereby ratified and affirmed. This Consent may be executed in counterparts. This Consent, and the foregoing Amendment, shall be fully effective notwithstanding the fact that Beny Alagem, another guarantor, is not signing this Consent, regardless of any effect his failure to sign may have on his guaranty with respect to Borrower. /s/ Alex Sandel /s/ Jason Barzilay - ----------------------------- ----------------------------- Alex Sandel Jason Barzilay -2- EX-10.16 18 COMPREHENSIVE CD DISC LICENSE AGREEMENT EXHIBIT 10.16 C O M P R E H E N S I V E - C D D I S C L I C E N S E A G R E E M E N T AGREEMENT, having an effective date of October 1, 1996 by and between U.S. Philips Corporation having its principal office at 580 White Plains Road, Tarrytown, New York 10591 (hereinafter referred to as "USPC") and Future Media Productions, Inc. having its principal office at 25136 Anza Drive, Valencia, CA 91355 (hereinafter referred to as "Licensee"). WHEREAS, the Philips' Group of Companies (hereinafter referred to as "Philips") has for many years been engaged in research and development of systems, in which signals encoded in digital form and stored on a disc are read and reproduced by means of devices using an optical read out beam, and has obtained valuable know-how and experience thereby; WHEREAS, one of the achievements of such research and development efforts was a new and revolutionary high-fidelity sound storage and reproduction system, which was further developed and defined in a cooperation with Sony Corporation of Japan and has been jointly presented under the name "Compact 1 Disc Digital Audio System" (CD-A); WHEREAS, on the basis of this "Compact Disc Digital Audio System" three further systems have been defined in a cooperation with Sony Corporation of Japan and have been jointly presented under the names "Compact Disc Data System" (CD-ROM); "CDV System" (CDV) and "Compact Disc Interactive System" (CD-i); WHEREAS, a multi-session CD system has been defined by Philips and Sony and jointly presented under the name "Enhanced Music Compact Disc System", which system is capable of storing sound and data respectively in two sessions on an optical disc; WHEREAS, Licensee desires the right to manufacture and sell discs utilizing any or all of the above CD-A, CD-ROM, CDV, CD-i and Enhanced Music CD Systems (jointly hereinafter referred to as "CD Systems"), and wishes such discs to be interchangeable with the discs manufactured and sold by the Philips' Group of Companies and others utilizing such CD- Systems; WHEREAS, USPC owns and/or controls the right to license patent rights pertinent to the CD-Systems and owns additional patent rights pertinent to optical disc manufacturing in 2 general; WHEREAS, USPC has been authorized by Sony to license patents owned by Sony and indicated on the Exhibits hereto under the terms and conditions specified herein, while Sony retains the right to also license such patents; WHEREAS, Licensee understands that USPC is willing to license any one or more patents owned by it for optical disc manufacturing, whether within or outside(1) of the Standard Specifications defining the CD Systems on reasonable terms and conditions; and WHEREAS, in furtherance of Licensee's efforts to manufacture and sell discs which are interchangeable within their respective CD-Systems, Licensee has requested USPC for a license under patent rights pertinent to the CD-Systems, which USPC has the free right to license, and, in addition, has requested USPC to disclose and make available certain basic information on the CD-Systems; NOW, THEREFORE, in mutual consideration of the premises ----------------- (1) For further information please contact Michael E. Marion, U.S. Philips Corporation, 580 White Plains Road, Tarrytown, NY 10591 3 and the faithful performance of the mutual covenants hereinafter set forth, the parties hereto have agreed as follows: ARTICLE I - DEFINITIONS As used in this Agreement the following terms shall have the following meanings, unless the context clearly requires otherwise: 1.01 DISC - any non-recordable, reflective, disc-shaped information carrier comprising any kind of information such as, but not limited to, audio/video/text/data related information, which information is irreversibly stored in layer during and as an integral part of the manufacturing process of the disc, in a form which is optically readable by playback devices. 1.02 CD-AUDIO DISC - any Disc comprising audio information encoded in digital form, which is optically readable by a CD-Audio-Player (as hereinafter defined) and conforms to the CD-Audio Standard Specifications (as hereinafter defined). 1.03 CD-ROM DISC - any Disc comprising information encoded in digital form, which is optically readable by a CD-ROM 4 Player (as hereinafter defined) and conforms to either the CD-ROM Standard Specifications (as hereinafter defined) the CD-ROM (XA) Standard Specifications (as hereinafter defined). 1.04 CD-i DISC - any Disc comprising any kind of information such as, but not limited to audio, video, text and data related information, encoded in digital form, which is optically readable by a CD-i Player (as hereinafter defined) and conforms to the CD-i Standard Specifications (as hereinafter defined). 1.05 CDV-DISC - any Disc comprising television picture information consisting of analog video information with digital audio information, and with or without additional information to be used for control, retrieval, educational and/or instructional purposes in relation to the visual display of said television picture information, which is optically readable by a CDV-Player (as hereinafter defined) and conforms to the CDV-Standard Specifications (as hereinafter defined). 1.06 ENHANCED MUSIC CD DISC - any disc comprising any kind of information such as, but not limited to, audio, video, 5 text and data related information encoded in digital form and which conforms to the Enhanced Music CD-Standard Specifications (as hereinafter defined). 1.07 CD-AUDIO STANDARD SPECIFICATIONS - the specifications for the CD-Audio- Disc/Player parameters as made available, modified or added to from time to time in accordance with the provisions of Article III hereof. 1.08 CD-ROM STANDARD SPECIFICATIONS - the specifications for the CD-ROM Disc/Player parameters as made available, modified or added to from time to time in accordance with the provisions of Article III hereof. 1.09 CD-ROM(XA) STANDARD SPECIFICATIONS - the specifications for the CD-ROM(XA) Disc/Player parameters as made available, modified or added to from time to time in accordance with the provisions of Article III hereof. 1.10 CD-i STANDARD SPECIFICATIONS - the specifications for the CD-i Disc/Player parameters (as hereinafter defined) as made available, modified or added to from time to time in accordance with the provision of Article III hereof. 1.11 CDV-STANDARD SPECIFICATIONS - the NTSC and/or PAL specifications for the CDV-Disc/Player parameters as made 6 available, modified or added to from time to time in accordance with the provisions of Article III hereof. 1.12 ENHANCED MUSIC CD-STANDARD SPECIFICATIONS - the specifications for the Enhanced Music CD-Disc/Player parameters as made available, modified or added to from time to time in accordance with the provisions of Article III hereof. 1.13 PLAYER - any playback device for optically reading information stored on a Disc and converting such information into electrical signals for reproduction purposes. 1.14 CD-AUDIO PLAYER - a Player which is designed and manufactured solely for the reproduction of information stored on a CD-Audio Disc and conversion of such information, which is bit-encoded according to the CD-Audio Standard Specifications, into electrical signals by means prescribed in the CD-Audio Standard Specifications, which electrical signals are directly capable and intended to be used for sound reproduction through amplifiers and loudspeakers. 1.15 CD-ROM PLAYER - a Player which is designed and 7 manufactured solely for the reproduction of information stored on a CD-ROM Disc and conversion of such information, which is bit-encoded according to the CD-ROM-Standard Specifications, into electrical signals by means prescribed in the CD-ROM Standard Specifications, which electrical signals are directly capable and intended to be used for reproduction of computer- related-data through data handling and/or data processing apparatus. 1.16 CD-i PLAYER - a Player which is designed and manufactured solely for the reproduction of any kind of information stored on a CD-i Disc and as defined in the CD-i Standard Specifications, and conversion of such information, which is bit-encoded according to said CD-i Standard Specifications, into electrical signals by means as prescribed in the CD-i Standard Specifications, which electrical signals are directly capable and intended to be used for reproduction of such information. 1.17 CDV-PLAYER - a Player which is designed and manufactured solely for the reproduction of information stored on a CDV-Disc and conversion of such information, which is encoded according to the CDV-Standard Specifications, into 8 electrical signals by means as prescribed in the CDV-Standard Specifications, which electrical signals are directly capable and intended to be used for visual reproduction through standard television receivers and/or standard television monitors. 1.18 ENHANCED MUSIC CD-PLAYER - a Player which is designed and manufactured solely for the reproduction of information stored on an Enhanced Music CD Disc and conversion of such information, which is bit-encoded according to the Enhanced Music CD Standard Specifications, into electrical signals by means as prescribed in the Enhanced Music CD Standard Specifications, which electrical signals are directly capable and intended to be used for the reproduction of audio, video, text and data related information through data handling and/or data processing apparatus. 1.19 COMBI-PLAYER - a Player which is any combination of a CD-Audio Player, a CD-ROM Player, a CD-i Player, a CDV-Player and an Enhanced Music CD Player. 1.20 LICENSED PRODUCT - any CD-Audio Disc, CD-ROM Disc, CD-i Disc, CDV-Disc or Enhanced Music CD Disc. 9 1.21 LICENSED PATENTS -- shall mean the patent rights listed in accordance with one of the following license options to be selected by the Licensee: (circle type of Licensed Product and Exhibit list of patents on each option chosen, whether A or B, for each type of Disc) I. Option A: Licensee, at its option, chooses from one or more of the U.S. Patents listed on Exhibit I (CD-Audio Disc), Exhibit III (CD-ROM Disc), Exhibit V (CD-i Disc), Exhibit VII (CDV Disc), and/or Exhibit IX (Enhanced Music CD), and defined herein as Licensed Patents; OR II. Option B: Licensee chooses, at its option, all of the U.S. Patents listed on Exhibit II (CD-Audio Disc), Exhibit IV (CD-ROM Disc), Exhibit VI (CD-i Disc), Exhibit VIII (CDV Disc), and/or Exhibit X (Enhanced Music CD Disc), and defined herein as Licensed Patents. By /s/ Date 10-23-96 ----------------------------- ---------------------------- 1.22 ASSOCIATED COMPANY -- any corporation or other legal entity, in which a party hereto, Philips Electronics North America Corporation, Philips Electronics, N.V. (PENV) of 10 the Netherlands or Sony Corporation of Japan, now or hereafter controls, directly or indirectly, more than fifty percent (50%) of the shares entitled to vote for the election of directors or persons performing similar functions, but any such company or other legal entity shall be deemed an Associated Company only for as long as such control exists. 1.23 TERRITORY -- United States of America, its territories and possessions. ARTICLE II - LICENSES Subject to the terms and conditions of this Agreement: 2.01 USPC hereby grants to Licensee and its Associated Companies a non-exclusive, non-transferable license under Licensed Patents to make, use and sell or otherwise dispose of Licensed Products in the Territory, but not to have Licensed Products made for the Licensee by third parties except as provided in Article IV. 2.02 USPC and Sony further agree for a period of ten (10) years from the effective date of this Agreement, to grant Licensee and its Associated Companies a non-exclusive, non-transferable license on reasonable, non-discriminatory 11 terms comparable to those set forth herein, to make, use, sell or otherwise dispose of Licensed Products in the Territory, under any patent rights not yet licensed hereunder which are essential to the manufacturing, use or sale of Licensed Products, as to which, and to the extent to which, USPC or Sony, have, or may hereafter acquire, the free right to grant licenses to Licensee and its Associated Companies and which patent rights were first filed in any country of the world after December 31, 1982. It is expressly understood that in respect of the patent rights to be licensed pursuant to this paragraph 2.02 of Article II, paragraph 5.02 of Article V will not be applicable and that royalties payable may have to be paid over and above the royalties due on the basis of the use of Licensed Patents pursuant to paragraph 2.01 of this Article II. 2.03 Finally, USPC and Sony agree for a period of ten (10) years from the date of this Agreement to grant Licensee and its Associated Companies upon their request and on reasonable, non-discriminating royalty rates and conditions to be agreed upon from case to case, a non- 12 exclusive, non-transferable license to make, use, sell or otherwise dispose of CD-Audio Players, CD-ROM Players, CD-i Players, CDV-Players and Combi-Players in the Territory under any or all present and future patent rights essential to the manufacture, use or sale of such Players as to which, and to the extent to which, USPC or Sony may now have, or may hereafter acquire, the free right to grant licenses to Licensee and its Associated Companies for the manufacture, use and sale of such Players. It is expressly understood that paragraphs 5.01 and 5.02 of Article V shall not in any way be applicable to licenses pursuant to this paragraph 2.03 of Article II. 2.04 In consideration of the undertakings set forth in paragraphs 2.01, 2.02 and 2.03 and similar undertakings by third party licensees of USPC or PENV, for a period of ten (10) years from the effective date of this Agreement, Licensee, agrees to grant to USPC, Philips Electronics North America Corporation, PENV, Sony Corporation of Japan and their respective Associated Companies, and to other third parties who have similarly entered, or will enter, into a license agreement with USPC, PENV or an Associated 13 Company thereof concerning Licensed Products and who have elected to accept or will accept a similar undertaking as contained in this paragraph 2.04, on reasonable, non-discriminating conditions comparable to those set forth herein, non-exclusive, non-transferable licenses to manufacture, use, sell or otherwise dispose of Licensed Products under any or all present and future patent rights which are essential to the manufacturing, use or sale of Licensed Product, as to which, and to the extent to which, Licensee or its Associated Companies may now have or may hereafter acquire the right to grant licenses. 2.05 In consideration of the undertakings set forth in paragraphs 2.01, 2.02 and 2.03 and similar undertakings by third party licensees of USPC or PENV, for a period of ten (10) years from the effective date of this Agreement, Licensee agrees to grant to USPC, Philips Electronics North America Corporation, PENV, Sony Corporation of Japan and their respective Associated Companies, and to other third parties who have entered or will enter into a license agreement with USPC, PENV or an Associated Company thereof concerning Players and who have accepted or will 14 accept a similar undertaking as contained in this paragraph 2.05, on reasonable, non-discriminating conditions to be agreed upon from case to case, non-exclusive, non-transferable licenses to manufacture, use, sell or otherwise dispose of CD-Audio, CD-ROM, CD-i, CDV, Enhanced Music CD and/or Combi-Players under any or all present and future patent rights which are essential to the manufacture, use or sale of such Player, as to which, and to the extent to which, Licensee or its Associated Companies may now have or may hereafter acquire the right to grant licenses. 2.06 To the extent a dispute exists between USPC, Licensee and/or Sony regarding whether any patent is "essential" or whether any license offered by Licensee, USPC, or Sony pursuant to this Article II is under "reasonable...conditions" as those words are used in this Article II then USPC, Sony and/or licensee shall submit such dispute to binding arbitration under the 1992 Patent Arbitration Rules of the American Arbitration Association ("AAA"). Such arbitration shall be held before a panel of three arbitrators and shall take place in New York, New York. 15 Licensee, USPC and/or Sony each shall choose one arbitrator who shall be unaffiliated with the parties and who shall have been a member of the bar of the United States Court of Appeals for the Federal Circuit for at least the preceding five years. The two arbitrators chosen by USPC, Licensee and/or Sony shall then choose a third arbitrator who shall also have been a member of the bar of the Federal Circuit for at least the preceding five years and who shall serve as chairperson of the panel. If the arbitrators chosen by USPC, Licensee and/or Sony are unable to agree on a chairperson of the panel within sixty days of their designation by USPC, Licensee and/or Sony then such third arbitrator shall be chosen in accord with the rules of the AAA. All other disputes regarding or relating to this License Agreement other than those specified in this paragraph shall not be subject to arbitration. IT IS EXPRESSLY UNDERSTOOD THAT (I) THE LICENSES AND LICENSE UNDERTAKINGS WITH REGARD TO THE MANUFACTURE OF LICENSED PRODUCTS DO NOT REFER TO RECORDING MACHINES, OR APPARATUS OR METHODS FOR THE MULTIPLICATION 16 OF DISCS, OR APPARATUS OR METHODS FOR THE MANUFACTURE OF MATERIALS; NOR DO THE LICENSE UNDERTAKINGS WITH REGARD TO THE MANUFACTURE OF PLAYERS EXTEND TO THE MANUFACTURE OF COMPONENTS OF PLAYERS SUCH AS, BUT NOT LIMITED TO SEMICONDUCTOR DEVICES, INTEGRATED CIRCUITS, LASERS, MOTOR AND LENSES, EXCEPT FOR PATENT RIGHTS PERTAINING TO CIRCUITRY AND/OR SYSTEM ASPECTS SPECIFIC TO THE CD-SYSTEM (AND SIMILAR TYPE OPTICAL READ-OUT SYSTEMS), AND (II) THE RIGHTS AND LICENSES GRANTED PURSUANT TO THIS AGREEMENT DO NOT EXTEND TO ANY COMBINATION OF ONE OR MORE LICENSED PRODUCTS WITH ANY OTHER ITEMS, PRODUCTS, SYSTEMS, STRUCTURES, APPARATUS OR SOFTWARE. ARTICLE III - STANDARD SPECIFICATIONS TECHNICAL INFORMATION AND SUPPORT 3.01 Upon execution of this Agreement and receipt of the payment provided for in paragraph 5.01 of Article V, USPC shall make available to Licensee for use by Licensee and its Associated Companies a copy of the then current version of the respective Standard Specifications, together with such information as is in USPC's reasonable opinion is required for the interpretation of such then 17 current Standard Specifications. 3.02 If USPC in its reasonable opinion determines that an addition or modification to any of the Standard Specifications should be made, Licensee shall be so notified in writing and be furnished with information to assist Licensee in the interpretation of such addition and/or modification. 3.03 Insofar as USPC has a free and legal right to do so, USPC further agrees to make available to Licensee upon Licensee's request and for use by Licensee and its Associated Companies in accordance with the terms of this Agreement, such other information, data and material as are, in USPC's reasonable opinion, strictly required to manufacture Licensed Products, which are interchangeable with Licensed Products made and/or sold by Philips. ARTICLE IV - HAVE MADE The licenses and rights granted to Licensee and its Associated Companies pursuant to Article II and the right to use the information pursuant to Article III, include the right for Licensee and its Associated Companies to have third parties manufacture for Licensee's or its Associated Companies' use and 18 account with due regard to what has been provided hereinbefore such Licensed Products as Licensee and/or its Associated Companies require in and for their sale of Licensed Products, provided that such third parties agree to use the information obtained by Licensee pursuant to Article III only for the manufacture of Licensed Products ordered by Licensee and its Associated Companies and also agree to observe the secrecy obligations accepted by Licensee hereunder. As and when the information supplied by USPC to Licensee pursuant to Article III is supplied by Licensee or an Associated Company of Licensee to a third party supplier to have such third party supplier manufacture Licensed Products for Licensee and/or its Associated Companies, Licensee will notify USPC of the name of such third party supplier and of the fact that such third party supplier has agreed in writing to the restrictions on the use of the USPC supplied information to be observed by it. ARTICLE V - ROYALTIES REPORTS AND PAYMENTS 5.01 Upon execution of this Agreement, Licensee will make a non-refundable payment of twenty five thousand ($25,000) US dollars to USPC. Said payment of twenty five thousand dollars shall not be credited against royalties payable 19 hereunder pursuant to paragraph 5.02 of this Article V. 5.02 (A) IN THE CASE WHERE LICENSEE HAS CHOSEN OPTION A TO DEFINE LICENSED PATENTS - In consideration of the patent licenses granted hereunder by USPC to Licensee, Licensee agree to pay to USPC royalties as follows: (a) seven point five U.S. cents ($0.075) for each CDV Disc with an outer diameter greater than 130mm; (b) two U.S. cents ($0.02) for each CD-Audio Disc with an outer diameter smaller than 90mm; and (c) four point five US cents ($0.045) for: - each CD-ROM Disc; - each CD-i Disc; - each Enhanced Music CD Disc; - each CDV Disc with an outer diameter equal to, or smaller than, 130mm; and - each CD-Audio Disc with an outer diameter equal to, or greater than, 90mm; which is made, used, sold or otherwise disposed of by Licensee or an Associated Company of Licensee, and in which a Licensed Patent is utilized. 5.02 (B) IN THE CASE WHERE LICENSEE HAS CHOSEN OPTION B TO 20 DEFINE LICENSED PATENTS - In consideration of the patent licenses granted hereunder by USPC to Licensee, Licensee agrees to pay to USPC royalties as follows: (a) eight U.S. cents ($0.08) for each CDV Disc with an outer diameter greater than 130mm; (b) two point two U.S. cents ($0.022) for each CD-Audio Disc with an outer diameter smaller than 90mm; and (c) four point eight US cents ($0.048) for: - each CD-ROM Disc; - each CD-i Disc; - each Enhanced Music CD Disc; - each CDV Disc with an outer diameter equal to, or smaller than, 130mm; and - each CD-Audio Disc with an outer diameter equal to, or greater than, 90mm; which is made, used, sold or otherwise disposed of by Licensee or an Associated Company of Licensee, and in which a Licensed Patent is utilized. 5.03 A Licensed Product shall be considered sold when invoiced, or if not invoiced, when delivered to a party other than the manufacturer. 21 5.04 Within thirty (30) days after the 31st March, the 30th June, the 30th September and the 31st December of each year during the period this Agreement shall be in force and effect, Licensee shall submit to USPC, even if there are no sales, a statement in writing, duly certified by an officer of the Licensee, setting forth with respect to the preceding quarterly period: (i) The quantities of Licensed Products sold by Licensee and its Associated Companies, specifying the quantities for each of the following individual type of Licensed Products: (a) CD-Audio Discs with an outer diameter smaller than 90 mm; (b) CD-Audio Discs with an outer diameter equal to, or greater than 90 mm; (c) CDV Discs with an outer diameter equal to, or greater than 130 mm; (d) CDV Discs with an outer diameter smaller than 130 mm; (e) CD-ROM Discs; (f) CD-i Discs; 22 (g) Enhanced Music DC Discs; and (ii) the royalty payable to USPC as calculated under the terms of this Agreement. Licensee shall pay to USPC the royalty due hereunder in U.S. dollars concurrently with submission of the above mentioned statement. 5.05 Royalties shall be due and payable on all Licensed Products manufactured prior to, but remaining in stock with Licensee and its Associated Companies at the date of expiration or termination of this Agreement. Certified reports on the number of Licensed Products in stock at the time of expiration or termination of this Agreement shall be submitted to USPC within thirty (30) days after such expiration or termination. For the purpose of royalty computation it shall be assumed that all Licensed Products in stock will be sold, leased or otherwise disposed of in the same countries and in proportionally the same quantities as in the last full six (6) months period reported on during the term of this Agreement. Payment of royalties due shall be effected concurrently with the 23 submission of said certified report. 5.06 All payments which are not made on the dates specified herein, shall accrue interest at the rate of two percent (2%) per month or the maximum permitted by applicable law, whichever is less. 5.07 All costs, such as stamp duties, taxes and other similar levies originating from or in connection with the conclusion of this Agreement shall be borne by Licensee. However, in the event that the government of a country imposes any income taxes on payments hereunder by Licensee to USPC and requires Licensee to withhold such tax from such payments, Licensee may deduct such tax from such payments. In such event, Licensee shall promptly furnish USPC with tax receipts issued by appropriate tax authorities so as to enable USPC to support a claim for credit against income taxes which may be payable by USPC and/or its Associated Companies in the Netherlands. 5.08 In order that the royalties and reports provided for in this Article V may be verified, Licensee agrees to ensure that full, complete and accurate books and records shall be kept covering all sales or other disposals of Licensed 24 Products by Licensee and/or its Associated Companies, for a period of three (3) years following such sales or other dispositions. It is agreed that the books and records of Licensee and/or its Associated Companies may be audited from time to time, but not more than once in each calendar year, by an independent certified public accountant appointed by USPC and reasonably acceptable to Licensee, to the extent necessary to verify the accuracy of the aforementioned statements and payments. Such inspection shall be completed at USPC's own expense provided that if any discrepancy or error exceeding three percent (3%) of the money actually due is found in connection with the computation, the cost of such inspection shall be borne by Licensee. 5.09 Notwithstanding the provisions of Paragraph 5.08 of this Article V, Licensee shall furnish whatever additional information as USPC may reasonably request from time to time to enable USPC to ascertain which products sold, leased or put into use by Licensee and/or its Associated Companies are subject to the payment of royalties to USPC hereunder, the patent rights which have been utilized in 25 connection with such products, and the amount of royalties payable. ARTICLE VI - MOST FAVORABLE CONDITIONS If under otherwise substantially the same conditions as contained in this Agreement, licenses under the patent rights referred to and licensed pursuant to Article II should be granted for Licensed Products to any third party at a royalty rate more favorable than the rate payable by Licensee under this Agreement, Licensee shall be entitled to have the royalty rate applicable to it modified to such extent that the same shall be as favorable as that available to such third party, provided always that such obligation shall not apply in respect of cross-license agreements and other agreements, in which the consideration for such licenses shall not be wholly expressed in payment of royalties and shall also not apply to licenses or other arrangements made pursuant to a court decision or a settlement of a dispute between USPC and a Licensee or between USPC and a third party. Without limiting the foregoing, this Article VI shall not apply to terms entered into in settlement of a filed court action regardless of the nature of such action or settlement terms. 26 ARTICLE VII - DISCLAIMER USPC warrants that it shall furnish the information to be supplied by it to the best of its ability, but it makes no representation or warranty as to the value of the information transmitted or the ability of Licensee to make use thereof to secure interchangeability. USPC makes no warranty whatsoever that the use of information supplied by USPC does not infringe or may not cause infringement of patent rights owned or controlled by third parties, or of patent rights owned or controlled by USPC or an Associated Company of USPC not licensed pursuant to Article II. In further certainty the parties of this Agreement recognize that third parties own patent rights in the field of Licensed Products and Licensee accepts that USPC makes no warranty whatsoever that any manufacture, use, sale, lease or other disposition of Licensed Product will be free from infringement of any patent other than Licensed Patents. ARTICLE VIII - SECRECY Licensee agrees that, subject to what has been provided for in Article IV of this Agreement, Licensee and its Associated Companies shall not disclose to any third party 27 information relative to the manufacture and sale of Licensed Products acquired from USPC or USPC's Associated Companies. This obligation, which shall run for the period of this Agreement and for a period of three (3) years thereafter, shall not apply to the extent information so acquired: (a) was known to Licensee or its Associated Companies prior to the date said information was acquired from USPC or its Companies, as shown by records of Licensee or any Company of Licensee or otherwise demonstrated to Philips' satisfaction; (b) is or has become available to the public in general through no fault of Licensee or its Companies; (c) was or is received from a third party who was free and had a legal right to disclose the same. In protecting information acquired from USPC or their Companies pertaining to Licensed Products, Licensee has agreed that Licensee and its Companies will take all necessary measures and precautions, including, but not limited to, measures requiring their present and future employees to give suitable undertakings of secrecy both for the period of their employment and thereafter, and that in general such information 28 will be treated in the same manner and with the same degree of care as Licensee applies and has applied to its own information of a sensitive or confidential nature. ARTICLE IX - PATENT MARKINGS AND LOGO 9.01 If requested by USPC, Licensee shall place appropriate patent markings on an exposed surface of the Licensed Products made, used, sold and/or otherwise disposed of hereunder. The content, form, location and language used in such markings shall be in accordance with the laws and practices of the country, where such markings are used. 9.02 In addition, Licensed Products may be provided with respective logos in accordance with the instructions laid down in the CD Logo Guide which is available from USPC on request (hereinafter referred to as "the Logo"). In advertisements and sales literature with respect to Licensed Products sold by Licensee and/or its Companies the Logo may similarly be used and applied. 9.03 USPC grants Licensee and its Companies a royalty free, non-exclusive, non- transferable, indivisible right to use the Logo on and with respect to Licensed Products manufactured by or for Licensee and/or its 29 Companies in accordance with the instructions laid down in Exhibit AA. 9.04 Licensee understands and agrees that USPC makes no warranty whatsoever that any use of the Logo will be free from infringement of intellectual property rights owned by third parties. ARTICLE X - ASSIGNMENT This Agreement shall inure to the benefit of and be binding upon each of the parties hereto and their respective assigns. It may not be assigned in whole or in part by Licensee without the prior consent in writing of USPC except to the surviving corporation of a merger, consolidation or other transfer of all or substantially all the assets of Licensee and except that Licensee may assign this Agreement to one of its Companies provided that Licensee remains liable hereunder and the transferee has the capability to perform all obligations to be performed hereunder. ARTICLE XI - TERM AND TERMINATION 11.01 This Agreement shall be effective from the date first written above, if and unless otherwise terminated shall 30 remain in force for a period of ten (10) years from the effective date of this Agreement. Notwithstanding the foregoing, this Agreement shall expire on the expiration date of the last to expire of the Licensed Patents licensed and referred to in Article II. 11.02 Either party may terminate this Agreement at any time on thirty (30) days notice to the other party in the event that the latter shall fail to perform any obligation under this Agreement and such default is not remedied within thirty (30) days after receipt of a notice specifying the nature of the default. Such right of termination shall not be exclusive of any other remedies or means of redress to which the non-defaulting party may be lawfully entitled, it being intended that all such remedies shall be cumulative. Any such termination shall not affect any payments, the rights to which may have fallen due under this Agreement prior to such termination. Notwithstanding anything to the contrary herein, USPC shall have the right, at its sole option and discretion, to terminate this Agreement without advance notice (but with written notice) in the event that Licensee shall fail to abide by 31 the obligations as set forth in Article V hereof for three (3) consecutive quarters. 11.03 The obligations set forth in paragraphs 2.02, 2.03, 2.04, 2.05, 5.05, 12.05 and Article VIII shall survive termination of this Agreement. Notwithstanding the foregoing, in the event termination is due to the breach of the Agreement by Licensee, paragraphs 2.02 and 2.03 shall not survive termination. 11.04 If Licensee should be dissolved or file a voluntary petition in bankruptcy or seek any court of governmental protection from creditors or make any assignment for creditors, or should an order be entered pursuant to any law relating to bankruptcy or insolvency appointing a receiver or trustee for Licensee, and if any such receivership is not terminated within sixty (60) days, then, in any of the events specified in this paragraph 11.04, USPC may give written notice to Licensee terminating this Agreement and this Agreement shall be terminated in accordance with the notice. ARTICLE XII - MISCELLANEOUS 12.01 This Agreement sets forth the entire agreement and 32 understanding between the parties as to the subject matter hereof and merges all prior discussions between them and neither of the parties shall be bound by any conditions, definitions, warranties, waivers, releases or representations (either expressed or implied) with respect to the subject matter of this Agreement, other than expressly provided for herein, or as duly set forth on or subsequent to the date hereof in writing signed by a duly authorized representative of the party to be bound thereby. 12.02 Nothing contained in this Agreement shall be construed: (a) as imposing on either party any obligation to institute any suit or action for infringement of any of the patent rights licensed hereunder or to defend any suit or action brought by a third party which challenges or concerns the validity of any of such patent rights, it being expressly understood that Licensee shall have no right to institute any such suit or action for infringement of any of the patent rights licensed by USPC hereunder, nor the right to defend any such suit or action which challenges or 33 concerns the validity of any such USPC patent right; (b) as imposing any obligation to file any patent application or to secure any patent or to maintain any patent in force; (c) as conferring any license or right to copy or to simulate the appearance and/or design of any product of USPC or its Companies; (d) as conferring any license under the patent rights licensed pursuant to Article II hereof to manufacture, use, sell, lease or otherwise dispose of any product or device other than a Licensed Product. 12.03 If at any time a party shall elect not to assert its rights under any provision of this Agreement, such action or lack of action in that respect shall not be construed as a waiver of its rights under said provision or of any other provision of this Agreement. 12.04 Any notice or request required or permitted to be given under or in connection with this Agreement or the subject matter hereof shall be in writing and shall be deemed to have been sufficiently given when, if given to Licensee, 34 it is addressed to: Robert Steinberg, Esq. Irell & Manella LLP 1800 Avenue of the Stars Suite 900 Los Angeles, California 90067-4276 and in respect of USPC, to: Intellectual Property Department U.S. Philips Corporation 580 White Plains Road, Tarrytown, New York 10591 and sent in each case by telecopy and Registered Mail, postage prepaid. The date of mailing shall be deemed to be the date on which such notice of request has been given. Either party may give written notice of change of address and, after notice of such change has been received, any notice or request required to be given shall thereafter be given to such party at such changed address in the manner as provided above. 12.05 This Agreement and all disputes, claims or controversies arising out of, or in any way relating to, this Agreement ("Dispute") shall be governed by and construed, and any 35 claim or controversy arising with respect thereto shall be determined, in accordance with the laws and in the competent courts of the State of New York. The parties hereto consent to the personal jurisdiction of the competent courts of the State of New York for the purpose of prosecuting or resolving any such Dispute. IN WITNESS WHEREOF, the parties hereof have caused this Agreement to be signed on the date first above written. U.S. PHILIPS CORPORATION FUTURE MEDIA PRODUCTIONS, INC. By /s/ Algy Tamoshunas By /s/ Alex Sandel ------------------------ ------------------------ Algy Tamoshunas Alex Sandel Title Vice President Title President ---------------------- --------------------- Date 10/30/96 Date 10/23/96 ---------------------- ---------------------- 36 Exhibit I Option A - CD-Audio Disc December 5, 1995 Page 1 SURVEY OF LICENSOR'S PATENT RIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U) Priority date Expiration Date Patent (PS) Publication (PUB) Prov. Publ. (PPU) or Appln. No./ Expiration date - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- N 6493 NL 7214999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection 09.02.1972 26.11.2008 25.08.1992 - ---------------------------------------------------------------------------------------------------------------------------------- N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer 12.12.1977 20.07.1998 - ---------------------------------------------------------------------------------------------------------------------------------- N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc 09.11.1978 26.12.1998 08.09.1999 - ---------------------------------------------------------------------------------------------------------------------------------- P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal 18.11.1976 14.11.1997 18.11.1996 recording medium - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit I Option A - CD-Audio Disc December 5, 1995 Page 2 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system 21.04.1978 Re 31,666/ 21.01.1998 19.10.1999 - ---------------------------------------------------------------------------------------------------------------------------------- P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium 04.10.1981 19.04.2011 04.10.2001 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system P 16056 14.07.1980 19.02.2002 14.07.2001 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80009 JP 55-67608/ PS 4,413,340/ PS 1872451/ CIRC P 14539 21.05.1980 20.05.2001 21.05.2000 - ---------------------------------------------------------------------------------------------------------------------------------- S-8P038 S 55-22605/ PS 4,398,292/ JPL 670009/ Method and apparatus for encoding digital with 25.02.1980 23.02.2001 25.02.2000 two error correcting codes - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit II Option B - CD-Audio Disc December 5, 1995 Page 1 SURVEY OF LICENSOR'S PATENT RIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U) Priority date Expiration Date Patent (PS) Publication (PUB) Prov. Publ. (PPU) or Appln. No./ Expiration date - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- N 6493 NL 7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection 09.02.1972 25.08.1992 - ---------------------------------------------------------------------------------------------------------------------------------- N 7016 PS 4,118,734/ Optical videodisc with variable width tracks 29.10.1996 - ---------------------------------------------------------------------------------------------------------------------------------- N 7340 NL 7401858/ PS 4,084,185/ Record carrier on which information is stored in 12.02.1974 03.03.1996 an optically readable structure - ---------------------------------------------------------------------------------------------------------------------------------- N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer 12.12.1977 20.07.1998 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit II Option B - CD-Audio Disc December 5, 1995 Page 2 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 9076 NL 7803069/ PS 4,450,553/ PS 1363333/ Multi-layer optical disc 22.03.1978 22.05.2001 22.03.1999 - ---------------------------------------------------------------------------------------------------------------------------------- N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc 09.11.1978 26.12.1998 08.09.1999 - ---------------------------------------------------------------------------------------------------------------------------------- N 9258 NL 7810463/ PS 4,930,116/ PS 1550033/ Optical disc with deep pits in shallow v-shaped 19.10.1978 27.05.2007 19.10.1999 groove - ---------------------------------------------------------------------------------------------------------------------------------- N 9398 NL 7902363/ PS 4,499,574/ PS 1694091/ Adaption of track distance to pit frequency 27.03.1979 12.02.2002 25.03.2000 - ---------------------------------------------------------------------------------------------------------------------------------- N 9567 PS 4,325,135/ Optical record carrier and apparatus for reading 13.04.1999 it - ---------------------------------------------------------------------------------------------------------------------------------- N 9587 PS 4,310,916/ Optical record carrier and apparatus for reading 12.01.99 it - ---------------------------------------------------------------------------------------------------------------------------------- N 9725 NL 8002039/ PS 4,389,719/ Optical disc with PVC substrate covered cured 08.04.1980 08.09.2000 lacquer - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit II Option B - CD-Audio Disc December 5, 1995 Page 3 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 9732 NL 8002411/ PS 4,556,967/ Two phase information structure without cross-talk 25.04.1980 03.12.2002 - ---------------------------------------------------------------------------------------------------------------------------------- N 9933 NL 8100098/ PS 4,423,502/ PS 7882422/ Optical disc with tracks at different levels 12.01.1981 09.11.2001 12.01.2002 - ---------------------------------------------------------------------------------------------------------------------------------- P 10530 P 51-138821/ PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc shaped signal 18.11.1976 14.11.1997 18.11.1996 recording medium - ---------------------------------------------------------------------------------------------------------------------------------- P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system 21.04.1978 19.10.1999 24.04.1998 Re 31,666/ 19.10.1999 - ---------------------------------------------------------------------------------------------------------------------------------- P 14768 P 55-99252/ PS 4,358,780/ PPU 57-24038/ Information recording medium 18.07.1980 10.07.2001 18.07.2000 - ---------------------------------------------------------------------------------------------------------------------------------- P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium 04.10.1981 19.04.2011 04.10.1981 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80007 NL 800-1028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system P 16056 14.07.1980 19.02.2002 14.07.2001 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit II Option B - CD-Audio Disc December 5, 1995 Page 4 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- Q 80009 JP 55-67608/ PS 4,413,340/ PS 1872451/ CIRC P 14539 21.05.1980 20.05.2001 21.05.2000 - ---------------------------------------------------------------------------------------------------------------------------------- S 8P038 S 55-22605/ PS 4,398,292/ JPI. 670009/ Method and apparatus for encoding digital with 25.02.1980 23.02.2001 25.02.2001 two error correcting codes - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit III Option A - CD-ROM Disc December 5, 1995 Page 1 SURVEY OF LICENSOR'S PATENT RIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U) Priority date Expiration Date Patent (PS) Publication (PUB) Prov. Publ. (PPU) or Appln. No./ Expiration date - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- N 6493 NL 7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection 09.02.1972 26.11.2008 25.08.1992 - ---------------------------------------------------------------------------------------------------------------------------------- N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer 12.12.1977 20.07.1998 - ---------------------------------------------------------------------------------------------------------------------------------- N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc 09.11.1978 26.12.1998 08.09.1999 - ---------------------------------------------------------------------------------------------------------------------------------- P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal 18.11.1976 14.11.1997 18.11.1996 recording medium - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit III Option A - CD-ROM Disc December 5, 1995 Page 2 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system 21.04.1978 Re 31,666/ 21.04.1998 19.10.1999 - ---------------------------------------------------------------------------------------------------------------------------------- P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium 04.10.1981 19.04.2011 04.10.2001 - ---------------------------------------------------------------------------------------------------------------------------------- P 18816 JP 58-35459/ PS 4,707,818/ PPU 59-162605/ Data transmitting system 04.03.1983 17.11.5004 04.03.2003 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system P 16056 14.07.1980 19.02.2002 14.07.2001 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80009 JP 55-67608/ PS 4,413,340/ PS 1872451/ CIRC P 14539 21.05.1980 20.05.2001 21.05.2000 - ---------------------------------------------------------------------------------------------------------------------------------- Q 83025 JP 83-161514/ PS 4,641,295/ PPU 60-52961/ Framing of data blocks on CD-ROM P 19764 01.09.1983 27.08.2004 01.09.2003 - ---------------------------------------------------------------------------------------------------------------------------------- Q 84008 JP 84-57595/ PS 4,980,764/ PPU 60-201575/ CD-ROM error correction system A P 21500 24.03.1984 22.03.2005 24.03.2004 Re 33.462/ 22.03.2005 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit III Option A - CD-ROM Disc December 5, 1995 Page 3 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- Q 84009 JP 84-57596/ PS 4,680,764/ PPU 60-201576/ CD-ROM error correction system B P 21501 24.03.1984 22.03.2005 24.03.2004 Re 33,462/ 22.03.2005 - ---------------------------------------------------------------------------------------------------------------------------------- S-8P038 S 55-22605/ PS 4,398,292/ JPI. 670009/ Method and apparatus for encoding digital with 25.02.1980 23.02.2001 25.02.2000 two error correcting codes - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit IV Option B - CD-ROM Disc December 5, 1995 Page 1 SURVEY OF LICENSOR'S PATENT RIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U) Priority date Expiration Date Patent (PS) Publication (PUB) Prov. Publ. (PPU) or Appln. No./ Expiration date - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- N 6493 NL 7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection 09.02.1972 26.11.2008 25.08.1992 - ---------------------------------------------------------------------------------------------------------------------------------- N 7016 PS 4,118,734/ Optical disc with variable width 09.10.1996 - ---------------------------------------------------------------------------------------------------------------------------------- N 7340 NL 7401858/ PS 4,084,185/ Record carrier on which information is stored in 12.02.1974 03.03.1996 an optically readable structure - ---------------------------------------------------------------------------------------------------------------------------------- N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer 12.12.1977 20.07.1998 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit IV Option B - CD-ROM Disc December 5, 1995 Page 2 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 9076 NL 7803069/ PS 4,450,553/ PS 1363333/ Multi-layer optical disc 22.03.1978 22.05.2001 22.03.1999 - ---------------------------------------------------------------------------------------------------------------------------------- N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc 09.11.1978 26.12.1998 08.09.1999 - ---------------------------------------------------------------------------------------------------------------------------------- N 9258 NL 781463/ PS 4,930,116/ PS 1550033/ Optical disc with deep pits in shallow v-shaped 19.10.1978 27.05.2007 19.10.1999 groove - ---------------------------------------------------------------------------------------------------------------------------------- N 9398 NL 7902363/ PS 4,499,574/ PS 1694091/ Adaption of track distance to pit frequency 27.04.1979 12.02.2002 25.03.2000 - ---------------------------------------------------------------------------------------------------------------------------------- N 9567 NL 7906576 PS 4,325,135/ Optical record carrier and apparatus for reading 13.04.1999 it - ---------------------------------------------------------------------------------------------------------------------------------- N 9587 PS 4,310,916/ Optical record carrier and apparatus for reading 12.01.1999 it - ---------------------------------------------------------------------------------------------------------------------------------- N 9725 NL 8002039/ PS 4,389,719/ Optical disc with PVC substrate covered cured 08.04.1980 08.09.2000 lacquer - ---------------------------------------------------------------------------------------------------------------------------------- N 9732 NL 8002411/ PS 4,556,967/ Two phase information structure without cross-talk 25.04.1980 03.12.2002 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit IV Option B - CD-ROM Disc December 5, 1995 Page 3 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 9933 NL 8100098/ PS 4,423,502/ PS 7882422/ Optical disc with tracks at different levels 12.01.1981 09.11.2001 12.01.2002 - ---------------------------------------------------------------------------------------------------------------------------------- P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal 18.11.1976 14.11.1997 18.11.1996 recording medium - ---------------------------------------------------------------------------------------------------------------------------------- P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system 21.04.1978 Re 31,666/ 21.04.1998 19.10.1999 - ---------------------------------------------------------------------------------------------------------------------------------- P 14768 P 55-99252 PS 4,358,780/ PPU 57-24038/ Information recording medium 18.07.1980 10.07.2001 18.07.2000 - ---------------------------------------------------------------------------------------------------------------------------------- P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium 04.10.1981 19.04.2011 04.10.2001 - ---------------------------------------------------------------------------------------------------------------------------------- P 18816 JP 58-35459/ PS 4,707,818/ PPU 59-162605/ Data transmitting system 04.03.1983 17.11.2004 04.03.2003 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system P 16056 14.07.1980 19.02.2002 14.07.2001 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit IV Option B - CD-ROM Disc December 5, 1995 Page 4 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- Q 80009 JP 55-67608/ PS 4,413,340/ PS 1872451/ CIRC P 14539 21.05.1980 20.05.2001 21.05.2000 - ---------------------------------------------------------------------------------------------------------------------------------- Q 83025 JP 83-161514/ PS 4,641,295/ PPU 60-52961/ Framing of data blocks on CD-ROM P 19764 01.09.1983 27.08.2004 01.09.2003 - ---------------------------------------------------------------------------------------------------------------------------------- Q 84008 JP 84-57595/ PS 4,680,764/ PPU 60-201575/ CD-ROM error correction system A P 21500 24.03.1984 22.03.2005 24.03.2004 Re 33,462/ 22.03.2005 - ---------------------------------------------------------------------------------------------------------------------------------- Q 84009 JP 84-57596/ PS 4,680,764/ PPU 60-201576/ CD-ROM error correction system B P 21501 24.03.1984 22.03.2005 24.03.2004 Re 33,462/ 22.03.2005 - ---------------------------------------------------------------------------------------------------------------------------------- S 8P038 S 55-22605/ PS 4,398,292/ JPL 670009/ Method and apparatus for encoding digital with 25.02.1980 23.02.2001 25.02.2001 two error correcting codes - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit V Option A - CD-1 Disc December 5, 1995 Page 1 SURVEY OF LICENSOR'S PATENT RIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U) Priority date Expiration Date Patent (PS) Publication (PUB) Prov. Publ. (PPU) or Appln. No./ Expiration date - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- B 33255 GB 8609078/ 4,868,764/ Enhanced resolution of CD-ROM stored TV-pictures 14.04.1986 06.04.2007 - ---------------------------------------------------------------------------------------------------------------------------------- B 33335 GB 8726961/ 4,858,026/ PPU 63-168781/ Pyramid encoder with decoder in prediction channel 24.12.1986 21.12.2007 24.12.2007 - ---------------------------------------------------------------------------------------------------------------------------------- N 6493 NL 7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection 09.02.1972 26.11.2008 25.08.1992 - ---------------------------------------------------------------------------------------------------------------------------------- N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer 12.12.1977 20.07.1998 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit V Option A - CD-1 Disc December 5, 1995 Page 2 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in Optical disc 09.11.1978 26.12.1998 08.09.1999 - ---------------------------------------------------------------------------------------------------------------------------------- N 11734 NL 8600980/ 4,914,515/ PPU 62-256269/ Partial updating of stationary pictures on CD-1 18.04.1986 15.04.2007 17.04.2007 - ---------------------------------------------------------------------------------------------------------------------------------- N 11753 NL 8601182/ 4,794,465/ PPU 62-269584/ Data driven action tagging in CD-1 12.05.1986 10.10.2006 11.05.2007 - ---------------------------------------------------------------------------------------------------------------------------------- P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal 18.11.1976 14.11.1997 18.11.1996 recording medium - ---------------------------------------------------------------------------------------------------------------------------------- P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system 21.04.1978 Re 31,666/ 21.04.1998 19.10.1999 - ---------------------------------------------------------------------------------------------------------------------------------- P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium 04.10.1981 19.04.2011 04.10.2001 - ---------------------------------------------------------------------------------------------------------------------------------- P 19262 JP 58-97687/ A 700817/ PS 1,864,908/ Digital signal transmitting method 01.06.1983 01.06.2003 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit V Option A - CD-1 Disc December 5, 1995 Page 3 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- P 19263 JP 58-97688/ A 700817/ PS 1,864,909/ Digital signal transmitting method 01.06.1983 01.06.2003 - ---------------------------------------------------------------------------------------------------------------------------------- P 19264 JP 58-97689/ A 700817/ PS 1,782,167/ Digital signal transmitting method 01.06.1983 01.06.2003 - ---------------------------------------------------------------------------------------------------------------------------------- P 23912 JP 60-51994/ PPU 61-211728 Data processing apparatus 15.03.1985 - 15.03.2005 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system P 16056 14.07.1980 19.02.2002 14.07.2001 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80009 JP 55-67608/ PS 4,413,340/ PPU 57-4629/ CIRC P 14539 21.05.1980 20.05.2001 21.05.2000 - ---------------------------------------------------------------------------------------------------------------------------------- Q 86003 NL 8600450/ 4,802,169/ PPU 62,217468/ Real time format switching in CD-1 P 30624 26.02.1986 24.02.2007 23.07.2007 - ---------------------------------------------------------------------------------------------------------------------------------- S-8P038 S 55-22605/ PS 4,398,292/ JPI. 670009/ Method and apparatus for encoding digital with 25.02.1980 23.02.2001 25.02.2000 two error correcting codes - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit VI Option B - CD-1 Disc December 5, 1995 Page 1 SURVEY OF LICENSOR'S PATENT RIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U) Priority date Expiration Date Patent (PS) Publication (PUB) Prov. Publ. (PPU) or Appln. No./ Expiration date - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- B 33255 GB 8609078/ 4,868,764/ Enhanced resolution of CD-ROM stored TV-pictures 14.04.1986 06.04.2007 - ---------------------------------------------------------------------------------------------------------------------------------- B 33335 GB 8726961/ 4,858,026/ PPU 63-168781/ Pyramid encoder with decoder in prediction channel 24.12.1986 21.12.2007 24.12.2007 - ---------------------------------------------------------------------------------------------------------------------------------- N 6493 NL 72511999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection 09.02.1972 26.11.2008 25.08.1992 - ---------------------------------------------------------------------------------------------------------------------------------- N 7016 PS 4,118,734/ Optical disc with variable width tracks 24.10.1996 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit VI Option B - CD-1 Disc December 5, 1995 Page 2 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 7340 NL 7401858 PS 4,084,185/ Record carrier on which information is stored in 03.03.1996 an optically readable structure - ---------------------------------------------------------------------------------------------------------------------------------- N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer 12.12.1977 20.07.1998 - ---------------------------------------------------------------------------------------------------------------------------------- N 9225 NL 7809227/ PS 4,230,915/ PS 1630678 Depth of smooth pits in optical disc 09.11.1978 26.12.1998 08.09.1999 - ---------------------------------------------------------------------------------------------------------------------------------- N 9258 NL 7810463/ PS 4,930,116/ PS 1550033/ Optical disc with deep pits in shallow v-shaped 19.10.1978 27.05.2007 19.10.1999 groove - ---------------------------------------------------------------------------------------------------------------------------------- N 9398 NL 7902363/ PS 4,499,574/ PS 1694091/ Adaption of track distance to pit frequency 27.03.1979 12.02.2002 25.03.2000 - ---------------------------------------------------------------------------------------------------------------------------------- N 9567 PS 4,325,135/ Optical record carrier and apparatus for reading 13.04.1999 it - ---------------------------------------------------------------------------------------------------------------------------------- N 9587 PS 4,310,916/ Optical record carrier and apparatus for reading it - ---------------------------------------------------------------------------------------------------------------------------------- N 9725 NL 8002039/ PS 4,389,719/ Optical disc with PVC substrate covered cured 08.04.1980 08.09.2000 lacquer - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit VI Option B - CD-1 Disc December 5, 1995 Page 3 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 9732 NL 8002411/ PS 4,556,967/ Two phase information structure without cross-talk 25.04.1980 03.12.2002 - ---------------------------------------------------------------------------------------------------------------------------------- N 9933 NL 8100098/ PS 4,423,502/ PS 7882422/ Optical disc with tracks at different levels 12.01.1981 09.11.2001 12.01.2002 - ---------------------------------------------------------------------------------------------------------------------------------- N 11734 NL 8600980/ 4,914,515/ PPU 62-256269/ Partial updating of stationary pictures on CD-1 18.04.1986 15.04.2007 17.04.2007 - ---------------------------------------------------------------------------------------------------------------------------------- N 11753 NL 8601182/ 4,794,465/ PPU 62-269584/ Data driven action tagging in CD-1 12.05.1986 10.10.2006 11.05.2007 - ---------------------------------------------------------------------------------------------------------------------------------- P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal 18.11.1976 14.11.1997 18.11.1996 recording medium - ---------------------------------------------------------------------------------------------------------------------------------- P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system 21.04.1978 Re 31,666/ 21.04.1998 19.10.1999 - ---------------------------------------------------------------------------------------------------------------------------------- P 14768 P 55-99252/ PS 4,358,780/ PPU 57-24038/ Information recording medium 18.07.1980 10.07.2001 18.07.2000 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit VI Option B - CD-1 Disc December 5, 1995 Page 4 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium 04.10.1981 19.04.2011 04.10.2001 - ---------------------------------------------------------------------------------------------------------------------------------- P 19262 JP 58-97687/ A 700817/ PS 1,864,908/ Digital signal transmitting method 01.06.1983 01.06.2003 - ---------------------------------------------------------------------------------------------------------------------------------- P 19263 JP 58-97688/ A 700817/ PS 1,864,909/ Digital signal transmitting method 01.06.1983 01.06.2003 - ---------------------------------------------------------------------------------------------------------------------------------- P 19264 JP 58-97689/ A 700817/ PS 1,782,167/ Digital signal transmitting method 01.06.1983 01.06.2003 - ---------------------------------------------------------------------------------------------------------------------------------- P 23912 JP 60-51994/ - PPU 61-211728 Data processing apparatus 15.03.1985 15.03.2005 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system P 16056 14.07.1980 19.02.2002 14.07.2001 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80009 JP 55-67608/ PS 4,413,340/ PPU 57-4629 CIRC P 14539 21.05.1980 20.05.2001 21.05.2000 - ---------------------------------------------------------------------------------------------------------------------------------- Q 86003 NL 8600450/ 4,802,169/ PPU 62-217468/ Real time format switching in CD-1 P 30624 26.02.1986 24.02.2007 23.07.2007 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit VI Option B - CD-1 Disc December 5, 1995 Page 5 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- S-8P038 S 55-22605/ PS 4,398,292/ JPI. 670009/ Method and apparatus for encoding digital with 25.02.1980 23.02.2001 25.02.2000 two error correcting codes - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit VII Option A - CDV - Disc December 5, 1995 Page 1 SURVEY OF LICENSOR'S PATENT RIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U) Priority date Expiration date Patent (PS) Publication (PUB) Prov. Publ. (PPU) or Appln. No./ Expiration date - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- N 6493 NL 7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection 02.09.1972 26.11.2008 25.08.1992 - ---------------------------------------------------------------------------------------------------------------------------------- N 8717 NL 7702874/ PS 4417285/ PS 1153514/ Automatic field correction during VLP stop-motion 17.03.1977 22.11.2000 25.09.1997 PS 1313142/ 16.03.1998 PS 1351132/ 16.03.1998 - ---------------------------------------------------------------------------------------------------------------------------------- N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer 12.12.1977 20.07.1998 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit VII Option A - CDV - Disc December 5, 1995 Page 2 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 9225 NL. 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc 09.11.1978 26.12.1998 08.09.1999 - ---------------------------------------------------------------------------------------------------------------------------------- N 10591 NL 8300541/ PS 4660097/ VIP with "Compact-Disc" audio 14.02.1983 21.04.2004 - ---------------------------------------------------------------------------------------------------------------------------------- N 10730 NL 8302542/ PS 4642702/ PS 1944768/ VIP with CD audio in underband 15.07.1983 13.07.2004 14.02.2004 - ---------------------------------------------------------------------------------------------------------------------------------- P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal 18.11.1976 14.11.1997 18.11.1996 recording medium - ---------------------------------------------------------------------------------------------------------------------------------- P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system 21.04.1978 Re 31,666/ 21.04.1998 19.10.1999 - ---------------------------------------------------------------------------------------------------------------------------------- P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium 04.10.1981 19.04.2011 04.10.2001 - ---------------------------------------------------------------------------------------------------------------------------------- P 20779 JP 58-226598/ PS 4893193/ PPU 60-119670/ Disc type recording media 30.11.1983 09.01.2007 30.11.2003 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit VII Option A - CDV - Disc December 5, 1995 Page 3 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system P 16056 14.07.1980 19.02.2002 14.07.2001 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80009 JP 55-67608/ PS 4,413,340/ PPU 57-4629/ CIRC P 14539 21.05.1980 20.05.2001 21.05.2000 - ---------------------------------------------------------------------------------------------------------------------------------- S 8P038 S 55-22605/ PS 4,398,292/ JPL 670009/ Method and apparatus for encoding digital with two 25.02.1980 23.02.2001 25.02.2000 error correcting codes - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit VIII Option B - CDV - Disc December 5, 1995 Page 1 SURVEY OF LICENSOR'S PATENT RIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Licensor's Priority US Patent (PS) JP Ut. Model (UM) Title Ref. No. PII Application/ or Appln. No./ Prov. Publ. (U) Priority date Expiration date Patent (PS) Publication (PUB) Prov. Publ. (PPU) or Appln. No./ Expiration date - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- N 6493 NL 7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection 09.02.1972 26.11.2008 25.08.1992 - ---------------------------------------------------------------------------------------------------------------------------------- N 7016 PS 4,118,734/ Optical disc with variable width tracks 24.10.1996 - ---------------------------------------------------------------------------------------------------------------------------------- N 7340 NL 7401858 PS 4,084,185/ Record carrier on which information is stored in an 03.03.1996 optically readable structure - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit VIII Option B - CDV - Disc December 5, 1995 Page 2 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 8717 NL 7702874/ PS 4417285/ PS 1153514/ Automatic field correction during VLP stop-motion 17.03.1977 22.11.2000 25.09.1997 PS 1313142/ 16.03.1998 PS 1351132/ 16.03.1998 - ---------------------------------------------------------------------------------------------------------------------------------- N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer 12.12.1977 20.07.1998 - ---------------------------------------------------------------------------------------------------------------------------------- N 9076 NL 7803069/ PS 4,450,553/ PS 1363333/ Multi-layer optical disc 22.03.1978 22.05.2001 22.03.1999 - ---------------------------------------------------------------------------------------------------------------------------------- N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc 09.11.1978 26.12.1998 08.09.1999 - ---------------------------------------------------------------------------------------------------------------------------------- N 9258 NL 7810463/ PS 4,930,116/ PS 1550033/ Optical disc with deep pits in shallow v-shaped 19.10.1978 27.05.2007 19.10.1999 groove - ---------------------------------------------------------------------------------------------------------------------------------- N 9398 NL 7902363/ PS 4,499,574/ PS 1694091/ Adaption of track distance to pit frequency 27.03.1979 12.02.2002 25.03.2000 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit VIII Option B - CDV - Disc December 5, 1995 Page 3 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 9567 PS 4,325,135/ Optical record carrier and apparatus for reading it 13.04.1997 - ---------------------------------------------------------------------------------------------------------------------------------- N 9587 NL 7907180 PS 4,310,916/ PS 1637642 Optical record carrier and apparatus for reading it 12.01.1999 - ---------------------------------------------------------------------------------------------------------------------------------- N 9725 NL 8002039/ PS 4,389,719/ Optical disc with PVC substrate covered cured 08.04.1980 08.09.2000 lacquer - ---------------------------------------------------------------------------------------------------------------------------------- N 9732 NL 8002411/ PS 4,556,968/ Two phase information structure without cross-talk 25.04.1980 03.12.2002 - ---------------------------------------------------------------------------------------------------------------------------------- N 9933 NL 8100098/ PS 4,423,502/ PS 7882422/ Optical disc with tracks at different levels 12.01.1981 09.11.2001 12.01.2002 - ---------------------------------------------------------------------------------------------------------------------------------- N 10591 NL 8300541/ PS 4660097/ VLP with "Compact-Disc" audio 14.02.1983 21.04.2004 - ---------------------------------------------------------------------------------------------------------------------------------- N 10730 NL 8302542/ PS 4642702/ PS 1944768/ VLP with CD audio in underband 15.07.1983 13.07.2004 14.02.2004 - ---------------------------------------------------------------------------------------------------------------------------------- P 10530 PS 51-138821 PS 4,142,210/ PPU 5.3-63002/ Method of signal recording and disc-shaped signal 18.11.1976 14.11.1997 18.11.1996 recording medium - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit VIII December 5, 1995 Option B - CDV - Disc Page 4 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system 21.04.1978 Re 31,666/ 21.04.1998 19.10.1999 - ---------------------------------------------------------------------------------------------------------------------------------- P 14768 P 55-99252/ PS 4,358,780/ PPU 57-24038/ Information recording medium 18.07.1980 10.07.2001 18.07.2000 - ---------------------------------------------------------------------------------------------------------------------------------- P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium 01.10.1981 19.04.2011 04.10.2001 - ---------------------------------------------------------------------------------------------------------------------------------- P 20779 JP 58-226598/ PS 4893193/ PPU 60-119670/ Disc type recording media 30.11.1983 09.01.2007 30.11.2003 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system P 16056 14.07.1980 19.02.2002 14.07.2001 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80009 JP 55-67608/ PS 4,413,340/ PPU 57-4629/ CIRC P 14539 21.05.1980 20.05.2001 21.05.2000 - ---------------------------------------------------------------------------------------------------------------------------------- S-8P038 S 55-22605/ PS 4,398,292/ JPL 670009/ Method and apparatus for encoding digital with two 25.02.1980 23.02.2001 25.02.2000 error correcting codes - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit IX December 5, 1995 Option A - Enhanced Music CD - Disc Page 1 SURVEY OF LICENSOR'S PATENT RIGHTS - ------------------------------------------------------------------------------------------------------------------------------ Licensor's Priority US Patent (PS) Jp Ul Model (UM) Title Ref No PII Application/ or Appln. No/ Prov. Publ (U) Priority date Expiration date Patent (PS) Publication (PUB) Prov. Publ (PPU) or Appln No/ Expiration date - ------------------------------------------------------------------------------------------------------------------------------ D 86308 DE 36 13 343/ PS 4,825,285/ A 63-001 183/ DPCM encoder with 2-dimensional low pass filter D 86313 19.04.1986 15 01 2007 20 04 2007 D 86337 DE 36 20 424/ 10.06.1986 DE 36 38 128/ 08.11.1986 - ------------------------------------------------------------------------------------------------------------------------------ D 86327 DE 36.31 252/ PS 4,901,075/ A 63-132.530/ Coefficient encoder in transform coding D 86336 13.09.1986 11.09.2007 14.09.2007 DE 37.38.127/ 08.11.1986 - ------------------------------------------------------------------------------------------------------------------------------
Exhibit IX December 5, 1995 Option A - Enhanced Music CD - Disc Page 2 SURVEY OF LICENSOR'S PATENT RIGHTS - --------------------------------------------------------------------------------------------------------------------------------- D 87091 DE 37 15 067/ PS 5,021,879/ A 63-287 186/ Motion estimation on superblocks of N transform D 87291 06.05.1987 04.06.2008 06.05.2008 blocks DE 37.15.147/ 07.05.1987 DE 37 44 280/ 28.12.1987 DE 37 26 520 - --------------------------------------------------------------------------------------------------------------------------------- F 89522 FR 8908186/ A 631,830/ A 92-500 443/ NORMALISATION/special subsample pictures 20.06.1989 19.06.2010 - --------------------------------------------------------------------------------------------------------------------------------- F 89526 FR 8903929/ PS 5,079,631/ A 02 028 596/ Selectable temporal/controlled by 24.08.1989 classification parameter - --------------------------------------------------------------------------------------------------------------------------------- N 6494 NI.7211999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection 09.02.1972 26.11.2008 25.08.1992 - --------------------------------------------------------------------------------------------------------------------------------- N 8979 NI.7713710 PS 4,188,433/ Optical disc with coating comprising U-V lacquer 12.12.1977 20.07.1998 - --------------------------------------------------------------------------------------------------------------------------------- N 9225 NI.7809227 PS 4,230,915/ Depth of smooth pits in optical disc 09.11.1978 26.12.1998 - ---------------------------------------------------------------------------------------------------------------------------------
Exhibit IX December 5, 1995 Option A - Enhanced Music CD - Disc Page 3 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 13088 NI.89-023581/ PS 5,428,598/ PPU 03-108,162/ Copyright protection using alternating copy-bit 12.09.1989 27.06.2012 14.09.2010 PS 5,453,968/ 26.09.2013 - ---------------------------------------------------------------------------------------------------------------------------------- N 13257 NI.900424/ A 369,864 A 04-216.288/ Image data blocks with hierarchal encoding level 22.02.1990 20.02.2011 - ---------------------------------------------------------------------------------------------------------------------------------- N 13409 NI.91.200.764/ A 07-707,527/ A 01-233.380/ Sector and word offset in video block header 06.08.1990 A 08-269,941 04.06.2011 - ---------------------------------------------------------------------------------------------------------------------------------- N 13661 EP.91.200.764/ PS 5,341,356/ PPU 9.1-089.596/ Recording of contact info in lead out 02.04.1991 17.01.2012 02.04.2012 EP.91.201.005/ 26.04.1991 - ---------------------------------------------------------------------------------------------------------------------------------- N 13685 EP.91.200.764/ PS 5,390,159/ PPU 93.094,657/ CD ROM-XA-WO 02.04.1991 12.02.2012 01.04.2012 EP.91.201.005/ A 08-328,307 26.04.1991 A 08-371,644
Exhibit IX December 5, 1995 Option A - Enhanced Music CD - Disc Page 4 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 13709 GB 9012538/ A 08-086,402/ A 04-229,464/ Decoder delay in coded videoframes on CD-I 15.06.1990 A 08-299,027/ 04.06.2011 - ---------------------------------------------------------------------------------------------------------------------------------- P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal 18.11.1976 14.11.1997 18.11.1996 recording medium - ---------------------------------------------------------------------------------------------------------------------------------- P 12222 PS 53-47247/ PS 4,355,392 PPUB 63-29451/ Burst error correcting system 21.04.1978 Re 31,666/ 21.06.1998 19.10.1999 - ---------------------------------------------------------------------------------------------------------------------------------- P 15668 I 56-546.301/ PS 5,305,301/ PPU 57-169938/ Optical recording medium 04.10.1980 19.04.2001 01.10.2001 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80007 NL 800-1028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system P16056 14.07.1980 19.02.2002 14.07.2001 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80009 JP 55-67608/ PS 4,413,340/ PPU 57-4629/ CIRC P 14539 21.05.1980 20.05.2001 21.05.2000 - ---------------------------------------------------------------------------------------------------------------------------------- S-8P038 S 55-22605/ PS 4,398,292/ JPL 670009/ Method and apparatus for encoding digital with two 21.02.1980 23.02.2001 25.02.2000 error correcting codes - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit IX December 5, 1995 Option A - Enhanced Music CD - Disc Page 5 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- S 32P040 S 56-17,734 USP 4,456,905/ IP 1,547,082/ Method and apparatus for encoding binary data 09.02.1981 08.02.2002 09.02.2001 - ---------------------------------------------------------------------------------------------------------------------------------- S 91P276 S 91P276 PS 5,191.436/ PUB4-014.974/ Apparatus for recording compressed digital video 09051990 3004.2011 09.05.2010 data on a compact disc media - ---------------------------------------------------------------------------------------------------------------------------------- S 90P308 JP 1-253,398 PS 5,155,593/ PUB 3-114.384/ Video signal coding method 27 09 1989 27 09 2010/ 27 09 2009 - ---------------------------------------------------------------------------------------------------------------------------------- S 90P340 JP 1-267,046/ PS 5,132,792/ PUB 3-129,986/ Video signal transmitting system 14 10 1989 12 10 2010 14 10 2009 IP 1-267,044/ PUB 3-129,985 14 10 1989 - ---------------------------------------------------------------------------------------------------------------------------------- 8 1000899 JP [ILLEGIBLE] PS 4,803,193/ PPU 60-119670/ Disc recording medium and apparatus for playback P 14539 30 11 1983 30 11 2003 thereof - ---------------------------------------------------------------------------------------------------------------------------------- 8-1002186 JP P58-226,599 PS 4-62151/ Disc reproducing apparatus 30 11 1983 30 11 2003 - ---------------------------------------------------------------------------------------------------------------------------------- 94902625 JP P06-32017 cbd cbd Recording medium and its reproducing apparatus 22 12 1994 and method - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit X December 5, 1995 Option B - Enhanced Music CD - Disc Page 1 SURVEY OF LICENSOR'S PATENT RIGHTS - ------------------------------------------------------------------------------------------------------------------------------ Licensor's Priority US Patent (PS) Jp ULModel (UM) Title Ref No P11 Application/ or Appln. No/ Prov. Publ (U) Priority date Expiration date Patent (PS) Publication (PUB) Prov. Publ (PPU) or Appln. No/ Expiration date - ------------------------------------------------------------------------------------------------------------------------------ D 86308 DE 36 13 343/ PS 4,825,285/ A 63-001. 183/ DPCM encoder with 2-dimensional low pass filter D 86313 19.04.1986 15.04.2007 20.04.2007 D 86337 DE 36 20 424/ 10.06.1986 DE 36 38 128/ 08.11.1986 - ------------------------------------------------------------------------------------------------------------------------------ D 86327 DE 36.31 252/ PS 4,901,075/ A 63-132.530/ Coefficient encoder in transform coding D 86336 13.09.1986 11.09.2007 14.09.2007 DE 37.38.127/ 08.11.1986 - ------------------------------------------------------------------------------------------------------------------------------
Exhibit X December 5, 1995 Option B - Enhanced Music CD - Disc Page 2 SURVEY OF LICENSOR'S PATENT RIGHTS - --------------------------------------------------------------------------------------------------------------------------------- D 87091 DE.37.15 067/ PS 5,021,879/ A 63-287 186/ Motion estimation on superblocks of N transform D 87291 06.05.1987 04.06.2008 06.05.2008 blocks DE 37.15.147/ 07.05.1987 DE 37 44 280/ 28.12.1987 DE 37 26 520 - --------------------------------------------------------------------------------------------------------------------------------- F 89522 FR 8908186/ A 631,830/ A 92-500 443/ Selectable temporal/special subsampled pictures 20.06.1989 19.06.2010 - --------------------------------------------------------------------------------------------------------------------------------- F 89526 FR 8903929/ PS 5,079,631/ A 02 028 596/ Normalisation controlled by classification parameter 24.03.1989 06.03.2010 23.03.2010 - --------------------------------------------------------------------------------------------------------------------------------- N 6493 NL 7214999/ PS 5,068,846/ PS 905844/ Optical disc with disc body acting as protection 02.09.1972 26.11.2008 25.08.1992 - --------------------------------------------------------------------------------------------------------------------------------- N 7016 PS 4,118,734/ Optical videodisc with variable width tracks 24.10.1996 - --------------------------------------------------------------------------------------------------------------------------------- N 7340 NL 7401858 PS 4,084,185/ Record carrier on which information is stored in an 03.03.1996 optically readable structure - ---------------------------------------------------------------------------------------------------------------------------------
Exhibit X December 5, 1995 Option B - Enhanced Music CD - Disc Page 3 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 8979 NL 7713710/ PS 4,188,433/ Optical disc with coating comprising U-V lacquer 12.12.1977 20.07.1998 - ---------------------------------------------------------------------------------------------------------------------------------- N 9225 NL 7809227/ PS 4,230,915/ PS 1630678/ Depth of smooth pits in optical disc 09.11.1978 26.12.1998 08.09.1999 - ---------------------------------------------------------------------------------------------------------------------------------- N 9258 NL 78104163/ PS 4,930,116/ PS 1550033/ Optical disc with deep pits in shallow v-shaped - 19.10.1978 27.05.2007 19.10.1999 groove - ---------------------------------------------------------------------------------------------------------------------------------- N 9398 NL 7902363/ PS 4,499,574/ PS 169-1091/ Adaption of track distance to pit frequency 27.03.1979 12.02.2002 25.03.2000 - ---------------------------------------------------------------------------------------------------------------------------------- N 9567 PS 4,325,135/ Optical record carrier and apparatus for reading it 13.04.1999- - ---------------------------------------------------------------------------------------------------------------------------------- N 9587 PS 4,310,916/ Optical record carrier and apparatus for reading it 12.01.1999 - ----------------------------------------------------------------------------------------------------------------------------------- N 9725 NL 8002039/ PS 4,389,719/ Optical disc with PVC substrate covered cured 08.04.1980 08.09.2000 lacquer - ----------------------------------------------------------------------------------------------------------------------------------- N 9732 NL 8002414/ PS 4,556,967/ Two phase information structure without cross-talk 25.04.1980 03.12.2002 - -----------------------------------------------------------------------------------------------------------------------------------
Exhibit X December 5, 1995 Option B - Enhanced Music CD - Disc Page 4 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 9933 NL 8100098/ PS 4,423,502/ PS 7882422/ Optical disc with tracks at different levels 12.01.1981 09.11.2001 12.01.2002 - ---------------------------------------------------------------------------------------------------------------------------------- N 13088 NL 89-02358/ PS 5,428,598/ PPU 03-108,162/ Copyright protection using alternating copy-bit 21.09.1989 27.06.2012 14.09.2010 PS 5,453,968/ 26.09.2012 - ---------------------------------------------------------------------------------------------------------------------------------- N 13257 NL 900424/ A 369,864 A 04-216.288/ Image data blocks with hierarchial encoding level 22.02.1990 20.02.2011 - ---------------------------------------------------------------------------------------------------------------------------------- N 13409 NL 9001771/ A 07-707.527 A 04-233.380/ Sector and word offset in video block header 06.08.1990 A 08-269.941 04.06.2011 - ---------------------------------------------------------------------------------------------------------------------------------- N 13661 EP 91.200.764/ PS 5,341,356/ PPU 93-089.596/ Recording of contract info in lead out 02.04.1991 07.01.2012 02.04.2012 EP 91.201.005/ 26.04.1991 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit X December 5, 1995 Option B - Enhanced Music CD - Disc Page 5 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- N 13685 EP 91.200.764/ PS 5,390,159/ PPU 93-094,675/ CD ROM-XA-WO 02.04.1991 12.02.2012 01.04.2012 EP 91 201 005/ A 08-328,307 26.04.1991 A 08-371,644 - ---------------------------------------------------------------------------------------------------------------------------------- N 13709 GB 9012538/ A 08-086,402 A 04-229.464/ Decoder delay in coded videoframes on CD-1 05.06.1990 A 08-299,027 04.06.2011 - ---------------------------------------------------------------------------------------------------------------------------------- P 10530 PS 51-138821 PS 4,142,210/ PPU 53-63002/ Method of signal recording and disc-shaped signal 18.11.1976 14.11.1997 18.11.1996 recording medium - ---------------------------------------------------------------------------------------------------------------------------------- P 12222 P 53-47247/ PS 4,355,392 PUB 63-29451/ Burst error correcting system 21.04.1978 Re 31,666/ 21.04.1998 19.10.1999 - ---------------------------------------------------------------------------------------------------------------------------------- P 14768 P 55-99252/ PS 4,358,780/ PPU 57-24038/ Information recording medium 18.07.1980 10.07.2001 18.07.2000 - ---------------------------------------------------------------------------------------------------------------------------------- P 15688 J 56-54678/ PS 5,305,301/ PPU 57-169938/ Optical recording medium 04.10.1981 19.04.2011 04.10.2001 - ---------------------------------------------------------------------------------------------------------------------------------- Q 80007 NL 8004028/ PS 4,501,000/ PPU 57-488486/ Signal modulation system P 16056 14.07.1980 19.02.2002 14.07.2001 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit X December 5, 1995 Option B - Enhanced Music CD - Disc Page 6 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- Q 80009 JP 55-67608/ PS 4,413,340/ PPU 57-4629/ CIRC P 14539 21.05.1980 20.05.2001 21.05.2000 - ---------------------------------------------------------------------------------------------------------------------------------- S-8P038 S 55-22605/ PS 4,398,292/ JPL 670009/ Method and apparatus for encoding digital with two 25.02.1980 23.02.2001 25.02.2000 error correcting codes - ---------------------------------------------------------------------------------------------------------------------------------- S-82P040 S 56-17,734 USP 4,456,905/ JP 1,547,082/ Method and apparatus for encoding binary data 09.02.1981 08.02.2002 09.02.2001 - ---------------------------------------------------------------------------------------------------------------------------------- S 91P276 JP 2-119,604 PS 5,191,436/ PUB 4-014,974/ Apparatus for recording compressed digital video 09.05.1990 30.04.2011 09.05.2010 data on a compact disc media - ---------------------------------------------------------------------------------------------------------------------------------- S 90P308 JP 1-253,398 PS 5,155,593/ PUB 3-114,384/ Video signal coding method 27.09.1989 27.09.2010 27.09.1989 - ---------------------------------------------------------------------------------------------------------------------------------- S 90P340 JP 1-267,046/ PS 5,132,792/ PUB 3-129,986/ Video signal transmitting system 14.10.1989 12.10.2010 14.10.2009 - ---------------------------------------------------------------------------------------------------------------------------------- 8-4000899 JP P58-226598 PS 4,893,193/ PPU 60-119670/ Disc recording medium and apparatus for playback 30.11.1983 09.01.2007 30.11.2003 thereof - ---------------------------------------------------------------------------------------------------------------------------------- 8-4002186 JP P58-226599 PS 4-62151/ Disc reproducing apparatus 10.11.1983 10.11.2003 - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit X December 5, 1995 Option B - Enhanced Music CD - Disc Page 7 SURVEY OF LICENSOR'S PATENT RIGHTS - ---------------------------------------------------------------------------------------------------------------------------------- 94902625 JP P06-320107 t.b.d. t.b.d. Recording medium and its reproducing apparatus and 22.12.1994 method - ---------------------------------------------------------------------------------------------------------------------------------- 94097815 JP P07-13211 t.b.d. t.b.d. Recording medium and recording and/or reproducing 30.01.1995 apparatus thereof - ----------------------------------------------------------------------------------------------------------------------------------
EX-10.17 19 NON-EXCLUSIVE PATENT LICENSE AGREEMENT EXHIBIT 10.17 NON-EXCLUSIVE PATENT LICENSE AGREEMENT FOR DISC PRODUCT MANUFACTURERS This AGREEMENT is made effective this 1st day of June, 1996, by and between DISCOVISION ASSOCIATES, a joint venture subject to the State of California partnership law, having a place of business at 2355 Main Street, Suite 200, Irvine, California 92714, United States of America (hereinafter referred to as DVA) and FUTURE MEDIA PRODUCTIONS, a California corporation, having a place of business at 25136 Anza Drive, Valencia, California 91355 (hereinafter referred to as LICENSEE), who agree as follows: SECTION 1.0 RECITALS 1.1 DVA has the right to grant licenses under certain DVA-owned United States and Canadian patents relating to the design, manufacture, and sale of optical disc products such as compact discs and CD-ROM discs. 1.2 DVA is prepared to grant non-exclusive licenses under such patents on reasonable terms and conditions to financially sound and commercially responsible applicants. 1.3 LICENSEE has produced and/or sold and intends to continue producing and/or selling products which may embody patented inventions covered by such DVA patents or which may be made using apparatus or methods which may embody such patented inventions. These products are manufactured by: (1) LICENSEE; (2) manufacturers licensed by DVA who do not pay United States and Canadian royalty rates; (3) manufacturers licensed by DVA who pay United States and Canadian royalty rates; or (4) manufacturers not licensed by DVA. As specified later in this Agreement, the amount of any royalty to be paid by LICENSEE to DVA depends partly on the source of the product. 1.4 DVA is offering LICENSEE, as an option herein, a license under individual ones of its patents, the availability of such license under any one or more of DVA's patents being in no way conditioned on the need for LICENSEE to take a license under any other DVA's patents. 1.5 LICENSEE has determined that its business interests will be best served by taking a license under the terms and conditions of this Agreement. In so doing, LICENSEE understands that if less than all DVA patents are licensed, then licenses under additional DVA patents may be required before LICENSEE can make or sell optical disc products free and clear of all claims of patent infringement by DVA. Information regarding infringement of additional DVA patents may be obtained by using the factory inspection provisions of Section 10.0 herein. SECTION 2.0 DEFINITIONS 2.1 "Information Storage Medium" (Media) shall mean any record carrier primarily designed to store and/or record any type of information. 2.2 "Disc(s)" shall mean any pre-recorded, non-recordable and non-erasable Information Storage Medium in the shape of a disc and having information recorded thereon in one or more information bearing layers, which information is recoverable using optical detection means. 2.3 "Digital Disc(s)" shall mean a Disc having pre-recorded thereon digitally encoded information. Digital Discs shall be limited to Discs commonly known as Compact Disc Digital Audio Discs or CD Digital Audio Discs, Compact Disc Single Discs or CD Single Discs, Compact Disc Read Only Memory Discs or CD-ROM Discs, Compact Disc-Graphics Discs or CD-G Discs, Compact Disc-Interactive Discs or CD-I Discs, and Pre-Recorded Mini Discs. 2.4 "Compact Disc Digital Audio Disc(s)" or "CD Digital Audio Disc(s)" shall mean a Digital Disc having pre-recorded thereon audio entertainment information. A CD Digital Audio Disc is defined herein according to the definition in a specification entitled "Compact Disc Digital Audio System Description" published by N.V. Philips Consumer Electronics B.V. and Sony Corporation and commonly referred to as the "Red Book." CD Digital Audio Discs shall mean Digital Discs commonly known as compact discs (CD's). 2.5 "Compact Disc Single Disc(s)" or "CD Single Disc(s)" shall mean a CD Digital Audio Disc, either three inches (3") or five inches (5") in diameter, having pre-recorded thereon twenty (20) minutes or less of audio entertainment information. 2.6 "Compact Disc Read Only Memory Disc(s)" or "CD-ROM Disc(s)" shall mean a Digital Disc having pre-recorded thereon text files, data files, image files, computer program files, and the like, primarily intended for computer-related, Page 2 of 23 database-related and/or multimedia-related usage. A CD-ROM Disc is defined herein according to the definition in a specification entitled "Compact Disc Read Only Memory (CD-ROM) System Description" published by N.V. Philips Consumer Electronics B.V. and Sony Corporation and commonly referred to as the "Yellow Book." CD-ROM Discs include CD-ROM/XA discs. 2.7 "Compact Disc-Interactive Disc(s)" or "CD-I Disc(s)" shall mean a Digital Disc having pre-recorded thereon audio, video and program control data for interactive use with a human user by means of computer apparatus. A CD-I Disc is defined herein according to the definition in a specification entitled "Compact Disc Interactive Media Full Functional Specification" published by N.V. Philips Consumer Electronics B.V. and Sony Corporation and commonly referred to as the "Green Book." 2.8 "Compact Disc-Graphics Disc(s)" or "CD-G Disc(s)" shall mean a Digital Disc having pre-recorded thereon graphics information comprised of discrete still pictures or graphic images having no user perceivable motion. 2.9 "Pre-Recorded Mini Disc(s)" shall mean a Digital Disc having a diameter of 65 millimeters or less, that is played back at constant linear velocity, capable of storing not more the 150 megabytes of information and defined in a specification published by Sony Corporation and commonly referred to as the "Rainbow Book." 2.10 "Video Disc(s)" shall mean a Disc having pre-recorded thereon information intended to produce visual images having user perceivable motion. Video Discs shall include, but are not limited to, Discs commonly known as laser discs (LD's), compact disc-video (CD-V) discs, and digital video/versatile discs (DVD's) and successors to DVD's. 2.11 "Licensed Product(s)" shall mean only Digital Discs as defined in this Agreement. 2.12 "Master Disc(s)" shall mean any recordable Information Storage Medium primarily designed for use in any process to eventually produce a Disc by any transfer process whereby the information from all tracks of a Master Disc is transferred substantially simultaneously to an Information Storage Medium to form a Disc. Page 3 of 23 2.13 "Mastering Apparatus" shall mean any instrumentality, or aggregate of instrumentalities, primarily designed to produce a Master Disc. 2.14 "Matrix" shall mean any element which transfers information from a Master Disc to an Information Storage Medium to form a Disc. Matrix shall include, but is not limited to, elements commonly known as fathers, mothers, and stampers. 2.15 "Matrixing Apparatus" shall mean any instrumentality, or aggregate of instrumentalities, primarily designed to produce a Matrix having any type of information recorded thereon corresponding to information on a Master Disc. 2.16 "Replication Apparatus" shall mean any instrumentality, or aggregate of instrumentalities, primarily designed to transfer any type of information from a Matrix or a Master Disc to a multiplicity of Information Storage Media and thereby to fabricate a multiplicity of Discs having identical information recorded thereon. 2.17 "Manufacturing Apparatus" shall mean apparatus for use in the fabrication of Discs, including apparatus used in performing quality assurance procedures and/or testing of Discs. Manufacturing Apparatus shall include, but is not limited to, any one or more of the following: Mastering Apparatus; Master Disc; Matrixing Apparatus; Matrix; and Replication Apparatus. 2.18 "Manufacturing Process(es)" shall mean any method or process, including related apparatus, used in the fabrication of Discs, including process steps directed to quality assurance procedures and/or testing of Discs. 2.19 "DVA Patent(s)" shall mean all United States and Canadian patents owned by DVA as of the effective date of this Agreement, including utility models and design patents, and any United States and Canadian patents, including utility models and design patents, issuing from pending United States and Canadian patent applications owned by DVA as of the effective date of this Agreement, directed to Licensed Products and/or any Manufacturing Apparatus and/or any Manufacturing Process, under which patents and patent applications (as well as divisionals, continuations, continuation-in-part applications, reissues, reexaminations and extensions thereof) DVA has, as of the effective date of this Agreement, the right to grant licenses to LICENSEE of the scope granted herein, PROVIDED HOWEVER that such grant, or the exercise of rights under such grant, will not result in the payment of royalties or other consideration by DVA to third Page 4 of 23 parties (except for payments to Affiliates of DVA and payments to third parties for inventions made by said third parties while employed by DVA or any of its Affiliates). United States and Canadian patents relating to Licensed Products and/or their manufacture which have issued and are licensable by DVA are set forth in Appendix A. DVA shall provide LICENSEE on at least an annual basis an updated version of Appendix A which includes any new patent to be added to Appendix A and which indicates the expiration of a previously listed patent by the addition of the letter "E" following the patent number. 2.20 "Licensed Patent(s)" shall mean those DVA-owned United States and Canadian patents listed in Appendix B of this Agreement, these being the DVA Patent(s) under which LICENSEE has agreed to take a license. Any DVA Patent(s) listed in Appendix A may be added to Appendix B and thereby become a Licensed Patent by written agreement of the parties. 2.21 "Transfer(s)" (Transferred) as used herein shall mean (i) sell and/or sold, (ii) deliver(ed) to others (including for export) other than by sale, regardless of the basis of compensation, if any, (for example, by consignment, by gift or by transshipment through an intermediate country or territory such as Switzerland, Hong Kong, et cetera) and/or (iii) sell (sold) in combination with other products. 2.22 "Type Number" shall mean any combination of numbers, letters, and/or words used to identify a particular type or model of Licensed Product. 2.23 "Affiliate(s)" shall mean any corporation, company, or other business entity controlled by a party to this Agreement. For this purpose, control means direct or indirect beneficial ownership of greater than fifty percent (50%) of the voting securities or greater than fifty percent (50%) interest in the income of such corporation, company, or other business entity. 2.24 "Arm's Length Trade" shall mean a sale, lease or other commercial transaction between unaffiliated parties having an adverse economic interest. After completion of an Arm's Length Trade, a party thereto will derive no further economic benefit from subsequent transactions by another party thereto with respect to the goods involved in such Arm's Length Trade. 2.25 "Manufacturer's Net Selling Price" shall mean the invoice price after discounts actually allowed for a Licensed Product sold in Arm's Length Trade by LICENSEE or its Affiliate, such price not to include: (1) packaging costs incurred by LICENSEE for such Licensed Product; (2) insurance fees and Page 5 of 23 packing and transportation charges incurred by LICENSEE and invoiced separately to a third party; (3) duties and sales taxes actually incurred and paid by LICENSEE in connection with delivery of such Licensed Product; (4) the cost of any copyright license fee paid by LICENSEE in respect of information stored on the Licensed Product; and (5) pre- mastering charges incurred by LICENSEE and necessary for the manufacture of the Licensed Product, which pre-mastering charges are invoiced separately to a third party. Manufacturer's Net Selling Price shall include all mastering charges, including but not limited to charges incurred for Manufacturing Apparatus used in the mastering process, whether such mastering charges are incurred as the result of LICENSEE's own Manufacturing Apparatus, or from mastering charges invoiced separately to a third party, such as LICENSEE's purchase of a stamper from a third party. In respect of a Licensed Product used or leased by LICENSEE or its Affiliate or sold or Transferred in other than Arm's Length Trade by LICENSEE or its Affiliate, the Manufacturer's Net Selling Price shall be deemed to be equal to the average Manufacturer's Net Selling Price as defined above for the same or equivalent Licensed Product sold in Arm's Length Trade during the then current accounting period. In the event there are no sales in Arm's Length Trade during an accounting period, DVA and LICENSEE shall attempt to agree upon an amount to be regarded as the Manufacturer's Net Selling Price for such accounting period. If DVA and LICENSEE do not so agree, then Manufacturer's Net Selling Price shall mean the actual selling price to an ultimate consumer. If a Licensed Product is not separately sold and is included with other apparatus, then the Manufacturer's Net Selling Price of such Licensed Product shall be the Manufacturer's Net Selling Price of the equivalent Licensed Product which is separately sold, or, if no such equivalent Licensed Product exists, shall be, at LICENSEE's option, either: (1) the price as aforesaid of such other apparatus multiplied by the ratio of the Manufacturing Cost of such Licensed Product to the Manufacturing Cost of such other apparatus; or (2) one hundred and fifty percent (150%) of the Manufacturer's Net Selling Price of that part of the apparatus that constitutes the Licensed Product. 2.26 "Manufacturing Cost" shall mean total cost of direct materials, direct and indirect factory labor and factory overhead determined in accordance with sound accounting principles. Page 6 of 23 SECTION 3.0 NON-EXCLUSIVE LICENSE GRANT 3.1 DVA grants to LICENSEE a non-exclusive, royalty bearing license under the Licensed Patent(s): 3.1.1 to make, have made, use, rent, lease, sell and/or Transfer Licensed Products in the United States of America and Canada and their territories and possessions; and 3.1.2 to make, have made, use or have used Manufacturing Apparatus and to use or have used Manufacturing Processes in the United States of America and Canada and their territories and possessions to manufacture Licensed Products for LICENSEE. It is understood by LICENSEE that licenses under additional DVA Patent(s) not listed in Appendix B may be required before LICENSEE can make, use, rent, lease, sell and/or Transfer Licensed Products free and clear of all claims of patent infringement by DVA. LICENSEE may obtain from DVA a determination as to the applicability of any DVA Patent(s) to LICENSEE's products by use of the factory inspection provisions of Section 10.0 of this Agreement. In any event, DVA reserves the right to bring a patent infringement action against LICENSEE with respect to any DVA Patent(s) not listed in Appendix B. 3.2 No license is granted by DVA to LICENSEE in this Section 3.0, either expressly or by implication, estoppel, or otherwise: 3.2.1 other than under the Licensed Patent(s) listed in Appendix B; 3.2.2 with respect to any products other than Licensed Products; 3.2.3 to rent, lease, sell and/or Transfer any Manufacturing Apparatus; or 3.2.4 to rent, lease, sell and/or Transfer any Manufacturing Process or process step thereof. 3.3 The license granted herein shall include a sublicense to LICENSEE's Affiliates, identified in Appendix C, which are LICENSEE's Affiliates as of the effective date of this Agreement. LICENSEE shall pay and account to DVA for royalties hereunder with respect to the exercise by any Affiliate of LICENSEE of the sublicense granted to it hereunder, and if LICENSEE fails to make such payment or accounting, DVA reserves the right to seek directly from such Affiliate any PAGE 7 OF 23 royalties due and owing to DVA. Sublicenses will be granted to additional Affiliates of LICENSEE during the term of this Agreement upon receipt by DVA of written notices from LICENSEE setting forth the names and addresses of such additional Affiliates to be covered by this Agreement, provided each such notice is given before any sales of Licensed Products by the Affiliate named therein. Each Affiliate sublicensed under this Agreement shall be bound by the terms and conditions of this Agreement as if it were named herein in the place of LICENSEE. LICENSEE represents to DVA that it has the power to bind each such Affiliate to the terms and conditions of this Agreement and agrees to take whatever action is necessary to legally bind such Affiliates. The sublicense granted to an Affiliate shall terminate on the date such Affiliate ceases to be an Affiliate. 3.4 Except as set forth in Section 3.3, LICENSEE is expressly not granted the right to sublicense third parties under this Agreement. SECTION 4.0 RELEASE 4.1 Upon payment of the consideration set forth in Section 5.8, DVA irrevocably releases LICENSEE and its Affiliates, identified in Appendix C, which are LICENSEE's Affiliates as of the effective date of this Agreement, from any and all claims of infringement of the Licensed Patent(s), which claims have been made or which might be made at any time, with respect to any Licensed Products used, rented, leased, sold, or otherwise Transferred by or for LICENSEE or its sublicensed Affiliates before the effective date of this Agreement, to the extent such Licensed Products would have been licensed hereunder had they been manufactured, used, rented, leased, sold, or otherwise Transferred after the effective date of this Agreement. This release shall not apply to any Licensed Product on which a royalty accrues after the effective date of this Agreement. This release applies only to the Licensed Patent(s) and does not apply to any other DVA Patent(s). LICENSEE may remain liable for infringement of other DVA Patent(s). 4.2 LICENSEE expressly represents that its Affiliates identified in Appendix C include all of LICENSEE's Affiliates as of the effective date of this Agreement. SECTION 5.0 ROYALTIES AND OTHER PAYMENTS 5.1 LICENSEE shall pay, as hereinafter provided, earned royalties to DVA with respect to both of the following for: Page 8 of 23 5.1.1 each Licensed Product for which LICENSEE is licensed hereunder in the country of manufacture; and 5.1.2 each Licensed Product for which LICENSEE is licensed hereunder in the country of use, rental, lease, sale or Transfer. 5.2 For each Licensed Product manufactured in the United States of America or Canada or their territories or possessions, no more than one royalty shall be due for such Licensed Product, regardless of the number of countries in which the use, distribution and sale of such Licensed Product occurs. 5.3 LICENSEE shall pay to DVA a royalty as set forth below in Section 5.4 or as set forth below in Section 5.5. LICENSEE's election between the royalty of Section 5.4 and the royalty of Section 5.5 shall be made in writing to DVA for each type of Licensed Product on or before submission of the royalty report for the first accounting period for which royalty is to be paid for such type of Licensed Product. This election, once made, cannot be changed except as provided herein. For any given accounting period, LICENSEE shall pay the same royalty for each Licensed Product of the same type. If Section 5.4 is selected, and LICENSEE subsequently wishes to change its royalty election, LICENSEE may change the royalty election by notifying DVA in writing, on or before submission of the royalty report for the next accounting period for which such royalties are to be paid, of LICENSEE'S election to pay royalties pursuant to Section 5.5 herein, and of the Licensed Patent(s) to be included in Appendix B. Appendix B shall thereupon be amended to list the Licensed Patent(s) in accordance with LICENSEE's written notification, LICENSEE shall be liable for royalty payments pursuant to Section 5.4 up to the date of DVA's receipt of written notice of LICENSEE's change of royalty election. If LICENSEE is considering an election to pay royalties pursuant to Section 5.5, LICENSEE may request a factory inspection in accordance with Section 10.0. If Section 5.5 is selected, DVA reserves the right to bring a patent infringement action against LICENSEE with respect to any DVA Patent(s) not listed in Appendix B. The royalty election may be changed from Section 5.5 to Section 5.4 by written agreement of the parties. page 9 of 23 5.4 As a first option, LICENSEE shall pay to DVA each of the following royalties: 5.4.1 For each Licensed Product which is manufactured, used, rented, leased, sold and/or Transferred by or for LICENSEE and/or its Affiliates, LICENSEE shall pay to DVA a royalty for: 5.4.1.1 Digital Discs (except CD Single Discs): three cents (U.S. $0.03) per information bearing layer; and 5.4.1.2 CD Single Discs: two cents (U.S. $0.02) per information bearing layer. 5.4.1.3 With respect to each of the preceding Sections 5.4.1.1 and 5.4.1.2, LICENSEE shall have the option of paying a royalty of three percent (3.0%) of the Manufacturer's Net Selling Price. 5.5 As a second option, LICENSEE shall pay to DVA for each Licensed Product which is manufactured, used, rented, leased, sold and/or Transferred by or for LICENSEE and/or its Affiliates, a royalty equal to the sum total of the individual patent royalty rates of Licensed Patent(s) as a percentage of the Manufacturer's Net Selling Price of such Licensed Product, such individual rates being set forth in Appendix B. 5.6 No royalties shall be paid by LICENSEE for: 5.6.1 Licensed Products manufactured for LICENSEE by any other DVA licensee, so long as the other DVA licensee has fully paid and reported royalties to DVA on such Licensed Products and has identified LICENSEE as the purchaser of such Licensed Products in its royalty reports to DVA. If the other DVA licensee has paid a partial royalty to DVA, then LICENSEE shall receive a credit for that partial royalty. 5.6.2 Licensed Products manufactured by LICENSEE for any other DVA licensee, so long as the other licensee has fully paid and reported royalties to DVA on such Licensed Products, and LICENSEE has identified such other DVA licensee as the purchaser, and both LICENSEE and such other DVA licensee have both identified the other in their respective royalty reports due DVA reporting such transaction. Page 10 of 23 If the other DVA licensee has paid a partial royalty to DVA, then LICENSEE shall a receive credit for that partial royalty. 5.7 Lists of manufacturers that have a valid patent license agreement for Licensed Products with DVA are listed in Appendix D-1 and D-2. These lists will be updated annually. If LICENSEE purchases Licensed Products from any manufacturer listed in Appendix D-2 (licensed manufacturers not paying U.S. and Canadian royalty rates), and uses, rents, leases, sells and/or Transfers such Licensed Products in the United States of America or Canada or their territories or possessions, then LICENSEE shall: 5.7.1 pay to DVA a royalty of two United States cents (U.S. $0.02) per information bearing layer; or 5.7.2 submit the royalty report described in Section 6.6 to both DVA and each such licensed manufacturer. If LICENSEE chooses this option, DVA will demand, where appropriate, payment of the owed royalties as specified in Section 5.7.1 from the licensed manufacturer. If the licensed manufacturer does not pay these royalties within sixty (60) days of DVA's demand, LICENSEE must pay these royalties. The fact that DVA seeks payment from the licensed manufacturer in no way absolves LICENSEE of liability for these royalties. 5.8 LICENSEE agrees to pay DVA within sixty (60) days of the execution of this Agreement, the sum of Twenty Thousand United States Dollars ($20,000) as additional consideration for the release granted LICENSEE in Section 4.0. This sum is not refundable and is not creditable toward royalties set forth in this Section 5.0. LICENSEE and its Affiliates are jointly and severally liable for this payment, and if LICENSEE fails to make this payment, then DVA reserves the right to seek such payment from any or all of LICENSEE's Affiliates. Section 6.0 ACCRUALS, RECORDS AND REPORTS 6.1 Royalties shall accrue when any Licensed Product with respect to which royalty payments are required by Section 5.0 of this Agreement is sold (as evidenced by bill or invoice), first rented, first leased, first put into use or Transferred, whether or not payment is received by LICENSEE. On sales or Transfers between LICENSEE and its Affiliate for resale or for further Transfer, the royalty shall accrue at the time of sale or Transfer to the Affiliate. Page 11 of 23 6.2 LICENSEE shall pay royalties and other sums of money due hereunder in United States dollars. All royalties for an accounting period computed on invoiced amounts in currencies other than United States dollars shall be converted directly into United States dollars, without intermediate conversions to another currency, at the currency exchange rate quoted by either the United States edition of the Wall Street Journal or the head office of Citibank N.A. of New York, New York at the close of banking on the last business day of such accounting period. 6.3 An accounting period shall end on the last day of each March, June, September and December during the term of this Agreement. The first accounting period under this Agreement shall be for a period commencing as of the effective date of this Agreement. Within sixty (60) days after the end of each such period, LICENSEE shall furnish to DVA the written reports containing the information specified in Sections 6.4, 6.5 and 6.6 hereof and shall pay to DVA all owed royalties accrued hereunder in favor of DVA to the end of each such period. If LICENSEE chooses the option specified in Section 5.7.2, LICENSEE shall also send the applicable licensed manufacturer a copy of the royalty report specified in Section 6.6 within the same sixty-day period. 6.4 With respect to Licensed Products LICENSEE manufactures or purchases from a manufacturer not listed in either Appendix D-1 or D-2, LICENSEE shall submit a royalty report including the following information: 6.4.1 identification by Type Number, brand name and/or label name, Licensed Product type (for example, CD Digital Audio, CD-ROM, etc.), Manufacturer's Net Selling Price, and quantity of each Licensed Product type upon which royalty has accrued pursuant to Section 6.1; 6.4.2 the name of the manufacturer, city and either state or country of the manufacture and the countries in which LICENSEE sold (as evidenced by bill or invoice), first rented, first leased, first put into use or Transferred those Licensed Products; and 6.4.3 identification of the royalty basis used for each Licensed Product type pursuant to the provisions of Section 5.0, the amount of royalties due for each Licensed Product type, all information required to show how such amount has been calculated and the aggregate amount of all royalties due. Page 12 of 23 In the event that Section 6.4.1. does not apply, LICENSEE shall so state. In the event no royalties are due, LICENSEE's report shall so state. 6.5 With respect to Licensed Products LICENSEE purchases from a licensed manufacturer listed in Appendix D-1, LICENSEE shall submit a royalty report including the following information: 6.5.1 identification by Type Number, brand name and/or label name, Licensed Product type (for example, CD Digital Audio, CD-ROM, etc.) Manufacturer's Net Selling Price, and quantity of each Licensed Product type upon which royalty has accrued pursuant to Section 6.1; 6.5.2 the name of the licensed manufacture, city and either state or country of the manufacturer and the countries in which LICENSEE sold (as evidenced by bill or invoice), first rented, first leased, first put into use or Transferred those Licensed Products; 6.5.3 identification of the royalty basis used for each Licensed Product type pursuant to the provisions of Section 5.0, the amount of royalties due for each Licensed Product type, all information required to show how such amount has been calculated and the aggregate amount of all royalties due; and 6.5.4 identification by Type Number, brand name and/or label name, Licensed Product type (for example, CD Digital Audio, CD-ROM, etc.), and quantity of each Licensed Product type which is available for sale by LICENSEE during the applicable account period which is exempt from royalty in accordance with Section 5.6. In the event that either of Sections 6.5.1 and 6.5.4 do not apply, LICENSEE shall so state as to each such Section. In the event no royalties are due, LICENSEE's report shall so state. 6.6 With respect to Licensed Products LICENSEE purchases from a licensed, manufacturer listed in Appendix D-2, LICENSEE shall submit a royalty report for each such licensed manufacturer including the following information: 6.6.1 identification by Type Number, brand name and/or label name, Licensed Product type (for example, CD Digital Audio, CD-ROM, Page 13 of 23 etc.), Manufacturer's Net Selling Price, and quantity of each Licensed Product type purchased from the licensed manufacturer; 6.6.2 the name of the licensed manufacturer, city and country of the manufacture, and the countries in which LICENSEE sold (as evidenced by bill or invoice), first rented, first leased, first put into use or Transferred those Licensed Products; 6.6.3 the total number of Licensed Products purchased from the licensed manufacturer and the total number of information bearing layers; and 6.6.4 the royalty rate specified in Section 5.7.1 (if applicable), the amount, if any, of the royalty paid by LICENSEE, and the total outstanding royalty owed DVA for Licensed Products purchased from the licensed manufacturer. 6.7 LICENSEE's royalty reports shall be certified by an officer of LICENSEE or by a designee of such officer to be correct to the best of LICENSEE's knowledge and information. 6.8 LICENSEE shall keep separate records in sufficient detail to permit the determination of royalties payable hereunder. At the request of DVA, LICENSEE will permit an independent auditor and/or technical consultant selected by DVA, or any other person or persons acceptable to both DVA and LICENSEE, to examine during ordinary business hours once in each calendar year such reports and other documents as may be necessary to verify or determine royalties paid or payable under this Agreement. Such auditor, technical consultant or other person(s) shall be instructed to report to DVA only the amount of royalties due and payable. If no request for examination of such records for any particular accounting period has been made by DVA within five (5) years after the end of said period, the right to examine such records for said period, and the obligation to keep such records for said period, shall terminate. 6.9 The fees and expenses of DVA's representatives performing any examination of record under Section 6.8 shall be borne by DVA. However, if an error in royalties of more than three percent (3.0%) if the total royalties due is discovered for any year examined, then the total fees and expenses of these representatives shall be borne by LICENSEE. Page 14 of 23 SECTION 7.0 INTEREST ON OVERDUE ROYALTIES AND OTHER PAYMENTS 7.1 LICENSEE shall be liable for interest at a rate of one and one-half percent (1.5%) per month compounded monthly on any overdue royalty or other payment set forth in Section 5.0 herein, commencing on the date such royalty or other payment becomes due. If such interest rate exceeds the maximum legal rate in the jurisdiction where a claim therefor is being asserted, the interest rate shall be reduced to such maximum legal rate. SECTION 8.0 ASSIGNMENTS 8.1 LICENSEE shall not assign any of its rights or privileges hereunder without the prior written consent of DVA, except to a successor in ownership of all or substantially all the assets of LICENSEE, which successor expressly assumes in writing the performance of all the terms and conditions of this Agreement to be performed by LICENSEE as if it were named herein in the place of LICENSEE. After any such assignment, LICENSEE shall no longer be licensed hereunder. SECTION 9.0 LICENSE TO DVA 9.1 LICENSEE grants to DVA and its Affiliates an irrevocable, worldwide, non- exclusive, royalty-free license under LICENSEE's patents and patent applications to make, have made, use, lease, sell or otherwise Transfer products corresponding to the Licensed Products defined herein, and to make, have made, use or have used Manufacturing Apparatus in the manufacture of such products and to practice or have practiced Manufacturing Processes in the manufacture of such products. Said license to DVA and its Affiliates shall be effective as of the date LICENSEE first pays royalties in accordance with Section 5.0 hereof. Said license shall be with respect to all of LICENSEE's patents and patent applications, including utility models, design patents, divisionals, reissues, extensions, continuations, and reexaminations, under which patents and patent applications LICENSEE now has or hereafter, during the term of this Agreement, obtains the right to grant licenses to DVA of the scope granted herein. 9.2 The license as set forth in Section 9.1 shall not apply with respect to any patent of LICENSEE, if such grant would result in the payment of royalties by LICENSEE to third parties, except for payments to Affiliates of LICENSEE and payments to third parties for inventions made by said third parties while employed by LICENSEE or any of its Affiliates. SECTION 10.0 FACTORY INSPECTION 10.1 At LICENSEE's request, DVA will perform a factory inspection at LICENSEE's Licensed Product manufacturing facility, or the Licensed Product manufacturing Page 15 of 23 facility of the manufacturer who supplies Licensed Products to LICENSEE, and thereafter provide LICENSEE with claim charts indicating which DVA Patent(s) listed in Appendix A apply to LICENSEE's products. If LICENSEE is not the manufacturer, it is LICENSEE's responsibility to obtain the authorization of the manufacturer for DVA to perform the desired factory inspection. LICENSEE shall pay to DVA an inspection fee of Fifty Thousand United States dollars (U.S. $50,000) for each Licensed Product manufacturing facility to be inspected, said fee to be paid prior to each inspection. 10.2 If LICENSEE notifies DVA that LICENSEE wishes to have the factory inspection set forth in Section 10.1, then LICENSEE agrees to allow, or to obtain authorization to allow, the representatives of DVA to inspect the manufacturing facility as follows: 10.2.1 DVA's representatives shall be allowed to inspect those parts of the manufacturing facility which are directly related to the possible infringement of DVA Patent(s). The inspection shall be made during reasonable business hours as soon as practically possible after payment of the inspection fee by LICENSEE. DVA and LICENSEE shall determine by mutual agreement the time, duration and other detailed manner and schedule of such inspection. 10.2.2 The employees at the manufacturing facility will be directed, to the best of LICENSEE's ability, to answer all questions asked by the DVA representatives and will allow the full and complete inspection, copying, videotaping and photographing of all documentation, machines, methods, and materials used in, at, or with a part of the manufacturing facility which LICENSEE has the right to disclose to others, as long as such questions and/or such part of the facility is directly related to the possible infringement. Any notes made by the DVA representatives and any documents, photographs, and videotapes shall be stamped "CONFIDENTIAL." 10.2.3 Any inspection of a Licensed Product manufacturing facility shall be on a confidential basis, and information learned as a result thereof shall be used for no purpose other than the technical discussions set forth herein. DVA shall safeguard the confidential information learned with standards at least as high as those that it uses to safeguard its own confidential information. Page 16 of 23 10.2.4 DVA shall not divulge any information obtained or learned as a result of such inspection to any other person or entity other than LICENSEE, including but not limited to other DVA licensees. This obligation shall not apply to information which is or becomes publicly available through no fault of DVA or is rightfully obtained without a bind of secrecy. 10.2.5 DVA shall use its best efforts to provide, within sixty (60) days from the inspection of the Licensed Product manufacturing facility, a report in writing to LICENSEE. The report shall include those DVA Patent(s) which DVA believes are infringed by such facility and shall be in the form of claim charts providing the basis and reasons for the possible infringement of the DVA Patent(s) in question. DVA shall use its best efforts to include in the report all DVA Patent(s) which DVA believes are infringed by such facility. It is understood and agreed by LICENSEE that the exclusion of one or more DVA Patents neither stops DVA from asserting a claim of infringement against LICENSEE under such DVA Patent(s), nor affects the rights of DVA in any way with respect to such DVA Patent(s). It is understood and agreed by LICENSEE that this report and these claim charts are for settlement purposes only and cannot and will not be used for any other purpose. LICENSEE agrees to keep this report and these claim charts confidential and not to disclose them to any other party. 10.3 LICENSEE can elect this inspection option once per calendar year. Any inspection of a Licensed Product manufacturing facility after the first inspection of such manufacturing facility shall be performed for a fee to be determined and agreed upon between DVA and LICENSEE. Section 11.0 TERM OF AGREEMENT; TERMINATION 11.1 Subject to Section 11.5 below, the term of this Agreement shall be from the effective date hereof until the expiration of the last to expire of the Licensed Patent(s), unless previously terminated as hereinafter provided. 11.2 LICENSEE may terminate the license granted herein, but only in its entirety, at any time by giving notice in writing to DVA. Such termination shall be effective on the date such notice is received by DVA. Page 17 of 23 11.3 DVA shall have the right to terminate this Agreement in the event: 11.3.1 LICENSEE fails to make any payment when due under this Agreement and such payment is not made within sixty (60) days of written notice from DVA; or 11.3.2 LICENSEE defaults under any term of this Agreement, other than a default involving the payment of money, which default is not cured within thirty (30) days of written notice from DVA; or 11.3.3 LICENSEE becomes insolvent or admits in writing its inability to pay its debts as they mature or makes an assignment for the benefit of creditors; or 11.3.4 LICENSEE files a petition under any foreign or U.S. bankruptcy law. The rights and remedies set forth in this section are not exclusive and are in addition to any other rights and remedies available to DVA under this Agreement or at law or equity. 11.4 In the event this Agreement or the license granted hereunder shall be terminated pursuant to this Section 11.0 or assigned pursuant to Section 8.0, the corresponding sublicenses granted to Affiliates of LICENSEE pursuant to Section 3.3 shall likewise terminate, but no notices need be given by DVA to such Affiliates. 11.5 Any expiration or termination of this Agreement pursuant to this Section 11.0, or any termination of a sublicense pursuant to Section 3.3, shall not relieve LICENSEE of any obligation or liability accrued hereunder prior to such termination (including, without limitation, the obligations set forth in Sections 5.0, 6.0 and 7.0), or rescind or give rise to any right to rescind anything done by LICENSEE or any payments made or other consideration given to DVA hereunder prior to the time such termination becomes effective, and such termination shall not affect in any manner any rights of DVA arising under this Agreement prior to such termination. Page 18 of 23 SECTION 12.0 PAYMENTS, NOTICES AND OTHER COMMUNICATIONS 12.1 Any notice or other communication pursuant to this Agreement shall be made by registered airmail (except that registered or certified mail may be used where delivery is in the same country as mailing) and shall be effective upon receipt by the addressee. Such notice or communication shall be mailed to: 12.1.1 In the case of DVA: Dennis Fischel President DISCOVISION ASSOCIATES Post Office Box 19616 Irvine, California 92713 12.1.2 In the case of LICENSEE: Alex Sandel FUTURE MEDIA PRODUCTIONS 25136 Anza Drive Valencia, California 91355 12.2 LICENSEE's royalty reports, as described in Section 6.0 of this Agreement, shall be mailed via air mail to: DISCOVISION ASSOCIATES ATTN: Controller Post Office Box 19616 Irvine, California 92713 Fax No.: (714) 660-1801 A summary of the report, which states the total royalty to be paid, shall be sent by facsimile to DVA on, or before, the mailing of the complete report. 12.3 All payments set forth in Section 5.0 of this Agreement shall be paid via bank wire transfer to: Federal Reserve Bank of San Francisco For Credit to Sumitomo Bank of California San Francisco - Head Office ABA: 121002042 Page 19 of 23 For Further Credit to: The Sumitomo Bank, Ltd., Los Angeles Branch for Account of Discovision Associates ABA: 122041594 ACCOUNT NUMBER: 046-133013-70 or by check payable to DVA and mailed via air mail directly to: DISCOVISION ASSOCIATES ATTN: Controller Post Office Box 19616 Irvine, California 92713 SECTION 13.0 APPLICABLE LAW; VENUE; JURISDICTION 13.1 This Agreement shall be construed, and the legal relations between the parties hereto shall be determined, in accordance with the laws of the State of New York and, as applicable, the laws of the United States of America. 13.2 Any dispute that arises under or relates to this Agreement shall, at DVA's election, be prosecuted exclusively in the appropriate court situated in the State of Delaware, United States of America. LICENSEE consents to the venue and jurisdiction of such court for purposes of any such dispute, and agrees that a judgment of such court shall be enforceable in the jurisdiction in which LICENSEE is located. SECTION 14.0 MISCELLANEOUS 14.1 Nothing contained in this Agreement shall be construed as: 14.1.1 requiring the filing of any patent application, the securing of any patents or the maintenance of any patents; or 14.1.2 a warranty or representation by DVA as to the validity or scope of any Licensed Patent; or 14.1.3 a warranty or representation that the manufacture, use, rental, lease, sale or other Transfer of any Licensed Product is free from infringement of any patents or other rights of third parties; or 14.1.4 an obligation on the part of DVA to furnish any manufacturing or technical information, or any information concerning other licensees; or Page 20 of 23 14.1.5 an obligation upon DVA to make any determination as to the applicability of its patents to any of LICENSEE's products, except as otherwise provided in Section 10.0; or 14.1.6 a license with respect to any act which would otherwise constitute inducement of infringement or contributory infringement under United States patent law or its equivalent under any law foreign to the United States; or 14.1.7 conferring any right to use, in advertising, publicity, or otherwise, any name, trade name, trademark, service mark, symbol or any other identification or any contraction, abbreviation or simulation thereof; or 14.1.8 conferring any rights by implication, estoppel or otherwise, to or under copyrights with respect to any computer software under any present system of statutory protection or one hereinafter enacted in any country or countries, wherein the copying of such computer software is a requisite of infringement under such system; or 14.1.9 an obligation to bring or prosecute actions or suits against third parties for infringement of any patent. 14.2 LICENSEE shall have the complete responsibility and shall use its best efforts to obtain all necessary approvals and validations of this Agreement, including all necessary approvals and validations for any products made, used or sold hereunder. 14.3 LICENSEE will sell and deliver to DVA, F.O.B. LICENSEE's shipping point, any Licensed Product ordered from LICENSEE by DVA and which is available for sale by LICENSEE. LICENSEE will also sell and deliver to DVA a copy of each manual (including, but not limited to, service, use and other technical manuals) relevant to a Licensed Product which is available for sale by LICENSEE, provided that, upon request by LICENSEE, DVA first delivers to LICENSEE a letter agreeing to hold such manual in confidence and to use it only for reverse engineering purposes. Any such sales will be at the same prices charged to LICENSEE's most favored customer. 14.4 The waiver by either party of a breach or default of any provision of this Agreement by the other party shall not be construed as a waiver of any succeeding breach of the same or any other provision, nor shall any delay or omission on the part of either party to exercise or avail itself of any right, power Page 21 of 23 or privilege that it has or may have hereunder operate as a waiver of any right, power or privilege of such party. 14.5 It is the intention of both parties to make this Agreement binding only to the extent that it may be lawfully done under existing applicable law as identified in Section 13.0. If any sentence, paragraph, clause or combination of the same is in violation of any applicable law, that portion which is in violation shall be severed from this Agreement and the remainder of this Agreement shall remain binding upon the parties hereto, except that no license is granted, expressly or by implication, unless royalties are paid pursuant to Section 5.0. 14.6 Each party represents and warrants that it has the full right and power to enter into this Agreement and that there are no outstanding agreements, assignments, or encumbrances to which the representing party is bound which may restrict, or prohibit entry into, or performance under, this Agreement. DVA further represents and warrants that it has the full power to grant the license and release set forth in Sections 3.0 and 4.0. Neither party makes any other representations or warranties, express or implied, other than the representations set forth in Sections 3.3 and 4.2 regarding Affiliates. 14.7 The headings of the several sections are inserted for convenience of reference only and are not intended to affect the meaning or interpretation of this Agreement. 14.8 The specifications referred to in various definitions in Section 2.0 of this Agreement (i.e., the Red Book, Green Book, Yellow Book and Rainbow Book) are for clarity and the convenience of the parties in determining the product(s) that the parties intend to be licensed under this Agreement. 14.9 This Agreement may be executed in any number of copies, but all of such counterparts together shall constitute one and the same Agreement. 14.10 The parties hereto acknowledge that this instrument sets forth the entire agreement and understanding of the parties hereto and shall supersede all previous communications, representations and understandings, either oral or written, between the parties relating to the subject matter hereof, except prior written agreements signed by both parties, and shall not be subject to any changes or modifications except by the signing of a written instrument by or on behalf of both parties hereto. Page 22 of 23 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly signed as of the dates written below, to be effective as of the date first above written. DISCOVISION ASSOCIATES /s/ Dennis Fischel -------------------------------- By: Dennis Fischel Witness: Title: President [ILLEGIBLE] Date: Sept. 16, 1996 - -------------------------------- -------------------------------- FUTURE MEDIA PRODUCTIONS EL:DHT:dh Witness: /s/ Alex Sandel -------------------------------- By: Alex Sandel Title: Date: 8-26-96 - -------------------------------- -------------------------------- Page 23 of 23 APPENDIX A
- ----------------------------------------------------------------------------------------------------------------------------------- INDIVIDUAL PATENT PATENT ROYALTY COUNTRY NUMBER RATE TITLE - ----------------------------------------------------------------------------------------------------------------------------------- UNITED STATES US 4,152,586 1.65% OPTICAL TRANSDUCER AND FOCUSING SYSTEM (Cont.) US 4,161,752 2.00% HIGH DENSITY VIDEO DISC HAVING TWO PIT DEPTHS US 4,161,753 2.00% VIDEO RECORDING DISK WITH INTERLACING OF DATA FOR FRAMES ON THE SAME TRACK US 4,185,065 1.65% APPARATUS FOR REPLICATING CENTRALLY APERTURED VIDEO DISC RECORDS US 4,100,880 1.65% DIGITAL METHOD AND APPARATUS FOR ROTATING AN INFORMATION STORAGE DISC US 4,204,199 2.00% METHOD AND MEANS FOR ENCODING AND DECODING DIGITAL DATA US 4,210,031 2.00% VIDEO PLAYER AND/OR RECORDER WITH HADAMARD TRANSFORM US 4,211,617 2.00% PROCESS FOR PRODUCING A STAMPER FOR VIDEODISC PURPOSES US 4,222,072 2.00% VIDEO PLAYER/RECORDER WITH NON-LINEAR MARK LENGTH MODULATION US 4,225,873 2.00% RECORDING AND PLAYBACK SYSTEM US 4,228,326 2.00% SYSTEM FOR RECORDING INFORMATION ON A ROTATABLE STORAGE DISC IN A SUBSTANTIALLY UNIFORM RECORDING DENSITY US 4,232,388 1.00% METHOD AND MEANS FOR ENCODING AND DECODING DIGITAL DATA US 4,241,698 1.65% VACUUM EVAPORATION SYSTEM FOR THE DEPOSITION OF A THIN EVAPORATED LAYER HAVING A HIGH DEGREE OF UNIFORMITY US 4,252,327 2.00% VIDEO DISC PLAYER US 4,256,374 0.75% WRITE AND READ OBJECTIVE LENS FOR HIGH DENSITY STORAGE US 4,260,360 1.65% METHOD AND MEANS FOR REPLICATING CENTRALLY APERTURED VIDEO DISC RECORDS US 4,264,911 2.00% OPTICAL RECORDING DISC AND RELATED METHOD OF MANUFACTURE US 4,274,110 2.00% RECORDING DISC COVER AND PLAYER APPARATUS FOR REMOVING COVER US 4,286,848 0.75% REPRODUCING OBJECTIVE LENS FOR VIDEODISCS US 4,307,381 2.00% METHOD AND MEANS FOR ENCODING AND DECODING DIGITAL DATA US 4,310,919 2.00% OPTICAL VIDEO DISC STRUCTURE US 4,313,100 1.20% METHOD FOR MAKING A COMPOSITE VIDEO DISC US 4,313,101 2.00% RECORDING MEDIUM HAVING A PILOT SIGNAL WITH AN ALIGNED PHASE ANGLE IN ADJACENT TRACKS US 4,337,538 2.00% DRIVE ASSEMBLY FOR A VIDEO RECORDER-PLAYBACK MACHINE US 4,330,614 2.00% SPINDLE ASSEMBLY FOR A VIDEO RECORDER-PLAYBACK MACHINE US 4,340,353 1.65% NOT SPRUE VALUE ASSEMBLY FOR AN INJECTION MOLDING MACHINE US 4,340,055 2.00% VIDEO DISC PLAYER US 4,341,469 0.80% LASER SHADOWGRAPH US 4,345,261 2.00% DIELECTRIC RECORDING MEDIUM US 4,347,500 0.80% SPINDLE CLAMP ASSEMBLY FOR A VIDEO RECORDER-PLAYBACK MACHINE - -----------------------------------------------------------------------------------------------------------------------------------
Page 4 of 7 APPENDIX A
- ----------------------------------------------------------------------------------------------------------------------------------- INDIVIDUAL PATENT PATENT ROYALTY COUNTRY NUMBER RATE TITLE - ----------------------------------------------------------------------------------------------------------------------------------- UNITED STATES US 4,347,619 2.00% DIGITAL FORMATTING SYSTEM (cont.) US 4,353,767 2.00% METHOD OF MANUFACTURING AN OPTICAL READING DISC US 4,357,633 2.00% FOCUS DETECTOR FOR AN OPTICAL DISC PLAYBACK SYSTEM US 4,358,774 2.00% APPARATUS AND METHOD FOR CONTROLLING FOCUS IN A RECORDING MEDIUM US 4,358,802 1.65% FLUID CUSHION TURNTABLE FOR VIDEO DISC PLAYER US 4,367,545 2.00% VIDEO DISC PLAYER US 4,388,957 0.75% WIDE APERTURE OBJECTIVE LENS US 4,372,741 1.65% HOT SPRUE VALVE ASSEMBLY FOR AN INJECTION MOLDING MACHINE US 4,374,638 1.65% APPARATUS FOR PRODUCING CENTRALLY APERTURED RECORD DISCS US 4,391,578 2.00% HOT SPRUE VALVE ASSEMBLY FOR AN INJECTION MOLDING MACHINE US 4,394,117 2.00% HOT SPRUE SLEEVE VALVE ASSEMBLY FOR AN INJECTION MOLDING MACHINE US 4,397,805 2.00% METHOD FOR MAKING A VIDEO DISC US 4,405,540 1.65% HOT SPRUE VALVE ASSEMBLY FOR AN INJECTION MOLDING MACHINE US 4,412,743 1.00% OFF-AXIS LIGHT BEAM DEFECT DETECTOR US 4,412,805 1.65% HOT SPRUE ASSEMBLY FOR AN INJECTION MOLDING MACHINE US 4,415,138 2.00% ELASTOMERIC VIDEODISC MOLD OR INTERMEDIATE MEMBER US 4,422,189 1.65% LENS ASSEMBLY FOR A VIDEO RECORDER-PLAYBACK MACHINE US 4,422,904 2.00% METHOD FOR FORMING VIDEO DISCS US 4,430,401 2.00% METHOD FOR PRODUCING A RECORDING DISC STAMPER US 4,433,423 2.00% HIGH QUALITY DELTA MODULATOR US 4,439,132 1.65% HOT SPRUE ASSEMBLY FOR AN INJECTION MOLDING MACHINE US 4,441,179 2.00% OPTICAL VIDEO DISC STRUCTURE US 4,445,144 0.60% METHOD FOR DETECTING ECCENTRICITY IN A VIDEO DISC AND IN A VIDEO DISC PLAYER US 4,445,209 2.00% DITHERED FOCUSING SYSTEMS US 4,450,486 2.00% SYSTEM FOR RECORDING CONTINUOUS-PLAY AND STOP-MOTION SIGNAL US 4,451,013 2.00% VIDEO DISC READ BACK SCANNER US 4,455,634 2.00% AUDIO/VIDEO QUALITY MONITORING SYSTEM US 4,456,375 1.20% OPTICAL DISC MEASUREMENT BY REFRACTION US 4,456,014 2.00% METHOD AND APPARATUS FOR STORING INFORMATION ON A STORAGE MEDIUM US 4,465,977 1.65% ERRONEOUS PULSE SEQUENCE DETECTOR - -----------------------------------------------------------------------------------------------------------------------------------
Page 5 of 7 APPENDIX A
- ----------------------------------------------------------------------------------------------------------------------------------- INDIVIDUAL PATENT PATENT ROYALTY COUNTRY NUMBER RATE TITLE - ----------------------------------------------------------------------------------------------------------------------------------- UNITED STATES US 4,466,934 1.65% HOT SPRUE VALVE ASSEMBLY FOR AN INJECTION MOLDING MACHINE (cont.) US 4,467,467 2.00% VIDEO RECORDER-PLAYBACK MACHINE US 4,477,890 1.20% MAPPING DISC DEFECT DETECTOR US 4,479,146 2.00% VERTICAL CODE VERIFIER US 4,488,279 2.00% VIDEO RECORDER-PLAYBACK MACHINE US 4,998,011 1.65% FLAT PLAT FOCUS SENSING APPARATUS US 4,499,502 2.00% COMPRESSED BANDWIDTH FREQUENCY MODULATION SIGNAL FORMAT APPARATUS AND METHOD US 4,499,560 2.00% WRITING BEAM FOCUS MONITOR US 4,500,464 2.00% PROCESS FOR MAKING A VIDEO RECORD DISC US 4,504,939 2.00% STORAGE MEDIUM TRACK PITCH DETECTOR US 4,510,536 2.00% SIGNAL CONDITIONING METHOD AND APPARATUS FOR FM CODE SIGNAL US 4,519,004 2.00% EXTENDED PLAY VIDEODISC US 4,524,444 2.00% ANALYZING THE SIGNAL TRANSFER CHARACTERISTICS OF A SIGNAL PROCESSING UNIT US 4,635,648 1.65% METHOD AND MEANS FOR DRYING COATINGS ON HEAT SENSITIVE MATERIALS US 4,668,000 2.00% STORAGE MEDIUM TRACK PITCH DETECTOR US 4,583,210 2.00% METHOD AND APPARATUS FOR STORING AND RETRIEVING INFORMATION US 4,598,324 2.00% AUDIO EVALUATION UNDER CONTROL OF VIDEO PICTURE FRAME NUMBER US 4,611,318 2.00% METHOD AND APPARATUS FOR MONITORING THE STORAGE OF INFORMATION ON A STORAGE MEDIUM US 4,616,753 2.00% VIDEO RECORD DISC AND PROCESS FOR MAKING SAME US 4,023,837 2.00% AUDIO/VIDEO QUALITY MONITORING SYSTEM US 4,646,084 2.00% STORAGE MEDIUM TRACK PITCH DETECTOR US 4,706,133 2.00% METHOD AND APPARATUS FOR RECOVERING INFORMATION FROM A VIDEO DISC US 4,759,007 2.00% STORAGE MEDIUM TRACK PITCH DETECTOR US 4,764,915 2.00% METHOD AND APPARATUS FOR RECORDING A MULTIPLEXED SIGNAL ON A RECORD MEDIUM US 4,796,098 2.00% BANDED AND INTERLEAVED VIDEO DISC FORMAT US 4,797,752 2.00% BANDED AND INTERLEAVED VIDEO DISC FORMAT US 4,810,223 2.00% VIDEO RECORD DISC US 4,893,297 2.00% VIDEO RECORD DISC AND PROCESS FOR MAKING SAME US 4,986,878 2.00% METHOD AND APPARATUS FOR SCANNING A RECORDING MEDIUM FOR DEFECTS
Page 6 of 7 APPENDIX A
- ----------------------------------------------------------------------------------------------------------------------------------- INDIVIDUAL PATENT PATENT ROYALTY COUNTRY NUMBER RATE TITLE - ----------------------------------------------------------------------------------------------------------------------------------- UNITED STATES US 5,001,568 2.00% SIGNAL EVALUATION BY ACCUMULATION AT ONE RATE AND RELEASING AND TESTING AT A SLOWER RATE (cont.) US 5,003,526 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT US 5,018,020 2.00% RECORD DISC FOR STORING SEPARATE VIDEO AND AUDIO INFORMATION US 5,084,852 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT US 5,126,990 2.00% A METHOD OF EVALUATING A STORAGE MEDIUM BY RECIRCULATING A TEST SAMPLE OF A SIGNAL US 5,136,558 2.00% TWO AXIS ELECTROMAGNETIC ACTUATOR US 5,155,633 1.65% ANAMORPHIC ACHROMATIC PRISM FOR OPTICAL DISC HEADS US 5,177,640 1.65% TWO-AXIS MOVING COIL ACTUATOR US 5,220,434 2.00% VIDEO RECORDING MEDIUM FOR STOP-MOTION PLAYBACK US 5,245,174 2.00% FOCUS SENSING APPARATUS UTILIZING A REFLECTING SURFACE HAVING VARIABLE REFLECTIVITY US 5,253,244 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT US 5,265,079 2.00% SEEK ACTUATOR FOR OPTICAL RECORDING US 5,313,332 0.60% FLEXURE SUSPENSION FOR TWO AXIS ACTUATOR US 5,321,000 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT US 5,331,622 2.00% COMPACT OPTICAL HEAD US 5,349,175 2.00% FOCUS SENSING APPARATUS USING ELECTRICAL AGC TO ENHANCE DIFFERENTIAL FOCUS ERROR SIGNAL US 5,373,490 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT US 5,375,116 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT US 5,448,545 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT US 5,459,709 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT US 5,470,390 2.00% SYSTEM FOR RECORDING DIGITAL INFORMATION IN A PULSE-LENGTH MODULATION FORMAT US RE 32,431 2.00% METHOD AND APPARATUS FOR RECOVERING INFORMATION FROM A ROTATABLE STORAGE DISC - -----------------------------------------------------------------------------------------------------------------------------------
Note: An "E" directly following the Patent Number indicates that patent has expired. APPENDIX B UNITED STATES AND CANADIAN PATENTS LICENSED TO LICENSEE UNDER THIS AGREEMENT:
INDIVIDUAL PATENT PATENT NUMBER ROYALTY RATE ------------- ------------
APPENDIX B PATENTS SHALL BE ALL OF THE PATENTS LISTED IN APPENDIX A APPENDIX B Page 1 of 1 APPENDIX C LICENSEE'S Affiliates as of the effective date of this Agreement are: Company: ------------------------------ Address: ------------------------------ ------------------------------ ------------------------------ Company: ------------------------------ Address: ------------------------------ ------------------------------ ------------------------------ Company: ------------------------------ Address: ------------------------------ ------------------------------ ------------------------------ Company: ------------------------------ Address: ------------------------------ ------------------------------ ------------------------------ Company: ------------------------------ Address: ------------------------------ ------------------------------ ------------------------------ APPENDIX C Page 1 of 2 Company: ------------------------------ Address: ------------------------------ ------------------------------ ------------------------------ Company: ------------------------------ Address: ------------------------------ ------------------------------ ------------------------------ Company: ------------------------------ Address: ------------------------------ ------------------------------ ------------------------------ Company: ------------------------------ Address: ------------------------------ ------------------------------ ------------------------------ Company: ------------------------------ Address: ------------------------------ ------------------------------ ------------------------------ APPENDIX C Page 2 of 2 APPENDIX D-1 LICENSED DISC MANUFACTURERS WHO ARE PAYING UNITED STATES AND CANADIAN RATES: National Tape & Disc Inc. Allied Digital Technologies (Hauppauge Record Mfg., Ltd.) Nimbus Manufacturing Inc. Americ Disc Inc. Nippon Columbia Co., Ltd. (U.S.) American MultiMedia, Inc. Optical Disc Corporation ASR Recording Services Philips (N.V.) Gloeilampenfabrieken Astraltech Americas, Inc. Pilz (U.S.) Atlantic Recording Corporation Pioneer Bertelsmann de Mexico P & O Compact Disc Better Quality Cassettes, Inc. Producers Color/Technidisc Cinram Ltd. Sanyo Laser Products Denon Corporation (U.S.A) Sanyo Verbarim CD Company, L.L.C. Digital Audio Disc Corporation (U.S.) Sonopress Inc. (U.S.) Discovery Systems/Metatec Sonopress (Germany) Distribution North America Sony Corporation (U.S.) Eastern Standard Productions, Inc. Sony Music Entertainment Eva-Tone, Inc. Time Warner Inc. (U.S.) EMI Manufacturing (USA) U.S. Optical Disc JVC America Warner Bros. Records Inc. KAO Corporation Warner Communications Inc. Kuraray Co., Ltd. WEA Manufacturing Inc. Mitsubishi Plastics Industries Ltd. Zomax Optical Media APPENDIX D-1 Page 1 of 1 APPENDIX D-2 LICENSED DISC MANUFACTURERS NOT PAYING UNITED STATES AND CANADIAN RATES: Bertelsmann AG Pilz GmbH & Company Compact Disc KG Damont Audio Limited Ritek Incorporation EMI Compact Disc (Holland) Sanyo Electric Co., Ltd. EMI Manufacturing Australia Seiko Epson Fuji Photo Film Co., Ltd. Show-Ads Omega Pty. Ltd. Fujitsu Limited (Disctronics Technologies) Hitachi Ltd. Sonopress (Germany) Japan Optical Disc Corporation Sonopress (Mexico) KAO Corporation Sonopress Pan Asia Ltd. Matsushita Electric Industrial Co., Ltd. Sony Corporation (Japan) Mayking Records Ltd. Sony DADC Austria AG Memory-Tech Corporation TDK Corporation Mitsubishi Electric Corporation Thorn EMI plc Moulage Plastique de L'ouest (MPO) Toshiba Corporation Nimbus Manufacturing (UK) Ltd. Toshiba-EMI Limited Nippon Columbia Co., Ltd. (Japan) Toyo Recording Co., Ltd. Optrom, Inc. Victor Company of Japan APPENDIX D-2 Page 1 of 1 EX-10.18 20 LETTER AGREEMENT DATED JUNE 15, 1998 EXHIBIT 10.18 June 15, 1998 Averil Associates, Inc. 833 17th Street, Suite Six Santa Monica, CA 90403 Attn: Diana L. Maranon Ladies and Gentlemen: In connection with your engagement as our financial advisor pursuant to a letter agreement, dated June 15, 1998 (as such agreement may be amended from time to time, the "Agreement"), between you and us, we hereby agree to indemnify and hold harmless you and your affiliates, and your respective directors, officers, agents, employees and controlling persons, and each of their respective successors and assigns (collectively, the "indemnified persons"), to the full extent lawful, from and against all losses, claims, damages, liabilities and expenses (or actions in respect thereof) that are related to or arise out of (i) actions or alleged actions taken or omitted to be taken (including any untrue statements made or any statements omitted to be made) by us or any of our affiliates, directors, officers, employees or agents, (ii) actions or alleged actions taken or omitted to be taken by an indemnified person (including acts or omissions constituting ordinary negligence) pursuant to the terms of, or in connection with services rendered pursuant to or in accordance with the terms of, the Agreement or any transaction or proposed transaction contemplated thereby or any indemnified person's role in connection therewith, or (iii) any untrue statement or alleged untrue statement of a material fact contained in any offering materials or in any amendment or supplement thereto, or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading. We will not be responsible, however, for any losses, claims, damages, liabilities or expenses pursuant to clause (ii) of the preceding sentence that are finally judicially determined to have resulted primarily from the gross negligence or willful misconduct of the person seeking indemnification hereunder. We also agree that (i) no indemnified person shall have any liability to us or any of our affiliates, directors, officers, employees or agents except for losses, claims, damages, liabilities or expenses incurred by us in connection with the transaction that are finally judicially determined to have resulted primarily from the gross negligence or willful misconduct of such indemnified person; and (ii) in no event shall the indemnified persons' aggregate liability in connection with such losses, claims, damages, liabilities and expenses exceed the fees you actually receive from us pursuant to the Agreement. Promptly after receipt by an indemnified person of notice of any complaint or the commencement of any action or proceeding with respect to which indemnification is being sought hereunder, such person will notify us in writing of such complaint or of the commencement of such action or proceeding. We will not, without the prior written consent of you, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not you or any other indemnified person is an actual or potential party to such claim, action, suit or proceeding). We agree that if any indemnification sought by an indemnified person pursuant to this letter agreement is held by a court to be unavailable for any reason other than as specified in the second sentience of the first paragraph of this letter agreement, then we will contribute to the losses, claims, damages, liabilities and expenses for which such indemnification is held unavailable (i) in such proportion as is appropriate to reflect the relative benefits to us, on the one hand, and you, on the other hand, in connection with your engagement referred to above, or (ii) if the allocation provided by clause (i) above in this paragraph is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) in this paragraph, but also the relative fault of us, on the one hand, and you, on the other hand, as well as any other relevant equitable considerations; PROVIDED HOWEVER, that in any event the aggregate contribution by all indemnified persons to all losses, claims, damages, liabilities and expenses with respect to which contribution is available hereunder will not exceed the amount of fees actually received by you from us pursuant to your engagement referred to above. It is hereby agreed that for purposes of this paragraph, the relative benefits to us, on the one hand, and you, on the other hand, with respect to your engagement shall be deemed to be in the same proportion as (i) the total value paid or proposed to be paid or received by us or our stockholders, as the case may be, pursuant to the transaction, whether or not consummated, for which you are engaged to render financial advisory services, bears to (ii) the fee paid or proposed to be paid to you in connection with such engagement. It is agreed that it would not be just and equitable if contribution pursuant to this paragraph were determined by pro rata allocation or by any other method which does not take into account the considerations referred to in this paragraph. We further agree that we will promptly reimburse you and any other indemnified person hereunder for all expenses (including fees and disbursements of counsel) as they are incurred in connection with investigating, preparing or defending any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder, whether or not in connection with pending or threatened litigation in which any indemnified person is a party; PROVIDED, HOWEVER; that we will have the right to mutually determine legal counsel to represent you and any other indemnified person hereunder and will have the right to manage any such legal process, so long as such management does not adversely impair, hinder or otherwise jeopardize the rights or defense of you or any other indemnified person hereunder. Our indemnity, contribution and other obligations under this letter agreement shall be in addition to any rights that you or any other indemnified person may have at common law or otherwise, and shall be binding on our successors and assigns. We hereby consent to personal jurisdiction, service and venue in any court in which any claim which is subject to, or which may give rise to a claim for indemnification or contribution under, this letter agreement is brought against you or any other indemnified person. This letter agreement shall be deemed made in California. This letter agreement and all controversies arising from or relating to performance under this letter agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to such state's rules concerning conflicts of laws. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR ACTION ARISING OUT OF THIS LETTER AGREEMENT OR ANY ENGAGEMENT OF YOU IS HEREBY WAIVED. It is understood that, in connection with your above-mentioned engagement, you may also be engaged in writing to act in one or more additional capacities, and that the terms of the original engagement or any such additional engagement may be embodied in one or more separate written agreements. The provisions of this letter agreement shall apply to the original engagement, related activities prior to the date of the original engagement, any such additional written engagement and any modification of the original engagement or such additional written engagement and shall remain in full force and effect following the completion or termination of your engagement(s). Sincerely, FUTURE MEDIA PRODUCTIONS By:________________________ Alex Sandel Dated:_____________________ Accepted: AVERIL ASSOCIATES, INC. By:_______________________ Diana L. Maranon Dated:____________________ EX-10.19 21 ENGAGEMENT AGREEMENT DATED JUNE 15, 1998 EXHIBIT 10.19 June 15, 1998 Mr. Alex Sandel President Future Media Productions 25136 Anza Drive Valencia, California 91355 Dear Mr. Sandel: 1. This letter confirms our understanding that Future Media Productions, Inc. (the "Company") has engaged Averil Associates, Inc. ("Averil") as financial advisor to the Company regarding its strategic and financing alternatives with respect to an initial public offering (the "Engagement"). It is anticipated that the scope of this retention will take the following form: (A) Averil will act as financial advisor to the Company with respect to the consideration and implementation of its strategic alternatives. As part of this assignment, Averil will (i) study and evaluate the short-term and long-term projected financial performance and capital needs of the Company, (ii) develop valuation perspectives regarding the Company, reflecting appropriate strategic, industry and macroeconomic considerations, (iii) as a result of Averil's diligence, and in conjunction with management analysis, work with management in developing a strategic financing plan for the Company; (iv) work with management in contacting and negotiating with potential underwriters in line with the financing plan, (v) review various structural and tax considerations applicable to a transaction impacting the Company, (vi) coordinate all financial and legal advisors involved in the transactional process, and (vii) assist in the preparation, execution and the closing of all aspects of an initial public offering. (B) A transaction may include the Company or any of its affiliates, including (without limitation) a new entity formed for such purpose (collectively, the "Entities"). 2. The Company shall pay to Averil, as compensation for services under this Engagement, as follows: (A) RETAINER. A non-refundable retainer fee of $35,000, payable upon execution of this letter agreement. (B) TRANSACTION FEES. In the case of a transaction, a transaction fee of .75% of the consideration raised, payable in cash, at the closing (or, if more than one, at each closing) of a transaction in line with the Company's business plan, by wire transfer or certified bank check; PROVIDED HOWEVER, the retainer fee payable pursuant to the first paragraph of Section 2(A) above, shall be credited against any transaction fees payable pursuant to this paragraph. In addition to the cash fees payable pursuant to the above paragraph, the Company shall issue to Averil, at no cost, additional equity securities, warrants or other participating interests in the Company (or, if applicable, another Entity) representing .25% of the consideration raised in value, priced in accordance with the Black Scholes option model, to be issued upon consummation of the transaction and receipt of the consideration in cash; provided, however, the minimum amount of warrants issuable pursuant to this transaction shall be $50,000 in value. The Company will grant to Averil registration rights, at Averil's expense, on Form S-3, exercisable after twelve months following any initial public offering. (C) EXPENSES. In addition to any fees payable hereunder, the Company shall, whether or not a transaction shall be consummated, reimburse Averil as billed for its business class travel and other reasonable out-of-pocket expenses (including all fees and disbursements of counsel and of other consultants and advisors retained by it, messenger and duplicating services, telephone and facsimile expenses, document and database charges and other customary expenditures), incurred in connection with, or arising out of, Averil's activities under or contemplated by this engagement. Averil shall charge all of its out-of-pocket expenses at its actual cost. Aggregate total expenses shall not exceed $7,500; provided, however, in the event that Averil is asked to travel with the Company either in connection with the selection of underwriters or completion of the roadshow, such expenses shall be covered by the Company. (D) DEFINITIONS. As used herein, "transaction" shall mean any transaction or series or combination of transactions whereby, directly or indirectly, a private or public party(ies) (excluding Greyrock Business Credit, Alexander Sandel, Beny Alagem and Jason Barzilay or any entity that any of them owns or controls) lends or otherwise invests in any of the Entities or their respective affiliates or assets. Such transaction may include, but shall not be limited to, placement of a term loan, revolver or other debt facility, subordinated debentures, convertible equity or other similar securities, a private or public financing transaction, an acquisition or exchange of capital stock or assets, a lease of assets with or without a purchase option, a merger or consolidation, the formation of a joint venture or partnership or any similar transaction through which the Company's financing objectives are met. As used herein, "consideration" shall mean all (i) cash, whether paid, funded or contributed immediately or to be paid, funded or contributed in the future (contingent, deferred or otherwise), (ii) the fair market value of all debt, equity and other securities, other participating interests and any other property paid, funded or contributed, and (iii) the fair market value of all debt or other liabilities paid, funded or secured (or otherwise assumed) directly or indirectly on behalf of the Company or any of its affiliates. 3. In connection with Averil's activities hereunder, the Company will furnish Averil with all material information regarding the business and financial condition of the Company (all such information so furnished being the "Information"). The Company recognizes and confirms that Averil (i) will use and rely primarily on the Information and on information available from generally recognized public sources in performing the services contemplated by this letter without having independently verified the same; (ii) does not assume responsibility for the accuracy or completeness of the Information and such other information, (iii) will not make an appraisal of any assets of the Company, and (iv) retains the right to continue to perform due diligence during the course of the engagement. 4. Since Averil will be acting on behalf of the Company in connection with its engagement hereunder, the Company and Averil have entered into a separate indemnification agreement, dated the date hereof and attached hereto, providing for the indemnification of Averil and certain related persons. Such indemnification agreement is an integral part of this letter and the terms thereof are incorporated by reference herein. It is understood that if any other person or entity is established by the Company for the purpose of carrying out any transaction contemplated by this engagement letter, such person or entity will enter into engagement and indemnification agreements substantially similar to this engagement letter and the associated indemnification agreement dated the date hereof. THE COMPANY ACKNOWLEDGES AND AGREES THAT THE SERVICES RENDERED BY AVERIL UNDER THIS ENGAGEMENT ARE FINANCIAL ADVISORY SERVICES ONLY AND DO NOT INCLUDE THE RENDERING OF ANY LEGAL REPRESENTATION BY AVERIL OR ANY OF ITS AGENTS OR EMPLOYEES. THE COMPANY REPRESENTS THAT IT EITHER HAS LEGAL COUNSEL, OR WILL RETAIN LEGAL COUNSEL, TO RENDER APPLICABLE LEGAL SERVICES IN RELATION TO THE ASSIGNMENTS CONTEMPLATED BY THIS ENGAGEMENT AND WILL IN NO WAY RELY UPON AVERIL TO RENDER SUCH LEGAL COUNSEL._________(initials) 5. Averil's engagement hereunder shall be terminable at will at any time prior to the closing of the Transaction by either the Company or Averil upon thirty days' prior written notice thereof to the other party. It is understood, however, that notwithstanding any termination of Averil's engagement hereunder by the Company, Averil shall be entitled to receive any retainer fees and all out-of-pocket expenses to be paid to it pursuant to clauses (A) and (C) of the second paragraph of this letter agreement and, for a period of twelve months subsequent to the termination of this engagement, any transaction fees referred to in clause (B) of the second paragraph of this letter agreement relating to assignments within the scope of this engagement. Otherwise, the parties shall not have any continuing liability or obligation to the other except for those related to the indemnification agreement referred to in paragraph 4 hereof and the representations and warranties contained in paragraph 7, the terms of which shall survive any termination of Averil's engagement hereunder. 6. The advice (written or oral) rendered by Averil pursuant to this agreement is intended solely for the benefit and use of the Company in considering the matters to which this agreement relates, and the Company agrees that neither such advice nor Averil's retention may be disclosed publicly or made available to third parties without the prior written consent of Averil. 7. The Company represents and warrants to Averil that (i) this Agreement has been duly authorized, executed and delivered by the Company, and, constitutes a legal, valid and binding agreement of the Company, enforceable in accordance with its terms and (ii) any offering materials will not, when delivered for distribution in connection with a transaction and at the closing of a transaction, contain any untrue statements of a material fact or omit to state any material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. The Company shall advise Averil promptly of the occurrence of any event or any other change that results in the Information or offering materials containing any untrue statement of a material fact or omitting to state any material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. 8. The execution of this letter shall not be deemed or construed as obligating Averil to make any investment in the Company or any other Entity, directly or indirectly. 9. This Agreement may not be modified or amended except in a writing duly executed by the parties hereto. 10. Any determination that any one or more of the provisions of this Agreement may be, or is, invalid, illegal or unenforceable shall not affect the validity, legality or enforceability of the remainder of this Agreement. 11. THIS AGREEMENT AND ALL CONTROVERSIES ARISING FROM OR RELATING TO PERFORMANCE UNDER THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO SUCH STATE'S RULES CONCERNING CONFLICTS OF LAWS. THE PARTIES HERETO HEREBY IRREVOCABLY CONSENT TO PERSONAL JURISDICTION AND VENUE IN ANY COURT OF THE STATE OF CALIFORNIA OR ANY FEDERAL COURT SITTING IN THE CITY OF LOS ANGELES FOR THE PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF THIS AGREEMENT OR ANY OF THE AGREEMENTS OR TRANSACTIONS CONTEMPLATED HEREBY, WHICH IS BROUGHT BY OR AGAINST ANY PARTY HERETO, AND HEREBY AGREE THAT ALL CLAIMS IN RESPECT OF ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE PARTIES HERETO HEREBY IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH PARTIES AT THEIR RESPECTIVE ADDRESSES SET FORTH ABOVE, SUCH SERVICE TO BECOME EFFECTIVE TEN (10) DAYS AFTER SUCH MAILING. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR ACTION ARISING OUT OF THIS AGREEMENT OR CONDUCT IN CONNECTION WITH THIS ENGAGEMENT IS HEREBY WAIVED.______(initials) 12. This agreement may be executed in counterparts, each of which together shall be considered a single document. Please confirm that the foregoing is in accordance with your understanding by signing and returning to Averil the enclosed duplicate of this letter, which shall thereupon constitute a binding agreement. AVERIL ASSOCIATES, INC. By: ----------------------------------- Diana L. Maranon ACCEPTED AND AGREED TO: FUTURE MEDIA PRODUCTIONS By: ------------------------------------ Alex Sandel EX-10.20 22 DVD FORMAT AND LOGO LICENSE DATED JAN 11, 2000 EXHIBIT 10.20 1 DVD FORMAT AND LOGO LICENSE This FORMAT AND LOGO LICENSE is made between Toshiba Corporation ("Licensor"), a corporation of Japan, having its principal place of business at 1-1, Shibaura 1-chome, Minato-ku, Tokyo 105-8001, Japan, and Future Media Productions, Inc. ("Licensee"), a corporation of U.S.A., having its principal place of business at 25136 Anza Drive Valencia, California 91536 U.S.A., and is effective as of the later of the two signature dates below (the "Effective Date"). WHEREAS, certain members of the DVD Forum as specified in each DVD Format Book ("Format Owners") have developed the DVD specifications pertaining to one or more DVD products, and have obtained know-how, trade secret and technical information and copyrights embodied therein; WHEREAS, the Format Owners have appointed Licensor as a licensing agent for the DVD specifications; WHEREAS, the Logo Owner (as defined below) of the trademark rights, copyrights and other rights in and to the Logos (as defined below) has appointed Licensor as agent for licensing the Logos; WHEREAS, Licensee has obtained one or more DVD Format Book(s) (hereinafter defined) for such DVD specifications from Licensor for evaluation purposes only pursuant to a non-disclosure agreement that has been duly executed between Licensor and Licensee and that is attached hereto and incorporated herein by reference (the "NDA"); WHEREAS, Licensor and Licensee wish to enter into this Agreement which sets forth the terms and conditions under which Licensor grants to Licensee certain rights with respect to the DVD Format Books and Logos (each as defined below). NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 2 1. Definitions ----------- For purposes hereof, the following capitalized terms shall have the respective meanings provided below and additional capitalized terms shall have the respective meanings provided in Schedule A: 1.1 "Agreement" shall mean this DVD Format and Logo License, including all schedules attached hereto, and any and all amendments to the Agreement and/or such schedules. 1.2 "Affiliate" shall mean, with respect to either party hereto, any corporation, firm, partnership, proprietorship, or other form of business entity, in whatever country organized or resident, directly or indirectly controlled by such party, and that is listed in Schedule C. For the purpose of this definition, "control" shall mean more than 50% ownership, directly or indirectly, or the equivalent power to direct or cause the direction of the management or policies of such entity, directly or indirectly. Licensee may add any Affiliate(s) of Licensee to Schedule C at any time with a prior written notice to Licensor. 1.3 "DVD Format Books" shall mean the format books set forth in Schedule A-1 containing DVD specifications pertaining to one or more DVD Products, including any supplements, revisions, or updates made thereto from time to time; provided, however, that each new version of a DVD Format Book shall be considered a separate DVD Format Book, where "new version" shall mean new specifications for a DVD format as represented by the change of the first digit of the version number. 1.4 "DVD Graphic Standards Manual" shall mean the DVD Graphic Standards Manual which sets forth the standards for using the Logos, as it may be revised from time to time by Licensor. 1.5 "DVD Product" shall mean each DVD Product set forth on Schedule A-2. 1.6 "DVD Product Category" shall mean the categories of DVD Products set forth on Schedule A-3. 1.7 "Logos" shall mean the DVD logos as set forth in the DVD Graphic Standards Manual, which maybe revised from time to time by the Logo Owner. 1.8 "Logo Owner" shall mean the owner of the trademark rights, copyrights and other rights in and to the Logos and shall include the current owner of such rights, Time Warner Entertainment Company, L.P. ("TWE"), and any successor of such rights pursuant to an assignment and/or transfer of such rights. 3 1.9 "Schedule A" shall mean Schedule A attached to this Agreement, as such schedule may be amended from time to time by Licensor. 1.10 "Schedule B" shall mean Schedule B attached to this Agreement, as such schedule may be amended from time to time by Licensor. 1.11 "Schedule C" shall mean Schedule C attached to this Agreement, as such schedule may be amended from time to time by Licensor. 1.12 "Schedule D" shall mean Schedule D attached to this Agreement, as such schedule may be amended from time to time by Licensor. 2. DVD Format License ------------------ 2.1 Upon the terms and conditions and with the limitations and exceptions hereafter set forth, Licensor hereby grants to Licensee and its Affiliates specified in Schedule C a non-exclusive license, on a worldwide basis during the term hereof, to use the DVD Format Books identified on Schedule A-1 as being licensed to Licensee, including the technical information, know-how and trade secrets contained therein, solely in connection with Licensee's development, manufacture (including having manufactured on a subcontract basis), sale, use or other disposition of the DVD Products included in the DVD Product Category(ies) identified on Schedule A-3 as being licensed to Licensee. Within thirty (30) days after the Effective Date, Licensee shall select such DVD Format Book(s) and DVD Product Category(ies) that are licensed to Licensee and its Affiliates under this Agreement by checking the applicable column(s) in Schedule A-1. During the term of this Agreement, Licensee may add such DVD Format Book(s) and DVD Product Category(ies) that Licensee has not selected before and may be licensed to Licensee and its Affiliates under this Agreement by (a) providing Licensor with a revised Schedule A-1, with Licensee's selection of additional DVD Format Book(s) and/or DVD Product Category(ies), and (b) making additional payment(s) in accordance with Article 5.1. In the event that Licensee has the DVD Products manufactured by a third party on a subcontract basis pursuant to this Section, Licensee shall be responsible for such third party's compliance with the terms and conditions of this Agreement, including compliance with the DVD Format Books and confidentiality obligations. 2.2 Reserved for future addition of SID Code related provisions 4 2.3 Licensor shall have made available to Licensee under the NDA for use by Licensee and its Affiliates upon payment by Licensee of US$5,000, a copy of the then current version of a DVD Format Book, which may not be copied by anyone in whole or in part without prior written consent of Licensor. Licensee may receive additional copies of any DVD Format Book that has been made available to Licensee for an additional fee of $500 or other amount to be specified by Licensor per copy under the NDA. 2.4 Licensee acknowledges that the right to use the DVD Format Books licensed hereunder does not extend to its use in connection with any product that does not comply with such DVD Format Books or that is incompatible with products that comply with such DVD Format Books. 2.5 IT IS EXPRESSLY UNDERSTOOD THAT THE RIGHTS AND LICENSES GRANTED PURSUANT TO THIS AGREEMENT DO NOT EXTEND TO ANY PRESENT OR FUTURE PATENT RIGHT WHATSOEVER.] 3. DVD Logo License ---------------- 3.1 Upon the terms and conditions and with the limitations and exceptions hereafter set forth, Licensor hereby grants to Licensee and its Affiliates a non-exclusive license to use the Logos solely on DVD Products that are within the Category I Products or Category II Products, and packing materials, and in related advertising and other sales and marketing literature, including catalogues or brochures, and user manuals for such DVD Products, in the form and manner specified in the DVD Graphic Standards Manual on a worldwide basis during the term hereof. if Licensee manufactures and/or assembles computers that incorporate DVD Drives as defined in Schedule A-2 and/or DVD Decoders as defined in Schedule A-2 bearing the Logos, Licensee shall not be required to enter into a license to use the Logos; provided, that (i) Licensee's sole use of the Logos is the inclusion in such computers of DVD Drives and/or DVD Decoders bearing the Logos; (ii) the manufacturer of such DVD Drives and/or DVD Decoders has duly obtained a license to use the Logos on such DVD Drives and/or DVD Decoders; (iii) such DVD Drives and/or DVD Decoders have been independently verified by one of the laboratories listed on Schedule B-1 pursuant to the procedures set forth in Article 4; and (iv) such DVD Drives and/or DVD Decoders have not been materially altered; provided, further, that if Licensee manufactures and/or assembles computers and affixes the Logos on the computers as a whole system product, then Licensee shall be required to obtain a license for the Logos pursuant to this Article 3. 5 3.2 Licensee and its Affiliates are strictly prohibited from using the Logos in any other form than that which is specifically set forth in the DVD Graphic Standards Manual. 3.3 Licensee and its Affiliates shall ensure that there is imprinted legibly and irremovably on all materials and things on or with which the Logos appear in any form, the legends and notices required by the DVD Graphic Standards Manual. 3.4 Licensee and its Affiliates shall not co-join, superimpose or combine any other logo, trademark, trade name or other designation with the Logos. Licensee shall not use the Logos in a manner which impairs the right in the Logos. 3.5 Licensee and its Affiliates shall ensure that distributors' and retailers' usage of the Logos in advertising, promotional materials, catalogues or brochures offering Licensee's and its Affiliates' DVD Products for sale shall comply with the DVD Graphic Standards Manual and Articles 3.2, 3.3, 3.4 and 4.1 of this Agreement. 3.6 Notwithstanding the foregoing, if Licensee develops, manufactures, sells, uses or otherwise disposes of DVD Products that are within the Category III Products, the license of the Logos and the rights and obligations of the Licensee regarding such license set forth in this Article 3 shall not apply with respect to such DVD Products. 4. Verification ------------ 4.1 Licensee and its Affiliates (if Licensee has been granted the License to use the Logos) agree that all products bearing or marketed under the Logos shall be of high quality and shall conform to the applicable DVD Format Book and such additional standards, specifications, instructions and other quality controls regarding use of the Logos as may be communicated in writing by Licensor from time to time, and that all uses of the Logos shall fully comply with the DVD Graphic Standards Manual. Licensee and its Affiliates further agree that in case the Licensee or any of its Affiliates sells any DVD Products that are within the Category I Products or Category II Products, on an OEM basis to third parties, the Licensee or any such Affiliate shall cause, and bear responsibility for causing, such third parties to comply with the requirements that all products bearing or marketed under the Logos and sold by the third parties shall be of high quality and conform to the applicable DVD Format Book, and that all uses of the Logos by the third parties shall comply with the DVD Graphic Standards Manual. 4.2 Licensee and its Affiliates hereby agree that it will not manufacture, sell, market, promote or distribute a DVD Product within the Category I Products or Category II Products and bearing or marketed under the Logos other than in full compliance with the 6 applicable DVD Format Book and the procedures set forth below and in Schedules B-3, B-4 and B-5. 4.3 If Final Failure (defined in Schedule B-3) is declared for a DVD Product, Licensor shall have the right to terminate the rights relating to the Logos granted to such Licensee under this Agreement with respect to the DVD Product that has been declared the Final Failure, upon thirty (30) days' prior written notice to Licensee. 4.4 If at any time during the term hereof, Licensor determines, in its sole reasonable judgment and in cooperation with a Class A Verification Laboratory listed in Schedule B-1, that Licensee or any of its Affiliates may be manufacturing, selling, marketing, promoting or distributing a DVD Product within the Category I Products or Category II Products and bearing or marketed under Logos, which is not in full compliance with the applicable DVD Format Book, at the request of Licensor, such Licensee shall follow procedures set forth in Schedule B-5. 4.5 If Final Failure II (defined in Schedule B-5) is declared for a DVD Product, Licensor shall have the right to terminate the rights relating to the Logos granted to such Licensee under this Agreement with respect to the DVD Product that has been declared the Final Failure II, upon thirty (30) days' prior written notice to Licensee. 4.6 The right of termination set forth in Articles 4.3 and 4.5 above shall not be exclusive of any other remedies or means of redress to which the Licensor may be lawfully entitled, and all such remedies shall be cumulative. Upon termination pursuant to Articles 4.3 or 4.5, all rights of Licensee granted hereunder, relating to the Logos with respect to the DVD Product that failed to meet the verification standards, shall cease and the termination procedures set forth in Section 9.2 below shall apply to such termination. 4.7 For purposes of this Agreement, samples to be submitted pursuant to this Article 4 shall be selected in a manner acceptable to the verification laboratory to which they are submitted. 4.8 NO NOTICE OR STATEMENT OF ANY KIND SENT BY ANY LABORATORY LISTED ON SCHEDULE B-1 OR BY LICENSOR, SHALL BE CONSTRUED AS A REPRESENTATION OR WARRANTY OF ANY KIND WITH RESPECT TO THE DVD PRODUCT IDENTIFIED IN SUCH NOTICE OR STATEMENT, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE OR INTERCHANGEABILITY WITH OTHER DVD PRODUCTS. 7 5. Fees 5.1 In consideration of the license granted hereunder, upon the terms and conditions and with the limitations set forth herein, Licensee agrees to pay to Licensor, within thirty (30) days after the Effective Date, the license fee set forth on Schedule A for each DVD Format Book licensed to Licensee in each DVD Product Category selected by Licensee, as identified on Schedule A-1; provided, however, that Licensee may be entitled to a discount in the amount of $5,000 which Licensee had paid to Licensor under the NDA from the total license fee payable hereunder. The license fee shall not be returnable or refundable in any event. In the event that Licensee adds DVD Format Book(s) and DVD Product Category(ies) in accordance with the provision of Article 2.1, Licensee agrees to pay to Licensor, concurrently with such addition, the license fee set forth on Schedule A-1 for each DVD Format Book newly licensed to Licensee in each DVD Product Category newly selected by Licensee, as identified on Schedule A-1. 5.2 Licensee agrees to pay to the verification laboratory to which Licensee submits a DVD Product for verification each time a sample DVD Product and a test result are submitted to a verification laboratory pursuant to Schedules B-3 or B-4 (regardless of the number of times a DVD Product is submitted to a verification laboratory) the fees as charged by the verification laboratory on a per-submission basis, promptly upon the receipt of an invoice from the verification laboratory, provided that such fee shall not exceed the amount as specified in Schedule B-2. The transportation fees for such submission and return of Licensee's DVD Product sample or test results shall be borne by Licensee. 5.3 All payments made by Licensee to Licensor or verification laboratories under this Agreement shall be made without any deduction for any taxes, except any income taxes that may be owed by Licensor that are required to be withheld under any law of any jurisdiction outside Japan on any payments by Licensee to Licensor under this Agreement, which taxes shall be withheld by Licensee to the extent required by law and actually paid to the appropriate taxing authority. Licensee shall provide written notice to Licensor before payment is made in reasonable time to allow Licensor to object. Licensee shall within one month following payment of any such taxes provide proof to Licensor of payment of such taxes (including, but not limited to, official receipts in the name of Licensor and photocopies of all forms filed by Licensee with the appropriate taxing authorities) together with certified English translations of such documentation (if not in the English language). Licensee shall indemnify Licensor for any penalties and interest that may be payable as a result of Licensee's failure to timely pay all taxes or other assessments of Licensor that Licensee is obligated to withhold. All other taxes imposed on payments by Licensee to Licensor or verification laboratories, including but not limited to value added taxes, consumption taxes, and sales taxes, which may be imposed now or in the future or under the laws of any applicable jurisdiction shall be Licensee's sole responsibility and Licensee 8 shall promptly transmit such taxes to the appropriate authorities as and when they become due. Such taxes shall not affect Licensee's obligation to make payments to Licensor or verification laboratories as required under this Agreement. 6. Ownership of the DVD Format Books and Logos; Reservation of Rights 6.1 Licensee acknowledges that this Agreement does not transfer or convey to Licensee ownership of or any rights in any of the DVD Format Books or the Logos, except as expressly set forth herein. Licensee's use of the Logos (if Licensee has been granted the license to use the Logos) shall inure solely to the benefit of the Logo Owner, as owner of all rights in and to the Logos. Upon termination of this Agreement, no monetary amounts shall be assigned as attributable to any goodwill associated with such Licensee's use of the DVD Format Books or the Logos. 6.2 Licensor hereby reserves all rights not herein expressly granted to Licensee. Such reserved rights are the sole and exclusive property of the Licensor and the Format Owners. 7. Confidentiality 7.1 Licensee agrees that Licensee and its Affiliates shall not disclose to any third party information contained in the DVD Format Books licensed hereunder and any other information provided by Licensor as confidential information pursuant to the terms and conditions of the NDA. Licensee further agrees that Licensee and its Affiliates shall use information contained in the DVD Format Books licensed hereunder and any other information provided by Licensor as confidential information pursuant to the terms and conditions of the NDA only for the purpose of development, manufacture (including having manufactured), sale, use and other disposition of the DVD Products included in the DVD Product Category(ies) identified on Schedule A-3 and selected by Licensee. 8. Warranty and Disclaimer 8.1 LICENSOR, OTHER FORMAT OWNERS AND LOGO OWNER MAKE NO REPRESENTATION OR WARRANTY AS TO THE VALUE OR UTILITY OF THE INFORMATION TO BE SUPPLIED TO LICENSEE PURSUANT TO THIS AGREEMENT, SUCH AS BUT NOT LIMITED TO THE DVD FORMAT BOOKS, THE DVD GRAPHICS STANDARDS MANUAL, AND TECHNICAL INFORMATION AND SUPPORT, IF ANY, OR THE ABILITY OF LICENSEE TO MAKE USE THEREOF TO SECURE INTERCHANGEABILITY WITH OTHER DVD PRODUCTS. LICENSOR, 9 OTHER FORMAT OWNERS AND LOGO OWNER MAKE NO WARRANTY WHATSOEVER THAT THE USE OF INFORMATION SUPPLIED BY LICENSOR DOES NOT INFRINGE OR WILL NOT CAUSE INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHT OWNED OR CONTROLLED BY ANY PERSON. LICENSEE UNDERSTANDS AND AGREES THAT THE LICENSOR, OTHER FORMAT OWNERS AND LOGO OWNER MAKE NO WARRANTY WHATSOEVER THAT ANY MANUFACTURE, USE, SALE, LEASE OR OTHER DISPOSAL OF LICENSED PRODUCTS WILL BE FREE FROM INFRINGEMENT OF ANY THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS. IT IS EXPLICITLY UNDERSTOOD BY LICENSEE THAT LICENSOR AND OTHER FORMAT OWNERS CLAIM TO HAVE ISSUED OR PROSPECTIVE PATENTS PERTINENT TO THE LICENSED PRODUCTS, WHICH PATENTS ARE NOT LICENSED HEREUNDER. LICENSOR, OTHER FORMAT OWNERS AND LOGO OWNER MAKE NO REPRESENTATION AND WARRANTY, EXPRESSED OR IMPLIED, STATUTORY OR OTHERWISE, AND EXPRESSLY DISCLAIM IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND ANY EQUIVALENTS UNDER THE LAWS OF ANY JURISDICTION THAT MIGHT ARISE FROM ANY ACTIVITIES OR INFORMATION DISCLOSURES RELATING TO THIS AGREEMENT. 9. Term and Termination 9.1 This Agreement shall become effective as of the Effective Date and shall continue in force until December 31, 2004. The parties hereby agree that prior to such expiration (other than earlier termination of this Agreement pursuant to the provisions herein), the parties shall negotiate in good faith to renew the license granted hereunder as such renewal may be subject to further terms and conditions, including payment of then determined license fees. 9.2 Immediately upon expiration or earlier termination of this Agreement, Licensee shall return to Licensor or destroy at Licensor's instruction, all DVD Format Books licensed to Licensee hereunder, the DVD Graphics Standards Manual (if Licensee has been granted the License to use the Logos), and all copies of the foregoing documents, upon the last date that this Agreement remains in force and effect. Licensee acknowledges that, on the last day of the term of this Agreement or its earlier termination, all rights of Licensee granted hereunder shall cease. 9.3 Either party may terminate this Agreement at any time on thirty (30) days' notice to the other party in the event that the latter shall materially breach or fail to perform any material obligation under this Agreement and such default is not remedied within thirty (30) days after notice is given specifying the nature of the default. Such right of 10 termination shall not be exclusive of any other remedies or means of redress to which the non-defaulting party may be lawfully entitled, and all such remedies shall be cumulative. Licensee hereby agrees (if Licensee has been granted the license to use the Logos) that the use of the Logos in any way not in compliance with the DVD Graphic Standards Manual, as such manual may be modified from time to time, or on any product or in any advertisement or sales literature concerning any product, which product does not comply with the applicable DVD Format Book, shall constitute a material breach of this Agreement and infringement of the Logos. 9.4 In the event that any Event of Bankruptcy occurs, then Licensor may give notice to Licensee terminating this Agreement and this Agreement shall be terminated in accordance with the notice. An "Event of Bankruptcy" occurs if: (i) a decree or order by a court having jurisdiction in the premises has been entered adjudging Licensee a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, readjustment, arrangement, composition, winding up or similar relief for Licensee under any applicable statute, or a decree or order of a court having jurisdiction in the premises for the appointment of a liquidator, receiver, administrator, trustee or assignee in bankruptcy or insolvency or other similar person or official of Licensee or of a substantial part of the property, or for the winding up or liquidation of the affairs of Licensee has been entered and remains unstayed; or if any substantial part of the property of Licensee has been sequestered or attached and has not been returned to the possession of Licensee or released from such attachment within 14 days thereafter; whether any such act or event occurs in Japan, or any foreign country, subdivision thereof, or any other jurisdiction; or (ii) Licensee institutes proceedings to be adjudicated a voluntary bankrupt or insolvent, consents to the filing of a bankruptcy or insolvency proceeding against it, files a petition or answer or consent seeking reorganization, readjustment, arrangement, composition, winding up, administration, receivership, or similar relief under any applicable statute or consents to the filing of any such petition or the entry of any such order, makes an assignment for the benefit of creditors, is determined to be unable to pay its debts or admits in writing its inability to pay its debts generally as they become due, or voluntarily suspends transactions of a substantial portion of its usual business; whether any such act or event occurs in Japan, or any foreign country or subdivision thereof, or any other jurisdiction. 9.5 The provisions set forth in Articles 6, 7, 8 and 9 shall survive the termination or expiration of this Agreement. 11 10. Miscellaneous 10.1 Licensee agrees that it will not bring any actions for unauthorized use or infringement of any of the DVD Format Books or the Logos. Licensee will notify Licensor immediately should it learn of any such potential unauthorized use or infringement. Licensor shall have the option, at its own expense, to assume the defense of any suit or action brought against Licensee that challenges or concerns the validity of any right granted by Licensor hereunder. 10.2 The performance by Licensor of its obligations hereunder shall be conditioned upon and subject to the receipt of all necessary export approvals required by and all restrictions or conditions imposed by any relevant government. 10.3 Licensor represents and warrants that it has the rights to enter into this Agreement and to grant a license to Licensee pursuant to the terms hereof on behalf of the Format Owners and Logo Owner. 10.4 This Agreement and the rights granted hereunder shall be personal to Licensee and shall not be assigned, pledged, divided or otherwise encumbered in any way. Licensee shall not have the right to sublicense any rights granted hereunder. Licensor shall have the right to assign this Agreement, at any time during the term thereof, to any other party which succeeds Licensor in its function as the licensor of the DVD Format Books and the Logos, upon prior written notice to Licensee. 10.5 Notices. Wherever provision is made in this Agreement for the giving of any notice, such notice shall be in writing and shall be deemed to have been duly given if mailed by airmail, postage prepaid, addressed to the party entitled to receive the same or delivered personally to such party, or sent by facsimile transmission or sent by courier, if to Licensor, to: Strategic Partnership & Licensing Division Digital Media Equipment & Services Company Toshiba Corporation 1-1, Shibaura 1-Chome Minato-ku, Tokyo 105-8001 Japan Attention: Hirohide Tagawa Fax No.: +81-3-5444-9430 and if to the Licensee, to: Vice President Future Media Productions, Inc. 12 Attention: David Moss Fax No.: +1-661-294-5582 or to such other address, in any such case, as any party hereto shall have last designated by notice to the other party. Notice shall be deemed to have been given on the day that it is so delivered personally or sent by facsimile transmission and the appropriate answer back or confirmation of successful transmission is received or, if sent by courier, shall be deemed to have been given two business days after delivery by the courier company, or if mailed, ten business days following the date on which such notice was so mailed. 10.6 THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF NEW YORK, AS IF THIS AGREEMENT WERE WHOLLY EXECUTED AND WHOLLY PERFORMED WITHIN SUCH STATE, AND WITHOUT REFERENCE TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. 10.7 ALL DISPUTES BETWEEN THE PARTIES HERETO ARISING OUT OF OR IN CONNECTION WITH THE INTERPRETATION OR EXECUTION OF THIS AGREEMENT, LICENSOR'S LICENSING OF THE LOGOS OR THE DVD FORMAT BOOKS, OR LICENSEE'S USE OF THE DVD FORMAT BOOKS AND THE LOGOS, SHALL BE FINALLY SETTLED BY THE FEDERAL OR STATE COURTS LOCATED IN THE COUNTY OF NEW YORK IN THE STATE OF NEW YORK; AND EACH PARTY TO THIS AGREEMENT HEREBY: (i) IRREVOCABLY CONSENTS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS FOR THE RESOLUTION OF SUCH DISPUTES; (ii) IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF SAID COURTS IN ANY SUCH DISPUTE BY PERSONAL DELIVERY OR MAILING OF PROCESS BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, AT THE RESPECTIVE ADDRESS SET FORTH IN SECTION 10.5 ABOVE; (iii) IRREVOCABLY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN SUCH COURTS OR TO THE CONVENIENCE OR INCONVENIENCE OF CONDUCTING OR PURSUING ANY ACTION OR PROCEEDING IN ANY SUCH COURT; AND (iv) IRREVOCABLY WAIVES ANY RIGHT TO A TRIAL BY JURY REGARDING THE RESOLUTION OF ANY DISPUTES BETWEEN THE PARTIES HERETO ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT. 10.8 This Agreement shall inure to the benefit of the parties hereto and each of their respective Affiliates, provided that (i) such Affiliates shall comply with the terms of this Agreement, (ii) nothing herein shall relieve any party of any of its obligations under the 13 terms of this Agreement, and (iii) a party shall be responsible for the acts and omissions of its Affiliates as if such acts and omissions had been the acts and omissions of such party. 10.9 This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges all prior discussions between them and neither of the parties shall be bound by any conditions, definitions, warranties, waivers, releases or representations (either expressed or implied) with respect to the subject matter of this Agreement, other than expressly set forth herein (including the exhibits hereto), or as duly set forth on or subsequent to the date hereof in writing signed by a duly authorized representative of the party to be bound thereby. 10.10 This Agreement may be executed in counterparts (including facsimile transmission) each of which shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives as of the Effective Date. TOSHIBA CORPORATION FUTURE MEDIA PRODUCTIONS, INC. /s/ Koji Hase /s/ Louis Weiss - ----------------------------------- ----------------------------------- By (Sign) By (Sign) Koji Hase Louis Weiss - ----------------------------------- ----------------------------------- Name (Print) Name (Print) Vice President Strategic Partnership & Licensing Division Chief Financial Officer - ----------------------------------- ----------------------------------- Title Title January 11, 2000 12/30/99 - ----------------------------------- ----------------------------------- Date Date SCHEDULE A-1 ------------ DVD Products, Corresponding DVD Format Books and License Fees -------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------- DVD Format Books* DVD Product License Fee Check if Category Licensed to Licensee - ------------------------------------------------------------------------------------------------------- DVD-Video Book I US$10,000 10000 ------------------------------------------------------------------ (DVD Specifications for Read- II US$10,000 ------------------------------------------------------------------ Only Disc III US$10,000 Part 3: Video (Version 1.1) - ------------------------------------------------------------------------------------------------------- DVD-ROM Book I US$10,000 ------------------------------------------------------------------ (DVD Specifications for Read- II US$10,000 ------------------------------------------------------------------ Only Disc III US$10,000 10000 Part 1: Physical (Version 1.01) Part 2: File System (Version 1.01) - ------------------------------------------------------------------------------------------------------- DVD-R Book I US$10,000 ------------------------------------------------------------------ (DVD Specifications for II US$10,000 ------------------------------------------------------------------ Recordable Disc III US$10,000 Part 1: Physical (Version 1.0) Part 2: File System (Version 1.0) - ------------------------------------------------------------------------------------------------------- DVD-RAM Book I US$10,000 ------------------------------------------------------------------ (DVD Specifications for II US$10,000 ------------------------------------------------------------------ Rewritable Disc III US$10,000 Part 1: Physical (Version 1.0) Part 2: File System (Version 1.0) - ------------------------------------------------------------------------------------------------------- DVD-Audio Book I US$10,000 ------------------------------------------------------------------ (DVD Specifications for Read-Only II US$10,000 ------------------------------------------------------------------ Disc III US$10,000 Part 4: Audio(Version 1.0)) - ------------------------------------------------------------------------------------------------------- Total Fees** 15000 - -------------------------------------------------------------------------------------------------------
* A new version of a DVD Format Book as represented by the change of the first digit of the version number shall be deemed a separate DVD Format Book, subject to a separate license fee of $1O,000. **US$5,000 may be discounted from the total fees. SCHEDULE A-2 ------------ DVD PRODUCTS: - ------------- DVD Discs shall mean any disc comprised of information encoded in digital form or enabled to write in digital form or case for DVD-RAM disc, and which conforms to the corresponding DVD Format Book(s) licensed to Licensee hereunder. DVD Drive shall mean a device conforming to the corresponding DVD Format Book that is specifically designed and manufactured for the reproduction or recording of information on a DVD Disc and conversion of such information, which is bit-encoded according to the corresponding DVD Format Book, into electrical signals in accordance with the corresponding DVD Format Book(s) licensed to Licensee hereunder, which electrical signals are directly capable and intended to be used for reproduction or recording of video, text, audio and data-related information through data handling or data processing apparatus. DVD Player shall mean a playback device conforming to the corresponding DVD Format Book that is specifically designed and manufactured for the reproduction of information stored on a DVD Disc and conversion of such information, which is bit-encoded according to the corresponding DVD Format Book, into electrical signals in accordance with the corresponding DVD Format Book(s) licensed to Licensee hereunder, which electrical signals are directly capable and intended to be used for visual reproduction through standard television receivers or television monitors and/or audio reproduction. DVD Decoder shall mean a decoder implemented in hardware or software capable of receiving and decoding transmissions from a DVD Drive over a computer system bus and that conforms to the corresponding DVD Format Book(s) licensed to Licensee hereunder. Integrated Products shall mean any product that incorporates or integrates DVD Drive, DVD Player or DVD Decoder. Other DVD Products: any product other than DVD Players, DVD Drives, DVD Discs, DVD Decoders, or Integrated Products, including, but not limited to, authoring tools, integrated circuits and encoders, that use the information included in the corresponding DVD Format Book(s). SCHEDULE A-3 ------------ DVD PRODUCT CATEGORIES ---------------------- Category I Products: DVD Discs. Category II Products: DVD Players, DVD Drives, DVD Decoders and Integrated Products. Category III Products: Other DVD Products. SCHEDULE B-1 ------------ VERIFICATION LABORATORIES ------------------------- Class A Verification Laboratories Tokyo (Hitachi) Laboratory Hitachi, Ltd. DVD Format Verification Laboratory Hitachi AtagoBldg., 15-12, Nishi Shinbashi 2-chome Minato-ku, Tokyo 105- 8430, Japan Tel: +81-3-3506-1616 Fax: +81-3-3506-1603 Tokyo (Pioneer) Laboratory Pioneer Electronic Corporation AV & Recording Development Center 4-2610, Hanazono, Tokorozawa Saitama 359-8522, Japan TEL: +81-42-942-1300 FAX: +81-42-943-0395 Tokyo (Sony) Laboratory Sony Corporation Shinagawa Intercity, Tower C 2-15-3, Konan, Minato-ku Tokyo 108-6201 Japan Fax: +81.3.5769.5890 Tokyo (Toshiba) Laboratory Toshiba Corporation Yanagi-cho 69, Saiwai-ku Kawasaki 210-8501, Japan FAX: +81-3-5444-9430 Osaka (Matsushita) Laboratory Matsushita Electric Industrial Co., Ltd. DVD Verification Laboratory 2-15 Matsuba-cho, Kadoma City Osaka 571-8503, Japan TEL: +81-6-6905-4195 FAX: +81-6-6909-5027 Europe (Philips) Laboratory Royal Philips Electronics Philips System Standards & Licensing Licensing Support P.O. Box 80002 5600 JB Eindhoven The Netherlands Fax: +31-40-2732113 http://www.licensing.philips.com North America (WAMO) Laboratory Warner Advance Media Operations 1400 E. Lackwanna Avenue Olyphant, Pennsylvania 18448 U.S.A. TEL: + 1-570-383-3291 FAX: + 1-570-383-7487 Asia (ITRI) Laboratory Industrial Technology Research Institute DVD Format Verification Laboratory Bldg. 78, 195-8, Section 4, Chung Hsing Road, Chutung, Hsinchu 310, Taiwan, R.O.C. TEL: +886-3-5916786 FAX: +886-3-5917531 Class B Verification Laboratories SCHEDULE B-2 ------------ MAXIMUM VERIFICATION FEES ------------------------- (1) $5,000 for a DVD Disc. (2) $10,000 for a DVD Player or any product that incorporates a DVD Player; (3) $5,000 for a DVD Drive or any product that incorporates a DVD Drive; and (4) $5,000 for a DVD Decoder SCHEDULE B-3 - ------------ 1. At any time after the Effective Date but no later than sixty (60) days after the initial commercial shipment of the First Production Model of Category I Product or Category II Product as defined in the applicable Test Specification attached hereto as Schedule B-6, Licensee or any of its Affiliates shall test First Production Model using the verification tool and following the instructions provided by a Class A Verification Laboratory listed on Schedule B-1, to be selected at the option of the Licensee, and submit the results of such test together with samples of such Model so tested to such Laboratory, and concurrently send a notice of such submission to Licensor; provided, however -------- ------- that if the DVD Drive or DVD Decoder is integrated into another product and the Logo is placed anywhere on such integrated product other than on the DVD Drive or DVD Decoder itself, such integrated product shall be tested. Reasonable numbers of samples to be submitted shall be designated by such Class A Verification Laboratory. 2. Before a DVD Product is submitted to a Class A Verification Licensee and such Laboratory shall enter into a non-disclosure agreement the basic terms and conditions of which are set forth in Schedule D attached hereto covering any confidential information submitted by the Licensee. 3. After the receipt of the result of such test and such sample product, (i) the Class A Verification Laboratory that received a test result and samples of DVD Product shall inform such Licensee of the results of the verification and concurrently send a copy of such correspondence to Licensor, and the Class A Verification Laboratory may keep a reasonable number of samples for Category I Products and Category II Products submitted by such Licensee; (ii) if the result of the verification is that such sample DVD Product does not comply with the applicable DVD Format Book in the sole reasonable judgment of such Class A Verification Laboratory, Licensor shall have the right to request that such Licensee modify the non-compliant product so as to comply, and submit sample(s) of such modified product to such Verification Laboratory within thirty (30) days or a longer period specified by such Verification Laboratory (Number of samples to be submitted shall be designated by such Verification Laboratory). Upon request of Licensor, Licensee shall promptly provide information necessary for Licensor to trace the cause of such non-compliance with the applicable DVD Format Book, including, without limitation, the names of authoring studios which created the master discs for the non-compliant DVD Discs and third-party suppliers of components for the non-compliant DVD Products; and (iii) if, (a) as the result of the second verification, the sample product still fails to comply with the applicable DVD Format Book in the sole reasonable judgment of such Verification Laboratory, or (b) Licensee fails to submit a modified product within such period set forth in the above paragraph 3(i), Licensor, in its sole discretion, shall have the right either to request that such Licensee further modify the product and submit such further modified product to the same Class A Verification Laboratory, or declare and inform Licensee of a final failure of such DVD Product to conform to the applicable DVD Format Book (" Final Failure"). SCHEDULE B-4 - ------------ 1. During the term of this Agreement and no later than sixty (60) days from the initial shipment of the Next Production Model of Category I Product or Category II Product as defined in the applicable Test Specifications (Schedule B-6), Licensee or its Affiliates shall (i) test such Second Production Model at its own quality assurance division using the verification tools and in accordance with procedures set forth in the Test Specifications or (ii) if Licensee or its Affiliates does not have its own quality assurance division, shall submit samples of such Second Production Model to a Class B Verification Laboratory listed on Schedule B-1 for verification. 2. If Licensee verifies its Second Production Model at its own quality assurance division, the following procedures shall apply. (i) If, in its reasonable judgment, the result of the verification at its own quality assurance division is that such Second Production Model does not comply with the applicable DVD Format Book, Licensee shall modify the non-compliant products so as to comply and verify such modified product. (ii) If, in its reasonable judgment, the modified product still fails to comply with the applicable DVD Format Book as the result of the second verification, Licensee shall either further modify the non-compliant modified products or determine not to ship such Second Production Model with the Logos. (iii) Licensee shall keep records of the verification conducted at its own quality assurance division at least for two (2) years after the discontinuation of production of the relevant model. 3. If Licensee submits samples of Second Production Model to a Class B Verification Laboratory, the following procedures shall apply. (i) Before a DVD Product is submitted to a Class B Verification Laboratory, Licensee and such Laboratory shall enter into a non-disclosure agreement the basic terms and conditions of which are set forth in Schedule D attached hereto covering any confidential information submitted by the Licensee. (ii) After the receipt of such sample product, (a) the Class B Verification Laboratory that received a sample DVD Product shall inform such Licensee of the results of the verification, and the Class B Verification Laboratory may keep a reasonable number of samples for Category I Products and Category II Products submitted by such Licensee; (b) if, in the sole reasonable judgment of such Class B Verification Laboratory, the result of the verification is that such sample DVD Product does not comply with the applicable DVD Format Book, such Verification Laboratory shall have the right to request that such Licensee modify the non-compliant product so as to comply, and submit sample(s) of such modified product to such Verification Laboratory within thirty (30) days or a longer period specified by such Verification Laboratory (Number of samples to be submitted shall be designated by such Verification Laboratory). Upon request of Licensor, Licensee shall promptly provide information necessary for Licensor to trace the cause of such non-compliance with the applicable D\DVD Format Book, including, without limitation, the names of authoring studios which created the master discs for the non-compliant DVD Discs and third-party suppliers of components for the non-compliant DVD Products; and (c) if, in the sole reasonable judgment of such Verification Laboratory, the sample product still fails to comply with the applicable DVD Format Book as the result of the second verification, Licensee shall either submit the modified product to the same Class B Verification Laboratory or determine not to ship such Second Production Model with the Logos. SCHEDULE B-5 1. Licensee shall immediately submit one sample of a DVD Product which has been determined to be not in full compliance with the applicable DVD Format Book pursuant to Article 4.4, to a Class A Verification Laboratory listed on Schedule B-1 to be selected at the option of the Licensee and concurrently send a notice of such submission to Licensor. After the receipt of such sample product: (i) The Class A Verification Laboratory that received a sample DVD Product shall inform such Licensee of the results of the verification and concurrently send a copy of such correspondence to Licensor; (ii) if the result of the verification is that in the sole reasonable judgment of such Class A Verification Laboratory such sample product does not comply with the applicable DVD Format Book, Licensor shall have the right to request that such Licensee modify the non-compliant product so as to comply, and submit one sample of such modified product to such Verification Laboratory within thirty (30) days or a longer period specified by such Verification Laboratory. Upon request of Licensor, Licensee shall promptly provide information necessary for Licensor to trace the cause of such non-compliance with the applicable DVD Format Book, including, without limitation, the names of authoring studios which created the master discs for the non-compliant DVD Discs and third-party suppliers of components for the non-compliant DVD Products; and (iii) if, (a) as the result of the second verification in the sole reasonable judgment of such Verification Laboratory the sample product still fails to comply with the applicable DVD Format Book, or (b) Licensee fails to submit a modified product within such period set forth in above paragraph, Licensor, in its sole discretion, shall have the right either to request that Licensee further modify the product and submit such further modified product to the same Verification Laboratory, or declare and inform Licensee of a final failure of such DVD Product to conform to the applicable DVD Format Book ("Final Failure II"). (iv) Licensee shall pay to the Verification Laboratory to which Licensee submitted the DVD Products a verification fee as charged by the Verification Laboratory, promptly upon receipt of an invoice from the Verification Laboratory, provided that Licensee shall not be required to pay the verification fee to the Verification Laboratory for a DVD Product which has been verified as compliant with the applicable DVD Format Book pursuant to the procedures under this Schedule B-5. Table of Test Specification, Corresponding DVD Specifications and Product - ------------------------------------------------------------------------- Category - --------
- ------------------------------------------------------------------------------------------------------------ DVD Format Books DVD Applicable Test Specifications Product Category - ------------------------------------------------------------------------------------------------------------ DVD-Video Book I DVD-Video Disc Test Specification ---------------------------------------------------------------------------------- II DVD Video Player Test Specification PC DVD Player & Component Test Specification DVD Audio Player Test Specification ---------------------------------------------------------------------------------- III - ------------------------------------------------------------------------------------------------------------ DVD-ROM Book I DVD-Video/Audio Disc Test Specification ---------------------------------------------------------------------------------- II DVD Video Player Test Specification PC DVD Player & Component Test Specification DVD Audio Player Test Specification ---------------------------------------------------------------------------------- III - ------------------------------------------------------------------------------------------------------------ DVD-R Book I DVD-R Disc, 3.9GB Test Specification ---------------------------------------------------------------------------------- II DVD-R Drivel 3.9GB Test Specification ---------------------------------------------------------------------------------- III - ------------------------------------------------------------------------------------------------------------ DVD-RAM Book I DVD-RAM Disc/ 2.6GB Test Specification ---------------------------------------------------------------------------------- II DVD-RAM Drive/2.6GB Test Specification DVD Video Recording Test Specification ---------------------------------------------------------------------------------- III - ------------------------------------------------------------------------------------------------------------ DVD-Audio Book I DVD-Audio Disc Test Specification ---------------------------------------------------------------------------------- II DVD Audio Player Test Specification ---------------------------------------------------------------------------------- III - ------------------------------------------------------------------------------------------------------------
SCHEDULE C - ---------- List of Licensee's Affiliates ----------------------------- SCHEDULE D Basic terms and conditions of the Non-Disclosure Agreement between Licensee and verification laboratory ------------------------------------ 1. Licensee and laboratory shall comply with the confidentiality obligations for the following information: (1) Laboratory: a. Sample(s) of DVD products including technical information relating to such sample(s) received from Licensee. b. The result of verification performed by Licensee. (2) Licensee: a. The verification tool, including technical information relating to such verification tool, provided by the laboratory. b. The result of verification performed by laboratory. 2. The period of confidentiality obligations shall be at least three (3) years after receipt of the other party's confidential information. 3. Licensee shall agree that the laboratory may disclose the result of the verification performed by the laboratory to Licensor and other laboratories specified in Schedule B-1, provided that Licensee's name and model numbers of Licensee's sample products may not be disclosed to such other laboratories, and provided further that Licensor and such other laboratories shall treat the verification result confidential. 4. Licensee and Laboratory may use the other party's confidential information only for the purpose of verifying Licensee's DVD products' conformance with the applicable DVD Format Book. 5. The Non-Disclosure Agreement shall be effective as long as Licensee manufactures DVD products, provided, however, that the confidential obligation shall survive such termination or expiration of the Non-Disclosure Agreement. 6. Licensee and Laboratory shall comply with all applicable rules and regulations of the United States, Japan and other countries and jurisdiction relating to the export or re-export of confidential information. EX-10.21 23 DVD VIDEO DISC AND DVD ROM DISC PARENT LICENSE AGREEMENT EXHIBIT 10.21 DVD VIDEO DISC AND DVD ROM DISC PATENT LICENSE AGREEMENT -------------------------------------------------------- This Agreement having an effective date of October 1, 1999 by and between U.S. PHILIPS CORPORATION, having its principal office at 580 White Plains Road, Tarrytown, New York 10591, (hereinafter referred to as "USPC"). and Future Media Productions, Inc., having its principal office at 25136 Anza Drive, Valencia, California 91355 (hereinafter referred to as "Licensee") WHEREAS, a new video and sound storage and reproduction system has been defined by Koninkliike Philips Electronics N.V., (hereinafter referred to as "Philips"), Sony Corporation of Japan ("Sony"), Pioneer Electronic Corporation of Japan ("Pioneer"), Hitachi Ltd. of Japan, Matsushita Electric Industrial Co. Ltd. of Japan, Mitsubishi Electric Corporation of Japan, Thomson Multimedia of France, Time Warner Entertainment Company L.P., of the USA, Toshiba Corporation of Japan, and Victor Company of Japan Ltd., of Japan, which system has been presented under the name "Digital Versatile Disc-Video System" ("DVD-Video System"), as well as a data storage and reproduction systems, which has been presented under the name "Digital Versatile Disc ROM-System" ("DVD-ROM System"), hereinafter collectively referred to as the "DVD Systems"; WHEREAS, the DVD Systems result from research and development efforts of each of the companies mentioned above; WHEREAS, the DVD Systems have been formally adopted by the entity known as "the DVD Forum"; WHEREAS, Philips, Sony and Pioneer each own certain patent rights relating to the DVD) Systems; WHEREAS, USPC has been authorized by Philips, Sony and Pioneer to grant licenses for the DVD Systems under certain patent rights relating to the DVD Systems, which are owned or controlled by Philips, Sony and its Associated Companies and by Pioneer and its Associated Companies respectively, as well as such patent rights relating to the DVD) Systems which are jointly owned by Pioneer, Sony and/or Philips, while Philips, Sony and Pioneer retain the right also to license their patent rights relating to the DVD Systems; WHEREAS, Licensee desires the right to manufacture and sell discs based on one or more DVD Systems, and wishes such discs to be in conformity with the relevant Standard Specifications defining the DVD Systems; NOW, THEREFORE, in consideration of the mutual obligations and covenants hereinafter set forth, the parties hereto have agreed as follows: 2 Article 1 - Definitions ----------------------- The following terms used in this Agreement shall have the meanings set out below: 1.01 "Disc": a non-recordable reflective disc-shaped information carrier comprising any kind of information such as, but not limited to, audio, -video-, text- and/or data-related information, which is irreversibly stored in one or more information layers during and as an integral part of the manufacturing process of the disc in a form which is optically readable by play-back devices. 1.02 "DVD-Video Disc/DVD-ROM Disc": a replicated Disc comprising any kind of information such as, but not limited to, audio-, video, text-, and/or data-related information, encoded in digital form, which is optically readable by a DVD-Video Player or a DVD-ROM Player (as hereinafter defined) and conforms to the DVD-Video and DVD-ROM Standard Specifications (as hereinafter defined), the DVD-Video Disc and DVD-ROM Disc together being referred to as "DVD-Disc". 1.03 "DVD-Video and DVD-ROM Standard Specifications": the specifications for the DVD) Systems, as have been defined in the Standard Specifications for DVD and as specified in the document "DVD) Specification for Read-Only Disc, version 1.0" of August 1996, or any updated version thereof which has been formally approved by the DVD) Forum. 1.04 "Player": a play-back device for optically reading information stored on a Disc and converting such information into electrical signals for reproduction purposes. 1 .05 "DVD-Video Player/DVD-ROM Player": a Player which is designed and manufactured specifically for the reproduction of information stored on a DVD-Disc and the conversion of such information, which is bit- encoded according to the DVD-Video and DVD-ROM Standard Specifications, into electrical signals by means prescribed in the DVD-Video and DVD-ROM Standard Specifications, which electrical signals are directly capable and intended to be used for visual reproduction through standard television receivers and/or television monitors, or for reproduction of video, text and data related information through data handling and/or data processing equipment, the DVD-Video Player and DVD-ROM Player together referred to as "DVD- Player". Such DVD-Player may, in addition to reproducing information on a DVD-Disc, also be capable of reproducing information stored on a CD-Audio Disc and/or a CD-ROM Disc. 1.06 "Licensed Product(s)": a DVD-Video Disc or DVD-ROM Disc, having either a single or dual information layer(s) (which is/are readable from one side of the disc) or two single or dual information layers (which are readable from opposite sides of the disc). 1.07 "Licensed Patents": all patent rights (or any one or more of the patent rights as agreed in writing between USPC and Licensee on the Effective Date) relating to DVD-Discs for which USPC has the right to grant licenses to Licensee and its Associated Companies and which have a first filing date or are entitled to a first filing date prior to January 1, 1997 (but only to 3 the extent that these patent rights are essential (as hereinafter defined) to Licensed Products), as listed in Exhibit I. The word "essential" as used in relation to patent rights in this Agreement shall refer to patent rights, the use of which is necessary (as a practical matter) for compliance with the Standard Specifications defining the relevant DVD Systems. Licensed Patents shall not include any patent rights relating to methods or the manufacture, use or sale of equipment for compression and/or decompression of audio signals concluding but not limited to the system known as MPEG-2 Audio) or for the compression or decompression of video signals in accordance with the system known under the name MPEG-2 Video. 1.08 "Associated Company": any business entity, in which Philips, Sony, Pioneer or Licensee controls, directly or indirectly, more than fifty percent (50%) of the shares entitled to vote for the election of directors, but any such business entity shall be deemed an Associated Company only for as long as such control exists. For the purpose of this Agreement, Discovision Associates shall not be deemed an Associated Company of Pioneer. 1.09 "Territory": the geographic area known as the United States of America, its territories and possessions. Article 2 - Grant of rights --------------------------- Subject to the terms and conditions of this Agreement 2.01 For the term of this Agreement, USPC hereby grants to Licensee and its Associated Companies a non-exclusive, non-transferable license under the Licensed Patents to manufacture Licensed Products within the Territory and to use, sell or otherwise dispose of Licensed Products so manufactured in all countries of the world. 2.02 USPC, on behalf of Philips, Sony and Pioneer, further agrees, for as long as this Agreement is in force and effect, to grant Licensee and its Associated Companies a non-exclusive, non-transferable license, either by means of a sub-license arrangement or by means of individual licenses from Philips, Sony and Pioneer respectively, on reasonable, non-discriminatory terms, to manufacture Licensed Products within the Territory and to use, sell or otherwise dispose of Licensed Products so manufactured in all countries of the world, under any patent rights not yet licensed pursuant to Article 2.01 which are essential to the manufacture, use, sale or other disposal of Licensed Products, for which Philips, Sony and Pioneer and their respective Associated Companies have or may hereafter acquire the free right to grant licenses to Licensee and its Associated Companies. It is acknowledged and agreed that in respect of the patent rights as may be licensed pursuant to this Article 2.02 additional 4 royalties may have to be paid over and above the royalties specified in Article 4.02 due on the basis of the use of Licensed Patents pursuant to Article 2.01. 2.03 USPC, on behalf of Philips, Sony and Pioneer, further agrees to grant Licensee and its Associated Companies upon their request, on reasonable non-discriminatory rates and conditions to be agreed upon from case to case, a non-exclusive, non-transferable license, either in a sub-license arrangement or by way of individual licenses from Philips, Sony and Pioneer respectively, to manufacture DVD-Players in the Territory and to use, sell or otherwise dispose of such DVD- Players so manufactured in all countries of the world, under any and all present and future patent rights essential to the manufacture, use, sale or other disposal of DVD-Players for which Philips, Sony and Pioneer and their respective Associated Companies have or may hereafter acquire the free right to grant licenses to Licensee and its Associated Companies for the manufacture, use, sale or other disposal of such DVD-Players. 2.04 In consideration of the undertakings set forth in Articles 2.01, 2.02 and 2.03 and similar undertakings by third party licensees of USPC or Philips and without prejudice to the provisions of Article 10 hereof, for a period of ten years from the Effective Date (as hereinafter defined) Licensee agrees to grant Philips, Sony and Pioneer and their respective Associated Companies and to other third parties who enter or have entered into a license agreement with USPC, Philips or an Associated Company of Philips concerning Licensed Products non-exclusive, non-transferable licenses, on reasonable, non- discriminatory conditions comparable to those set forth herein, to manufacture, use, sell or otherwise dispose of Licensed Products, under any and all present and future patent rights, for which Licensee or its Associated Companies may now have or may hereafter acquire the right to grant licenses and which are essential to the manufacture, use, sale or other disposal of Licensed Products, and which patent rights were first filed in any country of the world up to the date of termination of this Agreement. For the avoidance of doubt, the above undertakings shall only apply to those companies which accept or have accepted a similar undertaking as contained in this Article 2.04. 2.05 In addition, in consideration of the undertakings set forth in Articles 2.01, 2.02 and 2.03 and similar undertakings by third party licensees of USPC or Philips and without prejudice to the provisions of Article 10 hereof, for a period of ten years from the Effective Date, Licensee agrees to grant Philips, Sony and Pioneer and their respective Associated Companies and to other third parties who enter or have entered into a license agreement with USPC, Philips or an Associated Company of Philips concerning DVD-Players non-exclusive, non-transferable licenses, on reasonable, non-discriminatory conditions to be agreed upon from case to case, to manufacture, use, sell or otherwise dispose of DVD-Players under any or all present and future patent rights, for which Licensee or its Associated Companies may now have or may hereafter acquire the right to grant licenses and which are essential to the manufacture, use sale or other disposal of such DVD-Players and which patent rights were first filed in any country of the world up to the date of termination of this Agreement. For the avoidance of doubt, the undertaking set out in the preceding sentence shall only apply to those companies which accept or have accepted a similar undertaking as contained in this Article 2.05. 5 IT IS EXPRESSLY ACKNOWLEDGED AND AGREED THAT: (I) THE LICENSES AND LICENSE UNDERTAKINGS HEREIN CONTAINED WITH RESPECT TO THE MANUFACTURE OF LICENSED PRODUCTS DO NOT COVER RECORDING MACHINES, EQUIPMENT OR METHODS FOR THE REPLICATION OF DISCS NOR THE MANUFACTURE OF MATERIALS OR REPRODUCTION RIGHTS FOR INFORMATION (SUCH AS AUDIO, VIDEO, TEXT AND/OR DATA-RELATED INFORMATION), CONTAINED ON DISCS TO BE PLAYED BACK ON A PLAYER; NOR DO THE LICENSE UNDERTAKINGS WITH RESPECT TO THE MANUFACTURE OF PLAYERS EXTEND TO THE MANUFACTURE OF COMPONENTS OF PLAYERS INCLUDING BUT NOT LIMITED TO SEMICONDUCTOR DEVICES, INTEGRATED CIRCUITS, LASERS, MOTORS AND LENSES, EXCEPT FOR PATENT RIGHTS RELATING TO CIRCUITRY AND/OR SYSTEM ASPECTS SPECIFIC TO THE DVD SYSTEMS (AND SIMILAR OPTICAL READ-OUT SYSTEMS), (II) THE RIGHTS AND LICENSES GRANTED UNDER THIS AGREEMENT APPLY ONLY TO SUCH PART OF A COMBINATION OF ONE OR MORE LICENSED PRODUCTS OR DVD PLAYERS WITH ANY OTHER ELEMENTS, PRODUCTS, SYSTEMS, EQUIPMENT OR SOFTWARE WHICH IS IN COMPLIANCE WITH THE DVD-VIDEO AND DVD-ROM STANDARD SPECIFICATIONS. 2.07 It is acknowledged and agreed that Exhibit I may be amended from time to time, based upon an evaluation of the Licensed Patents by an independent patent expert appointed by Philips. In the event that, as a result of such evaluation, any of the Licensed Patent(s) are found not to be essential (as defined in Article 1.07) such Licensed Patent(s) shall be deleted from Exhibit I and Licensee shall be so notified. Notwithstanding such deletion, Licensee shall retain the right to continue the use of such deleted patent right(s) in accordance with this Agreement, without any additional payment, unless Licensee explicitly notifies USPC in writing of its decision to refrain from exercising such right. Article 3 -- Have made ---------------------- 3.01 The licenses and rights granted to Licensee and its Associated Companies pursuant to Article 2 include the right for Licensee and its Associated Companies to have third parties manufacture Licensed Products for Licensee's or its Associated Companies' use and account in accordance with the provisions hereof. Article 4 - Royalties, Reports and Payments ------------------------------------------- 4.01 Upon execution of this Agreement, Licensee will make a non-refundable payment of ten thousand US Dollars (US$ 10,000) to USPC. From this amount of US$ 10,000, an amount of 6 five thousand US Dollars (US$ 5,000) shall be regarded as an advance payment against royalties payable pursuant to Article 4.02. 4.02 In consideration of the rights granted hereunder by USPC to Licensee, Licensee agrees to pay to USPC royalties on each Licensed Product sold by Licensee or any of its Associated Companies, in which any one or more Licensed Patents is (are) used, irrespective of whether such Licensed Patent(s) is (are) used in the country of manufacture, use, sale or other disposal. These royalties shall amount to five US Dollar Cents (US$ 0.05) on each Licensed Product. A Licensed Product shall be considered sold when invoiced or, if not invoiced, when delivered by any party or otherwise disposed of to a party other than Licensee or an Associated Company of Licensee. No royalties shall be payable on Licensed Products purchased by Licensee or any of its Associated Companies on a "have made" basis in accordance with Article 3 from third party manufacturers, duly licensed by USPC or Philips, provided that Licensee can demonstrate to USPC's satisfaction, that such party manufacturer has paid to USPC or Philips the royalties due in respect of such Licensed Products. For the avoidance of doubt, in the event that none of the Licensed Patents would be infringed by the manufacture of Licensed Products within the Territory, Licensee shall have no obligation to pay royalties in respect of Licensed Products manufactured within the Territory and which are directly exported for final use to a country in which no Licensed Patents subsist. 4.03 Within thirty (30) days following 31 March, 30 June, 30 September and 31 December of each year during the term of this Agreement, Licensee shall submit to USPC (even in the event that no sales have been made) a written statement, signed by a duly authorized officer on behalf of Licensee, setting forth with respect to the preceding quarterly period: (1) the quantities of Licensed Products manufactured and sold by Licensee and its Associated Companies specified per individual type of Licensed Product, to wit: - DVD-Video Discs; - DVD-ROM Discs; (2) on a per country basis specified for each individual type of Licensed Product: (a) the trademarks used on or in connection with the sale of Licensed Products; and (b) the quantities of Licensed Products sold or otherwise disposed of; (3) a computation of the royalties due under this Agreement. 7 Licensee shall submit to USPC, once per calendar year, a written statement by its external auditors, who shall be independent certified accountants, confirming that the quarterly royalty statements as submitted by Licensee to USPC for the last four quarterly periods, were true, complete and accurate in every respect. Licensee shall pay the royalties due to USPC concurrently with the submission of the aforementioned written statement. 4.04 Within 30 days following the expiration or termination of this Agreement, Licensee shall submit to USPC a certified report on the number of Licensed Products in stock at the time of expiration or termination of this Agreement. Royalties shall be due and payable on all Licensed Products manufactured prior to, but remaining in stock with Licensee and/or its Associated Companies at the date of expiration or termination of this Agreement. For the purpose of royalty computation, all Licensed Products in stock will be deemed to have been sold or otherwise disposed of in the same countries and in proportionally the same quantities as in the last two full reporting quarters during the term of this Agreement. For the avoidance of doubt, this Article 4.04 shall be without prejudice to the provisions of Article 10.05. 4.05 All payments which are not made on the dates specified herein, shall accrue interest at the rate of two percent (2%) per month or the maximum amount permitted by law, whichever is lower. 4.06 All payments to USPC under this Agreement shall be made by transfer in such currency, convertible in the sense of Articles VIII and XIX of the Articles of Agreement of the International Monetary Fund, as designated by USPC. The rate of exchange for converting the currency of the Territory shall be the telegraphic transfer selling rate of the designated currency (or other convertible currency as the case may be) in terms of the currency officially quoted in the Territory by the officially authorized foreign exchange bank for payment of currency transactions on the day that the amount is due and payable. 4.07 All costs, stamp duties, taxes and other similar levies arising from or in connection with the conclusion of this Agreement shall be borne by Licensee. However, in the event that the government of a country imposes any income taxes on payments made by Licensee to USPC hereunder and requires Licensee to withhold such tax from such payments, Licensee may deduct such tax from such payments. In such event, Licensee shall promptly provide USPC with tax receipts issued by the relevant tax authorities so as to enable USPC to support a claim for credit against income taxes which may be payable by USPC. 4.08 In order that the royalty statements provided for in this Article 4 may be verified, Licensee shall maintain complete and accurate books and records covering all sales or other disposals of Licensed Products by Licensee and/or its Associated Companies, for a period of three (3) years following such sales or other disposals. In order to verify the accuracy of the aforementioned royalty statements USPC shall have the right to inspect such books and records of Licensee and/or its Associated Companies from time to time, but not more than once per calendar year, by an independent certified 8 accountant appointed by USPC. Such inspection shall be conducted at USPC's own expense provided that if any discrepancy or error exceeding three percent (3%) of the monies actually due is established, the cost of such inspection shall be borne by Licensee, without prejudice to any other claims that USPC may have under this Agreement or under applicable law. 4.09 Without prejudice to the provisions of Article 4.08, Licensee shall provide relevant additional information as USPC may reasonably request from time to time to enable USPC to ascertain which products manufactured, sold or otherwise disposed of by Licensee and/or its Associated Companies are subject to the payment of royalties to USPC hereunder, the patent rights which have been used in connection with such products, and the amount of royalties payable. 4.10 Within thirty (30) days after execution of this Agreement, Licensee shall pay to USPC a royalty, calculated according to the provisions of Article 4.02, on products which would have been Licensed Products under this Agreement and were manufactured, used, sold or otherwise disposed of by Licensee and/or its Associated Companies before the Effective Date of this Agreement and shall submit to USPC concurrently with this royalty, as calculated herein, a royalty statement in respect of such products, in accordance with Article 4.03. Upon the payment of this royalty, as calculated herein, such products shall become Licensed Products. Article 5 - Most Favourable Conditions -------------------------------------- 5.01 In the event that licenses under the patent rights referred to in Article 2 would be granted by USPC for Licensed Products to a third party, under substantially similar conditions but at a royalty rate more favourable than the rate payable by Licensee under this Agreement, Licensee shall be entitled to the same royalty rate applicable to such third party, provided always that this right of Licensee shall not apply in respect of cross- license agreements or other agreements providing for a consideration which is not exclusively based on payment of royalties and further provided that this right of Licensee shall not apply in respect of licenses or other arrangements made pursuant to a court decision or the settlement of a dispute between USPC and a third party, irrespective of the nature of such dispute, the terms of the court decision or the settlement terms. Article 6 -- No Warranty and Indemnification -------------------------------------------- 6.01 USPC makes no representation or warranty as to the completeness or accuracy of any information as may be provided in connection with this Agreement, nor with respect to the ability of Licensee to achieve interchangeability with respect to Licensed Products through the use of such information. USPC makes no warranty whatsoever that the use of information supplied by USPC or Philips does not infringe or may not cause infringement of any industrial or intellectual property rights owned or controlled by third parties, or any industrial or intellectual property rights owned or controlled by USPC, Philips, Sony and Pioneer or their respective Associated Companies not licensed pursuant to Article 2. 9 It is acknowledged by the parties hereto that third parties may own industrial and/or intellectual property rights in the field of Licensed Products and Licensee acknowledges and agrees that USPC, Philips, Sony and Pioneer and their respective Associated Companies make no warranty whatsoever that manufacture, use, sale or other disposal of any Licensed Product will be free from infringement of any industrial and/or intellectual property rights other than the Licensed Patents. USPC, Philips, Sony and Pioneer and their respective Associated Companies shall be fully indemnified and held harmless by Licensee from and against any and all third party claims in connection with Licensed Products manufactured, sold or otherwise disposed of by Licensee and/or any of its Associated Companies. Article 7 - Confidentiality --------------------------- 7.01 Licensee and its Associated Companies shall, during the term of this Agreement as specified in Article 10.01 and for a period of three (3) years thereafter, not disclose to any third party any information relating to the manufacture and sale of Licensed Products acquired from USPC, Philips or Philips' Associated Companies, or use such information for any other purpose than the manufacture or disposal of Licensed Products in accordance with this Agreement. This obligation shall not apply to the extent information so acquired: (a) was known to Licensee or its Associated Companies prior to the date on which such information was acquired from USPC, Philips, Sony or Pioneer or any of their Associated Companies, as shown by records of Licensee or any Associated Company of Licensee or otherwise demonstrated to USPC's satisfaction; (b) is or has become available to the public through no fault of Licensee or any of its Associated Companies; (c) was or is received from a third party who was under no confidentiality obligation in respect of such information.. In protecting information acquired from USPC, Philips or Philips' Associated Companies relating to the manufacture of Licensed Products, Licensee and its Associated Companies shall take all necessary measures and precautions, including, but not limited to, measures requiring their present and future employees to give suitable undertakings of secrecy both for the period of their employment and thereafter, and shall protect such information in the same manner and with the same degree of care with which Licensee protects its own information of a confidential nature. Article 8 - Patent Markings --------------------------- 8.01 If requested by USPC, Licensee shall place appropriate patent markings on an exposed surface of the Licensed Products made, used, sold or otherwise disposed of hereunder. The content, form, location and language used in such markings shall be in accordance with the laws and practices of the country where such markings are used. 10 Article 9 - Assignment ---------------------- 9.01 This Agreement shall inure to the benefit of and be binding upon each of the parties hereto and their respective assignees. It may not be assigned in whole or in part by Licensee without the prior consent in writing of USPC except in the event of a bona fide and solvent merger, consolidation or other transfer of all or substantially all the assets of Licensee and except that Licensee may freely assign this Agreement to any of its Associated Companies provided that Licensee shall remain liable hereunder and the transferee has the capability to perform all obligations on Licensee's part hereunder. Article 10 - Term and Termination --------------------------------- 10.01 This Agreement shall enter into force on the "Effective Date", being the date first written above, or, in the case validation of this Agreement is required by the competent governmental authorities, the date of such validation. This Agreement shall remain in force for a period of ten (10) years from the Effective Date, unless terminated earlier in accordance with the provisions of this Article 10. 10.02 Without prejudice to the provisions of Article 10.03 through 10.05, each party may terminate this Agreement at any time by means of written notice to the other party in the event that the other party fails to comply with any material obligation under this Agreement and, such failure is not remedied within thirty (30) days after receipt of a notice specifying the nature of such failure and requiring it to be remedied. Such right of termination shall not be exclusive of any other remedies or means of redress to which the non-defaulting party may be lawfully entitled and all such remedies shall be cumulative. Any such termination shall not affect any royalties or other payment obligations under this Agreement accrued prior to such termination. 10.03 USPC may terminate this Agreement forthwith by means of notice in writing to Licensee in the event that a creditor or other claimant takes possession of, or a receiver, administrator or similar officer is appointed over any of the assets of Licensee or in the event that Licensee makes any voluntary arrangement with its creditors or becomes subject to any court or administration order pursuant to any bankruptcy or insolvency law. 10.04 USPC shall have the right to terminate this Agreement forthwith or to revoke the license granted under any of USPC's, Philips', Sony's or Pioneer's respective patent rights in the event that Licensee or any of its Associated Companies brings a lawsuit or other proceeding for infringement of any of its essential patents related to Licensed Products or DVD Players against Philips, Sony or Pioneer and/or any of their respective Associated Companies respectively and Licensee refuses to license such patents on fair and reasonable terms to Philips, Sony and Pioneer respectively. 10.05 Upon the termination by USPC for any reason pursuant to Article 10.02 through 10.04, Licensee shall immediately cease the manufacture, sale or other means of disposal of 11 Licensed Products in which the Licensed Patents are used. Further, upon such termination, any and all amounts outstanding hereunder shall become immediately due and payable Article 11 - Miscellaneous -------------------------- 11.01 Any notice or request required or permitted to be given under or in connection with this Agreement or the subject matter hereof shall be in writing and shall be deemed to have been sufficiently given when, if given to Licensee. it is addressed to: Future Media Productions, Inc. 25136 Anza Drive Valencia, California 91355 and in respect to USPC, to: U.S. Philips Corporation 580 White Plains Road Tarrytown, New York 10591 Fax. No.: 914-332-0615 and sent in each case by telecopy and Registered Mail, postage prepaid. The date of mailing shall be deemed to be the date on which such notice of request has been given. Either party may give written notice of change of address and, after notice of such change has been received, any notice or request required to be given shall thereafter be given to such party at such changed address in the manner as provided above. 11.02 This Agreement sets forth the entire understanding and agreement between the parties as to the subject matter hereof and supersedes and replaces all prior arrangements, discussions and understandings between the parties specifically relating thereto. Neither party shall be bound by any obligation, warranty, waiver, release or representation, except as expressly provided herein, or as may subsequently be agreed in writing between the parties. 11.03 Nothing contained in this Agreement shall be construed (a) as imposing on either party any obligation to instigate any suit or action for infringement of any of the patent rights licensed hereunder or to defend any suit or action brought by a third party which challenges or relates to the validity of any of such patent rights. Licensee shall have no right to instigate any such suit or action for infringement of any of the patent rights licensed by USPC hereunder, nor the right to defend any such suit or action which challenges or relates to the validity of any such patent right licensed by USPC hereunder; 12 (b) as imposing any obligation to file any patent application or to secure any patent or to maintain any patent in force; (c) as conferring any license or right to copy or imitate the appearance and/or design of any product, (d) as conferring any license under the patent rights licensed pursuant to Article 2 hereof, to manufacture, use, sell or otherwise dispose of any product or device other than a Licensed Product. This sub clause (d) of this Article 11.03 shall however not be considered a prohibition of Licensee to manufacture Licensed Products as part of and incorporated in combination products. 11.04 Neither the failure nor delay of either party to enforce any provisions of this Agreement shall constitute a waiver of such provision or of the right of either party to enforce each and every provision of this Agreement. 11.05 Should any provision of this Agreement be finally determined void or unenforceable in any judicial proceeding, such determination shall not affect the operation of the remaining provisions hereof. 11.06 This Agreement and all disputes, claims or controversies arising out of, or in any way relating to, this Agreement ("Dispute") shall be governed by and construed, and any claim or controversy arising with respect thereto shall be determined, in accordance with the laws and in the competent courts of the State of New York. The parties hereto consent to the personal jurisdiction of the competent courts of the State of New York for the purpose of prosecuting or resolving any such Dispute. AS WITNESS, the parties hereto have caused this Agreement to be signed on the date first written above. U.S. PHILIPS CORPORATION FUTURE MEDIA PRODUCTIONS, INC. /s/ Algy Tamoshunas /s/ Louis Weiss - ---------------------------------- --------------------------------------- Algy Tamoshunas Name: Louis Weiss Title: Vice President Title: CFO --------------------------- --------------------------------- Date: 2/8/00 Date: 1/21/00 --------------------------- ---------------------------------- DVD - Video/ROM Disc Patent List Philips
================================================================================================================================= Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date ================================================================================================================================= N 6493 NL 72.11999/ - Read out of optical disc via substrate. PS 5,068,846/ - 02.09.1972 26.11.2008 - --------------------------------------------------------------------------------------------------------------------------------- N 14.746 EP 94.200.387.2/ EFM + -Modulation scheme for high density PS 5,696,505/ PPU 97-512,392/ 15.02.1994 disc. 08.02.2015 01.02.2015 A 08-900,275 - --------------------------------------------------------------------------------------------------------------------------------- N 15.093 BE 094.01044/ Disc size on disc. A 08-558,517/ PPU 97-507,946/ 18.11.1994 31.10.2015 - --------------------------------------------------------------------------------------------------------------------------------- N 14.752 EP 94.200.339.3/ SD Block format, with error coding PS 5,838,696/ PPU 96-509,316/ interleave. 16.02.1994 16.02.2015 14.02.2015 A 09-136,650 - --------------------------------------------------------------------------------------------------------------------------------- N 13.409 NL 90.01771/ DVD Sector and word offset in headers PS 5,740,310/ PPU 92-233,380/ 06.08.1990 for video block pointers. 04.06.2011 PS 5,745,641/ - --------------------------------------------------------------------------------------------------------------------------------- N 15.156 EP 94.203.642.7/ DVD/DVB Subtitle compression (pixel based A 08-572,255/ PPU 97-509,552/ region/subregion). 13.12.2015 12.12.2015 14.12.1994 =================================================================================================================================
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this is considered to be concluded as an integral part of this list. DVD - Video/ROM Disc Patent List Philips
================================================================================================================================= Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date ================================================================================================================================= N 15.395 EP 95.202.012.1/ DVD Subtitle duration A 08-516,836/ A 97-506,485/ 21.07.1995 18.08.2015 12.07.2016 - --------------------------------------------------------------------------------------------------------------------------------- N 15.424 EP 95.202.215.0/ DVD path control system. A 08-692,918/ PCT-JP 96/02, 188/ 16.08.1995 31.07.2016 02.08.2016 - --------------------------------------------------------------------------------------------------------------------------------- B 33.971 } GB 95.02172.1/ DVD Subtitle compression (run-length A 08-593,963/ PPU 98-500,273/ } 03.02.1995 coding). 26.01.2016 B 33.973 } GB 95.03063/ 16.02.1995 - --------------------------------------------------------------------------------------------------------------------------------- N 15.110 EP 94.203.466.1/ Variable bitrate Optical Recording System. A 08-562,660/ PPU 97-509,004/ 29.11.1994 27.11.2015 16.11.2015 A 08-858,482/ - --------------------------------------------------------------------------------------------------------------------------------- Q88.053 US A 07.157832/ Method of affixing information on read PS 4,961,077/ PS 2,810,950/ 19.02.1988 only optical discs. 19.02.2008 20.02.2009 - ---------------------------------------------------------------------------------------------------------------------------------
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this is considered to be concluded as an integral part of this list. DVD - Video/ROM Disc Patent List Philips
================================================================================================================== Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date ================================================================================================================== N 14.950 EP 94.202262.5/ Mastering write strategy. PS 5,605,782/ PPU 95-320,208/ 05.08.1994 22.12.2014 22.12.2014 PS 5,790,512/ 22.12.2014 ================================================================================================================== N 14.789 EP 94.200.922.6/ A Rate 8/9 DC-FREE Code PS 5,642,113/ PPU 96-511,405/ 05.04.1994 15.02.2015 21.03.2015 ==================================================================================================================
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this list considered to be concluded as an integral part of this list. DVD - Video/ROM Disc Patent List Sony
======================================================================================================================= Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date ======================================================================================================================= #01 S55-050,887 ECC for the sector ID PS 4,364,081/ S55-056,882 16.04.2001 - ----------------------------------------------------------------------------------------------------------------------- #02 S56-017,734 DSV control word PS 4,456,905/ PS 1,547,082/ 08.02.2002 09.02.2001 - ----------------------------------------------------------------------------------------------------------------------- #03 H06-157,175 8/16 Modulation PS 5,818,367/ LN1108-03l,100 06.10.2015 - ----------------------------------------------------------------------------------------------------------------------- #04 H06-116,213 Branching Operation Re. 33,765/ PS 2,544,333/ 01.05.2006 29.05.2005 - -------------------------------------------------------------------------------------------------------------------------- #05 S61-093,892 Flag for variable bit-rate ID) PS 4,819,236/ PS 2,740,163/ H08-008,149 04.04.2009 23.04.2006 PS 2,728,076 23.04.2006 ----------------------------------------------------------------------------------------------------------------------
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this list considered to be concluded as an integral part of this list. 2 DVD - Video/ROM Disc Patent List Sony
==================================================================================================================================== Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ: PPU/Exp. date ==================================================================================================================================== #06 S63-025,475 AV sync. code PS 2,636,294/ H07-037,627 14.08.2009 LN1107-21l,007 - ------------------------------------------------------------------------------------------------------------------------------------ #07 H04-249,791 24 Hz encoding for 2/3 pull down video signals PS 5,461,420/ LN1107-099,603 H04-249,792 17.09.2013 H05-166,746 H05-233,894 - ------------------------------------------------------------------------------------------------------------------------------------ #08 H04-277,956 Data search information entry point PS 5,455,684/ PS 2,785,220/ H04-350,577 22.09.2013 04.12.2012 H04-355,558 PS 5,568,274/ LN1106-144,522 22.10.2013 - ------------------------------------------------------------------------------------------------------------------------------------ #09 S57-029,472 Transform coding and band dividing PS 1,756,619/ 25.02.2002 - ------------------------------------------------------------------------------------------------------------------------------------ #10 H01-186,603 Frame Size Control PS 5,299,238/ LN1103-052,332 PS 5,299,239/ PS 5,299,240/ 29.03.2011 - ------------------------------------------------------------------------------------------------------------------------------------
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this list considered to be concluded as an integral part of this list. DVD - Video/ROM Disc Patent List Sony
==================================================================================================================================== Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date ==================================================================================================================================== #11 H02-021,210 An optical recording medium PS 5,533,001/ LN1103-225,650 02.07.2013 LN1109-185,852 LN1109-204,688 LN1109-204,689 - ------------------------------------------------------------------------------------------------------------------------------------ #12 H02-021,210 An optical disc system PS 5,587,990/ LN1103-225,650 24.12.2013 LN1109-185,852 LN1109-204,688 LN1109-204,689 - ----------------------------------------------------------------------------------------------------------------------------------- #13 H02-021,210 An optical disc PS 5,757,733/ LN1103-225,650 30.01.2011 LN1109-185,852 LN1109-204,688 LN1109-204,689 - ------------------------------------------------------------------------------------------------------------------------------------ #14 H02-021,210 An optical recording and/or reproducing apparatus PS 5,610,880/ LN1103-225,650 30.01.2011 LN1109-185,852 LN1109-204,688 LN1109-204,689 - ------------------------------------------------------------------------------------------------------------------------------------
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this list considered to be concluded as an integral part of this list. DVD - Video/ROM Disc Patent List Sony
==================================================================================================================================== Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date ==================================================================================================================================== #15 H07-088,607 Color-control of subtitle PS 5,748,256/ LN1108-265,661 21.03.2016 - --------------------------------------------------------------------------------------------------------------------------------- #16 H07-099,436 Position-information for displaying subtitle A 08/627,742 LN1108-275,205 - --------------------------------------------------------------------------------------------------------------------------------- #17 H07-202,703 Information for searching subtitle data A 08/683,344 LN1109-035,458 - --------------------------------------------------------------------------------------------------------------------------------- #18 H07-200,121 Path control A 08/692,918 LN1109-106,631 H07-200,122 H08-203,966 - --------------------------------------------------------------------------------------------------------------------------------- #19 H07-214,675 Top-field-flag of GOP A 08/701,754 LN1109-121,360 H08-221,592 - --------------------------------------------------------------------------------------------------------------------------------- #20 H07-215,506 Subtitle-displaying duration PS 5,748,217/ LN1109-051,502 24.07.2016 - --------------------------------------------------------------------------------------------------------------------------------- #21 H06-306,971 Disc having layer number LN1109-147,762 - --------------------------------------------------------------------------------------------------------------------------------- #22 H07-006,902 Line 21 data for closed caption A 08/586,158 LN1108-205,075 - --------------------------------------------------------------------------------------------------------------------------------- #23 H07-211,420 IPP address for closed caption A 08/688,819 LN1109-046,712 - --------------------------------------------------------------------------------------------------------------------------------- #24 H07-200,082 Aspect ratio data for VBID/WSS A 08/692,276 LN1109-051,501 - ---------------------------------------------------------------------------------------------------------------------------------
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this list considered to be concluded as an integral part of this list. DVD - VIDEO/ROM Disc Patent List Sony
==================================================================================================================================== Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date ==================================================================================================================================== #25 H07-197,816 Availability flag of audio/sub-picture stream A 08/690,873 LNI109-102,932 H08-133,644 - ------------------------------------------------------------------------------------------------------------------------------------ #26 H08-023,500 Interleaved unit size for seamless play PS 5,721,591/ LN1109-274,769 H09-026,238 30.01.2017 ====================================================================================================================================
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this list considered to be concluded as an integral part of this list. 1 DVD - Video/ROM Disc Patent List Pioneer
==================================================================================================================================== Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date ==================================================================================================================================== 42P30201 J 63-67598/ Method of recording and reproducing picture PS 4,953,035/ PS 2,811,445/ 22.03.1988 information, recording medium, and recording 23.09.2008 22.03.2008 medium playing apparatus. - ------------------------------------------------------------------------------------------------------------------------------------ 41P30564 J 62-169368/ Method of recording and reproducing information and PPU 01-12,777 07.07.1987 recording medium. - ------------------------------------------------------------------------------------------------------------------------------------ 42P30166 J 63-46604/ Method of recording and reproducing picture PS 2,735,557/ 29.02.1988 information and recording medium. 29.02.2008 ----------------------------------------------------------------------------------------------------------------------------------- 42P30229 J 63-57401/ Method of recording and reproducing picture PS 5,315,400/ PPU 01-232,573 11.03.1988 information, recording medium, and recording medium 24.05.2011 playing apparatus. - ------------------------------------------------------------------------------------------------------------------------------------ 42P30236 J 63-102175/ Method and apparatus for recording and PS 5,063,551/ PPU 01-273,268 25.04.1988 reproducing picture information and recording medium 31.01.2009 - ------------------------------------------------------------------------------------------------------------------------------------ 47P40013 J 04-243803/ Video disc having an aspect ratio information and A 115,771 PPU 06-98,291 11.09.1992 video disc player having an aspect ratio A 334,374 converting function. - ------------------------------------------------------------------------------------------------------------------------------------ 47P30077 J 04-293888/ Audio recording medium and audio reproducing PPU 06-124,540 07.10.1992 apparatus thereof. - ------------------------------------------------------------------------------------------------------------------------------------
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this list considered to be concluded as an integral part of this list. DVD -- Video/ROM Disc Patent List Pioneer
=================================================================================================================================== Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date =================================================================================================================================== 48P40116 J 05-282514/ Optical disk having synchronous marks and data PS 5,629,924/ PS 2,849,033/ 11.11.1993 marks to satisfy certain criteria Optical disc and 07.11.2014 11.11.2013 spindle servo circuit for playing apparatus thereof. A 08-236,411 - ----------------------------------------------------------------------------------------------------------------------------------- 48P30016 J 05-124068/ Recording medium and karaoke reproducing apparatus. PS 5,473,106/ PPU 06-332,485 26.05.1993 24.05.2014 - ----------------------------------------------------------------------------------------------------------------------------------- 48P30015 J 05-124070/ Recording medium and karaoke reproducing apparatus. PS 5,466,883/ PPU 06-332,481 26.05.1993 25.05.2014 - ----------------------------------------------------------------------------------------------------------------------------------- 48P30019 J 05-124067/ Recording medium playing apparatus and recording A 719,466 A 08-336,031 26.05.1993 medium. - ----------------------------------------------------------------------------------------------------------------------------------- 45P40038 J 02-179794/ Information storage medium and apparatus for PS 5,336,844/ A 10-315,653 06.07.1990 reproducing information therefrom. 09.08.2011 - ----------------------------------------------------------------------------------------------------------------------------------- 48P30012 J 05-148156/ Recording medium playing apparatus and recording A 719,466 A 08-336,054 18.06.1993 medium - ----------------------------------------------------------------------------------------------------------------------------------- 50P40030 J 06-174511/ Multi-layered recording disk and PS 5,608,715/ PPU 08-96,406 26.07.1994 recording/reproducing system using the same. 20.07.2015 - ----------------------------------------------------------------------------------------------------------------------------------- 50P40040 J 07-166024/ Information recording medium, and apparatus for A 670,533 PPU 09-17,159 30.06.1995 recording or reproducing on or from the same. Notice of Allowance - -----------------------------------------------------------------------------------------------------------------------------------
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this list considered to be concluded as an integral part of this list. 3 DVD -- Video/ROM Disc Patent List Pioneer
=================================================================================================================================== Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date =================================================================================================================================== 50P40041 J 07-170913/ Method and apparatus for recording record medium, A 675,016 PPU 09-23,404 06.07.1995 and apparatus for reproducing the same. Notice of Allowance - ----------------------------------------------------------------------------------------------------------------------------------- 50P40166 J 08-41942/ Information record media, apparatus for recording A 806,459 PPU 09-231,730 28.02.1996 the same and apparatus for reproducing the same. - ----------------------------------------------------------------------------------------------------------------------------------- 50P40188 J 08-41943/ Information record media, apparatus for recording A 806,458 PPU 09-231,677 28.02.1996 the same and apparatus for reproducing the same. - ----------------------------------------------------------------------------------------------------------------------------------- 50P40174 J 08-57757/ Information record media, apparatus for recording A 815,956 PPU 09-251,759 14.03.1996 the same and apparatus for reproducing the same. - ----------------------------------------------------------------------------------------------------------------------------------- 50P40171 J 08-59834/ Information record media, apparatus for recording A 816,889 PPU 09-251,760 15.03.1996 the same and apparatus for reproducing the same. Notice of Allowance - ----------------------------------------------------------------------------------------------------------------------------------- 50P40189 J 08-59835/ Information record media, apparatus for recording A 815,184 PPU 09-251,717 15.03.1996 the same and apparatus for reproducing the same. - ----------------------------------------------------------------------------------------------------------------------------------- 50P40182 J 08-59836/ Information record media, apparatus for recording A 812,882 PPU 09-252,449 15.03.1996 the same and apparatus for reproducing the same. - ----------------------------------------------------------------------------------------------------------------------------------- 50P40167 J 08-59837/ Information record media, apparatus for recording A 816,686 PPU 09-252,450 15.03.1996 the same and apparatus for reproducing the same. - -----------------------------------------------------------------------------------------------------------------------------------
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this list considered to be concluded as an integral part of this list. 4 DVD -- Video/ROM Disc Patent List Pioneer
=================================================================================================================================== Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date =================================================================================================================================== 50P40164 J 08-59838/ Information record media, apparatus for recording A 816,941 PPU 09-251,761 15.03.1996 the same and apparatus for reproducing the same. - ----------------------------------------------------------------------------------------------------------------------------------- 50P40176 J 08-61470/ Information record media, apparatus for recording A 822,157 PPU 09-251 ,763 18.03.1996 the same and apparatus for reproducing the same. Notice of Allowance - ----------------------------------------------------------------------------------------------------------------------------------- 50P40165 J 08-61471/ Information record media, apparatus for recording A 819,012 PPU 09-261,584 18.03.1996 the same and apparatus for reproducing the same. - ----------------------------------------------------------------------------------------------------------------------------------- 50P40187 J 08-61472/ Information record media, apparatus for recording A 819,011 PPU 09-251,723 18.03.1996 the same and apparatus for reproducing the same. - ----------------------------------------------------------------------------------------------------------------------------------- 50P40186 J 08-61473/ Information record media, apparatus for recording PS 5,805,537/ PPU 09-251,762 18.03.1996 the same and apparatus for reproducing the same. 17.03.2017 - ----------------------------------------------------------------------------------------------------------------------------------- 50P40180 J 08-63590/ Information record media, apparatus for recording A 820,256 PPU 09-259,573 19.03.1996 the same and apparatus for reproducing the same. Notice of Allowance - ----------------------------------------------------------------------------------------------------------------------------------- 50P40184 J 08-63591/ Information record media, apparatus for recording A 820,257 PPU O9-259,574 19.03.1996 the same and apparatus for reproducing the same. - ----------------------------------------------------------------------------------------------------------------------------------- 50P40169 J 08-66403/ Information record media, apparatus for recording A 821,424 PPU 09-259,541 22.03.1996 the same and apparatus for reproducing the same. - -----------------------------------------------------------------------------------------------------------------------------------
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this list considered to be concluded as an integral part of this list. DVD -- Video/ROM Disc Patent List Pioneer
=================================================================================================================================== Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date =================================================================================================================================== 50P40185 J 08-66404/ Information record media, apparatus for recording PS 5,742,569/ PPU 09-259,506 22.03.1996 the same and apparatus for reproducing the same. 21.03.2017 - ----------------------------------------------------------------------------------------------------------------------------------- 50P40168 J 08-66405/ Information record media, apparatus for recording A 822,457 PPU 09-259,542 22.03.1996 the same and apparatus for reproducing the same. - ----------------------------------------------------------------------------------------------------------------------------------- 50P40175 J 08-68730/ Information record media, apparatus for recording A 825,560 PPU 09-265,765 25.03.1996 the same and apparatus for reproducing the same. Notice of allowance - ----------------------------------------------------------------------------------------------------------------------------------- 50P40163 J 08-82932/ Information record media, apparatus for recording A 834,806 PPU 09-274,776 04.04.1996 the same and apparatus for reproducing the same. - ----------------------------------------------------------------------------------------------------------------------------------- 50P40179 J 08-83478/ Information record media, apparatus for recording A 831,716 PPU 09-282,848 05.04.1996 the same and apparatus for reproducing the same. - ----------------------------------------------------------------------------------------------------------------------------------- 50P40181 J 08-85808/ Information record media, apparatus for recording A 833,476 PPU 09-282,849 08.04.1996 the same and apparatus for reproducing the same. Notice of allowance - -----------------------------------------------------------------------------------------------------------------------------------
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this list considered to be concluded as an integral part of this list. EX-10.22 24 PATENT LICENSE AGREEMENT FOR THE USE OF AC-3 TECHNOLOGY Exhibit 10.22 PATENT LICENSE AGREEMENT FOR THE USE OF AC-3 TECHNOLOGY IN THE MANUFACTURE -------------------------------------------------------------------------- OF DVD DISCS ------------ This Agreement having an effective date of October 1, 1999 by and between U.S. PHILIPS CORPORATION, having its principal office at 580 White Plains Road, Tarrytown, New York 10591 (hereinafter referred to as "Philips") and Future Media Productions, Inc., having its principal office at 25136 Anza Drive, Valencia, California 91355 (hereinafter referred to as "Licensee") WHEREAS, Licensee is engaged in the manufacture of DVD-Video and DVD-ROM Discs (together hereinafter referred to as "DVD Discs") and, in the process of such manufacture, is making use of the technology developed by Dolby Laboratories and known as AC-3; WHEREAS, Koninklijke Philips Electronics N.V. (hereinafter referred to as "Philips"), Institut fur Rundfunk Technik G.m.b.H. of Munchen, Germany, (IRT) and the Centre Commun d'Etudes Telediffusion et Telecommunications of Cesson- Sevigne, France (CCETT) own certain patents rights relating to the AC-3 technology, these patent rights (hereinafter referred to as "Licensed Patents") are listed in Annex 1 hereto; WHEREAS, USPC has been authorized by Philips, IRT and CCETT to grant licenses for the use of the Licensed Patents in connection with the use of the AC-3 technology. WHEREAS, Licensee wishes to be licensed under the Licensed Patents in connection with the manufacture of DVD-Discs making use of AC-3 and Philips is willing to grant such license in accordance with the provisions hereof; IT IS HEREBY AGREED AS FOLLOWS: Article 1 - Definitions ----------------------- 1.01 "Disc": a non-recordable reflective disc-shaped information carrier comprising any kind of information such as, but not limited to, audio,- video-, text- and/or data-related information, which is irreversibly stored in one or more layers during and as an integral part of the manufacturing process of the disc in a form which is optically readable by play-back devices. 1.02 "Player": a playback device for optically reading information stored on a Disc and converting such information into electrical signals for reproduction purposes. 1.03 "DVD-Video Disc/DVD-ROM Disc": a replicated Disc comprising any kind of information such as, but not limited to, audio,- video,- text,- and/or data-related information, 2 encoded in digital form, which is optically readable by a DVD-Video Player or a DVD-ROM Player. 1.04 "DVD-Video Player/DVD-ROM Player": a Player which is designed and manufactured specifically for the reproduction of information stored on a DVD Disc and the conversion of such information, which is bit-encoded according to the DVD-Video and DVD-ROM Standard Specifications, into electrical signals by means prescribed in the DVD-Video and DVD-ROM Standard Specifications, which electrical signals are directly capable and intended to be used for visual reproduction through standard television receivers and/or television monitors, or for reproduction of video, text and data related information through data handling and/or data processing equipment, (the DVD-Video Player and DVD-ROM Player together referred to as "DVD Player"). 1.05 "Licensed Product(s)": DVD Discs incorporating AC-3 technology. 1.06 "Licensed Patents": The patents as listed in Annex I hereto. The word "essential" as used in relation to patent rights in this Agreement shall refer to patent rights, the use of which is necessary (as a practical matter) for the use of the AC-3 technology in connection with the Licensed Products. 1.07 "Associated Company": any business entity, in which Philips, IRT, CCETT or Licensee controls, directly or indirectly, more than fifty percent (50%) of the shares entitled to vote for the election of directors, but any such business entity shall be deemed an Associated Company only for as long as such control exists. 1.08 "Territory"; the geographic area known as the United States of America, its territories and possessions. Article 2 -- Grant of rights ---------------------------- 2.01 For the term of this Agreement and subject to the provisions hereof, USPC hereby grants to Licensee and its Associated Companies a non-exclusive, non-transferable license under the Licensed Patents to use the AC-3 technology in the manufacture of Licensed Products within the Territory and to use, sell or otherwise dispose of Licensed Products so manufactured in all countries of the world. 2.02 In consideration of the undertakings set forth in Articles 2.01, Licensee agrees to grant to Philips, IRT, CCETT and their respective Associated Companies, for a period of ten years from the Effective Date (as hereinafter defined), non-exclusive, non-transferable licenses, on reasonable, non-discriminatory conditions comparable to those set forth herein, to use the AC-3 technology in the manufacture of DVD Discs and to use, sell or otherwise dispose of DVD Discs so manufactured in all countries of the world, under any and all present and future patent rights, for which Licensee or its Associated Companies may now have or may hereafter acquire the right to grant licenses and which are essential to the use of AC-3 3 technology in the manufacture of DVD Discs and the subsequent use, sale or other disposal thereof, and which patent rights were first filed in any country of the world up to the date of termination of this Agreement. Article 3 - Roya1ties, Reports and Payments ------------------------------------------- 3.01 In consideration of the rights granted hereunder by USPC to Licensee, Licensee agrees to pay to USPC, a royalty of US$0.003 (three tenths of a US dollar cent) on each Licensed Product sold by Licensee or any of its Associated Companies, in which any one or more Licensed Patent(s) is (are) used, irrespective of whether such licensed Patent(s) is (are) used in the country of manufacture, use, sale or other disposal. A Licensed Product shall be considered sold when invoiced or, if not invoiced, when delivered by any party or otherwise disposed of to a party other than Licensee or an Associated Company of Licensee. For the avoidance of doubt, in the event that none of the Licensed Patents would be infringed by the manufacture of Licensed Products within the Territory, Licensee shall have no obligation to pay the royalties due on the basis of this Agreement in respect of Licensed Products manufactured within the Territory and which are directly exported for final use to a country in which no Licensed Patents subsist. 3.02 Within thirty (30) days following 31 March, 30 June, 30 September and 31 December of each year during the term of this Agreement, Licensee shall submit to USPC (even in the event that no sales have been made) a written statement, signed by a duly authorized officer on behalf of Licensee, setting forth with respect to the preceding quarterly period: (1) the quantities of Licensed Products manufactured and sold by Licensee and its Associated Companies: (2) a computation of the royalties due under this Agreement. Licensee shall submit to USPC, once per calendar year, a written statement by its external auditors, who shall be independent certified accountants, confirming that the quarterly royalty statements as submitted by Licensee to USPC for the last four quarterly periods, were true, complete and accurate in every respect. Licensee shall pay the royalties due to USPC concurrently with the submission of the aforementioned written statement. 3.03 Within 30 days following the expiration or termination of this Agreement, Licensee shall submit to USPC a certified report on the number of Licensed Products in stock at the time of expiration or termination of this Agreement. Royalties shall be due and payable on all Licensed Products manufactured prior to, but remaining in stock with Licensee and/or its Associated Companies at the date of expiration or termination of this Agreement. For the 4 purpose of royalty computation, all Licensed Products in stock will be deemed to have been sold or otherwise disposed of in the same countries and in proportionally the same quantities as in the last two full reporting quarters during the term of this Agreement. For the avoidance of doubt, this Article 3.03 shall be without prejudice to the provisions of Article 5.05. 3.04 Any payments which are not made on the dates specified herein, shall accrue interest at the rate of two percent (2%) per month or the maximum amount permitted by law, whichever is lower. 3.05 All payments to USPC under this Agreement shall be made by transfer in such currency, convertible in the sense of Articles VIII and XIX of the Articles of Agreement of the International Monetary Fund, as designated by USPC. The rate of exchange for converting the currency of the Territory shall be the telegraphic transfer selling rate of the designated currency (or other convertible currency as the case may be) in terms of the currency officially quoted in the Territory by the officially authorized foreign exchange bank for payment of currency transactions on the day that the amount is due and payable. 3.06 All costs, stamp duties, taxes and other similar levies arising from or in connection with the conclusion of this Agreement shall be borne by Licensee. However, in the event that the government of a country imposes any income taxes on payments made by Licensee to USPC hereunder and requires Licensee to withhold such tax from such payments, Licensee may deduct such tax from such payments. In such event, Licensee shall promptly provide USPC with tax receipts issued by the relevant tax authorities so as to enable USPC to support a claim for credit against income taxes which may be payable by USPC. 3.07 Licensee shall maintain complete and accurate books and records covering all sales or other disposals of Licensed Products by Licensee and/or its Associated Companies, for a period of three (3) years following such sales or other disposals. In order to verify the accuracy of the royalty statements mentioned in Article 3.02, USPC shall have the right to inspect such books and records of Licensee and/or its Associated Companies from time to time, but not more than once per calendar year, by an independent certified accountant appointed by USPC. Such inspection shall be conducted at USPC's own expense provided that if any discrepancy or error exceeding three percent (3%) of the monies actually due is established, the cost of such inspection shall be borne by Licensee, without prejudice to any other claims that USPC may have under this Agreement or under applicable law. 3.08 Without prejudice to the provisions of Article 3.07, Licensee shall provide relevant additional information as USPC may reasonably request from time to time to enable USPC to ascertain which products manufactured, sold or otherwise disposed of by Licensee and/or its Associated Companies are subject to the payment of royalties to USPC hereunder, the patent rights which have been used in connection with such products, and the amount of royalties payable. 5 3.09 Within thirty (30) days after execution of this Agreement, Licensee shall pay to USPC a royalty, calculated in accordance with the provisions of Article 3.01, on products which would have been Licensed Products under this Agreement and were manufactured, used, sold or otherwise disposed of by Licensee and/or its Associated Companies before the Effective Date of this Agreement and shall submit to USPC concurrently with this royalty, as calculated herein, a royalty statement in respect of such products, in accordance with Article 3.02. Upon the payment of this royalty, as calculated herein, such products shall become Licensed Products. Article 4 - No Warranty and Indemnification ------------------------------------------- 4.01 It is acknowledged by the parties hereto that third parties may own industrial and/or intellectual property rights in the field of AC-3 and Licensee acknowledges and agrees that USPC, Philips, IRT and CCETT and their respective Associated Companies make no warranty whatsoever that the use of the AC-3 technology or the manufacture, use, sale or other disposal of any Licensed Product will be free from infringement of any industrial and/or intellectual property rights other than the Licensed Patents. Article 5 - Term and Termination -------------------------------- 5.01 This Agreement shall enter into force on the "Effective Date", being the date first written above, or, in the case validation of this Agreement is required by the competent governmental authorities, the date of such validation. This Agreement shall remain in force for a period of ten (10) years from the Effective Date, unless terminated earlier in accordance with the provisions of this Article 5. 5.02 Without prejudice to the provisions of Article 5.03 through 5.05, each party may terminate this Agreement at any time by means of written notice to the other party in the event that the other party fails to comply with any material obligation under this Agreement and, such failure is not remedied within thirty (30) days after receipt of a notice specifying the nature of such failure and requiring it to be remedied. Such right of termination shall not be exclusive of any other remedies or means of redress to which the non-defaulting party may be lawfully entitled and all such remedies shall be cumulative. Any such termination shall not affect any royalties or other payment obligations under this Agreement accrued prior to such termination. 5.03 USPC may terminate this Agreement forthwith by means of notice in writing to Licensee in the event that a creditor or other claimant takes possession of, or a receiver, administrator or similar officer is appointed over any of the assets of Licensee or in the event that Licensee makes any voluntary arrangement with its creditors or becomes subject to any court or administration order pursuant to any bankruptcy or insolvency law. 5.04 USPC shall have the right to terminate this Agreement forthwith or to revoke the license granted under any of USPC's, Philips', IRT's or CCETT's respective patent rights in the 6 event that Licensee or any of its Associated Companies brings a lawsuit or other proceeding for infringement of any of its patents essential for the use of the AC-3 technology in the manufacture of DVD Discs and/or the use, sale or other disposal thereof against USPC, Philips, IRT or CCETT and/or any of their respective Associated Companies respectively and Licensee refuses to grant licenses under such patents on fair and reasonable terms to USPC, Philips, IRT and CCETT respectively. 5.05 Upon the termination by USPC for any reason pursuant to Article 5.02 through 5.04, Licensee shall immediately cease the manufacture, sale or other means of disposal of Licensed Products in which the Licensed Patents are used. Further, upon such termination, any and all amounts outstanding hereunder shall become immediately due and payable. Article 6 - Miscellaneous ------------------------- 6.01 Any notice or request required or permitted to be given under or in connection with this Agreement or the subject matter hereof shall be in writing and shall be deemed to have been sufficiently given when, if given to Licensee, it is addressed to: Future Media Productions, Inc. 25136 Anza Drive Valencia, California 91355 in respect of USPC, to: U.S. Philips Corporation 580 White Plains Road Tarrytown, New York 10591 Fax. No.: 914-332-0615 and sent in each case by telecopy and Registered Mail, postage prepaid. The date of mailing shall be deemed to be the date on which such notice of request has been given. Either party may give written notice of change of address and, after notice of such change has been received, any notice or request required to be given shall thereafter be given to such party at such changed address in the manner as provided above. 6.02 This Agreement sets forth the entire understanding and agreement between the parties as to the subject matter hereof and supersedes and replaces all prior arrangements, discussions and understandings between the parties specifically relating thereto. Neither party shall be bound by any obligation, warranty, waiver, release or representation, except as expressly provided herein, or as may subsequently be agreed in writing between the parties. 6.03 Nothing contained in this Agreement shall be construed: 7 (a) as imposing on either party any obligation to instigate any suit or action for infringement of any of the patent rights licensed hereunder or to defend any suit or action brought by a third party which challenges or relates to the validity of any of such patent rights. Licensee shall have no right to instigate any such suit or action for infringement of any of the patent rights licensed by USPC hereunder, nor the right to defend any such suit or action which challenges or relates to the validity of any such patent right licensed by USPC hereunder; (b) as imposing any obligation to file any patent application or to secure any patent or to maintain any patent in force; (c) as conferring any license or right to copy or imitate the appearance and/or design of any product; (d) as conferring any license under the patent rights licensed pursuant to Article 2 hereof, to manufacture, use, sell or otherwise dispose of any product or device other than a Licensed Product. 6.04 Neither the failure nor delay of either party to enforce any provisions of this Agreement shall constitute a waiver of such provision or of the right of either party to enforce each and every provision of this Agreement. 6.05 Should any provision of this Agreement be finally determined void or unenforceable in any judicial proceeding, such determination shall not affect the operation of the remaining provisions hereof. 6.06 This Agreement and all disputes, claims or controversies arising out of or in any way relating to, this Agreement ("Dispute") shall be governed by and construed, and any claim or controversy arising with respect thereto shall be determined, in accordance with the laws and in the competent courts of the State of New York. The parties hereto consent to the personal jurisdiction of the competent courts of the State of New York for the purpose of prosecuting or resolving any such Dispute. AS WITNESS, the parties hereto have caused this Agreement to be signed on the date first written above. U.S. PHILIPS CORPORATION FUTURE MEDIA PRODUCTIONS, INC. /s/ Algy Tamoshunas /s/ Louis Weiss - --------------------------------- -------------------------------- Algy Tamoshunas Name: Louis Weiss Title: VP Title CFO --------------------------- -------------------------- Date: 2/8/00 Date: 1/21/00 --------------------------- -------------------------- DVD - Video/ROM Disc Patent List AC3
- --------------------------------------------------------------------------------------------------------------------------------- Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ.PPU/Exp. date - --------------------------------------------------------------------------------------------------------------------------------- IRT-2 DE 3,639,753 Method for transfer of digital audio signals PS 4,972,484 PS 1.501.435 21.11.1986 20.11.2007 20,11,2007 - --------------------------------------------------------------------------------------------------------------------------------- IRT-3 DE3.440.613 Method for digitally transferring a broadcast 07.11.1984 program signal - --------------------------------------------------------------------------------------------------------------------------------- N 13.241 NL 89.01402 Universal subband coder format PS 5, 323,396 PPU 91-24834 02.06.1989 21.06.2011 01.06.2010 NL 90.00338 PS 5,606,618 13.02.1990 23.07.2013 PS 5,777,992 21.06.2011 PS 5,539,829 23,07.2013 A 08/488,536 PS 5,530,655 25.06.2013 - --------------------------------------------------------------------------------------------------------------------------------- Q 93.002 08/032915 Matrixing of bit rate reduced signals PS 5,481,643 18.03.1993 18.03.2013 - ---------------------------------------------------------------------------------------------------------------------------------
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents considered to be concluded as an integral part of this list. MPEG-2 AUDIO PATENT LICENSE AGREEMENT ------------------------------------- This Agreement is entered into this 1st day of October, 1999 by and between U.S. PHILIPS CORPORATION., having its principal office at 580 White Plains Road, Tarrytown, New York 10591, (hereinafter referred to as "USPC") and FUTURE MEDIA PRODUCTIONS, INC., having its principal office at 25136 Anza Drive, Valencia, California 91355 (hereinafter referred to as "Licensee") WHEREAS the parties hereto have entered into a DVD Video Disc and DVD ROM Disc Patent License Agreement (hereinafter referred to as the "DVD Agreement"), whereby USPC has granted to Licensee the right to use certain patent rights owned by Koninklijke Philips Electronics N.V., Sony Corporation and Pioneer Electronic Corporation, respectively in connection with the manufacture and sale of Licensed Products (as defined in the DVD Agreement); WHEREAS Philips, together with the Institut fur Rundfunk Technik G.m.b.H. of Munchen (Germany) and the Centre Commun d'Etudes Telediffusion et Telecommunications of CessonSevigne (France) own certain patents rights relating to the MPEG-2 Audio technology, which are being used in connection with the manufacture of Licensed Products (as defined in the DVD Agreement); these patent rights (hereinafter referred to as "the MPEG-2 Audio Patents") are listed in Annex I hereto; It is hereby agreed as follows: USPC hereby grants to Licensee and its Associated Companies and Licensee hereby accepts the right to use the MPEG-2 Audio Patents solely for the decoding of digital audio signals in accordance with the ISO/IEC 13818-3 MPEG-2 Audio Standard in connection with the manufacture of Licensed Products (as defined in the DVD Agreement), for no additional royalty consideration and for the duration of the DVD Agreement, provided that Licensee fully complies with all its obligations under the DVD Agreement. Further, Licensee and its Associated Companies shall have the right to use the MPEG-2 Audio logo on Licensed Products manufactured by it (them) in accordance with the provisions of this Agreement and the DVD Agreement. 2 In addition to the reporting of Licensed Products in accordance with Article 4.03 of the DVD Agreement, Licensee shall also report the quantities of Licensed Products making use of the above-mentioned MPEG-2 Audio Standard. The relevant provisions of the DVD Agreement shall apply, mutatis mutandis, to this Agreement. Signed for and on behalf of: U.S. PHILIPS CORPORATION FUTURE MEDIA PRODUCTIONS, INC. /s/ Algy Tamoshunas /s/ Louis Weiss - -------------------------------- -------------------------------- Algy Tamoshunas Title: VP Title: CFO ------------------------- ------------------------- Date: 2/8/00 Date: 01/21/00 -------------------------- -------------------------- DVD - Video/ROM Disc Patent List MPEG 2 Audio
- --------------------------------------------------------------------------------------------------------------------------- Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date - --------------------------------------------------------------------------------------------------------------------------- PCT-IRT DE 36 39 753/ Method for transfer of digital PS 4,972,484/ A 01-501.435/ 21.11.1986 audio signals. 20.11.2007 .......2007 - --------------------------------------------------------------------------------------------------------------------------- IRT-1 DE 41.02.324/ Method for transfer of digital WO-92.13396/ WO-92.13396/ 26.01.1991 subband coded audio signals by use of scaling factors. ........ 27.06.2011 - --------------------------------------------------------------------------------------------------------------------------- IRT-2 DE 41.24.493/ Method for transfer of digital bit WO-93.02508/ WO-93.02508/ 24.07.1991 rate reduced audio signals using an overall monitoring threshold. ........ 21.07.2012 - --------------------------------------------------------------------------------------------------------------------------- IRT-3 DE 34.40.613/ Method for digitally transferring - - 07.11.1984 a broadcast program signal. - --------------------------------------------------------------------------------------------------------------------------- IRT-4 DE 42.29.372/ Method for transfer of the bitrate - - 03.09.1992 allocation information in a digital bit rate reduced audio coding method. - --------------------------------------------------------------------------------------------------------------------------- F 85.506 FR 85-01429/ Digital analysis/synthesis filter bank. - - 01.02.1985 - --------------------------------------------------------------------------------------------------------------------------- Q 89.018 EP 89.201.408/ Digital transmission system using PS 5,214,678/ PPU 91-82,233/ 02.06.1989 subband coding of digital signals. 25.05.2010 02.06.2010 - -------------------------------------------------------------------------------------------------------------------------- -
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this considered to be concluded as an integral part of this list. 2 DVD - Video/ROM Disc Patent List MPEG 2 Audio
- --------------------------------------------------------------------------------------------------------------------------- Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date - ---------------------------------------------------------------------------------------------------------------------------- N 12.967 NL 89.01402/ Universal subband coder format. PS 5,323,396/ PPU 91-24,834/ 02.06.1989 21.06.2011 01.06.2010 N 13.241 NL 90.00338/ PS 5,777,992/ 12.02.1990 ..... PS 5,539,829/ 23.07.2013 A 08-488,536/ ..... PS 5,530,655/ 25.06.2013 - ---------------------------------------------------------------------------------------------------------------------------- N 14.361 EP 93.200156.3/ Three channel transmission of L-, PS 5,610,985/ PPU 94-318,922/ R- and Centre 22.01.1993 21.01.2014 21.01.2014 - ---------------------------------------------------------------------------------------------------------------------------- N 14.615 EP 93.203.000.0/ SB splitting prior to multiplexing PS 5,544,247/ A 95-5l2,501/ 27.03.1993 signals L, R, C. 25.10.2014 PS 5,818,943/ 18.10.2014 25.10.2014 ...... 25.10.2014 - ---------------------------------------------------------------------------------------------------------------------------- Q 93.002 US A08-032915/ Matrixing of bitrate reduces PS 5,481,643/ - 18.03.1993 signals 18.03.2013 - ---------------------------------------------------------------------------------------------------------------------------- N 15.812 EP 96.201.261.3/ Audio frequency scalability A 08-852,761/ A 97-539,685/ on DVD 08.05.1996 07.05.2017 30.04.2017 - ----------------------------------------------------------------------------------------------------------------------------
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this considered to be concluded as an integral part of this list. 3 DVD - Video/ROM Disc Patent List MPEG 2 Audio
- --------------------------------------------------------------------------------------------------------------------------- Licensor's Priority DOC/ Title US Patent PS JP Patent PS Ref. No. Priority Date Appln. No/Exp. date Publ. PPU/Exp. date - ---------------------------------------------------------------------------------------------------------------------------- N 15.808 EP 96.201.259.7/ Selection of Masked thresholds A08-826,919/ A97-536,003/ 08.05.1996 09.04.2017 02.04.2017 - ---------------------------------------------------------------------------------------------------------------------------- N 15.787 EP 96.201216.7/ N channel transmission compatible 02.05.1996 with 2- and 1-channel transmission. A 08-795,120/ A97-528,333/ 07.02.2017 31.01.2017 - ---------------------------------------------------------------------------------------------------------------------------- N 15.760 EP 96.200.937.9/ Multi channel encoding A 08-826,916/ A97-536,00l/ 10.04.1996 09.04.2017 01.04.2017 - ---------------------------------------------------------------------------------------------------------------------------- N 15.678 EP 96.200.274.7/ 7-channel backwards compatible PS 5,850,456/ A97-528,329/ 08.02.1996 encoding. 06.02.2017 24.01.2017 - ---------------------------------------------------------------------------------------------------------------------------- N 14.834 EP 94.201.214.7/ Intensity stereo coding on subband PS 5,850,418/ PPU 97-512,971/ 02.05.1994 signals. 01.05.2015 25.04.2015 - ---------------------------------------------------------------------------------------------------------------------------- N 15.653 EP 96.200.063.4/ Change bitpool to obtain constant 12.01.1996 bitrate output. A 08-768,353/ A97-525,026/ 17.12.2016 11.12.2016 - ---------------------------------------------------------------------------------------------------------------------------- N 15.516 EP 95.202866.0/ Repeated coding/decoding with 24.10.1995 variable delay. A 08-738,990/ PPU 98-512,131/ 24.10.2016 18.10.2016 - ----------------------------------------------------------------------------------------------------------------------------
All corresponding patent applications, patents, divisions, continuations and reissues based upon any of the patent applications or patents of this considered to be concluded as an integral part of this list. EX-23.2 25 CONSENT OF ERNST & YOUNG LLP Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated February 25, 2000 in the Registration Statement (Form S-1) and related Prospectus of Future Media Productions, Inc. for the registration of shares of its common stock. /s/ Ernst & Young LLP Los Angeles, California March 13, 2000 EX-27.1 26 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 0 0 7,468 266 767 8,253 41,231 11,394 41,089 16,165 0 0 0 3,790 15,679 41,089 53,002 53,002 31,938 31,938 4,921 0 1,404 14,740 2 14,738 0 0 0 14,738 1.64 1.43
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