-----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, SiogApDfTiANFvJ8+EGABv56ZkOf6qNr4vr0RHDwrr6pMg7IA5UCPUAa6+ec4+fM w7QjuSTHr9IeEDY78BS4AA== 0000950148-01-500958.txt : 20010607 0000950148-01-500958.hdr.sgml : 20010607 ACCESSION NUMBER: 0000950148-01-500958 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 55 FILED AS OF DATE: 20010606 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAM ENTERTAINMENT INC CENTRAL INDEX KEY: 0001132809 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770553117 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-62436 FILM NUMBER: 1655398 BUSINESS ADDRESS: STREET 1: 333 WEST SANTA CLARA BLVD STE 930 CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4082987500 S-1 1 v72115ors-1.txt S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 2001 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BAM! ENTERTAINMENT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7372 77-0553117 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NUMBER)
333 WEST SANTA CLARA STREET, SUITE 930 SAN JOSE, CA 95113 (408) 298-7500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) RAYMOND C. MUSCI CHIEF EXECUTIVE OFFICER BAM! ENTERTAINMENT, INC. 333 WEST SANTA CLARA STREET, SUITE 930 SAN JOSE, CA 95113 (408) 298-7500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO THOMAS J. POLETTI, ESQ. TIMOTHY R. CURRY, ESQ. TED WEITZMAN, ESQ. COLBY R. GARTIN, ESQ. MELISSA K. STACK, ESQ. BENJAMIN H. DEBERRY, ESQ. DAVID R. SCHWARTZ, ESQ. DANIEL H. MORRIS, ESQ. KIRKPATRICK & LOCKHART LLP BROBECK, PHLEGER & HARRISON LLP 10100 SANTA MONICA BLVD., 7TH FLOOR TWO EMBARCADERO PLACE LOS ANGELES, CALIFORNIA 90067 2200 GENG ROAD TELEPHONE (310) 552-5000 PALO ALTO, CALIFORNIA 94303 FACSIMILE (310) 552-5001 TELEPHONE (650) 424-0160 FACSIMILE (650) 496-2885
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 on 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, 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 delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AMOUNT OF TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------ Common stock.............................. $45,000,000 $11,250 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act. 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 HEREAFTER 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 SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PRELIMINARY PROSPECTUS (Subject to Completion) June 6, 2001 - -------------------------------------------------------------------------------- SHARES [BAM! ENTERTAINMENT LOGO] COMMON STOCK - -------------------------------------------------------------------------------- We are selling shares of our common stock. This is our initial public offering of shares of our common stock. No public market currently exists for any shares of our capital stock. We currently estimate that the initial public offering price of our common stock will be between $ and $ per share. We intend to apply for quotation of our common stock on the Nasdaq National Market under the symbol "BFUN." BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF INVESTING IN OUR COMMON STOCK IN "RISK FACTORS" BEGINNING ON PAGE 5. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PER SHARE TOTAL - ------------------------------------------------------------------------------------- Public offering price $ $ - ------------------------------------------------------------------------------------- Underwriting discounts and commissions $ $ - ------------------------------------------------------------------------------------- Proceeds, before expenses, to us $ $ - -------------------------------------------------------------------------------------
The underwriters may also purchase up to shares of our common stock from us at the public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus. The underwriters may exercise this option to only cover over-allotments, if any. The underwriters are offering our common stock on a firm commitment basis as described under "Underwriting." Delivery of the shares will be made on or about , 2001. UBS WARBURG JEFFERIES & COMPANY, INC. The date of this prospectus is , 2001 3 Through and including ____________ (25 days after the date of this prospectus), all dealers selling shares of our common stock, whether or not participating in this offering, may need to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. TABLE OF CONTENTS
- ------------------------------------------------------------------------------------------------------------------------------------ Prospectus summary.............................................. 1 Business............................................ 33 The offering.................................................... 3 Management.......................................... 45 Summary consolidated financial data ............................ 4 Related party transactions.......................... 51 Risk factors.................................................... 5 Principal stockholders.............................. 54 Forward-looking information..................................... 18 Description of capital stock........................ 56 Use of proceeds................................................. 18 Shares eligible for future sale..................... 59 Dividend policy................................................. 18 Underwriting........................................ 61 Capitalization.................................................. 19 Legal matters....................................... 63 Dilution ..................................................... 20 Experts............................................. 63 Selected consolidated financial data............................ 21 Where you can find additional information........... 63 Management's discussion and analysis of financial condition Index to consolidated financial statements.......... F-1 and results of operations....................................... 23
We have filed applications to register the trademarks BAM! Entertainment, BAM!, BAM!4 and Bay Area Multimedia, Inc. in the United States. This prospectus also refers to trade names and trademarks of other organizations. Nintendo(R), Nintendo 64(R), N64(R), Game Boy(R), GameCube, and/or other Nintendo products referenced herein are either trademarks or registered trademarks of Nintendo of America, Inc. Sony PlayStation(R), Sony PlayStation2(R) and/or other Sony products referenced herein are either trademarks or registered trademarks of Sony Computer Entertainment America Inc. Sega(R) and Dreamcast(R) are registered trademarks of Sega of America, Inc. Microsoft(R), Xbox and/or other Microsoft products referenced herein are either trademarks or registered trademarks of Microsoft Corporation. Dexter's Laboratory, Powerpuff Girls, and all related characters and elements are trademarks of The Cartoon Network, an AOL Time Warner company. Yogi Bear and all related characters and elements are trademarks of Hanna-Barbera Productions, Inc. Sports Illustrated(R) and Sports Illustrated for Kids(R) are registered trademarks of Time, Inc., an AOL Time Warner company. Driven and all related characters and elements are trademarks of Warner Bros., an AOL Time Warner Company. This prospectus includes trademarks other than those identified in the preceding paragraphs. The use of any such trademark herein is in an editorial form only, and to the benefit of the owner thereof, with no intention of infringement of the trademark. i 4 PROSPECTUS SUMMARY This summary highlights the information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk factors." OUR BUSINESS We are a rapidly emerging developer and publisher of interactive entertainment software. We license properties from a wide variety of sources including entertainment and media companies and we publish software based on their motion picture, sports and television cartoon properties. We currently publish software for many of the most popular interactive entertainment hardware platforms, such as the PlayStation manufactured by Sony Computer Entertainment ("PlayStation"), Nintendo 64 and Nintendo's Game Boy Color. We plan to develop and publish software for next generation hardware platforms such as the PlayStation2 manufactured by Sony Computer Entertainment ("PlayStation2"), Nintendo GameCube and Game Boy Advance and Microsoft's Xbox, as well as for other portable handheld devices and personal computers. According to Euromonitor, worldwide sales of consoles, console games and games for personal computers grew from $17 billion in 1996 to $27 billion in 2000. Forrester predicts that in the United States alone, interactive entertainment console manufacturers and software publishers will generate $26 billion in revenues in 2005. Of that $26 billion, Forrester estimates that $12.8 billion will be generated by sales of console game software alone. The Interactive Digital Software Association, or IDSA, further estimates that 60% of all Americans, or approximately 145 million people, play video games on a regular basis. We believe that our ability to license popular properties, develop content with internal and third party developers and distribute titles through our broad distribution channels provides us with significant competitive advantages. We focus on: - - Development and promotion of titles based on properties with existing brand recognition. We believe that by developing interactive entertainment software titles based on popular properties and existing brands that appeal to specific segments of the interactive entertainment industry, we enhance consumer acceptance and product life cycles. We have secured license agreements with AOL Time Warner's Cartoon Network and Sports Illustrated for Kids, Spyglass Entertainment Group and Franchise Films, as well as other entertainment and media property owners, and are developing titles based on their popular entertainment and media properties for targeted age groups. - - Strategic management of product development. We maintain a balanced mix of internal and external production efforts. We have an experienced in-house development staff and an internal product development studio where we develop titles. We have also established relationships with third party interactive entertainment software developers with proven track records of developing successful titles. - - Broad distribution channels. Our sales and marketing efforts are designed to broaden product distribution and increase the penetration of our products in domestic and international markets. We further seek to leverage and expand our channels of distribution in order to reach a larger number of consumers in the retail, direct and on-line markets, both domestically and internationally. We sell our interactive entertainment software to mass merchandisers such as Toys "R" Us, Target, Kmart, Wal-Mart and Best Buy, specialty chains such as Babbages, Etc. and Electronics Boutique and independent distributors. - - Hardware platform flexibility. While we have the technical ability to develop products for all current hardware platforms, our development efforts focus on specific hardware platforms for specific demographics. In addition, we leverage our more popular titles across multiple 1 5 hardware platforms that have sufficient installed bases and appropriate demographics for development to be successful. We believe this approach reduces both our reliance on any one hardware platform and the risks associated with product development. - - Management experience. Our executive management team has substantial domestic and international experience in the interactive entertainment software industry. Key members of our management team have been executives of other interactive entertainment software companies and in their current and past service have successfully identified and secured licenses for popular properties, established relationships with key third party product developers and successfully negotiated distribution arrangements with multiple retail channels. In addition, our team has developed strong working relationships with hardware platform manufacturers, which we believe provide substantial benefits in managing the product approval and development process. COMPANY INFORMATION Unless otherwise indicated, all references to "we," "us," and "our" refer to BAM! Entertainment, Inc. and our wholly-owned subsidiaries, BAM Entertainment Limited and BAM Studios (Europe) Limited. We were incorporated in California in October 1999 under the name Bay Area Multimedia, Inc. We reincorporated in Delaware in September 2000 and changed our name to BAM! Entertainment, Inc. in December 2000. Our principal executive offices are located at 333 West Santa Clara Street, Suite 930, San Jose, California 95113. Our telephone number is (408) 298-7500. Our web site is http://www.bam4fun.com. The information found on our web site is not a part of this prospectus. 2 6 THE OFFERING The following information assumes that the underwriters do not exercise the over-allotment option we granted to them to purchase additional shares in the offering. Common stock we are offering................................... ________________ shares Common stock to be outstanding after this offering............. ________________ shares Proposed Nasdaq National Market symbol......................... BFUN Use of proceeds................................................ For general corporate purposes, including additional product development, expansion of our sales and marketing activities, international operations and possible acquisitions. See "Use of proceeds."
The number of shares of our common stock to be outstanding after this offering is based upon 1,583,600 shares of our common stock outstanding as of March 31, 2001 and gives effect to the sale of 245,659 shares of Series C Preferred Stock in May 2001 for net proceeds of $5.3 million, our issuance of _____________ shares of common stock being sold by us in this offering and the conversion of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock upon the completion of this offering, and excludes: - - _______________ shares issuable upon exercise of the underwriters' over-allotment option; - - 83,000 shares of our common stock issuable upon exercise of options outstanding as of March 31, 2001 at a weighted average exercise price of $3.65 per share under our 2000 Stock Incentive Plan. For a description of our 2000 Stock Incentive Plan, please see "Management--2000 Stock Incentive Plan"; - - 130,000 shares issuable upon exercise of warrants outstanding as of March 31, 2001 at a weighted average exercise price of $7.92 per share; and up to 146,250 shares of our common stock issuable pursuant to a third-party property license agreement as of March 31, 2001; and - - up to 146,250 shares of our common stock issuable pursuant to a third-party property agreement as of March 31, 2001. Unless otherwise noted, all share and per share information in this prospectus gives effect to: - - a ____-for-one stock split of our common stock to be effected prior to the completion of this offering; - - a 0.195-for-one reverse stock split of our common stock effected as of May 11, 2000; and - - the automatic conversion of all of our outstanding shares of our redeemable convertible preferred stock into shares of our common stock upon the completion of this offering. 3 7 SUMMARY CONSOLIDATED FINANCIAL DATA Our summary consolidated financial data is presented in the following table to aid you in your analysis of a potential investment in our common stock. You should read this data in conjunction with "Management's discussion and analysis of financial condition and results of operations", our consolidated financial statements and the notes to those financial statements appearing elsewhere in this prospectus. The pro forma basic and diluted calculations below reflect the conversion, upon the completion of this offering, of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock, as if it occurred on the dates of original issuance.
OCTOBER 7, 1999 (INCEPTION) THROUGH ---------------------------------- NINE MONTHS ENDED JUNE 30, 2000 MARCH 31, 2000 MARCH 31, 2001 ------------- -------------- ----------------- (in thousands, except per share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA Net revenues.................................... $1,377 $ -- $17,305 Costs and expenses.............................. 2,158 512 16,928 ------ ------ ------- Income (loss) from operations................... (781) (512) 377 Other expense, net.............................. (22) (5) (952) ------ ------ ------- Net loss........................................ (803) (517) (575) ====== ====== ======= Loss per share: Basic and diluted........................ $(4.54) $(2.97) $ (1.84) Pro forma basic and diluted (unaudited).. $(4.44) $ (0.41) Shares used in computation: Basic and diluted........................ 177 174 313 Pro forma basic and diluted (unaudited).. 181 1,390
MARCH 31, 2001 ------------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (in thousands) CONSOLIDATED BALANCE SHEET DATA Cash and cash equivalents....................... $ 1,240 $ 6,540 $ Working capital................................. 4,949 10,249 Total assets.................................... 12,767 18,067 Long-term portion of debt....................... -- -- Redeemable convertible preferred stock.......... 6,657 -- Total stockholders' equity (deficit)............ (63) 11,894
- ------------------------- The preceding table presents a summary of our consolidated balance sheet data as of March 31, 2001: - - on an actual basis; - - on a pro forma basis to reflect the sale of 245,659 shares of Series C Preferred Stock in May 2001 for net proceeds of $5.3 million and the conversion of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock upon the completion of this offering; and - - on a pro forma as adjusted basis to give effect to the receipt of the estimated net proceeds from the sale of _____ shares of common stock in this offering, at an assumed initial public offering price of $______ per share after deducting the estimated underwriting discount and commissions and estimated offering expenses payable by us. 4 8 RISK FACTORS You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that adversely affect us. If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our common stock would decline and you may lose all or part of your investment. RISKS RELATED TO OUR FINANCIAL RESULTS BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT IS DIFFICULT TO EVALUATE AN INVESTMENT IN OUR COMMON STOCK. We were organized in October 1999 and released our first interactive entertainment software product in June 2000. It is difficult to evaluate our future prospects and an investment in our common stock because we have a limited operating history and the market for our products is rapidly evolving. Our prospects are uncertain and must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stage of development. Our future performance will depend upon a number of factors, including our ability to: - - expand our customer base; - - secure popular entertainment properties upon which to base future products; - - develop and enhance products in response to new interactive entertainment hardware platform releases, customer demand and competitive market conditions; - - expand our interactive entertainment software development and sales and marketing capabilities; - - expand our international operations; - - attract, retain and motivate qualified personnel; and - - maintain adequate control of our expenses. WE HAVE A HISTORY OF OPERATING LOSSES AND MAY NEVER ACHIEVE PROFITABILITY. We incurred net losses of $575,000 for the nine months ended March 31, 2001 and $803,000 for the period from October 7, 1999 (inception) to June 30, 2000. We may incur a net loss for the year ending June 30, 2001 as we continue to make significant expenditures for product development, sales and marketing, international expansion, and general and administrative functions. We will need to generate significant revenues to achieve profitability. There can be no assurance that our revenues will grow in the future or that we will achieve sufficient revenues for profitability. If our revenues do not grow as quickly as we anticipate, or if our operating expenses exceed our expectations, our business would be severely harmed. OUR REVENUES FLUCTUATE DUE TO SEASONAL DEMAND AND THE NATURE OF THE INTERACTIVE ENTERTAINMENT INDUSTRY. We have experienced and may continue to experience significant quarterly fluctuations in net sales and operating results. The interactive entertainment industry is highly seasonal, with sales typically higher during the fourth and first calendar quarters, due primarily to the increased demand for games during and immediately following the holiday buying season. Our failure or inability to introduce products on a timely basis to meet seasonal fluctuations in demand will harm our business and operating results. Although we are attempting to reduce the effect of seasonal patterns on our business by distributing our product release dates more evenly throughout the year, we cannot assure you that these efforts will be successful. These fluctuations could cause our stock price to decline. Other factors that cause fluctuations include: - - the timing of our release of new titles; - - the popularity of both new titles and titles released in prior periods; 5 9 RISK FACTORS - - fluctuations in the size and rate of growth of consumer demand for titles for different hardware platforms; - - the timing of the introduction of new hardware platforms and the accuracy of retailers' forecasts of consumer demand; - - the timing of shipments by hardware manufacturers or delays in those shipments; - - changes in the mix of titles with varying profit margins; - - the development and timing of releases of products by competitors; - - the timing of customer orders; and - - product returns. Our expense levels are based, in part, on our expectations regarding future sales and therefore, our operating results would be harmed by a decrease in sales or a failure to meet our sales expectations. The uncertainties associated with interactive entertainment software development, lengthy manufacturing lead times, production delays and the approval process for products by hardware manufacturers and other licensors make it difficult to predict the quarter in which our products will ship and therefore, may cause us to fail to meet financial expectations. In some future quarters our operating results may fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock could significantly decline. OUR EARNINGS WILL BE AFFECTED UPON THE ISSUANCE OF SHARES OF OUR COMMON STOCK PURSUANT TO THIRD PARTY ENTERTAINMENT PROPERTY LICENSE AGREEMENTS. Pursuant to a license agreement with a production company, we are obligated to issue 14,625 shares of our common stock to the production company after the release of any film for which we elect to produce interactive entertainment software products, up to 10 films or 146,250 shares of common stock. To date, we have elected to produce titles for three films and have issued 14,625 shares under this agreement. We are required to issue these shares when the films are released and will then incur a non-cash charge. If the software product is released after the release of the film, we will amortize the non-cash charge over the life of the product, which is expected to be between three and six months. If the software product is released prior to the release of the film, we will expense the non-cash charge at the time of the issuance of the shares. We cannot estimate the aggregate dollar amount of future non-cash charges as they are based on our share price at a future point in time, but they may be substantial. The non-cash charge on the initial shares issued is expected to be incurred in the first or second fiscal quarter of 2002. In addition, in connection with the issuance of warrants pursuant to a license agreement with another production company, we incurred a non-cash charge of $354,000, which is being amortized on a straight-line basis over five years. This amortization commenced in October 2000. In connection with these warrants, a further non-cash charge of $556,000 will be amortized over a period, expected to be between three and six months, commencing on the release of the subject interactive entertainment software products, expected to be in the first or second fiscal quarter of 2003. Each of these charges will affect our gross margins and profitability and may cause the trading price of our common stock to decline significantly. RISKS RELATED TO OUR BUSINESS OUR MARKET IS CHARACTERIZED BY CHANGING CONSUMER PREFERENCES AND SHORT PRODUCT LIFE CYCLES. TO COMPETE EFFECTIVELY WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE. The interactive entertainment software market is characterized by short product life cycles, changing consumer preferences and frequent introduction of new products. We believe that our success will be dependent on the production of successful titles on a continuous basis. We cannot assure you that new products introduced by us will achieve significant market acceptance or that such acceptance, if achieved, will be sufficient to permit us to recover development and other associated costs. Consumer preferences for interactive entertainment software products are continually changing and are difficult to predict. Historically, very few interactive entertainment software products have achieved sustained market acceptance. Rather, a limited number of products have become popular and have accounted for a substantial portion of revenues in the industry. Even 6 10 RISK FACTORS the most successful titles remain popular for only limited periods of time, often less than six months. The life cycle of a game generally consists of a relatively high level of sales during the first few months after introduction, followed by a decline in sales. Accordingly, we expect that substantially all of our net sales for a particular year will be generated by titles released in that year and in the latter part of the prior year. In the past, we have experienced delays in the introduction of new titles and we anticipate that we will experience similar delays in the future in connection with the introduction of additional new titles, including products currently under development. Because net revenues associated with the initial shipments of a new product generally constitute a high percentage of the total net revenues associated with the life of a product, any delay in the introduction of, or the presence of a defect in, one or more new products could harm the ultimate success of the products or our business and operating results. In addition, the development cycle for new titles is long, typically ranging from 12 to 24 months. After development of the product, it may take between six to 12 additional months to develop the product for additional hardware platforms. In order to distribute a product, we must develop and test the necessary game software, obtain approval from the manufacturer and licensor if required, and have the initial order of cartridges or disks manufactured. During the development cycle, the market appeal of a title may decline. If market acceptance is not achieved, we may grant markdown allowances to maintain our relationship with retailers and our access to distribution channels. Because we introduce a relatively limited number of new products in a given period, the failure of one or more of our products to achieve market acceptance could harm our business. THE INTRODUCTION OF NEW INTERACTIVE ENTERTAINMENT HARDWARE PLATFORMS CREATES RISKS RELATING TO THE DEVELOPMENT OF TITLES FOR THOSE HARDWARE PLATFORMS. The interactive entertainment industry is also characterized by rapid technological change. For example, the 128-bit hardware platform was released within five years of the release of the 64-bit hardware platform. As a result, we must continually anticipate these changes and adapt our offerings to emerging hardware platforms and evolving consumer preferences. Generally, because of the length of the development cycle, our development efforts must begin well in advance of the release of new hardware platforms in order to introduce titles on a timely basis with the release of such hardware platforms. Further, we have no control over the release dates of new hardware platforms or the number of units that will be shipped upon such release. It is difficult to ensure that our schedule for releasing new titles will coincide with the release of the corresponding hardware platforms. Additionally, if fewer than expected units of a new hardware platform are produced or shipped, such as recently occurred with PlayStation2, developers of titles for those hardware platforms may experience lower than expected sales. Our development efforts with respect to new hardware platforms may not lead to marketable titles or titles that generate sufficient revenues to recover their development and marketing costs, especially if a new hardware platform does not reach an expected level of acceptance. This risk may increase in the future, as continuing increases in development costs require corresponding increases in net sales in order for us to maintain profitability. The technological advancements of the new hardware platforms also allow more complex software products. As software products become more complex, the risk of undetected errors in products when first introduced increases. We cannot assure you that, despite testing, errors will not be found in new products or releases after shipments have been made, resulting in loss of or delay in timely market acceptance, product returns, loss of revenues and damage to our reputation. The introduction of new hardware platforms and technologies can also render existing titles obsolete and unmarketable. Generally, as more advanced hardware platforms are introduced, consumer demand for titles for older hardware platforms diminishes. In addition, a broad range of competing and incompatible emerging technologies may lead consumers to postpone buying decisions until a particular hardware platform gains widespread acceptance. As a result of such reduced consumer demand for titles on older hardware platforms, our titles for older hardware platforms may not generate sufficient sales to make our titles profitable. 7 11 RISK FACTORS THE COSTS OF DEVELOPING AND MARKETING PRODUCTS FOR NEW INTERACTIVE ENTERTAINMENT HARDWARE PLATFORMS MAY BE SUBSTANTIAL AND COULD HARM OUR BUSINESS. The costs associated with the introduction of products for new hardware platforms, such as Nintendo GameCube, Sony's PlayStation2 and Microsoft's Xbox, could harm our business. We anticipate that it will be more costly to develop titles for new hardware platforms and believe the costs of developing and publishing titles for these hardware platforms may require greater financial and technical resources than prior development and publishing efforts. Additionally, during periods of new technology introductions, forecasting our revenues and earnings is more difficult than in more stable or rising product markets. IF NEW INTERACTIVE ENTERTAINMENT HARDWARE PLATFORMS FAIL TO ACHIEVE SIGNIFICANT MARKET ACCEPTANCE, IT MAY HARM OUR BUSINESS. Our sales are dependent on, among other factors, the popularity and unit sales of the interactive entertainment hardware platforms of the various manufacturers. The interactive entertainment industry has experienced periods of significant growth in consumer interest and popularity, followed by periods in which consumer demand for interactive entertainment products has slowed. Unexpected shortfalls in the market acceptance of a particular hardware platform can significantly harm consumer demand for titles released or scheduled for release for that hardware platform. Therefore, we are dependent upon the successful marketing efforts of the manufacturers of the various hardware platforms to meet financial expectations. PRODUCT RETURNS AND MARKDOWN ALLOWANCES COULD HARM OUR BUSINESS. We are exposed to the risk of product returns and markdown allowances with respect to our customers. The decrease in demand for products based upon older hardware platforms may lead to a high level of these product returns and markdown allowances. We allow distributors and retailers to return defective, shelf-worn and damaged products in accordance with negotiated terms. In addition, we provide markdown allowances to our customers on certain unsold merchandise. Product returns and markdown allowances that exceed our expectations could harm our business. A SUBSTANTIAL PORTION OF OUR REVENUES HAVE BEEN DERIVED FROM A LIMITED NUMBER OF PRODUCTS. To date, a substantial portion of our revenues have been derived from a limited number of products. Sales of our POWERPUFF GIRLS products accounted for 82% of our net revenues for the nine months ended March 31, 2001. Sales of our BEAST WARS product accounted for 100% of our net revenues for the period from inception through June 30, 2000. If we fail to replace these titles with additional products generating significant revenues, our business will be harmed. OVER 60% OF OUR NET REVENUES ARE DERIVED FROM SALES TO OUR FOUR LARGEST CUSTOMERS. WE COULD BE ADVERSELY AFFECTED IF ANY OF THEM REDUCED OR TERMINATED THEIR PURCHASES FROM US OR DID NOT PAY THEIR OBLIGATIONS TO US. Revenues from our four largest customers collectively accounted for 63% of our net revenues for the nine months ended March 31, 2001 as compared to 75% from our three largest customers for the period from inception through June 30, 2000. Our largest customers for the nine months ended March 31, 2001 were Toys "R" Us which accounted for 20% of our net revenues, Wal-Mart which accounted for 16% of our net revenues, Target which accounted for 15% of our net revenues, and Kmart which accounted for 12% of our net revenues. For the period from inception through June 30, 2000, Blockbuster accounted for 49% of our net revenues, Wal-Mart accounted for 16% of our net revenues and KB Toys accounted for 10% of our net revenues. We have no written agreements or other understandings with any of our customers that relate to future purchases, so purchases by these customers or any others could be reduced or terminated at any time. A substantial reduction or a termination of purchases by any of our largest customers would harm us. Our sales are typically made on credit, with terms that vary depending upon the customer and other factors. While we attempt to carefully monitor the creditworthiness of our customers and distributors, we bear the risk of their inability to pay our receivables and of any delay in payment. A business failure by any of our largest customers would harm us, as could a business failure by any of our distributors or other retailers. 8 12 RISK FACTORS WE CANNOT PUBLISH OUR INTERACTIVE ENTERTAINMENT SOFTWARE TITLES WITHOUT THE APPROVAL OF HARDWARE MANUFACTURERS. OUR ABILITY TO CONTINUE TO DEVELOP AND MARKET OUR TITLES IS DEPENDENT ON THE HARDWARE MANUFACTURERS CONTINUING TO DO BUSINESS WITH US. We are wholly dependent on the manufacturers of interactive entertainment hardware platforms and our ability to obtain or maintain non-exclusive licenses with them, both for the right to publish and manufacture titles for their hardware platforms. We are required to obtain a license to develop and publish titles for each hardware platform for which we develop and publish titles. Each license specifies the territory to which it applies, and such licenses range from as broad as worldwide distribution to as narrow as approval on a title-by-title basis. Our existing hardware platform licenses for Sony's PlayStation and PlayStation2, Nintendo's Game Boy Color and Game Boy Advance, Nintendo 64 and Microsoft's Xbox, and our pending license for Nintendo GameCube, require that we obtain approval for the publication of new titles on a title-by-title basis. We expect that our pending license for this next generation hardware platform will contain similar provisions. As a result, the number of titles we are able to publish for these hardware platforms, along with our ability to time the release of these titles and, accordingly, our revenues from titles for these hardware platforms, may be limited. Should any manufacturer choose not to renew or extend our license agreement at the end of its current term, or if the manufacturer were to terminate our license for any reason, we would be unable to publish additional titles for that manufacturer's hardware platform. License agreements relating to these rights generally extend for a term of two to three years. The agreements are terminable upon the occurrence of a number of factors, including: (1) breach of the agreement by us; (2) our bankruptcy or insolvency; or (3) our entry into a relationship with, or acquisition by, a competitor of the manufacturer. We cannot assure you that we will be able to obtain new or maintain existing licenses on acceptable terms, or at all. Generally, when we develop interactive entertainment software titles for a hardware platform offered by Sony or Nintendo, the products are manufactured exclusively by that hardware manufacturer. Our hardware platform licenses with Sony and Nintendo provide that the manufacturer may change prices for the manufacturing of products at any time and includes other provisions that give the manufacturer substantial control over our costs and the release of new titles. Since each of the manufacturers is also a publisher of games for its own hardware platforms and manufactures products for all of its other licensees, a manufacturer may give priority to its own products or those of our competitors in the event of insufficient manufacturing capacity. We would be materially harmed by unanticipated delays in the manufacturing and delivery of products. WE MUST RETAIN CURRENT OFFICERS AND DIRECTORS AND ATTRACT ADDITIONAL KEY PERSONNEL. Our success depends to a significant extent on the continued service of our key personnel, in particular our Chief Executive Officer and President, Raymond C. Musci, and our Vice Chairman, Anthony R. Williams. Our future success will also depend upon our ability to continue to attract, motivate and retain highly qualified employees and third party contractors, particularly software design and development personnel and outside sales representatives. Competition for highly skilled employees is intense and we may not be successful in attracting and retaining such personnel. Our failure to retain the services of Raymond C. Musci, Anthony R. Williams or our other key personnel or to attract and retain additional qualified employees would harm our business. WE ARE DEPENDENT UPON LICENSES TO PROPERTIES ORIGINATED AND OWNED BY THIRD PARTIES FOR THE DEVELOPMENT OF OUR TITLES. Many of our titles, such as those from our POWERPUFF GIRLS series, DEXTER'S LABORATORY and DRIVEN, are based upon entertainment properties licensed from third parties. We cannot assure you that we will be able to obtain new licenses, or renew existing ones, on reasonable terms, if at all. If we are unable to obtain licenses for the properties which we believe offer significant consumer appeal, we would be required to develop titles internally or forego future product offerings. Any internally developed title would require significantly greater marketing expense in order to establish brand identity and may not achieve market acceptance. 9 13 RISK FACTORS WE ARE DEPENDENT ON THIRD PARTY INTERACTIVE ENTERTAINMENT SOFTWARE DEVELOPERS FOR DEVELOPING AND COMPLETING MANY OF OUR TITLES. We rely on third party interactive entertainment software developers for the development of a significant number of our interactive entertainment software titles. Quality third party developers are continually in high demand. For this reason, we cannot assure you that the third party software developers who have developed titles for us in the past will continue to be available to develop software for us in the future. Due to the limited number of third party software developers and the lack of control that we exercise over them, we cannot assure you that these developers will complete titles for us on a timely basis or within acceptable quality standards, if at all. IF WE ARE REQUIRED TO WRITE DOWN PREPAID ROYALTIES OR CAPITALIZED SOFTWARE DEVELOPMENT COSTS BELOW THEIR CURRENT RECORDED VALUE, OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED. The agreements we enter into with licensors of popular entertainment properties and third party developers of interactive entertainment software titles typically require advance payments of royalties and/or guaranteed minimum royalty payments. We cannot assure you that the sales of products for which these royalties are paid or guaranteed payments are made will be sufficient to cover the amount of these required payments. We capitalize our advances to developers on our balance sheet once technological feasibility is achieved. We analyze all of our capitalized costs quarterly and we take write-offs when, based on our estimates, future individual product contributions will not be sufficient to recover our investment. OUR SUCCESS DEPENDS ON OUR ABILITY TO EFFECTIVELY MANAGE OUR GROWTH. Our operations have rapidly expanded since our inception in October 1999 and we plan to continue to significantly expand our operations. Our rapid growth has placed, and will continue to place, significant strain on our management and operational systems and resources. We anticipate that as our business grows, we will have to improve and enhance our overall financial and managerial controls, reporting systems and procedures, and we will need to continue to expand, train and manage our workforce. We will also have to increase the capacity of our current systems to meet additional demands. An inability to manage our growth and meet these additional demands will impair the success of our business. OBTAINING ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH COULD IMPAIR THE VALUE OF YOUR INVESTMENT. If we expand more rapidly than currently anticipated or if our working capital needs exceed our current expectations, we may need to raise additional capital through public or private equity offerings or debt financings. Our future capital requirements depend on many factors including our product development and sales and marketing activities. We do not know whether additional financing will be available when and if needed, or whether it will be available on terms favorable to us. If we cannot raise needed funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution and the new equity securities may have greater rights, preferences or privileges than our existing common stock. OUR SUCCESS IS HIGHLY DEPENDENT ON OUR PROPRIETARY SOFTWARE AND INTELLECTUAL PROPERTY. We rely primarily on a combination of copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and other methods to protect our proprietary rights. While we provide standard industry, or shrinkwrap, license agreements or limitations on use with our interactive entertainment software products, the effectiveness of these agreements or limitations is uncertain. We are aware that unauthorized copying occurs within our industry, and if a significantly greater amount of unauthorized copying of our interactive entertainment software products were to occur, our business would be harmed. We also outsource some of our product development to third party developers and contract with them for the ownership of the software code they develop as well as related documentation. If a third party developer successfully challenged our ownership rights to the software code for a particular title or group of titles, our business could be harmed. 10 14 RISK FACTORS We rely on existing copyright laws to prevent unauthorized distribution of our products. Existing copyright laws afford only limited protection. Policing unauthorized use of our products is difficult, and software piracy is a persistent problem, especially in international markets. In addition, the laws of some countries in which our products are or may be distributed either do not protect our products and intellectual property rights to the same extent as the laws of the United States or are weakly enforced. Legal protection of our rights may be ineffective in these countries. Any unauthorized use of our proprietary information could result in costly and time-consuming litigation to enforce our proprietary rights. We require all of our employees to sign confidentiality agreements providing that they will not disclose any confidential or proprietary information or trade secrets regarding us to any third party or use any such information or trade secrets for their benefit or the benefit of any third party. Although terms of the confidentiality agreement survive the termination of an employee's work with us, enforcing these terms and policing our employees during and especially after employment is difficult. These confidentiality agreements may not be sufficient to protect our proprietary rights. Any unauthorized disclosure or use of our confidential or proprietary information or our trade secrets could result in costly and uncertain litigation, and our business could be harmed. OUR ABILITY TO LICENSE ENTERTAINMENT PROPERTIES UNDERLYING THE DEVELOPMENT OF FUTURE TITLES COULD BE IMPAIRED BY AN IMPENDING LABOR STRIKE THAT WOULD AFFECT THE DEVELOPMENT OF MOTION PICTURES AND TELEVISION SHOWS AND AFFECT THE SCHEDULED RELEASE OF MOTION PICTURES INTENDED TO COINCIDE WITH THE LAUNCH OF OUR RELATED TITLES. The existing collective bargaining agreement governing contracts and agreements with members of the Screen Actors' Guild is due to expire on June 30, 2001. We are not a signatory to this collective bargaining agreement, however, we are dependent on third party licensors for entertainment properties based on the production of motion pictures requiring the services of members of the Screen Actors' Guild. Although development efforts have been stepped up in the past year and projects have been accumulated in anticipation of a strike, if the collective bargaining agreement with the Screen Actors' Guild is allowed to expire and such a strike occurs, a prolonged work stoppage could impair our ability to license entertainment properties underlying the development of our future software titles and our business could be harmed. In addition, although we retain our rights to licensed properties whether or not the related motion picture is ever released, if this collective bargaining agreement is allowed to expire and a strike occurs, a prolonged work stoppage would delay the production and release of all motion pictures. This would impair our ability to coordinate the launch of software titles with the scheduled release of the related motion pictures, which could affect consumer acceptance of these titles and harm our business. OTHER PARTIES MAY ASSERT CLAIMS AGAINST US THAT WE ARE INFRINGING UPON THEIR INTELLECTUAL PROPERTY RIGHTS AND WE ARE REQUIRED TO INDEMNIFY HARDWARE MANUFACTURERS FROM CERTAIN CLAIMS IN EXCHANGE FOR THE RIGHT TO PURCHASE TITLES AND MANUFACTURE OUR SOFTWARE FOR THEIR HARDWARE PLATFORMS. We cannot be certain that our products do not infringe upon the intellectual property rights of others. Authorship of intellectual property rights can be difficult to verify. We may be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the intellectual property rights of third parties. If our products violate third-party proprietary rights, we cannot assure you that we would be able to obtain licenses to continue offering such products on commercially reasonable terms, or at all. In addition, we must indemnify the hardware manufacturers with respect to all loss, liability and expense resulting from any claim against them involving the development, marketing, sale or use of our products, including any claims for copyright or trademark infringement brought against them. As a result, we bear the risk that the properties upon which our software titles are based, or that the information and technology licensed from the hardware manufacturer and incorporated in our software, may infringe the rights of third parties. Any claims against us or the parties we indemnify relating to the infringement of third-party proprietary rights, even if not meritorious, could result in the expenditure of significant financial and managerial resources and also result in injunctions preventing us from offering these products. Such claims could severely harm our financial condition and ability to compete. We may also be subject to legal proceedings and claims from time to time in the ordinary course of business, including claims of alleged infringement of the trademarks and other intellectual property rights of third 11 15 RISK FACTORS parties. For example, we have recently become aware that other parties are utilizing the "BAM" mark, or marks that incorporate the letters "BAM", in businesses similar to ours, and those parties may have rights to such mark that are superior to ours. These parties could challenge our rights to use the name "BAM" in their markets. In this event, we could be required to stop using the name in particular markets or to obtain a license from these parties to use it in such markets. In addition, in May 2001, Nintendo of America, Inc. and Spike Co., Ltd. received a letter from counsel to World Wrestling Federation Entertainment, Inc. claiming a yet-to-be released game violated certain of the World Wrestling Federation Entertainment, Inc.'s intellectual property rights and demanding that each of them cease the United States distribution of the game. We hold the rights to the United States version of the game. We believe that the game, slated for sale in North America, does not violate the World Wrestling Federation Entertainment, Inc.'s rights because we believe that the United States version does not contain references to the characters, moves or wrestling organizations mentioned in the letter. However, in the event it is determined that the game we intend to distribute in North America violates the World Wrestling Federation Entertainment, Inc.'s intellectual property rights, we may be liable for damages and/or could be enjoined from distributing the game, which would negatively affect our net revenues. Our agreements with third party software developers and property licensors typically provide for us to be indemnified with respect to certain matters. However, if any claim is brought by a hardware manufacturer against us for indemnification, our software developers or property licensors may not have sufficient resources to, in turn, indemnify us. In addition, these parties' indemnification of us may not cover the matter that gives rise to the hardware manufacturer's claim, and in either case, our business could be harmed. THE CALIFORNIA ENERGY CRISIS COULD HARM OUR BUSINESS. California is currently experiencing a utility crisis and does not have sufficient sources of affordable power. This energy crisis could impact our business, financial condition and results of operations. Our domestic headquarters and principal operations are located in San Jose, California, which has undergone several periods of rolling blackouts, a technique used by our power providers to conserve resources. Although our operations have not been halted for significant periods of time as a result of these conservation measures, potential suspensions of our operations could result in lost productivity, materially higher costs and lost revenues. In addition, regulators have announced electricity rate increases in California, which will also increase our cost of operations. THE INTERACTIVE ENTERTAINMENT INDUSTRY IS CONSOLIDATING. IN MAKING ACQUISITIONS, WE FACE SIGNIFICANT COMPETITION FROM OTHER COMPANIES WITH GREATER FINANCIAL RESOURCES. WE ALSO FACE INTEGRATION CHALLENGES WITH ANY COMPANIES THAT WE ACQUIRE. To enhance our product development and distribution capabilities, we may pursue acquisitions of companies, intellectual property rights and other assets that can be acquired on acceptable terms and which we believe can be operated or exploited profitably. We cannot assure you that we will be successful in identifying suitable acquisition opportunities. As the interactive entertainment industry continues to consolidate, we face significant competition in making acquisitions, which may constrain our ability to complete suitable transactions. Many of our competitors for potential acquisitions have significant financial and other resources. If we attempt an acquisition, we cannot assure you that, given the competitive environment, we will complete the acquisition or that any completed acquisitions will benefit our business or operations. In addition, the integration of any newly acquired company's operations with our existing operations will take management time and effort. There is a possibility that we may not be successful in integrating operations of any newly acquired companies. Additionally, there is a risk of loss of key employees, customers and vendors of any recently acquired companies. THE DEVELOPMENT AND MARKETING OF PC TITLES DIFFER FROM CONSOLE TITLES AND ENTAIL ADDITIONAL RISKS. We have no experience developing and marketing titles for personal computers, or PCs. The development and marketing of PC games subject us to some different risks than those we encounter in connection with console games. These risks include the ability to accurately predict which titles appeal to the purchasers of games for PCs and our ability to produce titles using PC technology, which differs from that of traditional 12 16 RISK FACTORS interactive entertainment hardware. We cannot assure you that we will be able to develop and market successful titles for the PC market. WE FACE RISKS ASSOCIATED WITH DOING BUSINESS IN FOREIGN COUNTRIES, INCLUDING OUR ABILITY TO GENERATE INTERNATIONAL DEMAND FOR OUR PRODUCTS. We intend to expand our international sales and marketing activities. This expansion will require significant management time and attention and financial resources in order to develop our international operations. We cannot assure you that we will be able to generate international market demand for our products. International sales and operations are subject to a number of risks, including: - - the impact of possible recessions in foreign economies; - - our ability to protect our intellectual property; - - the time and costs associated with translating and localizing products for foreign markets; - - foreign currency fluctuations; - - unexpected changes in regulatory requirements; - - difficulties and costs of staffing and managing foreign operations; and - - political and economic instability. OUR OFFICERS AND DIRECTORS OWN A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AND THEREFORE HAVE SUBSTANTIAL INFLUENCE OVER OUR OPERATIONS AND CAN SIGNIFICANTLY INFLUENCE MATTERS REQUIRING STOCKHOLDER APPROVAL. Our officers and directors will beneficially own approximately ___% of our common stock following the completion of this offering, or approximately ___% if the underwriters' over-allotment option is exercised in full. As a result, they will have the ability to control all matters requiring approval by our stockholders, including the election and removal of directors, approval of significant corporate transactions and the decision of whether a change in control will occur. RISKS RELATED TO OUR INDUSTRY COMPETITION WITHIN THE INTERACTIVE ENTERTAINMENT SOFTWARE INDUSTRY IS INTENSE AND POSES AN ONGOING THREAT TO THE SUCCESS OF OUR BUSINESS. The interactive entertainment industry is intensely competitive. We compete primarily with other parties that develop and publish interactive entertainment software titles. Significant competitors include independent software publishers such as Acclaim Entertainment, Inc., Activision, Inc., Bandai America Incorporated, Capcom USA, Inc., Eidos PLC, Electronic Arts Inc., Infogrames, Inc., Interplay Entertainment Corp., Konami Corporation of America, Inc., Midway Games Inc., Namco Ltd., Sega Enterprises, Inc. (USA), Take-Two Interactive Software, Inc., THQ, Inc., Ubi Soft Entertainment and The 3DO Company, and manufacturers of interactive entertainment hardware platforms, such as Sony, Nintendo and Microsoft. Many of our competitors have greater name recognition among consumers and licensors of entertainment properties, broader product lines and greater financial, marketing and other resources than us. Accordingly, these competitors may be able to market their products more effectively, make larger offers or guarantees in connection with the acquisition of licensed entertainment properties, adopt more aggressive pricing policies or pay more to third party developers. We believe that the principal competitive factors in the interactive entertainment software industry include: - - product features; - - brand name recognition; - - access to distribution channels; - - product quality and ease of use; 13 17 RISK FACTORS - - price; - - marketing support; - - reviews received from independent reviewers; - - quality of customer service; and - - ownership of properties. We believe that other technology, entertainment and media companies are increasing their focus on the interactive entertainment software market, which might result in greater competition for us. In addition, many of our competitors are developing on-line interactive entertainment software products and interactive networks that will be competitive with our interactive entertainment software products. Competitive pressures could have the following effects on us: - - As competition for popular entertainment properties increases, our cost of acquiring licenses for those properties may increase, resulting in reduced margins. - - As competition for retail shelf space becomes more intense, we may need to increase our marketing expenditures to maintain sales of our interactive entertainment software titles. - - We could be required to reduce the wholesale unit prices of our titles. COMPETITION FOR LIMITED SHELF SPACE AND PROMOTIONAL RESOURCES AMONG INTERACTIVE ENTERTAINMENT SOFTWARE PUBLISHERS IS INTENSE AND POSES AN ONGOING THREAT TO THE SUCCESS OF OUR BUSINESS. There is intense competition among developers and publishers of interactive entertainment software products for high quality retail shelf space and promotional support from retailers. As the number of titles and hardware platforms increases, competition for shelf space will intensify and may require us to increase our marketing expenditures. Due to increased competition for limited shelf space, retailers and distributors are in an increasingly better position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product return policies. Our products constitute a relatively small percentage of any retailer's sales volume, and we cannot assure you that retailers will continue to purchase our products or to provide our products with adequate levels of shelf space and promotional support. As a result of their positions in the industry, the manufacturers of interactive entertainment hardware platforms generally have better bargaining positions with respect to retail pricing, shelf space and retailer accommodations than do any of their licensees, including us. GOVERNMENT RESTRICTIONS INCLUDING THE LIKELY ADOPTION OF AN INTERACTIVE ENTERTAINMENT SOFTWARE RATING SYSTEM AND POTENTIAL OPPOSITION BY CONSUMER ADVOCACY GROUPS TO CERTAIN SOFTWARE CONTENT COULD HARM OUR BUSINESS. Legislation is periodically introduced at the state and federal levels in the United States and in foreign countries to establish a system for providing consumers with information about graphic violence and sexually explicit material contained in interactive entertainment software products. Under such a system interactive entertainment software publishers would be expected to comply by identifying particular products within defined rating categories and communicating such ratings to consumers through appropriate package labeling and through advertising and marketing presentations consistent with each product's rating. In addition, many foreign countries have laws which permit governmental entities to censor the content of products, including interactive entertainment software. In some instances, we may be required to modify our products to comply with the requirement of such governmental entities, which could delay the release of those products in such countries. Such delays could harm our business. We currently voluntarily submit our products to industry-created review boards and publish their ratings on our game packaging. Some retailers may refuse to carry titles that bear an unacceptable rating. We believe that mandatory government-run interactive entertainment software products rating systems eventually will be adopted in many countries which represent significant markets or potential markets for us. Due to the uncertainties in the implementation of such a rating system, confusion in the marketplace may occur, and we are unable to predict what effect, if any, such a rating system would have on our business. In addition to such regulations, consumer advocacy 14 18 RISK FACTORS groups have in the past opposed sales of interactive entertainment software products containing graphic violence and sexually explicit content by pressing for legislation in these areas and by engaging in public demonstrations and media campaigns. While to date such actions have not harmed our business, we cannot assure you that these groups will not target our products in the future, which will possibly require us to significantly change or discontinue a particular title. RISKS RELATED TO THIS OFFERING WE EXPECT OUR STOCK PRICE TO BE VOLATILE. Prior to this offering, there has been no public market for our common stock. Accordingly, we cannot assure you that an active trading market will develop or be sustained or that the market price of our common stock will not decline. The initial public offering price for the shares of our common stock will be determined by us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The price at which our common stock will trade after this offering is likely to be highly volatile and may fluctuate substantially due to many factors, some of which are: - - actual or anticipated fluctuations in our results of operations; - - changes in securities analysts' expectations or our failure to meet those expectations; - - announcements of technological innovations or content relationships by us or our competitors; - - introductions of new products by us or our competitors; - - introductions of new hardware platforms; - - additions or departures of key personnel; - - commencement of litigation; - - developments with respect to intellectual property rights, including increased copyright piracy; - - conditions and trends in technology industries; - - changes in the estimation of the future size and growth rate of our markets; - - general market conditions; and - - future sales of our common stock. In addition, the stock market has experienced significant price and volume fluctuations that affected the market price for the common stock of many technology, communications and entertainment and media companies. These market fluctuations were sometimes unrelated or disproportionate to the operating performance of these companies. Any significant stock market fluctuations in the future, whether due to our actual performance or prospects or not, could result in a significant decline in the market price of our common stock. ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND IN DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL AND, AS A RESULT, NEGATIVELY IMPACT OUR STOCKHOLDERS. Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition or make removal of incumbent directors or officers more difficult. These provisions may discourage takeover attempts and bids for our common stock at a premium over the market price. These provisions include: - - the ability of our board of directors to alter our bylaws without stockholder approval; - - the restriction on the ability of stockholders to call special meetings; - - the restriction on the ability of our stockholders to act by written consent; 15 19 RISK FACTORS - - the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholders meetings; and - - the establishment of a classified board of directors with staggered, three-year terms, which prevents a majority of the board from being elected at one time. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which prohibits a publicly held Delaware corporation from engaging in a merger, asset or stock sale or other transaction with an interested stockholder for a period of three years following the date such person became an interested stockholder, unless prior approval of our board of directors is obtained or as otherwise provided. These provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us without obtaining the prior approval of our board of directors, which may cause the market price of our common stock to decline. MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING. The net proceeds from this offering will be used for general corporate purposes. Although we list expanding our manufacturing capacity, expanding our research and development operations, enhancing our technology, expanding our sales and marketing activities, expanding our international operations and possible acquisitions as examples of general corporate purposes, we are not obligated to pursue any of these opportunities. We have not reserved or allocated the net proceeds for any specific transaction, and we cannot specify with certainty how we will use the net proceeds. Accordingly, our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase our operating results or market value. Until the net proceeds are used, they may be placed in investments that do not produce income or that lose value. A SUBSTANTIAL AMOUNT OF OUR SHARES WILL BE ELIGIBLE FOR SALE SHORTLY AFTER THIS OFFERING. If our stockholders sell substantial amounts of common stock in the public market following this offering, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or our equity-related securities at a time and price that we deem appropriate. Based on shares outstanding as of March 31, 2001, upon completion of this offering, we will have ___________ shares of common stock outstanding. Of these shares, the ____________ shares being offered hereby will be freely tradable and the remaining shares will become eligible for sale in the public market pursuant to Rule 144. All of the remaining shares are subject to contractual restrictions with the underwriters that prevent them from being sold until 180 days after the date of this prospectus without the consent of UBS Warburg LLC. Of the remaining shares, 1,583,600 may be sold on the 181st day after the date of this prospectus without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. An additional 14,625 shares will be available in April 2002 for sale without registration under the Securities Act to the extent permitted by Rule 144. The remaining 245,659 shares will be available in May 2002 for sale without registration under the Securities Act to the extent permitted under Rule 144. UBS Warburg LLC may, in its sole discretion, at any time without notice, release all or any portion of the shares subject to the lock-up agreements, which would result in more shares being available for sale in the public market at an earlier date. Sales of common stock by existing stockholders in the public market, or the availability of such shares for sale, could materially and adversely affect the market price of our common stock. In addition, we expect to register for sale 325,000 shares of common stock reserved for issuance under our 2000 Stock Incentive Plan. As of March 31, 2001, options to purchase 83,000 shares of our common stock were granted under our 2000 Stock Incentive Plan. Shares acquired upon exercise of these options will be eligible for sale in the public market from time to time subject to vesting and the 180 day lock-up restrictions that apply to the outstanding stock. The exercise price of the majority of these stock options is lower than the initial public offering price of our common stock. The sale of a significant number of these shares could cause the price of our common stock to decline. 16 20 RISK FACTORS OUR SHARES PURCHASED IN THIS OFFERING WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION OF APPROXIMATELY $_________ PER SHARE. The assumed initial public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of the outstanding common stock immediately after this offering. Accordingly, assuming an initial public offering price of $______ per share, if you purchase common stock in this offering, you will incur immediate and substantial dilution of $______ in the pro forma net tangible book value per share of the common stock. In addition, investors will incur additional dilution upon the exercise of outstanding stock options and warrants after this offering. 17 21 FORWARD LOOKING INFORMATION This prospectus may contain forward-looking statements. When used in this prospectus, the words "anticipate," "believe," "estimate," "will," "plan," "intend" and "expect" and similar expressions identify forward-looking statements. Although we believe that our plans, intensions and expectations reflected in those forward looking statements are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this prospectus. Important factors that could cause actual results to differ materially from our forward-looking statements are set forth in this prospectus, including under the heading "Risk factors." Our actual results could differ materially from those predicated in these forward-looking statements, and the events anticipated in the forward-looking statements may not actually occur. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this prospectus. Other than with respect to previously issued projections, we are under no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. 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 our 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. USE OF PROCEEDS The net proceeds to us from this offering, at an assumed initial public offering price of __________ per share, after deducting underwriting discounts and commissions and estimated offering expenses, are estimated to be $_______ million, or $_______ million if the underwriters' over-allotment option is exercised in full. We expect to use the net proceeds of the offering for general corporate purposes, including approximately $__________ million, which have not been allocated in specific amounts, for product development, expansion of sales and marketing activities, $_________ million for expansion of our international operations and possible acquisitions. We currently have no commitments or agreements and are not involved in any negotiations with respect to any acquisitions. The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our product development efforts, sales and marketing activities, technological advances, the amount of cash generated or used by our operations and competition. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the balance of the net proceeds. Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing, investment grade securities. Our management team made the determination to offer our shares to the public to fund our future expansion, to compensate our employees and to attract new employees. We determined the portion of our business to be sold in this offering through a combination of estimates of our future expansion plans, evaluation of market conditions and recent offerings of comparable companies. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends on our capital stock in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, contractual obligations and future prospects and other factors the board of directors may deem relevant. 18 22 CAPITALIZATION Our capitalization as of March 31, 2001 is set forth in the following table on: - - an actual basis; - - a pro forma basis to reflect the sale of 245,659 shares of Series C Preferred Stock in May 2001 for net proceeds of $5.3 million and the conversion of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock upon the completion of this offering; and - - the pro forma information on an as adjusted basis to give effect to the receipt of the estimated net proceeds from the sale of _______ shares of common stock in this offering, at an assumed initial public offering price of $_______ per share after deducting the estimated underwriting discount and commissions and estimating offering expenses payable by us. The table does not include: - - 83,000 shares of our common stock issuable upon exercise of options outstanding as of March 31, 2001 with a weighted average exercise price of $3.65 under our 2000 Stock Incentive Plan; - - 130,000 shares of our common stock issuable upon exercise of warrants outstanding as of March 31, 2001 with a weighted average exercise price of $7.92; and - - up to 146,250 shares of our common stock issuable as of March 31, 2001 pursuant to a third party property license agreement. You should read this table in conjunction with "Management's discussion and analysis of financial condition and results of operations" and our consolidated financial statements and the notes to those financial statements included elsewhere in this prospectus.
MARCH 31, 2001 ------------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (in thousands, except share and per share data) Long-term debt....................................................... $ -- $ -- $ -- -------- -------- ------- Redeemable convertible preferred stock: $0.001 par value; 3,000,000 shares authorized; 1,270,840 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted................. 6,657 -- -- -------- -------- ------- Common stock: $0.001 par value; 10,000,000 shares authorized; 312,760 shares issued and outstanding, actual; 1,829,259 shares issued and outstanding, pro forma; ________ shares issued and outstanding, pro forma as adjusted .............................. 1 2 Additional paid-in-capital........................................... 1,365 13,321 Receivable from stockholder.......................................... (1) (1) Deferred stock compensation.......................................... (46) (46) Accumulated deficit.................................................. (1,378) (1,378) Accumulated other comprehensive loss................................. (4) (4) -------- -------- ------- Total stockholders' equity (deficit)................................. (63) 11,894 -------- -------- ------- Total capitalization................................................. $ 6,594 $ 11,894 $ ======== ======== =======
19 23 DILUTION Our pro forma net tangible book value as of March 31, 2001 was approximately $_______ per share of our common stock. Our net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding, as of March 31, 2001. In making this calculation, we gave effect to the sale of 245,659 shares of Series C Preferred Stock in May 2001 for net proceeds of $5.3 million and the conversion of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock upon the completion of this offering. After giving effect to our sale in this offering of _______________ shares of our common stock at an assumed initial public offering price of $_______ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of March 31, 2001 would have been _______ per share of our common stock. This represents an immediate increase in net tangible book value of ______ per share to our existing stockholders and an immediate dilution of _______ per share to you. The following table illustrates this per share dilution: Assumed initial public offering price per share....................................... $ Pro forma net tangible book value per share before this offering................ $ --------- Increase attributable to investors in this offering............................. Pro forma net tangible book value after the offering.................................. -------- Dilution per share to investors in this offering...................................... $ ========
The differences between our existing stockholders and investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid for both common and preferred stock is summarized on a pro forma basis, as of March 31, 2001 before underwriters' discount and estimated offering expenses in the following table, after giving effect to the sale of 245,659 shares of Series C Preferred Stock in May 2001 for net proceeds of $5.3 million and the conversion of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock upon the completion of this offering. The following table does not include 83,000 shares of our common stock issuable upon exercise of options outstanding as of March 31, 2001 with a weighted average exercise price of $3.65 under our 2000 Stock Incentive Plan; 130,000 shares of our common stock issuable upon exercise of warrants outstanding as of March 31, 2001 with a weighted average exercise price of $7.92; and up to 146,250 shares of our common stock issuable as of March 31, 2001 pursuant to a third party property license agreement. You should read this table in conjunction with "Management's discussion and analysis of financial condition and results of operations" and our consolidated financial statements and the notes to those financial statements included elsewhere in this prospectus. See "Management - 2000 Stock Incentive Plan" and note 5 to our consolidated financial statements.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- ----------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------ ------- ------ ------- --------- (in thousands) Existing stockholders............................... % % $ Investors in this offering.......................... ----- ----- ----- ----- ------- Total............................................... 100.0 % 100.0% $ ===== ===== ====== ===== =======
20 24 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and related notes thereto and "Management's discussion and analysis of financial condition and results of operations" included elsewhere in this prospectus. The selected consolidated financial data as of June 30, 2000 and March 31, 2001 and for the period from October 7, 1999 (inception) through June 30, 2000 and for the nine months ended March 31, 2001 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data for the period from October 7, 1999 (inception) through March 31, 2000 is derived from our unaudited financial statements appearing elsewhere in this prospectus. The unaudited information has been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, contains all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of our operating results for these periods and our financial condition as of these dates.
PERIOD FROM PERIOD FROM OCTOBER 7, 1999 OCTOBER 7, 1999 (INCEPTION) THROUGH (INCEPTION) THROUGH NINE MONTHS ENDED JUNE 30, 2000 MARCH 31, 2000 MARCH 31, 2001 ------------------- ------------------- ----------------- (in thousands, except per share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA Net revenues ............................................... $ 1,377 $ -- $ 17,305 -------- -------- -------- Costs and expenses: Cost of revenues ...................................... 807 -- 9,766 Royalties, software costs, license costs and project abandonment ................................... 248 -- 2,028 Research and development* ............................. 260 133 663 Sales and marketing* .................................. 132 -- 3,234 General and administrative* ........................... 711 379 1,218 Amortization of deferred stock compensation ........... -- -- 19 -------- -------- -------- Total costs and expenses .......................... 2,158 512 16,928 -------- -------- -------- Income (loss) from operations .............................. (781) (512) 377 Other expense, net ......................................... (22) (5) (952) -------- -------- -------- Net loss ................................................... $ (803) $ (517) $ (575) ======== ======== ======== Net loss per share: Basic and diluted (1) ................................. $ (4.54) $ (2.97) $ (1.84) Pro forma loss per share Basic and diluted (unaudited) (2) ..................... $ (4.44) $ (0.41) Shares used in computation: Basic and diluted (1) ................................. 177 174 313 Pro forma basic and diluted (unaudited) (2) ........... 181 1,390 *Excludes amortization of deferred stock compensation: Research and development .............................. $ --- $ -- $ 16 Sales and marketing ................................... -- -- 3 General and administrative ............................ -- -- -- -------- -------- -------- $ -- $ -- $ 19 ======== ======== ========
JUNE 30, 2000 MARCH 31, 2001 ------------- -------------- (in thousands) CONSOLIDATED BALANCE SHEET DATA Cash and cash equivalents .............. $ 908 $ 1,240 Working capital ........................ 1,318 4,949 Total assets ........................... 2,712 12,767 Long-term portion of debt .............. -- -- Redeemable convertible preferred stock.. 2,103 6,657 Total stockholders' equity (deficit) ... (706) (63)
21 25 SELECTED CONSOLIDATED FINANCIAL DATA (1) The diluted net loss per share computation excludes potential shares of common stock issuable upon conversion of redeemable convertible preferred stock and exercise of options to purchase common stock, as their effect would be antidilutive. See Notes 1 and 7 of notes to consolidated financial statements for a detailed explanation of the determination of the shares used in computing basic and diluted net loss per share. (2) Includes the weighted average number of shares resulting from the assumed conversion of all outstanding shares of redeemable convertible preferred stock upon the completion of this offering. See note 1 of notes to consolidated financial statements for a detailed explanation of the determination of the shares used in computing pro forma net loss per share. The diluted pro forma net loss per share computation excludes potential shares of common stock issuable upon exercise of options to purchase common stock as their effect would be antidilutive. 22 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations should be read in conjunction with "Selected consolidated financial data" and the consolidated financial statements and related notes to those statements included elsewhere in this prospectus. This discussion and analysis may contain forward-looking statements that involve risks, uncertainties and assumptions. As a result of many factors, such as those set forth under "Risk factors" and elsewhere in this prospectus, our actual results may differ materially from those anticipated in the forward-looking statements. OVERVIEW We develop and publish interactive entertainment software. We currently publish titles for many of the most popular interactive entertainment hardware platforms, such as Sony's PlayStation, Nintendo 64 and Nintendo's Game Boy Color, and plan to develop and publish titles for next generation hardware platforms such as Sony's PlayStation2, Nintendo GameCube and Game Boy Advance and Microsoft's Xbox, as well as for other portable handheld devices and PCs. We were incorporated in California in October 1999 under the name Bay Area Multimedia, Inc. We reincorporated in Delaware in September 2000 and changed our name to BAM! Entertainment, Inc. in December 2000. We commenced operations in October 1999 and shipped our first products in June 2000. We license properties from a wide variety of sources, and publish titles based on the motion picture, sports and television cartoon character properties of our licensors. We have entered into strategic license arrangements with entertainment and media companies that have developed well-known characters and brands and that are producing popular properties that are expected to form the basis of some of our future products. Our agreements with licensors and developers generally require us to make advance royalty payments, and we may be required to spend money on advertising and promotion. We generally pay royalties based on net revenues. We design and develop our titles internally, or through third parties with whom we have established relationships. Our development cycle for new titles is long, typically ranging from 12 to 24 months. After development of the product, it may take between six to 12 additional months to develop the product for, or port the product to, a different hardware platform. We sell our products to mass merchandisers such as Toys "R" Us, Target, Kmart, Wal-Mart and Best Buy, specialty chains such as Babbages, Etc. and Electronics Boutique and independent distributors. Our products are manufactured exclusively by third parties. We have operations in both the United States and Europe. Our international operations are conducted through our offices in England, where we have our internal product development studio, perform international sales and marketing activities and manage local third-party developers. We currently have minimal international revenues, but anticipate that these will increase as we localize our products for international markets. NET REVENUES We derive revenues from shipment of finished products to the customer. We may allow customers to exchange and return our products within certain specified periods after shipment and provide price protection on certain unsold merchandise in the form of a credit against amounts due from the customer. Net revenues from product sales are reflected after deducting the estimated cost of allowances for returns and price protection. These estimates are based upon current known circumstances and historical results. Net revenues will be affected by many factors, including pricing strategies, the channels through which our products are distributed, product maturity, exchange and return privileges and price protection. Net revenues are recognized when we have satisfied the following conditions: persuasive evidence of an arrangement exists, delivery has occurred, the price has been fixed or is determinable, and collectibility has been reasonably assured. 23 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We expect that substantially all of our net revenues for a particular year will be generated by titles released in that year or in the latter part of the prior year. The markets for interactive entertainment software are characterized by short product life cycles, changing consumer preferences and frequent introduction of new products. The life cycle of a title generally consists of a relatively high level of sales during the first few months after introduction, followed by a decline in sales, with only a small percentage of sales occurring more than six months after release. We have experienced, and may continue to experience, quarterly fluctuations in net revenues. The interactive entertainment industry is highly seasonal, with net revenues typically significantly higher during the fourth calendar quarter, due primarily to the increased demand for titles during the year-end holiday buying season. Our failure or inability to introduce products on a timely basis to meet seasonal increases in demand will harm our business and operating results. While we are attempting to reduce the effect of seasonal patterns on our business by distributing our product release dates more evenly throughout the year, we may not be successful in this endeavor. COST OF REVENUES Cost of revenues includes manufacturing costs of finished goods, freight, inventory management costs and inventory obsolescence costs. Cost of revenues will vary depending on the volume of products manufactured and shipped, the mix of products sold and the shipping channel used. ROYALTIES, SOFTWARE COSTS, LICENSE COSTS AND PROJECT ABANDONMENT Royalties, software costs, license costs and project abandonment includes royalties paid to software licensors, software amortization and amortization of non-cash charges related to warrants and rights to acquire our common stock issued to certain production companies. These costs will be affected in particular periods by many factors, including the specific terms or agreements under which royalties are paid to third parties, the commercial acceptance of products, the cost of developing a product and the timing of stock and warrants issued pursuant to the terms of our license agreements as described below. Our agreements with licensors and developers generally require us to make advance royalty payments and pay royalties based on product sales. Prepaid royalties are amortized commencing upon the product release at the greater of the contractual royalty rate based on actual product sales, or the ratio of current revenues to total projected revenues. The Company evaluates the future recoverability of prepaid royalties on a quarterly basis and expenses costs if and when they are deemed unrecoverable. Commencing upon product release, we amortize capitalized software development costs. We capitalize software development costs subsequent to establishing technological feasibility of a title. Technological feasibility is evaluated on a product-by-product basis. For products where proven game engine technology exists, this may be early in the development cycle. Software development costs are expensed to research and development if and when they are deemed unrecoverable. The following criteria is used to evaluate recoverability of software development costs: historical performance of comparable products; the commercial acceptance of prior products released on a given hardware platform; orders for a product prior to its release and actual development costs of a product as compared to forward-looking projections. Amortization of software development costs is based on the greater of the proportion of current revenues to total projected revenues or the straight-line method over the estimated product life, generally three to six months. We evaluate the future recoverability of capitalized amounts on a quarterly basis. Pursuant to a license agreement with a production company, we are obligated to issue 14,625 shares of our common stock to the production company after the release of any film for which we elect to produce interactive entertainment software products, up to 10 films or 146,250 shares of common stock. To date, we have elected to produce titles for three films and have issued 14,625 shares under this agreement. We are required to issue these shares when the films are released and will then incur a non-cash charge. If the software product is released after the release of the film, we will amortize the non-cash charge over the life of the product, which is expected to be between three and six months. If the software product is released prior to the release of the film, we will expense the non-cash charge at the time of the issuance of the shares. We cannot estimate the aggregate dollar amount of these future non-cash charges as they are based on our share price 24 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS at a future point in time, but they may be substantial. The non-cash charges on the initial shares issued is expected to be incurred in the first or second quarter of fiscal 2002. In addition, in connection with the issuance of warrants pursuant to a license agreement with another production company, we incurred a non-cash charge of $354,000, which will be amortized on a straight-line basis over five years. This amortization commenced in October 2000. In connection with these warrants, a further non-cash charge of $556,000 will be amortized over a period which is expected to be between three to six months, commencing on the release of the subject titles, expected to be the first or second fiscal quarter of 2003. Each of these charges will affect our gross margins and profitability. RESEARCH AND DEVELOPMENT Research and development expenses relate to the design and development of new interactive entertainment software products. These expenses generally consist of salaries, related expenses for engineering personnel and third-party development costs. We will continue to develop our products both internally and through third parties. In absolute dollars we expect to see increases in research and development expense as we expand our product offerings. However, we expect to see a reduction in research and development expense as a percentage of revenues in future periods as our net revenues increase. SALES AND MARKETING Sales and marketing expenses consist primarily of salaries and related expenses for our direct sales force and marketing personnel, commissions to independent sales staff, marketing programs and advertising campaigns. In absolute dollars we expect to see a significant increase in sales and marketing expense as revenues increase and we expand our product offerings and international presence. However, we do not expect to see significant variations in sales and marketing expenses as a percentage of revenues in future periods. GENERAL AND ADMINISTRATIVE General and administrative expenses consist primarily of salaries and related expenses for finance and other administrative personnel, facilities and occupancy charges, professional fees and bad debt expense. We expect our general and administrative expenses to increase in absolute dollars as we expand our staff, build our infrastructure, grow our business and incur costs associated with being a public company. As a percentage of revenue, we expect to see a reduction in general and administrative expenses as our revenues increase. AMORTIZATION OF DEFERRED STOCK COMPENSATION Amortization of deferred stock compensation consists of deferred compensation expenses relating to stock option grants to employees. Deferred compensation represents the difference between the deemed fair market value of our common stock at the grant date and the exercise price of the related stock options. Deferred compensation is represented as a reduction of stockholders' equity and amortized, using a multiple option award valuation and amortization approach, over the vesting periods of the options, which is generally four years. We currently expect to amortize $____ in the quarter ending June 30, 2001 and then $____ during fiscal 2002. OTHER EXPENSE, NET Other expense, net consist mostly of interest expense net of interest income. We expect to be able to negotiate more favorable credit terms after this offering and therefore expect to see a net improvement in other expense, net in the future. 25 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth as a percentage of net revenues our consolidated statements of operations data for the periods indicated. The consolidated financial information for the nine months ended March 31, 2001 and for the period from October 7, 1999 (inception) through June 30, 2000 is derived from our audited consolidated financial statements. The consolidated financial information for the period from October 7, 1999 (inception) through March 31, 2000 is not presented as we had no revenues. Results for any interim period are not necessarily indicative of future operating results.
NINE INCEPTION MONTHS THROUGH ENDED JUNE 30, MARCH 31, 2000 2001 --------- -------- Net revenues ............................................. 100.0 % 100.0 % ----- ----- Cost and expenses: Cost of revenues ................................... 58.6 56.5 Royalties, software costs, license costs and project abandonment ................................... 18.0 11.7 Research and development (1) ....................... 18.9 3.8 Sales and marketing (1) ............................ 9.6 18.7 General and administrative (1) ..................... 51.6 7.0 Amortization of deferred stock compensation ........ -- 0.1 ----- ----- Total costs and expenses .............................. 156.7 97.8 ----- ----- Income (loss) from operations ............................ (56.7) 2.2 Other expense, net ....................................... (1.6) (5.5) ----- ----- Net loss ................................................. (58.3)% (3.3)% ===== =====
- ----------------------- (1) Excludes amortization of deferred stock compensation. NET REVENUES Net revenues were $17.3 million for the nine months ended March 31, 2001, none for the period from October 7, 1999 (inception) through March 31, 2000 and $1.4 million for the period from our inception through June 30, 2000. Net revenues in the periods ended March 31, 2001 and June 30, 2000 arose primarily from sales of new products released during those periods. Our four largest customers collectively accounted for 63% of net revenues for the nine months ended March 31, 2001 as compared to 75% from our three largest customers for the period from inception through June 30, 2000. Our largest customers for the nine months ended March 31, 2001 were Toys "R" Us, which accounted for 20% of net revenues, Wal-Mart, which accounted for 16% of net revenues, Target, which accounted for 15% of net revenues, and Kmart, which accounted for 12% of net revenues. For the period from inception through June 30, 2000, Blockbuster accounted for 49% of net revenues, Wal-Mart accounted for 16% of net revenues, and KB Toys accounted for 10% of net revenues. To date, a substantial portion of our revenues has been derived from a limited number of products. Sales of our POWERPUFF GIRLS titles accounted for 82% of net revenues for the nine months ended March 31, 2001. Sales of our BEAST WARS title accounted for 100% of net revenues for the period from inception through June 30, 2000. As we expand our product offerings in different periods, we expect that the percentage of total revenue from our largest product offerings will decrease. COST OF REVENUES Cost of revenues were $9.8 million, or 56% of net revenues, for the nine months ended March 31, 2001 and $807,000, or 59% of net revenues, for the period from our inception through June 30, 2000. The increase in 26 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS cost of revenues was due to increased sales of product, and the improvement in cost of revenues as a percentage of revenues arose primarily as a result of a change in product mix, offset by higher freight costs as a result of changed shipping channels. ROYALTIES, SOFTWARE COSTS, LICENSE COSTS AND PROJECT ABANDONMENT Royalties, software costs, license costs and project abandonment were $2.0 million, or 12% of net revenues, for the nine months ended March 31, 2001, and $248,000, or 18% of net revenues, for the period from our inception through June 30, 2000. The increase in costs was due to increased sales of product, and the improvement in costs as a percentage of revenues arose because of a change in product mix that resulted in sales of product which have lower contracted third party royalty rates. RESEARCH AND DEVELOPMENT Research and development expenses were $663,000, or 4% of net revenues, for the nine months ended March 31, 2001, $133,000 for the period from our inception through March 31, 2000, and $260,000, or 19% of net revenues, for the period from our inception through June 30, 2000. This increase in absolute dollars was primarily the result of an increased headcount. In October 2000 we opened our internal development studio in London, England. Prior to opening this studio, all development was performed by third parties. SALES AND MARKETING Sales and marketing expenses were $3.2 million, or 19% of net revenues, for the nine months ended March 31, 2001, zero for the period from our inception through March 31, 2000 and $132,000, or 10% of net revenues, for the period from our inception through June 30, 2000. This increase in absolute dollars was the result of increased advertising and marketing activities, along with an increase in commissions. GENERAL AND ADMINISTRATIVE General and administrative expenses were $1.2 million, or 7% of net revenues, for the nine months ended March 31, 2001, $379,000 for the period from our inception through March 31, 2000, and $711,000, or 52% of net revenues, for the period from our inception through June 30, 2000. This increase in absolute dollars was attributable to growth in headcount, professional fees, facility costs, bad debt expense and accounting fees. AMORTIZATION OF DEFERRED STOCK COMPENSATION Amortization of deferred stock compensation was $19,000, or 0.1% of revenues, for the nine months ended March 31, 2001, and zero for each of the periods from our inception through March 31, 2000 and June 30, 2000. We did not grant any stock options prior to June 2000. OTHER EXPENSE, NET Other expense, net was $952,000 for the nine months ended March 31, 2001, $5,000 for the period from inception through March 31, 2000, and $22,000 for the period from inception through June 30, 2000. Interest income was $41,000 for the nine months ended March 31, 2001, $7,000 for the period from our inception through March 31, 2000, and $8,000 for the period from our inception through June 30, 2000. Interest income in all periods relates to interest earned on funds deposited in money market accounts. Interest expense was $993,000, or 6% of net revenues, for the nine months ended March 31, 2001, $21,000 for the period from our inception through March 31, 2000, and $39,000, or 3% of net revenues, for the period from our inception through June 30, 2000. Interest expense incurred during the periods ended March 31, 2000 and June 30, 2000 is comprised of interest and other funding charges incurred on promissory notes and through a purchase order funding arrangement with a finance company. The promissory notes were converted to redeemable convertible preferred stock in June 2000. Subsequent to this conversion, interest expense comprised primarily interest and other funding charges incurred through a purchase order funding arrangement with a finance company and through a commercial line of credit. 27 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We had zero other income for the nine months ended March 31, 2001, other income of $9,000 for the period from our inception through March 31, 2000, and other income of $9,000 for the period from our inception through June 30, 2000. Other income for the periods from inception to March 31, 2000, and June 30, 2000 comprised rental income. QUARTERLY RESULTS OF OPERATIONS The following table presents our unaudited quarterly consolidated results of operations, in dollars and as a percentage of net revenues, for our five most recent fiscal quarters and the period from our inception through December 31, 1999. In the opinion of management, this unaudited financial information has been prepared on the same basis as the audited financial information, and includes all adjustments, consisting only of normal recurring adjustments, necessary to present this information fairly when read in conjunction with our consolidated financial statements and the related notes contained elsewhere in this prospectus. These operating results are not necessarily indicative of results of any future period.
INCEPTION THREE MONTHS ENDED THROUGH ---------------------------------------------------------------- DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, 1999 2000 2000 2000 2000 2001 --------- -------- -------- -------- -------- -------- (in thousands) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues ..................................... $ -- $ -- $ 1,377 $ 495 $ 10,717 $ 6,093 -------- -------- -------- -------- -------- -------- Costs and expenses: Cost of revenues ............................ -- -- 807 179 6,029 3,558 Royalties, software costs, license costs and project abandonment................. -- -- 248 126 1,113 789 Research and development (1) ................ 32 101 127 114 318 231 Sales and marketing (1) ..................... -- -- 132 252 1,844 1,138 General and administrative (1) .............. 130 249 332 252 360 606 Amortization of deferred stock compensation.. -- -- -- -- 9 10 -------- -------- -------- -------- -------- -------- Total costs and expenses ................ 162 350 1,646 923 9,673 6,332 -------- -------- -------- -------- -------- -------- Income (loss) from operations .................... (162) (350) (269) (428) 1,044 (239) Other expense, net ............................... (3) (2) (17) (7) (454) (491) -------- -------- -------- -------- -------- -------- Net income (loss) ................................ $ (165) $ (352) $ (286) $ (435) $ 590 $ (730) ======== ======== ======== ======== ======== ========
- ---------------- (1) Excludes amortization of deferred stock compensation.
THREE MONTHS ENDED ----------------------------------------------- JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 2000 2000 2000 2001 -------- --------- -------- -------- AS A PERCENTAGE OF NET REVENUES (2): Net revenues................................... 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- Costs and expenses: Cost of revenues .......................... 58.6 36.2 56.3 58.4 Royalties, software costs, license costs and project abandonment .................. 18.0 25.5 10.4 12.9 Research and development .................. 9.2 23.0 3.0 3.8 Sales and marketing ....................... 9.6 50.9 17.2 18.7 General and administrative ................ 24.1 50.9 3.3 9.9 Amortization of deferred stock compensation -- -- 0.1 0.2 ----- ----- ----- ----- Total costs and expenses .................. 119.5 186.5 90.3 103.9 ----- ----- ----- -----
28 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED ----------------------------------------------- JUNE 30, SEPT. 30, DEC. 31, MAR. 31, 2000 2000 2000 2001 ------- -------- -------- ------- AS A PERCENTAGE OF NET REVENUES (2): Income (loss) from operations .................. (19.5) (86.5) 9.7 (3.9) Other expense, net ............................. (1.2) (1.4) (4.2) (8.1) ----- ----- ----- ----- Net income (loss) .............................. (20.7) % (87.9) % 5.5 % (12.0) % ===== ===== ===== =====
- ------------------- (1) As we had no revenues for the period from inception through December 31, 1999 and for the three months ended March 31, 2000, these periods are not presented. NET REVENUES We sold our first product, BEAST WARS, in the quarter ended June 30, 2000. Our second product offering was not released until late in the quarter ended September 30, 2000 and this, combined with low seasonal demand, reduced quarterly net revenues for the quarter ended September 30, 2000. In the quarter ended December 31, 2000 we introduced six additional products, including two POWERPUFF GIRLS offerings which, in combination with holiday seasonal demand, resulted in significantly increased net revenues during the quarter. As expected, demand for product decreased in the quarter ended March 31, 2001, the quarter after the holiday season, resulting in reduced net revenues in the quarter. RESEARCH AND DEVELOPMENT Prior to the quarter ended December 31, 2000, we developed products solely through third parties. In the quarter ended December 31, 2000, we opened our internal development studio, resulting in an increase in research and development costs. In the quarter ended December 31, 2000, we incurred an expense of $125,000 relating to a performance bonus paid to a third party developer. This expense was not repeated in the quarter ended March 31, 2001. SALES AND MARKETING Sales commissions and marketing expenses grew significantly in the quarter ended December 31, 2000 as we actively promoted our products during the holiday season. Promotion decreased in the first calendar quarter of 2001 and sales and marketing expenses decreased. GENERAL AND ADMINISTRATIVE One off professional and legal costs were the cause of the increase in general and administrative costs in the quarter ended June 30, 2000. With the exception of these one off costs, general and administrative costs increased gradually over each quarter as we expanded our infrastructure. OTHER EXPENSE, NET Significant purchase order funding charges were the cause of the significant expense increase in other expense, net in the quarters ended December 31, 2000 and March 31, 2001. LIQUIDITY AND CAPITAL RESOURCES From inception we have financed our operations primarily through the private sale of equity securities, cash generated from the sale of our products, a product financing arrangement with a finance company, the issuance of promissory notes to stockholders, a commercial line of credit and short-term liabilities. Net cash used in operating activities was $5.8 million for the nine months ended March 31, 2001, $651,000 for the period from October 7, 1999 (inception) through March 31, 2000, and $1.7 million for the period from our inception through June 30, 2000. For these periods, net cash used in operating activities was the result of net losses and increases in operating assets. 29 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net cash used in investing activities was $1.4 million for the nine months ended March 31, 2001, $54,000 for the period from our inception through March 31, 2000, and $91,000 for the period from our inception through June 30, 2000, and consisted primarily of purchases of property and equipment and restricted cash. Net cash provided by financing activities was $7.5 million for the nine months ended March 31, 2001, $1.0 million for the period from our inception through March 31, 2000 and $2.7 million for the period from our inception through June 30, 2000. Financing for the nine months ended March 31, 2001 consisted primarily of the sale of redeemable convertible preferred stock, net borrowings on finance agreements and a line of credit with our bankers. Financing for the periods from our inception through March 31, 2000 and June 30, 2000, consisted primarily of the sale of common stock, redeemable convertible preferred stock, promissory notes and net borrowings on finance agreements. In October 1999 we issued 123,609 shares of common stock to our principal stockholder in exchange for a promissory note. Also in October 1999 we issued 58,500 shares of common stock at $0.51 per share to consultants in exchange for services performed valued at approximately $30,000. In each of November 1999 and January 2000, we issued our principal stockholder convertible promissory notes in the principal amount of $500,000, and in May 2000 issued him an additional convertible promissory note in the principal amount of $47,000 for operating capital. Each note bore interest at 7% per annum with principal and accrued interest due on demand after one year from the date of issuance. Each note was automatically convertible into shares of our Series A Preferred Stock upon the initial closing of our Series A Preferred Stock financing. In May 2000, the notes were converted and our principal stockholder was issued 482,625 shares of our Series A Preferred Stock at the price of $2.17 per share. In May 2000, inclusive of shares issued to our principal stockholder upon the conversion, we sold and issued 976,220 shares of our Series A Preferred Stock at a price of $2.17 per share. Each share of our Series A Preferred Stock is convertible into one share of our common stock. In addition, at the same time we issued the Series A Preferred Stock, we issued 130,651 shares of our common stock at $0.51 per share for $59,000 in cash and for services valued at $7,000. In December 2000, we sold and issued 294,620 shares of our Series B Preferred Stock at a price of $17.65 per share. Each share of our Series B Preferred Stock is convertible into one share of our common stock. In May 2001, we sold and issued 245,659 shares of our Series C Preferred Stock at a price of $22.553 per share. Each share of our Series C Preferred Stock is convertible into one share of our common stock. In February 2000, we entered into a master purchase order assignment agreement with a finance company, whereby we assign customer purchase orders to the finance company and request the finance company purchase finished goods to fulfill such customer purchase orders. Our obligations under the agreement are secured by our assets and purchase order accounts receivable, and guaranteed by our President and Chief Executive Officer. Under the agreement, we assign purchase orders to the finance company as collateral. The agreement required a security deposit of $90,000 to be made by us to the finance company and specified that the finance company's funding commitment with respect to a purchase order shall not exceed 60% of the retail purchase order price. We are required to pay the finance company's expenses under the contract, a deal fee comprising a transaction and initiation fee equal to 5% of the face amounts of letters of credits issued or other funds advanced by the finance company, a daily maintenance fee of 0.067%, a materials advance fee at prime rate plus 4%, and a late payment fee where applicable. Outstanding borrowings under the agreement are collateralized by our inventory, accounts receivable, fixed assets and intangible assets. Under the initial terms of the agreement, the finance company's aggregate outstanding funding was limited to $1.0 million and the term of the agreement was 12 months, ending on February 25, 2001. In September 2000, the agreement was amended increasing the maximum outstanding funding to $5.0 million. In December 2000, the agreement was further amended extending the term to March 31, 2002 and increasing the maximum outstanding funding to $8.5 million. In November 2000 we entered into an agreement with our bankers whereby they would provide us with a $1.0 million commercial line of credit, repayable on demand. The interest rate on amounts drawn down is at the bank's prime interest rate plus 3% and is payable monthly. The line of credit is secured by restricted cash being held in a money market account with the same bank. 30 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As of March 31, 2001, we had cash and cash equivalents of $1.2 million. As of March 31, 2000, we had cash and cash equivalents of $315,000. As of June 30, 2000, we had cash and cash equivalents of $908,000. Capital expenditures were $361,000 for the nine months ended March 31, 2001, $54,000 for the period from our inception through March 31, 2000, and $91,000 for the period from our inception through June 30, 2000. We did not have any material commitments for capital expenditures at any of those dates. Our principal commitments at March 31, 2001 comprised operating leases, guaranteed royalty payments and contractual marketing commitments. At that date, we had commitments to spend $252,000 under operating leases, prepay $1.8 million for royalties under agreements with various content providers and spend $4.1 million in advertising on the networks and websites of these content providers. Of these amounts, $2.9 million must be paid no later than March 31, 2002. Guaranteed royalty payments will be applied against any royalties that may become payable to the content providers. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to various market risks, including changes in foreign exchange rates and interest rates. Market risk is the potential loss arising from changes in market rates and prices. FOREIGN CURRENCY EXCHANGE RATE RISK Currently, all our net revenues and 85% of our operating expenses are denominated in US dollars. Remaining expenses are mostly denominated in British pounds or the Euro and consequently we are currently exposed to fluctuations in the US dollar to British pound and Euro exchange rates. We estimate that a 10% change in foreign exchange rates would impact reported operating results by less than $100,000. Accordingly, we have not entered into any hedging arrangements. As we expand our international operations, revenues will be generated and more operating expenses will be incurred in currencies other than the US dollar, which will increase potential exchange rate risk. We anticipate we will be entering into customary hedging arrangements to reduce this risk. INTEREST RATE RISK We do not consider our cash and cash equivalents to be subject to interest rate risk due to the short maturities of the instruments in which we have invested. We are currently exposed to interest rate risk on our product financing arrangement with a finance company and our line of credit with our bankers. Upon completion of this public offering our risk may be reduced as we plan to reduce or eliminate use of the product financing arrangement and the line of credit. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We estimate that a 10% increase in interest rates would impact our results of operations by $100,000 for the nine months ended March 31, 2001 and $2,000 for the period from inception through June 30, 2000. INFLATION Inflation has not had a material adverse effect on our results of operations; however, our results of operations may be materially and adversely affected by inflation in the future. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." This statement requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains and losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 was effective for us beginning in the first quarter of fiscal 2001 and did not have a significant impact on our consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the staff's views in 31 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS applying generally accepted accounting principles in the United States to revenue recognition in financial statements and provides interpretations regarding the application of generally accepted accounting principles to revenue recognition where there is an absence of authoritative literature addressing a specific arrangement or a specific industry. SAB101 is effective for our company in the fourth quarter of fiscal 2001. The adoption of the revenue recognition practices prescribed by the guidance in SAB 101 is not expected to have a material effect on our consolidated financial statements. In March 2000, the FASB issued Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation ("FIN 44"), an interpretation of Accounting Principles Board Opinion No. 25 ("APB No. 25"). FIN 44 clarifies the application of APB No. 25 for various issues, specifically: - The definition of an employee, - The criteria for determining whether a plan qualifies as a noncompensatory plan, - The accounting consequence of various modifications to the terms of a previously fixed stock option or award, and - The accounting for an exchange of stock compensation awards in a business combination. FIN No. 44 was effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The impact of FIN 44 did not have a material effect on our consolidated financial statements. 32 36 BUSINESS COMPANY OVERVIEW We are a rapidly emerging developer and publisher of interactive entertainment software. We license properties from a wide variety of sources including entertainment and media companies and we publish interactive entertainment software based on their motion picture, sports and television cartoon properties. We currently publish interactive entertainment software for many of the most popular hardware platforms, such as Sony's PlayStation, Nintendo 64 and Nintendo's Game Boy Color. We plan to develop and publish interactive entertainment software for next generation hardware platforms such as Sony's PlayStation2, Nintendo GameCube and Game Boy Advance and Microsoft's Xbox, as well as for other portable handheld devices and PCs. Our interactive entertainment software is primarily based on properties that have consumer recognition and appeal, such as the popular television cartoons POWERPUFF GIRLS and DEXTER'S LABORATORY distributed by AOL Time Warner's Cartoon Network. We develop titles that can be leveraged through sequels and extensions and across multiple hardware platforms. We sell our products to mass merchandisers such as Toys "R" Us, Target, Kmart, Wal-Mart and Best Buy, and specialty chains such as Babbages, Etc. and Electronics Boutique and independent distributors. INDUSTRY BACKGROUND According to Euromonitor, worldwide sales of consoles, console games and PC games grew from $17 billion in 1996 to $27 billion in 2000. Forrester predicts that, in the United States alone, interactive entertainment console manufacturers and software publishers will generate $26 billion in revenues in 2005. Of that $26 billion, Forrester estimates that $12.8 billion will be generated by sales of console game software alone. Interactive Digital Software Association, or IDSA, further estimates that 60% of all Americans, or approximately 145 million people, play video games on a regular basis. According to International Data Corporation, or IDC, the majority of video game households own more than one video game system. The interactive entertainment industry includes three distinct forms of hardware systems: - portable handheld devices, such as Nintendo's Game Boy and its recently released Game Boy Advance; - in-home television connected hardware platforms, such as Sega's Dreamcast and Saturn, Nintendo's Super Nintendo and Nintendo 64 and Sony's PlayStation and PlayStation2 and announced consoles such as Nintendo GameCube and Microsoft's Xbox; and - personal computers. According to IDG, 15.7% of all interactive entertainment software dollar sales for 2000 were attributable to products for portable handheld devices, 59.5% for in-home hardware platforms and 24.8% for PCs. The hardware platform and video game console market has evolved from 8- and 16-bit technology in the early 1980s to 32- and 64-bit technology in the past few years. The terms 8-, 16-, 32- or 64-bit technology means that the central processing unit, or chip, on which the software operates is capable of processing data in 8-, 16-, 32- or 64-bit units. Larger per bit capacity translates into a faster and more realistic game experience. The transition to 128-bit, or next generation, hardware platforms has already begun with the recent introduction of Sony's PlayStation2. INDUSTRY TRENDS Currently, there are a number of trends affecting the interactive entertainment industry. We believe that the following should result in increased opportunities for interactive entertainment software developers and publishers: 33 37 BUSINESS - Hardware platform technology evolution. Consoles that employ 128-bit technology will provide faster and more complex images and more lifelike animation and sound than their 32- and 64-bit predecessors. Additionally, most handheld devices will employ 32-bit technology instead of 8-bit technology. Titles published for these new hardware platforms should appeal to the core population of video game players and attract new players. The transition to 128-bit hardware platforms is expected to drive demand for titles published for these next generation systems. - Introduction of next generation hardware platforms drives software demand. Historically, as next generation hardware platforms have been introduced, the number of software units sold per hardware platform sold has increased. This ratio is known as the tie ratio. Increasing tie ratios represent an upward trend in units of software products purchased for each successive generation of hardware platforms. According to IDG, these ratios had steadily increased from approximately 6:1 for 16-bit hardware platforms to approximately 9:1 for the 32-bit Sony PlayStation in North America. If historical patterns are indicative of future tie ratios, interactive entertainment software developers and publishers should see an increasing demand for their products as new 128-bit next generation hardware platforms are introduced and gain wider acceptance. - Many next generation hardware platforms are DVD compatible and can access the Internet. Many of the 128-bit hardware platforms, such as Sony's PlayStation2 and Microsoft's Xbox, will utilize a DVD software format and have the potential to serve as multi-purpose entertainment centers by doubling as a player for DVD movies and compact discs. Moreover, some next generation hardware platforms are expected to have online capability that will allow users to access the Internet. We believe these new systems will have cross-over appeal to a segment of the market that might not otherwise be inclined to purchase hardware platforms for game use alone, which will drive additional hardware and software sales. - Development of hardware platforms utilizing a disk-based software format. The increased use of disk-based software for new hardware platforms is expected to result in shortened order lead times, reduced inventory risk and gross margins that are typically greater than those achievable with cartridge-based systems. Quicker product manufacturing and greater pricing flexibility will allow software producers to adjust to market demands and introduce products to the marketplace more rapidly. In addition, the memory capacity of disks generally exceeds cartridges, allowing for enhanced graphic capabilities and more realistic game play. - Backward compatibility. Sony's PlayStation2 and Nintendo's Game Boy Advance are both backward compatible, meaning that titles produced for the earlier version of the hardware platform may be used on the new hardware platform. We believe that backward compatibility may result in a smoother revenue transition for interactive entertainment software developers and publishers because the lag in consumer demand for products for existing hardware platforms that typically precedes the release of a next generation hardware platform may be diminished. - Broadening demographic appeal. According to IDC, a pattern has emerged in which male gamers appear to be slowly migrating away as the primary gamers of older platforms. Other household members - in particular, females and younger children - transition to become that platform's primary gamers. IDC reports that the percentages of households where the primary gamer is female for PlayStation, Nintendo 64 and Super Nintendo grew from 17.2%, 15.3%, and 22.6% in 1999 to 18.1%, 15.8%, 29.8% in 2000. According to IDSA, 58% of all Americans who play video games most frequently are over the age of 18 and 43% of Americans who play video games are female. This demographic expansion broadens opportunities for interactive entertainment software developers to produce titles with content focused on a specific sex or targeted age group. INDUSTRY CHALLENGES As the transition to next generation hardware platforms begins and the number of titles continues to rise, differentiation among developers and publishers will become increasingly important. This need is heightened by the fact that the market for interactive entertainment software products tends to be dominated by a limited 34 38 number of successful titles that are typically based on popular properties with brand name recognition. In order to succeed in this market environment, we believe interactive entertainment software developers and publishers will need to: - identify and license brand name properties from a wide variety of sources; - develop creative software both internally and using third-party interactive entertainment software developers with a proven track record of developing successful titles; - aggressively market and sell titles to retailers and through traditional and emerging distribution channels in both domestic and international markets; - develop compelling titles for multiple hardware platforms; and - develop a network of relationships with hardware platform manufacturers, mass merchandisers and other industry participants. OUR SOLUTION We develop and publish interactive entertainment software for multiple hardware platforms. We believe our ability to license popular properties, develop content with internal and third-party developers and distribute titles through our broad distribution channels provides us with significant opportunities. The following are the key elements of our business solution: Development and promotion of titles based on properties with existing brand recognition. Since the best selling titles are often based on popular properties and existing brands, we strive to secure license agreements with the owners of popular entertainment and media properties. We have agreements to utilize properties from AOL Time Warner's Cartoon Network and Time Inc.'s Sports Illustrated For Kids, Spyglass Entertainment Group, Franchise Films and other entertainment and media property owners. We believe that developing interactive entertainment software titles with brand name recognition and sustainable consumer appeal may allow us to promote titles over an extended period of time through the release of sequels and extensions and to re-release products at different price points. We work closely with the property owners to develop follow-on products based on both existing and new brands with the potential to become successful titles. We focus on developing titles that target specific segments of the interactive entertainment industry. We identify popular properties that have the potential to become successful titles, evaluate the demographic segment that the titles are most likely to appeal to and begin the development process. In this manner, we are able to develop titles with brand name recognition that appeal to specific segments of the interactive entertainment software market. We are currently developing titles in the following categories: - cartoon titles targeting game players ages 10 and under, based on properties that appeal to this demographic segment. We have developed and are developing titles based on the popular television cartoons POWERPUFF GIRLS and DEXTER'S LABORATORY distributed by AOL Time Warner's Cartoon Network. We coordinate product release and promotion with the Cartoon Network and selected mass merchandisers to enhance consumer acceptance; - sports titles targeting game players age nine to 14, as well as the casual sports fan. We believe that existing sports games appeal more to the older core video game playing and sports audiences than the younger game player. With AOL Time Warner's Sports Illustrated for Kids, we are developing a line of sports-based titles that we believe will appeal to this audience; and - entertainment titles that target the mass market based on content originated by independent film production companies. We have entered into agreements with Spyglass Entertainment Group, producer of the upcoming Disney motion picture REIGN OF FIRE, and Franchise Films, producer of the recent Warner Bros. motion picture DRIVEN, to create games based on these films. We work with our film company content providers early in the development process to produce titles closely aligned with the film's plot and endeavor to coordinate product release concurrently with that of the film. 35 39 BUSINESS Strategic management of product development. To maintain our position in the competitive interactive entertainment software industry, we devote significant resources to the internal development of products and to securing relationships with third party interactive entertainment software developers with proven track records of developing successful titles. Product design and development is a joint effort between our producers and our marketing and sales groups. Members of each group have unique expertise, which allows for the creation of ideas that combine the latest technologies, current and future trends, and consumer and retailer demands. We believe this enables us to better manage our internal and external production efforts thereby allowing for greater efficiency and improved predictability in the development process. Broad distribution channels. Our sales and marketing efforts are designed to broaden product distribution and increase the penetration of our products in domestic and international markets. We further seek to leverage and expand our channels of distribution in order to reach a larger number of consumers in the retail, direct and on-line markets, both domestically and internationally. We sell our products to mass merchandisers such as Toys "R" Us, Target, Kmart, Wal-Mart and Best Buy, specialty chains such as Babbages, Etc. and Electronics Boutique and independent distributors. Hardware platform flexibility. While we have the ability to develop products for all current hardware platforms, our development efforts focus on specific hardware platforms for specific demographics. For example, our initial titles targeted at the 14 and under audience have primarily focused on the Nintendo Game Boy Color hardware platform since this audience primarily uses that platform. In contrast, games under development for the mass market will be offered on a wider range of hardware platforms since we believe there will be a widespread demographic appeal for these products. In addition, we leverage our more popular titles across multiple hardware platforms that have sufficient installed bases and appropriate demographics for development to be successful. For example, follow-on products for POWERPUFF GIRLS, scheduled for release in 2002 and 2003, will be developed for Nintendo GameCube and Sony's PlayStation2, as well as for PCs. We believe this approach reduces both our reliance on any one hardware platform and the risks associated with product development. Management experience. Our executive management team has substantial experience in the interactive entertainment software industry. Key members of our management team have been executives of other interactive entertainment software companies and in their current and past service have successfully identified and secured licenses for popular properties, established relationships with key third party product developers and successfully negotiated distribution arrangements with multiple retail channels. In addition, our team has developed strong working relationships with hardware platform manufacturers, which we believe provide substantial benefits in the product approval and development process. We believe that established relationships with retailers and a track record for publishing top-selling titles are important factors that affect our ability to gain access to highly competitive shelf space. STRATEGY Our objective is to enhance our position as a developer and publisher of interactive entertainment software. In pursuing our business strategy we intend to: Focus on next-generation hardware platforms to increase market share. We continue to develop products for hardware platforms that have or we expect will have large installed bases. We assess the potential acceptance and success of emerging hardware platforms and the anticipated continued viability of existing hardware platforms based on many factors, including the number of competing titles, the tie ratio, the current and potential installed base, the rate of sales and the cost and timing of developing titles for that hardware platform. We work with hardware companies to coordinate the release of our new titles with the launch of the next generation hardware platforms for which those titles are designed. Over the next 12 to 24 months, we plan to release titles for Nintendo GameCube and Game Boy Advance, Sony's PlayStation2, Microsoft's Xbox, portable handheld devices and PCs. Continue to develop relationships with owners of popular properties. We will continue to pursue licensing relationships with a wide variety of sources for well-known properties. We also plan to continue to work closely with licensors to engage in efficient marketing efforts that capitalize on promotional campaigns that 36 40 BUSINESS precede the launch of our titles. We believe that we are an attractive partner for licensors as evidenced by our recent agreement with Time Inc.'s Sports Illustrated For Kids. Expand international distribution. We believe we can further expand our presence in foreign markets. According to the European Leisure Software Publishers Association Ltd, or ELSPA, the European market for interactive entertainment software is slightly larger than the U.S. market. We recently opened our office in Bath, England to enhance our international presence. We plan to increase our penetration in international markets by licensing our titles to publishers in these markets, entering into distribution agreements and establishing direct distribution capabilities. To further grow in global markets, we may also develop titles that are customized for consumer preferences in these foreign markets. Continue to build internal and external development capabilities. We intend to continue to devote significant resources to expanding existing relationships and securing new relationships with interactive entertainment software developers with proven track records of developing successful titles. We believe that our success as a publisher of well known titles will help us to continue to attract and retain dependable, creative and innovative developers to enhance product design creativity and reduce risks associated with dependence on a limited number of developers. PRODUCTS The following tables set forth our existing titles and those anticipated to be released in the next 12 months. We cannot assure you that any of the titles anticipated for release in the next 12 months will be released when scheduled, if ever.
EXISTING TITLES TITLE GENRE HARDWARE PLATFORM DATE OF RELEASE ----- ----- ----------------- --------------- Beast Wars Action Nintendo 64/ June 2000 PlayStation Contender 2 Action PlayStation October 2000 Jimmy White's Cueball 2 Sports PlayStation October 2000 Bad Mojo Jojo (Powerpuff Girls) Adventure Game Boy Color November 2000 Paint the Townsville Green (Powerpuff Girls) Adventure Game Boy Color November 2000 Sgt. Rock Action Game Boy Color November 2000 Dexter's Laboratory: Robot Revenge Adventure Game Boy Color December 2000 Yogi Bear Adventure Game Boy Color December 2000 Battle Him (Powerpuff Girls) Adventure Game Boy Color February 2001
37 41 BUSINESS
ANTICIPATED TITLES TITLE GENRE HARDWARE PLATFORM ----- ----- ----------------- Dexter's Laboratory Adventure Game Boy Advance/PlayStation/PC Driven Sports PlayStation2/Game Boy Advance/Xbox/Palm/Handspring Ecks v. Sever Action Game Boy Advance Fire Pro Wrestling Sports Game Boy Advance Hot Potato Puzzle Game Boy Advance Powerpuff Girls Adventure Game Boy Advance/PlayStation/Nintendo 64/PC/Playstation2 Sports Illustrated For Kids: Baseball Sports Game Boy Advance/Nintendo GameCube Sports Illustrated For Kids: Basketball Sports Game Boy Advance/Nintendo GameCube Sports Illustrated For Kids: Football Sports Game Boy Advance/Nintendo GameCube Riding Spirits Sports PlayStation2 3D Pro Wrestling Sports PlayStation2
STRATEGIC RELATIONSHIPS We have entered into strategic relationships with entertainment and media companies that have developed well-known characters and brands and that are producing popular properties that are expected to form the basis of future products. The Cartoon Network. Between March 2000 and October 2000, we entered into three non-exclusive license agreements that give us the right to develop and distribute interactive entertainment software based on Warner Bros.' POWERPUFF GIRLS, DEXTER'S LABORATORY and YOGI BEAR properties. The POWERPUFF GIRLS, DEXTER'S LABORATORY and YOGI BEAR television shows are aired on AOL Time Warner's Cartoon Network. Under these agreements, we are obligated to pay royalties based on a percentage of net sales of the titles and are obligated to advertise and promote the titles on the Cartoon Network. We believe that the Cartoon Network has significant brand awareness among six to 11 year olds. According to the Cartoon Network, their programs are viewed in 69 million homes around the world. We participate in promotional programs with the Cartoon Network and certain retailers who advertise on the Cartoon Network in connection with the release of our products. For example, our POWERPUFF GIRLS series of titles were co-promoted with on-air advertisements sponsored in part by the Cartoon Network and in-store displays with Toys "R" Us, Target, Best Buy, Sears, Circuit City, Electronics Boutique and Babbages, Etc. We believe this promotional campaign has helped us sell over 740,000 units of our three POWERPUFF GIRLS Game Boy Color 38 42 BUSINESS titles since their initial launch in the fourth calendar quarter of 2000. We are developing additional titles based on the POWERPUFF GIRLS and DEXTER'S LABORATORY for existing and new hardware platforms. Franchise Films. In April 2000, we entered into a strategic arrangement with Franchise Films, Inc. Our agreement gives us the exclusive, first look right to review screenplays acquired by the studio and develop titles based on films produced from those screenplays. Our agreement expires upon the later of three years or the theatrical release of the tenth film on which we base a product. Franchise Films has also agreed to provide us with free access to any publicity and advertising materials it prepares and granted us the right to use these materials to promote and advertise our products. Under the agreement, we agreed to pay Franchise Films royalties based on the net sales of the titles based on the films we select and issue 14,625 shares of our common stock following the theatrical release of each film for which we have developed a title, up to a maximum of 146,250 shares. Our title based upon the movie DRIVEN, which is the first property subject to the arrangement, is currently in production for Sony's PlayStation2, Microsoft's Xbox and Nintendo's Game Boy Advance. DRIVEN, directed by Renny Harlin, the director of films such as DIE HARD 2 and DEEP BLUE SEA, is based on the CART racing circuit and has a cast that includes Sylvester Stallone and Burt Reynolds. Warner Bros. released DRIVEN in April 2001 and we plan a Fall 2001 release for our related title. Spyglass Entertainment Group. In October 2000, we entered into a strategic arrangement with Spyglass Entertainment Group, L.P., the studio that produced the film THE SIXTH SENSE. Our five-year agreement gives us an exclusive right of first refusal to develop titles based on films produced by the studio and to distribute them worldwide. In addition, Spyglass Entertainment Group has agreed to provide us with free access to any publicity and advertising materials it prepares and to use these materials to promote and advertise our titles. Under the agreement, we granted Spyglass Entertainment Group a warrant to purchase up to 100,000 shares of our common stock and agreed to pay the studio royalties based on the net sales of titles based on its films. We have commenced development on the first Spyglass Entertainment Group title, REIGN OF FIRE, for Sony's PlayStation2 and Microsoft's Xbox. REIGN OF Fire, scheduled for release by Disney in 2002, is being directed by Rob Bowman, producer of AIRBORNE and THE X-FILES, and will star Christian Bale, Matthew McConaughey and Izabella Scorupco. Sports Illustrated For Kids. In May 2000, we signed a strategic arrangement with Time, Inc. for the development of titles utilizing the Sports Illustrated For Kids brand name. Our four-year, non-exclusive license gives us the right to publish titles based on popular sports that are appropriate for children ages seven to 17 and to distribute those titles in North America, Japan and the European Union. Our agreement gives us the right to access a portion of their subscriber base for market research purposes. Under the agreement, we are obligated to pay a royalty based on the gross wholesale price of the titles and advertise and promote the titles in the magazine. We believe that Sports Illustrated For Kids has significant brand awareness, especially for boys ages 10 to 14. According to Phillips Business Information, Sports Illustrated For Kids has a subscription base of 950,000 readers and a circulation of over one million. We are currently developing the first three titles under this collaboration for Nintendo's Game Boy Advance. The targeted sports are football, basketball and baseball, and we plan to release these titles between Fall 2001 and Spring 2002. SOFTWARE PRODUCT DESIGN AND DEVELOPMENT We believe our success will depend in large part on our ability to design and develop innovative interactive entertainment software based on popular content, design and develop sequels to our more popular products and offer previously released products on additional hardware platforms. We design and develop some of our titles internally, while others are developed by third parties with whom we have established relationships. In deciding whether to use our internal development staff or an external software developer, we identify particular developers whose area of expertise matches the specific concept or property that we would like to develop. We believe that our use of internal and external developers promotes the creative and entrepreneurial environment necessary to develop innovative and successful titles in a cost-effective and timely manner. 39 43 BUSINESS PRODUCT DESIGN Our in-house development staff includes producers who are responsible for monitoring the progress of our internal design teams and external third party software developers. Our producers evaluate the work of internal and third party developers through design review, progress evaluation, milestone review and quality checks. Each milestone submission is reviewed by our in-house development staff to ensure compliance with the product's design specifications. INTERNAL PRODUCT DEVELOPMENT Our internal product development studio located in London, England, presently consists of 19 employees. When we decide to develop a title in-house, we establish a production team, development schedule and budget. Our internal development process includes initial design and concept layout, computer graphic design, two-dimensional and three-dimensional artwork, programming, prototype testing, sound engineering and quality control. We utilize a variety of advanced hardware and software development tools, including animation, sound compression utilities, clay modeling and video compression to successfully complete the production and development of our interactive entertainment titles. Our internal development staff is organized into teams which are typically led by a producer and also consist of game designers, software programmers, artists and sound technicians. We believe that this team approach promotes the creative and cooperative environment necessary to develop innovative and successful titles. Our international development efforts are conducted through our office located in England. In addition to designing software titles, the software designers in this office manage the efforts of local third-party developers in Europe. Although to date our international product development efforts have primarily consisted of the localization of existing products, we are currently designing and developing original products at our international office. The development process for an original, internally-developed product for a next generation hardware platform, such as Sony's PlayStation2, Nintendo GameCube or Microsoft's Xbox, typically takes 12 to 24 months. This process is shorter for existing products currently used on 32-bit and 64-bit hardware platforms. It takes approximately six to 12 months to develop an existing title as a product for a different hardware platform. EXTERNAL PRODUCT DEVELOPMENT When we elect to develop a concept or property externally, we contract with a third party software developer to develop products under our supervision. In addition, we may utilize third party developers to develop an existing title for a different hardware platform. Our agreements with software developers are typically entered into on a title-by-title basis and provide for the payment of the greater of a fixed amount or royalties based on actual sales. We generally pay third party developers installments of the fixed advance based on the achievement of specific development milestones. Royalties in excess of the fixed advance are generally based on a fixed amount per unit sold. We generally obtain ownership of the software code and related documentation from our independent developers. Upon completion of development, each title is play-tested by us and sent to the manufacturer for its testing, review and approval. Related artwork, user instructions, warranty information, brochures and packaging designs are also developed by third parties under our supervision. MARKETING, SALES AND DISTRIBUTION Our marketing, sales and distribution efforts are designed to broaden product distribution and increase the penetration of our products in domestic and international markets. We rely in part on the name recognition of the motion picture, sports and television cartoon properties on which our products are based to attract consumers and obtain shelf space from mass merchandisers. We supplement our domestic direct distribution efforts with third party distributors, and in the last year, we have increased our marketing, sales and distribution efforts in international markets through licensing and third party distribution strategies. 40 44 BUSINESS DOMESTIC ACTIVITIES Our domestic sales and marketing activities are directed by our Vice President of Sales and Marketing, who maintains contact with major retail accounts, manages the activities of our marketing department and oversees our independent regional sales representatives. Our marketing department develops and implements marketing programs and campaigns for each of our titles. In preparation for a product launch, our marketing activities may include print and cooperative retail advertising campaigns, game reviews in consumer and trade publications, pre-release giveaways, and retail in-store promotions including demonstrations, videos, over-size displays and posters. We have selectively included in our marketing efforts radio, television and Internet advertising campaigns. We also budget a portion of each of our product's sales and marketing budget for cooperative advertising and market development with retailers. Every title is launched with a multi-tiered marketing campaign that is developed on an individual basis to promote product awareness and customer pre-orders. We sell our products primarily to mass merchandisers and, to a lesser extent, to third party distributors. Our principal customers include Toys "R" Us, Target, Best Buy, Wal-Mart, Kmart, Babbages, Etc. and Electronics Boutique. Revenues from our four largest customers collectively accounted for approximately 63% of our net revenues for the nine months ended March 31, 2001 as compared to 75% from our three largest customers for the period from inception through June 30, 2000. Our largest customers for the nine months ended March 31, 2001 were Toys "R" Us which accounted for 20% of our net revenues, Wal-Mart which accounted for 16% of our net revenues, Target which accounted for 15% of our net revenues, and Kmart, which accounted for 12% of our net revenues. For the period from inception through June 30, 2000, Blockbuster accounted for 49% of our net revenues, Wal-Mart accounted for 16% of our net revenues, and KB Toys accounted for 10% of our net revenues. We do not have any written agreements or other understandings with any of our customers that relate to future purchases, so our customers could reduce or terminate their purchases from us at any time. We sell our products to retailers and distributors through 59 independent regional sales representatives who operate on a commission basis. The sales staff is largely responsible for generating retail demand for our products by presenting new products to our customers in advance of the products' scheduled release dates by providing technical advice with respect to the products and by working closely with retailers and distributors to sell the products. We typically ship our products within a short period of time after acceptance of purchase orders from distributors and other customers. Accordingly, we do not have a material backlog of unfilled orders and net sales in any quarter are substantially dependent on orders booked in that quarter. We seek to extend the life cycle and financial return of many of our products by marketing those products differently throughout the product's life. Although the product life cycle for each title varies based on a number of factors, including the quality of the title, the number and quality of competing titles, and in certain instances seasonality, we typically consider a title as back catalog six months after its initial release. We utilize marketing programs appropriate for the particular title, which generally includes progressive price reductions over time to increase the product's longevity in the retail channel as we shift advertising support to newer releases. We provide terms of sale comparable to competitors in our industry. In addition, we provide technical support for our products through our customer support department. To date we have not experienced any material warranty claims. We utilize an electronic data interchange with most of our major domestic customers to efficiently receive, process and ship customer product orders and to accurately track and forecast sell-through of our products to consumers in order to determine whether to order additional products from manufacturers. INTERNATIONAL ACTIVITIES Our international sales and marketing activities are conducted from our office located in England. Our international marketing activities are planned to include television advertising and publicity campaigns in interactive entertainment publications, magazines and newspapers. We anticipate that our first international 41 45 BUSINESS titles will be introduced in June 2001 and we intend to continue to increase our international sales by localizing our products for the various international markets and releasing localized versions of many of our products simultaneously with the commercial release of the corresponding titles in North America. MANUFACTURING Nintendo and Sony are the sole manufacturers of the software products sold for use on their respective hardware platforms. We begin the manufacturing process by placing a purchase order for the manufacture of our products with Nintendo or Sony and opening either a letter of credit in favor of the manufacturer or utilizing our line of credit with the manufacturer. We then send software code and a prototype of the product to the manufacturer, together with related artwork, user instructions, warranty information, brochures and packaging designs for approval, defect testing and manufacture. Microsoft appoints approved third party manufacturers to manufacture software for its hardware platform. Microsoft also offers us the opportunity to enter into one or more kit licenses, pursuant to which Microsoft would license software development tools and hardware to assist us in the development of titles prior to sending such titles to authorized third party manufacturers for replication. COMPETITION The interactive entertainment software industry is intensely competitive and is characterized by the frequent introduction of new hardware platforms and titles. Our competitors vary in size from small companies to large corporations, including the manufacturers of the hardware platforms. We must obtain a license from and compete with the hardware platform manufacturers in order to develop and sell titles for their respective hardware platforms, with each such manufacturer being the largest publisher and seller of software products for its own hardware platforms. As a result of their commanding positions in the interactive entertainment industry as the manufacturers of hardware platforms and publishers of titles for their own hardware platforms, these manufacturers generally have better bargaining positions with respect to retail pricing, shelf space and purchases than do any of their licensees. In addition to the hardware platform manufacturers, we compete with other interactive entertainment software companies. Many of these competitors are large corporations that have significantly greater financial, marketing, personnel and product development resources than us. Due to these greater resources, certain of these competitors are able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, pay higher fees to licensors of desirable motion picture, television, sports and character properties and pay more to third party software developers than we can. We believe that we are able to successfully compete with regard to the principal factors of the interactive entertainment software industry, including price, content, product features, brand name recognition, access to distribution channels, quality, ease of use, marketing support and quality of customer support, although any significant increase in the development, marketing and sales efforts of our competitors could harm our business. INTELLECTUAL PROPERTY Our business relies on the hardware platform manufacturers and our non-exclusive licenses with them to publish titles and manufacture our products for their hardware platforms. Our existing hardware platform licenses for Nintendo's Game Boy Color and Game Boy Advance, Nintendo 64, Sony's PlayStation and PlayStation2, Sega's Dreamcast and Microsoft's Xbox and our pending license for Nintendo GameCube grant us the right to develop, publish and distribute titles for use on the respective hardware platforms. Each of these hardware platform licenses requires that our titles be manufactured solely by the respective manufacturer. The amounts charged by the manufacturers include a manufacturing, printing and packaging fee as well as a royalty for the use of the manufacturer's name, proprietary information and technology. All of these fees are subject to adjustment by the manufacturers at their discretion. Nintendo charges us a fixed amount for each cartridge that includes the royalty. This amount varies based, in part, on the memory capacity of the cartridges. Sony charges us a royalty for every disk manufactured. The manufacturers have the right to review, evaluate and approve a prototype of each title and the title's packaging and marketing materials. 42 46 BUSINESS Each hardware platform license may be terminated by the manufacturer if a breach or default by us is not cured after we receive written notice from the manufacturer, or if we become insolvent. Upon termination of a hardware platform license for any reason other than our breach or default, the manufacturer has the right to purchase from us, at the price paid by us, any product inventory manufactured by such manufacturer that remains unsold for a specified period after termination. We must destroy any such inventory not purchased by the manufacturer. Upon termination as a result of our breach or default, we must destroy any remaining inventory, subject to the right of any of our institutional lenders to sell such inventory for a specified period. We hold copyrights on our products, product literature and advertising and other materials. We rely on common law trademark rights to our name and our logo. We do not currently hold any patents. We outsource some of our product development to third party developers, contractually retaining all intellectual property rights related to such projects. No third party developer has challenged our ownership interest in the intellectual property rights to projects we have outsourced, but it is always possible that a third party developer could issue such a challenge and prevail. We also license products developed by third parties and pay royalties on such products. We regard our products as proprietary and rely primarily on a combination of copyright, trademark and trade secret laws, confidentiality and nondisclosure agreements and other methods to protect our proprietary rights. We require our employees, consultants and other outside individuals and entities to execute confidentiality and nondisclosure agreements upon the start of employment, consulting or other contractual relationships with us. These agreements provide that all confidential information developed or made known to the individual or entity during the course of the relationship is to be kept confidential and not disclosed to third parties except in specific circumstances. However, our ability to police these individuals and entities and enforce these agreements is costly and uncertain. While we provide standardized license agreements or limitations on use with our products, the enforceability of these agreements or limitations is also costly and uncertain. We are aware that unauthorized copying occurs within our industry and if a significant amount of unauthorized copying of our interactive entertainment software products were to occur, our business would be harmed. While we do not copy protect our products, we do not provide source code to third parties unless they have signed nondisclosure agreements with us. We rely on existing copyright laws to prevent unauthorized distribution of our products. However, existing copyright laws afford only limited protection. Policing unauthorized use of our products is difficult and software piracy can be a persistent problem, especially in certain international markets. In addition, the laws of some countries in which our products are or may be distributed either do not protect our products and intellectual property rights to the same extent as the laws of the United States, or these laws are weakly enforced. Legal protection of our rights may be ineffective in these countries, and as we leverage our products using emerging technologies, such as the Internet and on-line services, our ability to protect our intellectual property rights, and to avoid infringing the intellectual property rights of others, becomes more difficult. In addition, intellectual property laws are less clear with respect to such emerging technologies. Accordingly, existing intellectual property laws may not provide adequate protection to our products that are developed in connection with emerging technologies. As the number of titles in the interactive entertainment software industry increases and the features and content of these titles further overlap, interactive entertainment software developers may increasingly become subject to infringement claims. Although we make reasonable efforts to ensure that our products do not violate the intellectual property rights of others, we cannot assure you that claims of infringement will not be made. Any such claims, with or without merit, can be time consuming and expensive to defend and we cannot assure you that infringement claims against us will not result in costly litigation or require us to license the intellectual property rights of third parties, either of which could harm us. LEGAL PROCEEDINGS From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this prospectus, we are not a party to any legal proceedings. 43 47 BUSINESS EMPLOYEES As of March 31, 2001, we had 35 full time employees, including 24 in product development, six in sales and marketing and five in finance, general and administrative. We also retain independent contractors to provide various services, primarily in connection with our product development and sales activities. We are not subject to any collective bargaining agreements and we believe that our relationship with our employees is good. FACILITIES Our headquarters are located in San Jose, California, where we lease approximately 2,100 square feet of office space. We plan to lease additional space in the same building within the next six months. This lease expires in December 2003. We currently lease approximately 1,000 square feet in London, England for our development studio. This lease expires in 2002. We believe that our facilities are adequate for our current needs and suitable additional or substitute space will be available in the future to replace our existing facilities, if necessary, or accommodate expansion of our operations. 44 48 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES Set forth below is information concerning our current and proposed directors, executive officers and other key employees.
NAME AGE POSITION - ---- --- -------- Robert W. Holmes, Jr..................................... 47 Chairman of the Board of Directors Anthony R. Williams...................................... 42 Vice Chairman of the Board of Directors Raymond C. Musci ........................................ 40 Chief Executive Officer, President and Director Stephen M. Ambler........................................ 41 Chief Financial Officer and Vice President of Finance Joseph P. Morici......................................... 45 Vice President of Sales and Marketing Aaron H. Endo............................................ 35 Director of Business Development George M. Sundheim, III.................................. 48 Secretary and Director Mark Dyne................................................ 41 Director David E. Tobin (1)(2).................................... 29 Director Anthony G. Williams (1)(2)............................... 43 Director Steven J. Massarsky (1).................................. 53 Director Robert T. Slezak (2)..................................... 43 Director
- --------------- (1) Member of our compensation committee. (2) Member of our audit committee. Robert W. Holmes, Jr. has served as our Chairman since May 2001 and as a member of our board of directors since October 1999. From March 1998 to the present, Mr. Holmes has pursued independent investment and consulting opportunities. In April 1987, Mr. Holmes co-founded Acclaim Entertainment, where he was a General Manager, Senior Vice President, and Director. He became Chief Operating Officer of Acclaim in March 1989 and President in January 1990. He served as President until October 1996, and as a Director until February 1997, after which time he remained as Special Consultant to the Chairman until August 1999. Mr. Holmes earned a B.A. in Romance Languages from Wesleyan University and his M.B.A. from Western Michigan University. Anthony R. Williams has served as our Vice Chairman since May 2001 and as our Co-Chairman of the board of directors from July 2000 to April 2001. Mr. Williams served as our Chief Executive Officer from July 2000 to May 2001 and as our Chief Financial Officer from July 2000 to March 2001. From February 1998 to July 2000, Mr. Williams served as the Co-Chairman and Chief Operating Officer of Take-Two Interactive Software, Inc. (NASDAQ:TTWO), a developer, publisher and distributor of interactive entertainment software. From April 1988 to February 1998, Mr. Williams was employed in various executive positions at Acclaim Entertainment, Inc. (NASDAQ:AKLM), a developer, publisher and distributor of interactive entertainment software. Mr. Williams currently serves as a director of the Near East Foundation, a private, nonprofit development agency dedicated to assisting people in the Middle East and Africa. Mr. Williams earned a B.A. in Economics from Cambridge University. In 2000, Mr. Williams and the staff of the Securities and Exchange Commission, or SEC, agreed to settle a proposed administrative proceeding relating to a press release issued by Acclaim in October 1995. Under the settlement, Acclaim and Mr. Williams, without admitting or denying the findings and conclusions of the SEC, have agreed to cease and desist from future violations of Sections 10(b) and 13(b) of the Securities and Exchange Act of 1934. Raymond C. Musci is our founder and has served as our Chief Executive Officer since May 2001, as our Chief Operating Officer and Co-Chairman of the Board from July 2000 to April 2001 and as our President and a member of our board of directors since October 1999. From October 1999 to July 2000, Mr. Musci served as our Chief Financial Officer and Secretary. From May 1996 through July 1999, Mr. Musci was President, Chief Executive Officer and a member of the board of directors of the US division of Infogrames Entertainment, S.A., a developer, publisher 45 49 and distributor of interactive entertainment software. From September 1994 to July 1996, Mr. Musci served as a director of Ocean International, Ltd., the holding company of Ocean of America. From 1990 until its merger with Infogrames Entertainment (Paris Bourse:5257), in May 1996, Mr. Musci was co-founder, President, and Chief Operating Officer of Ocean of America, a private developer, publisher and distributor of interactive entertainment software. From October 1996 to the present, Mr. Musci is a member of the board of directors of Brilliant Digital Entertainment, Inc., a developer, publisher and distributor of interactive entertainment software (AMEX: BDE), where he is a member of the audit and compensation committees. Mr. Musci earned a B.A. in Criminal Justice from Western New Mexico University. Stephen M. Ambler has served as our Chief Financial Officer and Vice President of Finance since April 2001. From April 1994 to March 2001, Mr. Ambler served in various executive capacities, including Chief Financial Officer, Secretary and Senior Vice President Finance, at Insignia Solutions PLC (NASDAQ:INSG), a software developer. Mr. Ambler received his diploma in Accounting Studies, with distinction, from Oxford Polytechnic, and he is a member of the Institute of Chartered Accountants in England and Wales. Joseph P. Morici has served as our Vice President of Sales and Marketing since March 2000. From November 1998 through March 2000, Mr. Morici was the Executive Vice President of Metro3D, Inc., developer, publisher and distributor of interactive entertainment software. From November 1996 through November 1998, Mr. Morici was Vice President of Fujitsu Interactive, a producer of interactive CD-ROMs for children. From January 1995 through November 1996, Mr. Morici served as a consultant to Simply Interactive, Inc., Titus Interactive, S.A. and Gametek Inc. Mr. Morici earned a B.S. in Economics from Santa Clara University. Aaron H. Endo has served as our Director of Business Development since November 1999. From December 1997 through November 1999, Mr. Endo was the Business Development Manager at Warner Bros. Interactive Entertainment, a division of AOL Time Warner (NYSE:AOL). From March 1997 through December 1997, Mr. Endo was an independent consultant. From July 1996 through March 1997, Mr. Endo was a senior financial analyst at Macromedia, Inc. (NASDAQ: MACR). Mr. Endo earned a B.S. in Mechanical Engineering from Northwestern University and an M.B.A. from the University of North Carolina. George M. Sundheim III has served as our Secretary since July 2000 and as a member of our board of directors since October 1999. From April 1986 to the present, Mr. Sundheim has been a partner of the law firm of Doty Sundheim & Gilmore, a professional corporation. Mr. Sundheim earned a B.A. in Economics from Stanford University and a J.D. from Northwestern University. Mark Dyne has served on our board of directors since July 2000. From June 1995 to October 1996, Mr. Dyne served as Co-Chief Executive Officer of Sega Enterprises, a theme park developer. From October 1996 to the present, Mr. Dyne has served as Chairman of the Board and Chief Executive Officer at Brilliant Digital Entertainment, Inc. From September 1997 to the present, Mr. Dyne has also served as the Chairman of the Board of Tag-It Pacific, Inc. (ASE:TAG), a specialty printing and packaging company for the garment, accessories and related market areas. Additionally, from October 1998 though January 2000, Mr. Dyne was Chairman and Chief Executive Officer of Virgin Interactive Entertainment Ltd., a distributor of software programs and video games that is based in London, England. Mr. Dyne is a founder and a director of Ozisoft Pty Ltd., a leading distributor of entertainment software in Australia and New Zealand. Mr. Dyne attended the University of California, Los Angeles. David E. Tobin has served on our board of directors since December 2000. From April 1996 to the present, Mr. Tobin has served as a Vice President at PAR Capital Management, Inc., an investment management firm in Boston, MA. Mr. Tobin earned a B.A. in Finance from Saint Anselm College. Anthony G. Williams has served on our board of directors since April 2001. From July 2000 to the present, Dr. Williams has been pursuing independent investment opportunities and non-commercial activities. From November 1994 to July 2000, Dr. Williams served in various Director positions as a partner at Goldman Sachs & Co., London, including Global Co-Head Swaps 2000, Global Head of FICC Risk, and Global Head of Fixed Income Arbitrage. Dr. Williams earned a B.A., M.A., and Ph.D. in Physics from Cambridge University. Steven J. Massarsky has served on our board of directors since May 2001. From February 1999 to the present, Mr. Massarsky has served as the Chief Executive Officer of The Business Incubation Group, a business incubator. From May 1997 to January 1999, Mr. Massarsky pursued independent investment opportunities and personal interests. From May 1996 to April 1997, Mr. Massarsky was the President of Acclaim Comics, Inc., 46 50 a comic book publishing company. Mr. Massarsky earned a B.A. in political science from Brown University and a J.D. from Rutgers University. Robert T. Slezak has served on our board of directors since June 2001. From November 1999 to the present, Mr. Slezak has worked as an independent management consultant. From October 1989 through November 1999, Mr. Slezak served as the Chief Financial Officer of Ameritrade Holding Corporation, an online brokerage firm (NASDAQ: AMTD) and is currently a member of their board of directors. Mr. Slezak earned a B.S. in business administration from the University of Nebraska at Omaha and an M.B.A. from Creighton University. Our board of directors currently consists of nine members. Our board of directors is divided into three classes, each serving staggered three-year terms. Robert W. Holmes, Jr., Anthony R. Williams and Raymond C. Musci have been designated Class I Directors whose terms expire at the 2001 annual meeting of stockholders. George M. Sundheim, III, David E. Tobin and Mark Dyne have been designated Class II Directors, whose terms expire at the 2002 annual meeting of the stockholders. Anthony G. Williams, Steven Massarsky and Robert T. Slezak have been designated Class III Directors, whose terms expire at the 2003 annual meeting of stockholders. This classification of our board of directors may delay or prevent a change in control of our company or our management. Subject to existing employment agreements, our board of directors appoints our executive officers on an annual basis to serve until their successors have been duly elected and qualified. There are no family relationships among any of our directors or officers. BOARD COMMITTEES - - AUDIT COMMITTEE -- In April 2001, our board of directors established an audit committee composed of three independent directors, who are currently David E. Tobin, Robert T. Slezak and Anthony G. Williams. The audit committee will generally meet with and consider suggestions from members of management and our internal accounting personnel, as well as our independent accountants, concerning our financial operations. The audit committee will also have the responsibility to: - review the audit committee charter at least annually and recommend any changes to our board of directors; - review our annual financial statements and any other relevant reports or other financial information; - review the regular internal financial reports prepared by management and any internal auditing department; - recommend to the board of directors the selection of the independent accountants and approve the fees and other compensation to be paid to the independent accountants; - review and discuss with the accountants all significant relationships the accountants have with us to determine the accountants' independence; - review the performance of the independent accountants and approve any proposed discharge of the independent accountants when circumstances warrant; - review separately with the independent accountants, the internal auditing department, if any, and management, following completion of the annual audit, any significant difficulties encountered during the course of the audit; and - review the independence of each member of the committee. - - COMPENSATION COMMITTEE -- In April 2001, our board of directors established a compensation committee composed of three directors, who are currently Steven J. Massarsky, Anthony G. Williams and David E. Tobin. The compensation committee is responsible for the design, review, 47 51 recommendation and approval of compensation arrangements for our directors, executive officers and key employees, and for the administration of our 2000 Stock Incentive Plan, including the approval of grants under such plan to our employees, consultants and directors. Our board of directors may establish other committees to facilitate the management of our business. DIRECTOR COMPENSATION We provide annual compensation of $10,000 to each of our non-employee directors for serving on our board of directors and for attendance of meetings of the board of directors and the committees of the board of directors. Non-employee directors are reimbursed for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of the board of directors and committees of the board of directors. Employee directors are eligible to receive option grants and direct stock issuances under our 2000 Stock Incentive Plan. Non-employee directors will each receive, from time to time, grants of options to purchase a number of shares of our common stock determined by our compensation committee. Those shares will vest upon the optionee's completion of four years of board service measured from the grant date. See "2000 Stock Incentive Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION We did not have a compensation committee or other board committee performing equivalent functions until April 2001. All members of our board of directors, some of whom were executive officers, participated in deliberations concerning executive officer compensation. No interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other company other than Mr. Musci who serves on the board of directors and compensation committee of Brilliant Digital Entertainment, Inc., a company of which Mr. Dyne is the Chairman of the Board. EXECUTIVE COMPENSATION SUMMARY OF CASH AND OTHER COMPENSATION FOR FISCAL YEAR ENDED JUNE 30, 2000 The following summary compensation table indicates the cash and non-cash compensation earned during the fiscal year ended June 30, 2000 by our Chief Executive Officer. No other executive officers received compensation that exceeded $100,000 in the fiscal year ended June 30, 2000.
EXECUTIVE COMPENSATION TABLE (FISCAL YEAR ENDED JUNE 30, 2000) - ------------------------------------------------------------------------------------------------------------------------------------ LONG-TERM COMPENSATION SECURITIES BASE OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SAR COMPENSATION - --------------------------- ---- -------- ------ ------------ ------------- ------------ Raymond C. Musci............................. 2000 $168,750 -- -- -- -- Chief Executive Officer, President and Director (1)
- ------------------------ (1) Mr. Musci previously served as our Chief Operating Officer, Chief Financial Officer and Secretary. We did not grant any stock options or stock appreciation rights to Mr. Musci during the fiscal year ended June 30, 2000. Mr. Musci did not hold any unexercised options at June 30, 2000 and he did not exercise any options in the fiscal year ended June 30, 2000. 2000 STOCK INCENTIVE PLAN Our 2000 Stock Incentive Plan provides for the grant of qualified incentive stock options that meet the requirements of Section 422 of the Internal Revenue Code, nonqualified stock options and restricted stock awards. Our board of directors adopted our 2000 Stock Incentive Plan in July 2000 and our stockholders approved it in July 2000. We have reserved a total of 325,000 shares of our common stock for issuance 48 52 under our 2000 Stock Incentive Plan, which is subject to anti-dilution provisions for stock splits, reverse stock splits, stock dividends, combinations, reclassifications and similar events. Our 2000 Stock Incentive Plan may be administered by our board of directors or a committee or subcommittee of a committee designated by our board of directors. The administrator of our 2000 Stock Incentive Plan has the power to select participants among eligible people and to determine the terms of options or awards. Under current law, incentive stock options may only be granted to a person who is an employee or officer of ours or of any future subsidiary of ours. The exercise price of an award under the 2000 Stock Incentive Plan is payable in full in cash, by promissory note with recourse approved by the administrator of the plan, by surrender of shares of common stock owned equal to the aggregate exercise price, withholding whole shares of common stock then issuable upon the exercise of an option or any combination of the foregoing. In the event of a change of control, all stock option and restricted stock awards will terminate unless the award is assumed by our successor corporation and there will be no acceleration of vesting or exercisability of an award unless an individual's award agreement provides otherwise. A change of control is defined in our 2000 Stock Incentive Plan as (i) a merger or consolidation where we are not the successor entity; (ii) the sale or disposition of substantially all of our assets; (iii) a reverse merger where we are the surviving entity but the holders of our common stock prior to the merger do not possess more than 50% of the total control voting power of the surviving entity's outstanding securities after the merger; or (iv) if any person obtains beneficial ownership of 50% or more of the combined voting power of our outstanding securities. Incentive stock options and restricted stock awards generally may not be transferred, although non-qualified stock options may be transferred pursuant to California Code of Regulations Section 260.140.41 or by will or intestacy. Our board of directors may from time to time amend, suspend or terminate our 2000 Stock Incentive Plan unless stockholder approval is required. As of March 31, 2001, no shares of restricted stock had been issued and options to purchase 83,000 shares of our common stock were outstanding under our 2000 Stock Incentive Plan at an exercise price between $2.17 and $5.00 per share. 401(K) RETIREMENT PLAN We have in place a contributory retirement plan, or 401(k) plan, for employees age 21 and older. Our 401(k) plan is designed to be tax deferred in accordance with the provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended. Under our 401(k) Plan, employees may elect to enroll as of the first day of the month coinciding with or following the date on which the employee meets the eligibility requirements. Our 401(k) plan provides that each participant may contribute up to the maximum amount per year allowed by federal law, which was $10,500 in 2000, and we may contribute to the participant's plan account at the end of each plan year a percentage of salary contributed by the participant. We may make such matching contributions in our sole discretion. Subject to the rules for maintaining the tax status of our 401(k) plan, we may make an additional contribution in our sole discretion that vests upon the employees' number of years of service, and this contribution is divided among eligible employees on a pro-rata share based on the amount of total compensation each eligible employee receives in comparison to all eligible employees. Total contributions to our 401(k) plan for the period from October 7, 1999 (inception) through June 30, 2000 were $6,500 and $28,000 for the nine months ended March 31, 2001. INDEMNIFICATION OF DIRECTORS AND OFFICERS We have included in our certificate of incorporation a provision that, to the extent permitted by Delaware General Corporation Law, our directors will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as directors, except for liability: - - for any breach of the director's duty of loyalty to us or our stockholders; 49 53 - - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - - under Section 174 of the General Corporation Law of the State of Delaware, which relates to unlawful dividends; or - - for any transaction from which the director derived an improper personal benefit. Our bylaws provide for the indemnification of our directors to the fullest extent permitted by the Delaware General Corporation Law. Our bylaws further provide that our board of directors has sole discretion to indemnify our officers and other employees. We may limit the extent of such indemnification by individual contracts with our directors and executive officers, but have not done so. We are not, however, required to indemnify any director or executive officer in connection with any proceeding initiated by us and approved by a majority of our board of directors, that alleges (a) unlawful misappropriation of corporate assets, (b) disclosure of confidential information or (c) any other willful breach of such director or executive officer's duty to us or our stockholders. We are required to advance, prior to the final disposition of any proceeding, promptly on request, all expenses incurred by any director or executive officer in connection with that proceeding on receipt of an undertaking by, or on behalf of, that director or executive officer to repay those amounts if it should be determined ultimately that he or she is not entitled to be indemnified under our bylaws or otherwise. We have entered into agreements with our directors and executive officers containing provisions specifying that the Company will indemnify and defend these directors and officers against any liability incurred in performance of services in their capacity as directors and officers to the fullest extent authorized by our certificate of incorporation, bylaws and applicable law. EMPLOYMENT AGREEMENTS In October 1999 we entered into a two year employment agreement with Raymond C. Musci, our Chief Executive Officer and President. In July 2000 we entered into a two year employment agreement with Anthony R. Williams, our Vice Chairman, which was subsequently amended to reflect his change in title. Messrs. Musci and Williams are each entitled to an annual base salary of $225,000 and are both eligible for any bonus program or plan established for our employees. The employment agreements entitle the employees to receive stock options or other equity rights to be determined in the sole discretion of our Compensation Committee and to receive certain insurance and other employee plans and benefits established for our employees. If the employment agreement of either Messrs. Musci or Williams is terminated for any reason, except for disability or cause, or if either of Messrs. Musci or Williams resign for good cause, he shall receive severance in an amount equal to 24 months of his then-current base salary, with 50% payable within 60 days of the termination date and 50% payable as salary continuing for 12 months following the termination date. In addition, they will receive 12 months of insurance coverage following the termination date. 50 54 RELATED PARTY TRANSACTIONS In October 1999, Raymond C. Musci, our Chief Executive Officer and President, purchased 123,609 shares of our common stock for $634. In October 1999, each of Robert W. Holmes, Jr., our Chairman of the Board, and D&S Partners, whose general partner, Mr. George Sundheim, III is our Secretary and a director, purchased 9,750 shares of our common stock for $0.51 per share, or an aggregate purchase price of $5,000. In each of November 1999 and January 2000, we issued Mr. Musci a convertible promissory note each in the principal amount of $500,000, and in May 2000 we issued him an additional convertible promissory note in the principal amount of $47,000. Each note bore interest at 7% per annum with principal and accrued interest due on demand after one year from the date of issuance. Each note was automatically convertible into shares of our Series A Preferred Stock upon the initial closing of our Series A Preferred Stock financing. In May 2000, the notes were converted and Mr. Musci was issued 482,625 shares of our Series A Preferred Stock at the price of $2.17 per share. In February 2000, we entered into an agreement with Transcap Trade Finance to have Transcap finance the purchase of materials required to produce our products. As a condition of this agreement, Mr. Musci entered into a separate agreement with Transcap to guarantee our obligations under the agreement. In May 2000, we sold and issued 976,220 shares of our Series A Preferred Stock at a price of $2.17 per share. Each share of our Series A Preferred Stock is convertible into one share of our common stock. In addition, at this time, we sold shares of our common stock at a price of $0.51 per share to certain purchasers of our Series A Preferred Stock. In addition to Mr. Musci, who converted promissory notes into 482,625 shares of Series A Preferred Stock, purchasers included the following officers, directors and entities affiliated with them:
SHARES OF SERIES A PREFERRED SHARES OF COMMON STOCK PURCHASER STOCK PURCHASED PURCHASED - --------- ---------------------------- ---------------------- Anthony R. Williams(1) 351,000 89,897 Robert W. Holmes, Jr. 87,750 22,474 Mark Dyne 10,969 3,656 FIMAS, L.P. 10,969 3,656
(1) Mr. Williams' shares of Series A Preferred Stock are currently held in an irrevocable trust administered by Breams Trust Limited. Although Breams Trust Limited has the power to dispose of trust property, Mr. Williams has the right to appoint new or additional trustees and to require any trustee to resign. Mr. Williams is our Vice Chairman, Mr. Dyne is a director and Mr. Sundheim is a general partner of FIMAS, L.P. In October 2000, we issued to Spyglass Entertainment Group, L.P. a warrant with a six year term to purchase 100,000 shares of our common stock at an exercise price of $5.00 per share in connection with our strategic arrangement with Spyglass. In November 2000, we entered into an agreement with Comerica Bank-California to have Comerica provide a revolving note for an amount of up to $1 million. As consideration for providing the note, Comerica was given a security interest in a money market account in the name of Anthony R. Williams maintained at the bank. In addition, as a condition of this agreement, Mr. Musci entered into a separate agreement with Comerica to guarantee our obligations under the agreement. Both guarantees lapsed in December 2000, when the revolving note became secured by restricted cash held in a money market account with the same bank. 51 55 RELATED PARTY TRANSACTIONS In December 2000, we sold shares of our Series B Preferred Stock at a price of $17.65 per share. Each share of our Series B Preferred Stock is convertible into one share of our common stock. Purchasers included the following officers, directors and 5% stockholders:
PURCHASER SHARES OF SERIES B PREFERRED STOCK PURCHASED - --------- -------------------------------------------- PAR Investment Partners, L.P. 198,301 Raymond C. Musci 28,329 Anthony R. Williams(1) 28,329 Merchant Bankers, Inc.(2) 28,329 Robert W. Holmes, Jr. 11,332
- ------------- (1) Mr. Williams' shares of Series B Preferred Stock are currently held in an irrevocable trust administered by Breams Trust Limited. Although Breams Trust Limited has the power to dispose of trust property, Mr. Williams has the right to appoint new or additional trustees and to require any trustee to resign. (2) Merchant Bankers, Inc. is the general partner of Morgan Keegan Early Stage Fund, L.P., which purchased 22,092 shares of Series B Preferred Stock, and Morgan Keegan Employee Investment Fund, L.P., which purchased 6,237 shares of Series B Preferred Stock. Merchant Bankers, Inc. is deemed to beneficially own these shares. Merchant Bankers, Inc. is a wholly-owned subsidiary of Morgan Keegan & Co., Inc. In connection with the sale of the Series B Preferred Stock, we paid placement agent fees of $253,000 to Morgan Keegan & Co., Inc. Mr. Tobin, a director, is a Vice President of PAR Capital Management, Inc ("PAR Capital"). A three year warrant for 30,000 shares of our common stock has also been issued to PAR Investment Partners, L.P. ("PIP") at an exercise price of $17.65 per share. PAR Capital is a Delaware S Corporation and the sole general partner of PAR Group, L.P. ("PAR Group"). The principal business of PAR Capital is to act as the general partner of PAR Group. PAR Group is a Delaware limited partnership and the sole general partner of PIP. The principal business of PAR Group is that of a private investment partnership engaging in the purchase and sale of securities for its own account. PIP is a Delaware limited partnership and its principal business is that of a private investment partnership engaging in the purchase and sale of securities for its own account. Mr. Sundheim is a partner of the law firm Doty, Sundheim & Gilmore, a professional corporation, which provides legal services to us. For the nine months ended March 31, 2001, we paid Doty, Sundheim & Gilmore $87,000 for legal services rendered and $9,000 for the period from our inception through June 30, 2000. In May 2001, we sold shares of our Series C Preferred Stock at a price of $22.553 per share. Each share of our Series C Preferred Stock is convertible into one share of our Common Stock. Purchasers included the following officers, directors and 5% stockholders.
PURCHASER SHARES OF SERIES C PREFERRED STOCK PURCHASED - --------- -------------------------------------------- Merchant Bankers, Inc.(1) 88,680 PAR Investment Partners, L.P. 88,680 Anthony R. Williams 13,302 Raymond C. Musci 13,302 Robert W. Holmes, Jr. 6,651 Mark Dyne 4,434 Stephen M. Ambler(2) 1,109 Joseph P. Morici(3) 887
(1) Merchant Bankers, Inc. is the general partner of Morgan Keegan Early Stage Fund, L.P., which purchased 70,944 shares of Series C Preferred Stock, and Morgan Keegan Employee Investment Fund, L.P., which purchased 17,736 shares of Series C Preferred Stock. Merchant Bankers, Inc. is deemed to beneficially own these shares. (2) Mr. Ambler is our Chief Financial Officer and Vice President of Finance. 52 56 RELATED PARTY TRANSACTIONS (3) Mr. Morici is our Vice President of Sales and Marketing. In connection with the sale of the Series C Preferred Stock, we paid placement agent fees of $200,000 and issued a five-year warrant to purchase 3,500 shares of common stock at a per share exercise price of $22.553 to Morgan Keegan & Co., Inc. Anthony R. Williams has accrued approximately $113,000 in salary that has not yet been paid to him. Mr. Musci has accrued approximately $281,000 in salary that has not yet been paid to him. 53 57 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of June 1, 2001 reflecting its sale of 245,659 shares of Series C Preferred Stock in May 2001, shares of our common stock in this offering and the conversion of all shares of our preferred stock into shares of our common stock prior to the completion of this offering, for each of the following persons: - - all executive officers; - - all directors; and - - each person who is known by us to beneficially own prior to this offering, 5% or more of our common stock Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or become exercisable within 60 days of June 1, 2001 are included. Those shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Each stockholder's percentage of ownership in the following table is based upon 1,843,884 shares of common stock outstanding as of June 1, 2001, after giving effect to the sale of 245,659 shares of Series C Preferred Stock in May 2001. Unless otherwise indicated in the table, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the stockholder's name. All share numbers and percentages assume no exercise of the underwriters over-allotment option. Unless otherwise indicated, the address of each beneficial owner listed below is c/o: BAM! Entertainment, Inc., 333 West Santa Clara Street, Suite 930, San Jose, California 95113.
PERCENTAGE OF SHARES BENEFICIALLY OWNED NUMBER OF SHARES ----------------------- BENEFICIALLY BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING - ------------------------ ---------------- -------- -------- Raymond C. Musci ................................... 647,865 35.1% --% Anthony R. Williams(1) ............................. 482,528 26.2 -- PAR Investment Partners, L.P. ...................... 316,981 16.9 -- David E. Tobin(2) One Financial Center, Suite 1600 Boston, MA 02111 Robert W. Holmes, Jr.(3) ........................... 138,957 7.5 -- Merchant Bankers, Inc.(4) .......................... 117,009 6.3 50 North Front Street, 19th Floor Memphis, TN 38103 Spyglass Entertainment Group, L.P.(5) .............. 100,000 5.1 -- 500 S. Buena Vista Street Burbank, CA 91521-1855 George M. Sundheim III(6) .......................... 26,275 1.4 * Mark Dyne(7) ....................................... 20,059 1.1 * Steven J. Massarsky ................................ 2,217 * * Stephen M. Ambler .................................. 1,109 * * Robert T. Slezak ................................... -- -- -- Anthony G. Williams ................................ -- -- -- All directors and executive officers as a group(10 persons)(1)(2)(3)(4)(6)(7) ........... 1,635,991 87.2% --%
- ---------- * Less than 1%. (1) Mr. Williams' shares of Series A and Series B Preferred Stock are currently held in an irrevocable trust administered by Breams Trust Limited. Although Breams Trust Limited has the power to dispose of trust property, Mr. Williams has the right to appoint new or additional trustees and to require any trustee to resign. 54 58 PRINCIPAL STOCKHOLDERS (2) Includes 30,000 shares of our common stock issuable upon exercise of a warrant exercisable within 60 days held by PAR Investment Partners, L.P. Mr. Tobin is a Vice President of PAR Capital Management, Inc. and disclaims beneficial ownership of the shares held by this entity except to the extent of his pecuniary interest in the shares. (3) Includes 1,000 options exercisable within 60 days. (4) Merchant Bankers, Inc. is the general partner of Morgan Keegan Early Stage Fund, L.P., which holds 22,092 shares of our Series B Preferred Stock and 88,680 shares of our Series C Preferred Stock, and Morgan Keegan Employee Investment Fund, L.P., which holds 6,237 shares of Series B Preferred Stock. Merchant Bankers, Inc. is deemed to beneficially own these shares. Merchant Bankers, Inc. is a wholly-owned subsidiary of Morgan Keegan & Co., Inc. Excludes 3,500 shares of common stock issuable upon exercise of a warrant exercisable within 60 days held by Morgan Keegan & Co., Inc., of which Merchant Bankers, Inc. disclaims beneficial ownership. (5) Represents shares of our common stock issuable upon exercise of warrants exercisable within 60 days. (6) Includes 9,750 shares held by D&S Partners, and 15,525 shares held by FIMAS, L.P., of which Mr. Sundheim is a general partner. Mr. Sundheim disclaims beneficial ownership of the shares held by these entities except to the extent of his pecuniary interest in these shares. Also includes 1,000 options exercisable within 60 days. (7) Includes 1,000 options exercisable within 60 days. 55 59 DESCRIPTION OF CAPITAL STOCK The following information describes our common stock and preferred stock, as well as options to purchase our common stock, and provisions of our certificate of incorporation and our bylaws, all as will be in effect upon the completion of this offering. This description is only a summary. You should also refer to our certificate of incorporation and bylaws which have been filed with the Securities and Exchange Commission as exhibits to our registration statement, of which this prospectus forms a part. The descriptions of the common stock and preferred stock, as well as options to purchase our common stock, reflect changes to our capital structure that will occur upon the completion of this offering in accordance with the terms of the certificate of incorporation. As of March 31, 2001, all outstanding shares of our capital stock were held of record by 16 stockholders. Upon the completion of this offering, our authorized capital stock will consist of ten million shares of common stock, par value $0.001 per share. We will also have three million shares of authorized redeemable convertible preferred stock, par value $0.001 per share. COMMON STOCK We are authorized to issue ten million shares of common stock, par value $0.001 per share. Options to purchase an aggregate of 83,000 shares of our common stock, and warrants to purchase 130,000 shares of our common stock and a contractual obligation to issue 146,250 shares of our common stock were outstanding. There will be _____________ shares of our common stock outstanding after giving effect to the sale of the shares offered in this offering. - - Voting rights -- The holders of our common stock are entitled to one vote for each share held of record. - - Dividends -- Holders of record of shares of our common stock are entitled to receive dividends when, if and as may be declared by the board of directors out of funds legally available for such purposes, subject to the rights of preferred stockholders. We presently intend to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. - - Liquidation rights -- Upon our liquidation, dissolution or winding-up, the holders of our common stock are entitled to share ratably in all assets available for distributions after payment in full to creditors and holders of preferred stock. - - Other provisions -- The holders of our common stock are not entitled to cumulative voting, preemptive rights, subscription rights or the right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares are, and the shares of our common stock sold in the offering will be validly issued, fully paid and nonassessable. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of our redeemable convertible preferred stock will be automatically converted on a one to one basis into shares of common stock. Thereafter, our board of directors has the authority, without action by our stockholders, to issue up to three million shares of preferred stock in one or more series and to designate the rights, preferences and privileges of each series, any or all of which may be greater than the rights of the common stock. The effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock and delaying or preventing a change in control of our company without further action by the stockholders. We have no plans to issue any shares of preferred stock upon completion of this offering. 56 60 DESCRIPTION OF CAPITAL STOCK OPTIONS As of March 31, 2001, options to purchase a total of 83,000 shares of common stock were outstanding. Additional options to purchase a total of 242,000 shares of common stock may be granted under the 2000 Stock Incentive Plan. See "Management -- 2000 Stock Incentive Plan." WARRANTS As of March 31, 2001, warrants to purchase a total of 130,000 shares of common stock were outstanding at prices ranging from $5.00 to $17.65. CONTINGENT ISSUANCES OF COMMON STOCK We are obligated to issue up to 146,250 shares of our common stock pursuant to a license agreement with a production studio. Pursuant to the terms of that license agreement, we have agreed to issue 14,625 shares of our common stock following the theatrical release of each film for which we have developed a software title, up to ten films. To date, we have issued 14,625 shares under this agreement. AUTHORIZED BUT UNISSUED CAPITAL STOCK Following the completion of this offering, there will be _______________ shares of authorized but unissued common stock, or ______________ if the underwriters' over-allotment option is exercised in full. Of this amount, 325,000 shares of common stock are reserved for issuance upon exercise of options outstanding or available for future grant under our 2000 Stock Incentive Plan or outside of our 2000 Stock Incentive Plan. A total of 130,000 shares of common stock are also issuable upon the exercise of warrants that were outstanding as of March 31, 2001. In addition, following the completion of this offering, there will be 3,000,000 shares of authorized preferred stock. Delaware law does not require stockholder approval for the issuance of authorized shares. However, the listing requirements of The Nasdaq Stock Market, Inc., which apply so long as the common stock remains included in that inter-dealer quotation system, require prior stockholder approval of specified issuances, including issuances of shares bearing voting power equal to or exceeding 20% of the pre-issuance outstanding voting power or pre-issuance outstanding number of shares of common stock. These additional shares could be used for a variety of corporate purposes, including, but not limited to, facilitating corporate acquisitions. One of the effects of the unissued and unreserved common stock and preferred stock may be to enable our board of directors to issue shares to persons who may agree or be inclined to vote in concert with current management on issues put to consideration of stockholders, which issuance could render more difficult or discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise, and protect the continuity of our management and possibly deprive our stockholders of the opportunity to sell their shares of common stock at prices higher than prevailing market prices. DELAWARE ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS We are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, this statute prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date that the person became an interested stockholder unless, with certain exceptions, the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns or within three years prior, did own 15% or more of the corporation's voting stock. These provisions may have the effect of delaying, deferring or preventing a change in control of us without further action by our stockholders. Our certificate of incorporation and bylaws contain provisions that could have the effect of discouraging potential acquisition proposals or making a tender offer or delaying or preventing a change in control of our company, including changes a stockholder might consider favorable. In particular, our certificate of incorporation and bylaws, as applicable, among other things, will: - - provide our board of directors with the ability to alter our bylaws without stockholder approval; 57 61 DESCRIPTION OF CAPITAL STOCK - - provide that special meetings of stockholders can only be called by our president or secretary at the request in writing of a majority of the members of our board of directors or holders of at least 10% of the total voting power of all outstanding shares of stock entitled to vote. In addition, the business permitted to be conducted at any special meeting of stockholders is limited to the business brought before the meeting by our board of directors or the stockholders; - - provide for an advance notice procedure with regard to the nomination, other than by or at the direction of the board of directors, of candidates for election as directors and with regard to business to be brought before a meeting of stockholders; - - provide that vacancies on our board of directors may be filled by a majority of directors in office, although less than a quorum; and - - allow us to issue up to 3,000,000 shares of preferred stock with rights senior to those of the common stock and that otherwise could adversely affect the rights and powers, including voting rights, of the holders of common stock. In some circumstances, this issuance could have the effect of decreasing the market price of our common stock, as well as having the anti-takeover effects discussed above. Such provisions may have the effect of discouraging a third-party from acquiring us, even if doing so would be beneficial to our stockholders. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by them, and to discourage some types of transactions that may involve an actual or threatened change in control of our company. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage some tactics that may be used in proxy fights. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure our company outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms. However, these provisions could have the effect of discouraging others from making tender offers for our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is __________________. 58 62 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices. Furthermore, only a limited number of shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale (as described below), sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding __________________ shares of our common stock. Of these shares, the _________________ shares sold in the offering, plus any shares issued upon exercise of the underwriters' over-allotment option, will be freely tradable without restriction under the Securities Act, unless purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act, which generally would be our officers, directors and 10% stockholders. The remaining 1,843,884 shares outstanding are "restricted securities" within the meaning of Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration, such as the exemption provided under Rules 144 or 701 promulgated under the Securities Act, which are summarized below. Sales of the restricted securities in the public market, or the availability of such shares for sale, could adversely affect the market price of the common stock. All of our stockholders and option holders have entered into lock-up agreements providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of our common stock or any securities exercisable for or convertible into our common stock owned by them for a period of 180 days after the effective date of the registration statement filed pursuant to this offering without the prior written consent of UBS Warburg LLC. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under an effective registration statement or an exemption from registration, shares subject to lock-up agreements may not be sold until such agreements expire or are waived by the designated underwriters' representative, which is at their sole discretion. Taking into account the lock-up agreements, and assuming UBS Warburg LLC does not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times: - - beginning on the effective date of the offering, only the shares sold in this offering will be immediately available for sale in the public market; - - 1,583,600 shares will become eligible for sale pursuant to Rule 144 beginning 180 days after the date of this prospectus, 14,625 shares will be eligible for sale in April 2002 and 245,659 shares will be eligible for sale in May 2002. Shares eligible to be sold by affiliates pursuant to Rule 144 are subject to volume restrictions as described below; and - - 143,500 shares issuable upon exercise of outstanding warrants and 131,625 shares issuable pursuant to a contractual arrangement will be eligible for sale one year after issuance. In general, under Rule 144 currently in effect, and beginning after the expiration of the lock-up agreements, a person, or persons whose shares are aggregated, who has beneficially owned restricted shares 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 number of shares of common stock then outstanding, which will equal approximately _______________ shares immediately after the offering; or - - the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been an affiliate of us at any time during the three months preceding a sale, and who has beneficially owned 59 63 SHARES ELIGIBLE FOR FUTURE SALE the shares proposed to be sold for at least two years, is entitled to sell shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Beginning 90 days after the effective date, any employee, officer or director of or consultant to us who purchased shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. In addition, we intend to file registration statements under the Securities Act as promptly as possible after the effective date to register shares to be issued pursuant to our employee benefit plans. As a result, any options exercised under our 2000 Stock Incentive Plan or any of our other benefit plans after the effectiveness of such registration statement will also be freely tradable in the public market following the expiration of the 180-day lock-up period, except that shares held by affiliates will still be subject to the volume limitation, manner of sale, notice and public information requirements of Rule 144 unless otherwise resalable under Rule 701. The sale of a significant number of these shares could cause the price of our common stock to decline. 60 64 UNDERWRITING We and the underwriters for the offering named below have entered into an underwriting agreement concerning the shares being offered. Subject to conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. UBS Warburg LLC and Jefferies & Co., Inc. are the representatives of the underwriters.
NUMBER UNDERWRITER OF SHARES - ----------- --------- UBS Warburg LLC........................................................... Jefferies & Co., Inc. .................................................... --------- Total.............................................................. =========
If the underwriters sell more shares than the total number set forth in the table above, the underwriters have a 30-day option to buy from us up to an additional _______________ shares at the initial public offering price less the underwriting discounts and commissions to cover these sales. If any shares are purchased under this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase up to an additional __________________ shares.
NO EXERCISE FULL EXERCISE ----------- ------------- Per share ...................................... $ $ Total .......................................... $ $
We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately _________________. Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $________________ per share from the initial public offering price. Any of these securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $________________ per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the they selling terms. The underwriters have informed us that they do not expect discretionary sales to exceed __% of the shares of common stock to be offered. Our company and each of, our directors, officers, stockholders and optionholders have agreed with the underwriters not to offer, sell, contract to sell, hedge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, without the prior written consent of UBS Warburg LLC. The underwriters have reserved for sale, at the initial public offering price, _____________ shares of our common stock being offered for sale to our customers and business partners. At the discretion of our management, other parties, including our employees, may participate in the reserved shares program. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. Prior to this offering, there has been no public market for our common stock. The initial public offering price was negotiated by us and the representatives. The principal factors to be considered in determining the initial public offering price included: 61 65 UNDERWRITING - - the information set forth in this prospectus and otherwise available to the representatives; - - the history and the prospects for the industry in which we compete; - - the ability of our management; - - our prospects for future earnings, the present state of our development and our current financial position; - - the general condition of the securities markets at the time of this offering; and - - recent market prices of, and demand for, publicly traded common stock of comparable companies. In connection with the offering, the underwriters may purchase and sell shares of our common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. "Covered" short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from us in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the overallotment option. "Naked" short sales are any sales in excess of the overallotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock while the offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of our common stock. As a result, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. We have agreed to indemnify the several underwriters against liabilities, including liabilities under the Securities Act and to contribute to payments that the underwriters may be required to make in respect thereof. 62 66 LEGAL MATTERS Kirkpatrick & Lockhart LLP, Los Angeles, California, will pass for us on the validity of the common stock offered hereby. Brobeck, Phleger & Harrison LLP, Palo Alto, California, is acting as counsel for the underwriters in connection with selected legal matters. An affiliate of Kirkpatrick & Lockhart LLP owns 1,109 shares of our Series C Preferred Stock and holds a warrant to purchase 10,000 shares of our common stock at an exercise price of $22.553 per share. EXPERTS The consolidated financial statements as of June 30, 2000 and March 31, 2001 and for the period from October 7, 1999 (inception) through June 30, 2000, and for the nine months ended March 31, 2001 included in this prospectus and the related consolidated financial statement schedule included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION We filed a registration statement on Form S-1 under the Securities Act with the SEC to register the shares of our common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits to the registration statement. You should refer to the registration statement and the exhibits and schedules to the registration statement for more information about us and our common stock. Our statements in this prospectus concerning the contents of any document are not necessarily complete, and in each instance, we refer you to the copy of the document filed as an exhibit to the registration statement. Each statement about those documents is qualified in its entirety by this reference. Following this offering, we will become subject to the reporting requirements of the Securities Exchange Act of 1934. In accordance with that law, we will be required to file reports and other information with the SEC. The registration statement and exhibits, as well as those reports and other information when we file them, may be inspected without charge at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W, Washington, D.C. 20549, and at the regional offices of the SEC located at Seven World Trade Center, 13th Floor, New York, New York 10048, and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. Copies of all or any part of the registration statement may be obtained from the SEC's offices upon payment of fees prescribed by the SEC. The SEC maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov. We will furnish to our stockholders annual reports and unaudited quarterly reports for the first three quarters of each fiscal year. Annual reports will include audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements included in those annual reports will be audited and reported upon, with an opinion expressed, by our independent auditors. This prospectus contains statistical data regarding Internet usage and other industry estimates that we obtained from industry publications, including reports generated by the International Data Corporation, Euromonitor, the Interactive Digital Software Association, Forrester and the European Leisure Software Publishers Association, Ltd. These industry publications generally indicate that they have obtained their information from sources believed to be reliable, but we do not guarantee the accuracy and completeness of their information and we have not independently verified their data. 63 67 BAM! ENTERTAINMENT, INC. (FORMERLY BAY AREA MULTIMEDIA, INC.) AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report............................................................................... F-2 Consolidated Balance Sheets as of June 30, 2000 and March 31, 2001......................................... F-3 Consolidated Statements of Operations for the Period from October 7, 1999 (inception) through June 30, 2000, the Period from October 7, 1999 (inception) through March 31, 2000 (Unaudited) and the Nine Months Ended March 31, 2001....................................................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Loss for the Period from October 7, 1999 (Inception) through June 30, 2000 and the Nine Months Ended March 31, 2001............. F-5 Consolidated Statements of Cash Flows for the Period from October 7, 1999 (inception) through June 30, 2000, the Period from October 7, 1999 (inception) through March 31, 2000 (Unaudited) and the Nine Months Ended March 31, 2001................................................................... F-6 Notes to Consolidated Financial Statements................................................................. F-7
F-1 68 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of BAM! Entertainment, Inc. (formerly Bay Area Multimedia, Inc.): We have audited the accompanying consolidated balance sheets of BAM! Entertainment, Inc. (formerly Bay Area Multimedia, Inc.) and its subsidiaries (the "Company") as of June 30, 2000 and March 31, 2001, and the related consolidated statements of operations, stockholders' equity (deficit) and comprehensive loss, and cash flows for the period from October 7, 1999 (inception) through June 30, 2000 and the nine months ended March 31, 2001. 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 of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2000 and March 31, 2001, and the results of its operations and its cash flows for the period from October 7, 1999 (inception) through June 30, 2000 and for the nine months ended March 31, 2001 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP San Jose, California June 1, 2001 F-2 69 BAM! ENTERTAINMENT, INC. (FORMERLY BAY AREA MULTIMEDIA, INC.) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA MARCH 31, JUNE 30, 2000 MARCH 31, 2001 2001 ------------- -------------- ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents .................................................... $ 908 $ 1,240 Restricted cash .............................................................. -- 1,014 Accounts receivable, net of allowance of $77 as of June 30, 2000 and $788 as of March 31, 2001 ....................................................... 1,299 4,667 Inventory .................................................................... 6 718 Prepaid royalties, capitalized software costs and licensed assets ............ 368 3,100 Prepaid expenses and other ................................................... 52 383 -------- -------- Total current assets .................................................... 2,633 11,122 Prepaid royalties, capitalized software costs and licensed assets, net of current portion ............................................................. -- 1,260 Property and equipment, net ..................................................... 79 385 -------- -------- Total assets .................................................................... $ 2,712 $ 12,767 ======== ======== LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable - trade ..................................................... $ 118 $ 1,055 Short-term borrowings ........................................................ 610 3,292 Royalties payable ............................................................ 248 273 Accrued compensation and related benefits .................................... 221 943 Accrued expenses - other ..................................................... 118 610 -------- -------- Total current liabilities ............................................... 1,315 6,173 Redeemable convertible preferred stock; $0.001 par value; shares authorized: 976,220 and 3,000,000 as of June 30, 2000 and March 31, 2001, respectively; shares issued and outstanding: 976,220 and 1,270,840 as of June 30, 2000 and March 31, 2001, respectively, none issued and outstanding on a pro forma basis ........................................... 2,103 6,657 Stockholders' equity (deficit): Common stock, $0.001 par value; shares authorized: 5,000,000 and 10,000,000 as of June 30, 2000 and March 31, 2001, respectively; shares issued and outstanding: 312,760 as of June 30, 2000 and March 31, 2001, 1,583,600 issued and outstanding on a pro forma basis ...................... 1 1 $ 2 Additional paid-in capital ................................................... 97 1,365 8,021 Receivable from stockholder .................................................. (1) (1) (1) Deferred stock compensation .................................................. -- (46) (46) Accumulated deficit .......................................................... (803) (1,378) (1,378) Accumulated other comprehensive loss ......................................... -- (4) (4) -------- -------- -------- Total stockholders' equity (deficit) .................................... (706) (63) $ 6,594 -------- -------- ======== Total liabilities and stockholders' equity (deficit) ............................ $ 2,712 $ 12,767 ======== ========
See notes to consolidated financial statements F-3 70 BAM! ENTERTAINMENT, INC. (FORMERLY BAY AREA MULTIMEDIA, INC.) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PERIOD FROM OCTOBER 7, 1999 (INCEPTION) THROUGH ------------------------------- NINE MONTHS ENDED JUNE 30, 2000 MARCH 31, 2000 MARCH 31, 2001 ------------- -------------- ----------------- (UNAUDITED) Net revenues .................................................................. $ 1,377 $ -- $ 17,305 Costs and expenses: Cost of revenues ........................................................... 807 -- 9,766 Royalties, software costs, license costs and project abandonment ........... 248 -- 2,028 Research and development (exclusive of amortization of deferred stock compensation) ............................................................ 260 133 663 Sales and marketing (exclusive of amortization of deferred stock compensation) ............................................................ 132 -- 3,234 General and administrative (exclusive of amortization of deferred stock compensation) ............................................................ 711 379 1,218 Amortization of deferred stock compensation* ............................... -- -- 19 ------- ----- -------- Total costs and expenses .............................................. 2,158 512 16,928 ------- ----- -------- Income (loss) from operations ................................................. (781) (512) 377 Interest income ............................................................... 8 7 41 Interest expense .............................................................. (39) (21) (993) Other income .................................................................. 9 9 -- ------- ----- -------- Net loss ...................................................................... $ (803) $(517) $ (575) ======= ===== ======== Net loss per share: Basic and diluted .......................................................... $ (4.54) $(2.97) $ (1.84) ======= ===== ======== Shares used in computation: Basic and diluted .......................................................... 177 174 313 ======= ===== ======== Pro forma net loss per share (Note 1): Basic and diluted (unaudited) .............................................. $ (4.44) $ (0.41) ======= ======== Shares used in pro forma computation (Note 1): Basic and diluted (unaudited) .............................................. 181 1,390 ======= ======== * Amortization of deferred stock compensation: Research and development ................................................... $ -- $ -- $ 16 Sales and marketing ........................................................ -- -- 3 General and administrative ................................................. -- -- -- ------- ----- -------- $ -- $ -- $ 19 ======= ===== ========
See notes to consolidated financial statements F-4 71 BAM! ENTERTAINMENT, INC. (FORMERLY BAY AREA MULTIMEDIA, INC.) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DEFERRED COMMON STOCK ADDITIONAL RECEIVABLE STOCK ACCUMU- --------------- PAID-IN FROM STOCK- COMPEN- LATED SHARES AMOUNT CAPITAL HOLDER SATION DEFICIT ------- ------ ---------- ----------- -------- ------- Issuance of common stock for note receivable ........................... 123,609 $- $ 1 $(1) $ -- $ -- Issuance of common stock for services ... 73,124 -- 37 -- -- -- Sale of common stock .................... 116,027 1 59 -- -- -- Net loss and comprehensive loss ......... -- -- -- -- -- (803) ------- --- ------ --- ---- ------- Balance, June 30, 2000 .................. 312,760 1 97 (1) -- (803) Issuance of common stock warrants in connection with a license agreement ............................ -- -- 910 -- -- -- Issuance of common stock warrants in connection with Series B redeemable convertible preferred stock .......... -- -- 283 -- -- -- Issuance of stock options to consultant ............................ -- -- 10 -- -- -- Deferred stock compensation ............. -- -- 65 -- (65) -- Amortization of deferred stock compensation .......................... -- -- -- -- 19 -- Net loss ................................ -- -- -- -- -- (575) Change in accumulated other comprehensive loss .................... -- -- -- -- -- -- Comprehensive loss ...................... -- -- -- -- -- -- ------- --- ------ --- ---- ------- Balance, March 31, 2001 ................. 312,760 $ 1 $1,365 $(1) $(46) $(1,378) ======= === ====== === ==== =======
ACCUMULATED TOTAL STOCK- TOTAL OTHER HOLDERS' COMPRE- COMPRE- EQUITY HENSIVE HENSIVE LOSS (DEFICIT) LOSS ------------- ------------ --------- Issuance of common stock for note receivable ........................... $ -- $ -- Issuance of common stock for services ... -- 37 Sale of common stock .................... -- 60 Net loss and comprehensive loss ......... -- (803) ---- ----- Balance, June 30, 2000 .................. -- (706) Issuance of common stock warrants in connection with a license agreement ............................ -- 910 Issuance of common stock warrants in connection with Series B redeemable convertible preferred stock .......... -- 283 Issuance of stock options to consultant ............................ -- 10 Deferred stock compensation ............. -- -- Amortization of deferred stock compensation .......................... -- 19 Net loss ................................ -- (575) $(575) Change in accumulated other comprehensive loss .................... (4) (4) (4) ----- Comprehensive loss ...................... -- -- $(579) ---- ----- ===== Balance, March 31, 2001 ................. $ (4) $ (63) ==== =====
See notes to consolidated financial statements F-5 72 BAM! ENTERTAINMENT, INC. (FORMERLY BAY AREA MULTIMEDIA, INC.) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM OCTOBER 7, 1999 (INCEPTION) THROUGH ------------------------------- NINE MONTHS ENDED JUNE 30, 2000 MARCH 31, 2000 MARCH 31, 2001 ------------- -------------- ----------------- (UNAUDITED) Cash flows from operating activities: Net loss .................................................................... $ (803) $ (517) $ (575) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................................ 12 3 550 Amortization of deferred stock compensation .............................. -- -- 19 Provision for bad debts and price protection ............................. 77 -- 838 Consulting services performed in exchange for common stock and options ... 37 -- 10 Consulting services performed in exchange for redeemable convertible preferred stock ........................................................ 96 -- -- Other .................................................................... -- -- (4) Changes in operating assets and liabilities: Accounts receivable .................................................... (1,376) (54) (4,206) Inventory .............................................................. (6) -- (712) Prepaid expenses and other ............................................. (52) (31) (331) Accounts payable - trade ............................................... 118 21 937 Prepaid royalties, capitalized software costs and licensed assets ...... (368) (242) (3,577) Royalties payable ...................................................... 248 -- 25 Accrued compensation and related benefits .............................. 221 117 722 Accrued expenses - other ............................................... 118 52 492 -------- -------- -------- Net cash used in operating activities ............................... (1,678) (651) (5,812) -------- -------- -------- Cash flows from investing activities: Purchase of property and equipment ....................................... (91) (54) (361) Increase in restricted cash .............................................. -- -- (1,014) -------- -------- -------- Net cash used in investing activities ............................... (91) (54) (1,375) -------- -------- -------- Cash flows from financing activities: Net proceeds from issuance of promissory notes ........................... 1,047 1,020 -- Advances under short-term borrowings ..................................... 610 -- 10,656 Net repayments of short-term borrowings .................................. -- -- (7,974) Net proceeds from issuance of common stock ............................... 60 -- -- Net proceeds from issuance of redeemable convertible preferred stock ..... 960 -- 4,837 -------- -------- -------- Net cash provided by financing activities ........................... 2,677 1,020 7,519 -------- -------- -------- Net increase in cash and cash equivalents ................................... 908 315 332 Cash and cash equivalents, beginning of period .............................. -- -- 908 -------- -------- -------- Cash and cash equivalents, end of period .................................... $ 908 315 1,240 ======== ======== ======== Noncash investing and financing activities: Conversion of promissory notes to redeemable convertible preferred stock .................................................................. $ 1,047 $ -- $ -- ======== ======== ======== Issuance of common stock for promissory notes ............................ $ 1 $ 1 $ -- ======== ======== ======== Issuance of common stock warrants in connection with license agreement ... $ -- $ -- $ 910 ======== ======== ======== Issuance of common stock warrants in connection with redeemable convertible preferred stock ............................................ $ -- $ -- $ 283 ======== ======== ======== Deferred stock compensation .............................................. $ -- $ -- $ 65 ======== ======== ========
See notes to consolidated financial statements F-6 73 BAM! ENTERTAINMENT, INC. (FORMERLY BAY AREA MULTIMEDIA, INC.) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD FROM OCTOBER 7, 1999 (INCEPTION) THROUGH JUNE 30, 2000, PERIOD FROM OCTOBER 7, 1999 (INCEPTION) THROUGH MARCH 31, 2000 (UNAUDITED) AND NINE MONTHS ENDED MARCH 31, 2001 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business - BAM! Entertainment, Inc. (formerly Bay Area Multimedia, Inc.) and subsidiaries (the "Company") is a developer and publisher of interactive entertainment software products for popular interactive entertainment hardware platforms and personal computers. The Company licenses popular properties that have consumer recognition and appeal from a wide variety of sources and publishes software based on their motion picture, television, sports and cartoon character properties. The Company sells its software to mass merchandisers and independent distributors. Principles of Consolidation - The consolidated financial statements include the Company and its wholly-owned subsidiaries in the United Kingdom. All intercompany transactions and balances have been eliminated in consolidation. Foreign Currency Translation - The functional currency for the Company's foreign operations is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate during the period. The gains or losses resulting from such translation are reported as a separate component of equity as accumulated other comprehensive loss, whereas gains or losses resulting from foreign currency transactions are included in results of operations. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to: allowances for price protection, uncollectible accounts receivable and sales returns; inventory valuations; recoverability of prepaid royalties, capitalized software costs and licensed assets; depreciation and amortization; taxes and contingencies. Actual results could differ from those estimates. Certain Significant Risks and Uncertainties - Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are held with one financial institution and consist primarily of cash in bank accounts. The Company generates revenue primarily from large retailers in the United States and generally does not require its customers to provide collateral or other security to support accounts receivable. To reduce credit risk, management performs ongoing credit evaluations of its customers' financial condition and maintains allowances for estimated potential bad debt losses. The Company participates in a dynamic high-technology industry and believes that changes in any of the following areas could have a material adverse effect on the Company's future financial position, results of operations or cash flows: ability to obtain future financing; advances and trends in new technologies and industry standards; competitive pressures in the form of new and more popular products by competitors; changes in the overall demand by customers and consumers for products offered by the Company; unexpected quantities of product returns and mark-down allowances; changes in certain strategic relationships or customer relationships; the loss of significant customers; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; the inability to procure the necessary third-party licenses or proprietary software needed to develop its products; risk associated with changes in domestic and international economic and/or political conditions or regulations; risks associated with regulation within the industry; availability of necessary product components; the Company's ability to attract and retain employees necessary to F-7 74 support its growth; the Company's reliance on senior management; the Company's limited operating history; inability to manage the growth of the business; delays and cost overruns on products under development; risks associated with development of products by third-party developers; failure to anticipate changing consumer preferences; dependence on hardware manufacturers for the provision of the platforms necessary to generate revenue; the Company's inability to protect its proprietary rights or to avoid claims from other companies; short product life cycles and the reliance on platform manufacturers in manufacturing the Company's products. Cash and Cash Equivalents - The Company considers all highly liquid debt instruments purchased with maturities at the date of purchase of three months or less to be cash equivalents. The recorded carrying amounts of the Company's cash and cash equivalents approximate their fair market value due to their short maturities. Restricted Cash - Restricted cash of $1,014,000 at March 31, 2001 represents a money market account held with a bank, which is not accessible by the Company until its obligations to the bank under a line of credit are satisfied in full. Inventories - Inventories, which consist primarily of finished goods, are stated at the lower of cost (based upon the first-in, first-out method) or market value. The Company estimates the net realizable value of slow moving inventories on a product-by-product basis and charges the excess of cost over net realizable value to cost of revenues. Property and Equipment - Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets of three years. Prepaid Royalties, Capitalized Software Costs and Licensed Assets - Advance royalty payments for intellectual property licenses are capitalized and recorded as prepaid royalties. Royalty payments for intellectual property licenses are classified as current assets to the extent they relate to anticipated sales during the subsequent year and long-term assets if the sales are anticipated after one year. Prepaid royalties are amortized to cost of revenues commencing upon the product release at the greater of the contractual royalty rate based on actual product sales, or the ratio of current revenues to total projected revenues. The Company evaluates the future recoverability of prepaid royalties on a quarterly basis and expenses to costs of revenue if and when they are deemed unrecoverable. The Company utilizes both independent software developers (who are paid advances against future royalties) and internal development teams to develop its software. The Company accounts for prepaid royalties relating to development agreements and capitalized software costs in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Payments made to independent software developers under development agreements are capitalized to software development costs once technological feasibility is established or if the development costs have an alternative future use. Internal development costs are capitalized to software development costs once technological feasibility is established. Technological feasibility is evaluated on a product-by-product basis. For products where proven game engine technology exists, this may occur early in the development cycle. Commencing upon product release, capitalized software development costs are amortized to "royalties, software costs, license costs and project abandonment." Software development costs are expensed if and when they are deemed unrecoverable. The following criteria is used to evaluate recoverability of software development costs: the commercial acceptance of prior products released on a given hardware platform; orders for a product prior to its release and actual development costs of a product as compared to forward-looking projections. Amortization of such costs is based on the greater of the proportion of current revenues to total projected revenues, or the straight-line method over the estimated product life (generally three to six months). The Company evaluates the future recoverability of capitalized amounts on a quarterly basis. Research and development costs are expensed as incurred. F-8 75 During the period from October 7, 1999 (inception) through June 30, 2000 and the nine months ended March 31, 2001, the Company amortized $0 and $495,000, respectively, of capitalized software development costs. Fair Value of Financial Instruments - The Company's financial instruments include cash equivalents and short-term debt. Cash equivalents are stated at cost, which approximates fair market value, based on quoted market prices. The recorded carrying amount of the Company's short-term debt approximates fair value since such debt instruments bear interest at rates which approximate market rates. Long-Lived Assets - The Company evaluates long-lived assets, such as property and equipment and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets, as defined in SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. Income Taxes - The Company accounts for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes, and operating loss and other tax credit carryforwards measured by applying currently enacted tax laws. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized in the future. Stock-Based Compensation - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and to nonemployees using the fair value method in accordance with SFAS No. 123, Accounting for Stock-Based Compensation. Revenue Recognition - The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price has been fixed or is determinable and collectibility has been reasonably assured. This occurs when finished goods in the form of software on a cartridge, CD-ROM or similar media are shipped to the customer. Subject to certain limitations, the Company permits customers to obtain exchanges and returns for defective, shelf-worn and damaged products within certain specified periods and provides price protection on certain unsold merchandise. On a product by product basis, revenue from product sales is reflected net of the allowance for returns and price protection. The Company estimates the amount of future returns, and price protection based upon current known circumstances and historical results. No right of return exists for sales to distributors. Cost of Revenues - Cost of revenues includes manufacturing costs of the finished goods, freight, and inventory management costs. Advertising - Advertising and sales promotion costs are generally expensed as incurred. Advertising costs were $54,000 and $1,400,000 for the period from October 7, 1999 (inception) through June 30, 2000 and the nine months ended March 31, 2001, respectively. Net Loss per Share - Basic earnings per share (EPS) excludes dilution and is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding for the period excluding the weighted average common shares subject to repurchase. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (redeemable convertible preferred stock, common stock options and warrants using the treasury stock method) were exercised or converted into common stock. Potential common shares in the diluted EPS computation are excluded in net loss periods as their effect would be antidilutive. Unaudited Pro Forma Net Loss per Share - Pro forma net loss per share, basic and diluted, is computed to give effect to the conversion of redeemable convertible preferred stock that will F-9 76 automatically convert upon completion of the Company's initial public offering (using the if-converted method). Unaudited Pro Forma Information - The unaudited pro forma information in the accompanying consolidated balance sheet assumes that the conversion of the outstanding shares of redeemable convertible preferred stock into 1,270,840 shares of common stock resulting from the completion of an initial public offering had actually occurred on March 31, 2001. Common shares issued resulting from such an initial public offering and its related estimated net proceeds are excluded from such pro forma information. Unaudited Interim Financial Information - The interim financial information for the period from October 7, 1999 (inception) through March 31, 2000 is unaudited and has been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, such unaudited financial information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of this interim information. Comprehensive Loss - In fiscal 2000, the Company adopted SFAS No. 130, Reporting Comprehensive Income, which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources. Comprehensive loss for the period from October 7, 1999 (inception) through June 30, 2000, and for the nine months ended March 31, 2001 has been disclosed within the statement of stockholders' equity (deficit). Recently Adopted Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 was effective for the Company beginning in the first quarter of fiscal year 2001. The adoption of this statement did not have a significant impact on the Company's consolidated financial statements during the nine months ended March 31, 2001. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles in the United States to revenue recognition in financial statements and provides interpretations regarding the application of generally accepted accounting principles to revenue recognition where there is an absence of authoritative literature addressing a specific arrangement or a specific industry. SAB 101 is effective for the Company in the fourth quarter of fiscal 2001. The Company's revenue recognition practices comply with the applicable guidance in SAB 101 and the adoption of SAB 101, therefore, will not have a material effect on the financial statements for the nine months ended March 31, 2001. In March 2000, the FASB issued Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation ("FIN 44"), an interpretation of APB No. 25. FIN 44 clarifies the application of APB No. 25 for various issues, specifically: - The definition of an employee, - The criteria for determining whether a plan qualifies as a noncompensatory plan, - The accounting consequence of various modifications to the terms of a previously fixed stock option or award, and - The accounting for an exchange of stock compensation awards in a business combination. FIN No. 44 was effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The impact of FIN 44 did not have a material effect on the Company's financial statements. F-10 77 2. PREPAID ROYALTIES, CAPITALIZED SOFTWARE COSTS AND LICENSED ASSETS Prepaid royalties, capitalized software costs and licensed assets consisted of the following:
JUNE 30, MARCH 31, 2000 2001 -------- --------- (IN THOUSANDS) Prepaid royalties ................. $ 150 $ 1,251 Capitalized software costs ........ 218 2,230 Licensed assets ................... -- 879 ----- ------- (368) 4,360 Less current portion: Prepaid royalties ............. (150) (1,047) Capitalized software costs .... (218) (1,982) Licensed assets ............... -- (71) ----- ------- 368 (3,100) ----- ------- Long-term portion ................. $ -- $ 1,260
During the period from October 7, 1999 (inception) through June 30, 2000 and the nine months ended March 31, 2001, the Company amortized $0 and $495,000, respectively, of capitalized software costs. 3. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following:
JUNE 30, MARCH 31, 2000 2001 -------- --------- (IN THOUSANDS) Furniture and equipment ................................ $ 27 $ 113 Computer equipment ..................................... 23 277 Computer software ...................................... 41 62 ----- ----- 91 452 Less accumulated depreciation and amortization ......... (12) (67) ----- ----- Total property and equipment, net ...................... $ 79 $ 385 ===== =====
4. SHORT-TERM BORROWINGS Financing Agreement In February 2000, the Company entered into a master purchase order assignment agreement (the "Agreement") with a finance company, whereby the Company assigns customer purchase orders to the finance company and requests the finance company to purchase the finished goods to fulfill such customer purchase orders. The Agreement specifies that the finance company's funding commitment with respect to a customer purchase order shall not exceed 60% of the retail purchase order price. Under the Agreement the finance company's aggregate outstanding funding (i.e., advance of funds or purchase of finished goods to fulfill customer purchase orders) shall not exceed $8,500,000. The Company is required to pay the finance company's expenses under the contract, a deal fee (consisting of a transaction and initiation fee equal to 5.0% of the face amounts of letters of credit issued or other funds advanced by the finance company), a daily maintenance fee of 0.067%, a materials advance fee at prime rate plus 4.0% and a late payment fee where applicable; all of which are included in interest expense. F-11 78 Upon the signing of the agreement, the Company paid the finance company a security deposit of $90,000. An extension payment of $50,000 was made when the contract was amended in December 2000. The agreement expires on March 31, 2002. The amount outstanding under the agreement as of June 30, 2000 and March 31, 2001 was $610,000 and $2,332,000, respectively. Outstanding borrowings under the above agreement are collateralized by inventory, accounts receivable, fixed assets and intangible assets of the Company. As of March 31, 2001, the Company had outstanding letters of credit issued of $607,000. Management does not expect any material losses to result from these off-balance sheet instruments. Line of Credit In November 2000, the Company entered into a short-term revolving line of credit under which it may borrow up to $1,000,000, of which $960,000 has been utilized as of March 31, 2001. Borrowings are payable on demand and interest is paid at the bank's base rate until time of demand or default, when interest becomes payable at the bank's base rate plus 3.0% (8.5% as of March 31, 2001). The line of credit is secured by restricted cash being held in a money market account with the same bank. 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND COMMON STOCK Stock Split In May 2000, the Company effected a reverse stock split of 0.195 to one with an adjusted par value of $0.001. All share and per share amounts in these financial statements have been adjusted to give effect to the reverse stock split. Redeemable Convertible Preferred Stock Under the Company's certificate of incorporation, as amended in December 2000, the Company is authorized to issue 3,000,000 shares of redeemable convertible preferred stock. The Company issued 976,220 shares of Series A redeemable convertible preferred stock on June 30, 2000 for cash, services and through the conversion of promissory notes. On December 28, 2000, the Company issued 294,620 shares of Series B redeemable convertible preferred stock. As of March 31, 2001, redeemable convertible preferred stock consisted of the following:
AMOUNT NET OF ORIGINAL ISSUANCE SHARES ISSUED AND PAR VALUE LIQUIDATION COMMON STOCK ISSUE PRICE COSTS DESIGNATED OUTSTANDING AMOUNT PREFERENCE EQUIVALENTS ----------- ---------- ---------- ----------- --------- ----------- ------------ (IN THOUSANDS) (IN THOUSANDS) Series A ......... $ 2.17 $ 2,103 976,220 976,220 $ 0.001 $ 2,118 976,220 Series B ......... $ 17.65 4,554 320,000 294,620 $ 0.001 5,750 294,620 --------- --------- --------- -------- --------- $ 6,657 1,296,220 1,270,840 $ 7,868 1,270,840 ========= ========= ========= ======== =========
Significant terms of the redeemable convertible preferred stock are as follows: - Each share of Series A and Series B redeemable convertible preferred stock is convertible into one share of common stock, subject to adjustments for events of dilution, at the option of the holder any time after the date of issuance. In addition, each share of redeemable convertible preferred stock will automatically be converted into common stock upon the completion of a public offering of common stock with aggregate proceeds greater than $15,000,000 and at a price per share not less than $75 per share. - If, as, and when declared by the Board of Directors, the holders of Series A and Series B redeemable convertible preferred stock are entitled to receive noncumulative dividends at the rate F-12 79 of $0.031 and $1.25 per share per annum, respectively, in preference to holders of common shares. - In the event of liquidation, dissolution or winding up of the Company, the holders of Series A redeemable convertible preferred stock shall be entitled to receive, prior and in preference to common stock, an amount equal to the original issuance price of $2.17 per share, plus any declared but unpaid dividends thereon. The holders of Series B redeemable preferred stock shall be entitled to receive prior and in preference to common stock an amount equal to the original issuance price of $17.65 per share plus an amount per each outstanding share of Series B preferred stock equal to 7.0% per annum accruing on the Series B issuance price of $17.65 per share, calculated from the date of issuance until the date of payment of the liquidation preference, plus any declared, but unpaid dividends thereon. If the amount that would have been payable if the conversion of the redeemable convertible preferred stock took place prior to the liquidation event is greater than the amounts specified above, this amount will be payable. Any remaining assets will be distributed to the holders of common stock. - In the event of a change in control or sale or disposition of substantially all of the Company's assets, a majority of the preferred shareholders may elect to require the Company to redeem the redeemable convertible preferred stock at the above liquidation preference. - Each share has the voting rights equivalent to the number of shares of common stock into which it is convertible. Common Stock In October 1999, the Company issued 123,609 shares of common stock to its founder in exchange for a note receivable from the founder. Also in October 1999, the Company issued 58,500 shares at $0.51 per share to consultants in exchange for services performed valued at $30,000. In June 2000, an additional 130,651 shares were issued at $0.51 per share in exchange for cash of $59,000 and services valued at $7,000. Note Receivable from Stockholder - At June 30, 2000, the note receivable from stockholder represents a full-recourse promissory note of $634 received in connection with the sale of common stock. The note bears interest at 7.0% and is payable on demand. Warrants In connection with the execution of a license agreement (the "Agreement") during October 2000, the Company issued a production company warrants to purchase 100,000 shares of common stock at an exercise price of $5.00 per share. The warrants expire in September 2006. Under the warrant agreement, 50% of the warrants became vested and exercisable upon execution of the Agreement, while the remaining warrants become vested in equal portions in December 2000, representing the date on which certain performance measures were met. The fair value of these warrants at the grant date was estimated to be $708,000, using the Black-Scholes option pricing model with the following assumptions: expected term equal to six years; risk-free interest rate of 5.8%; volatility of 95%; and no dividends during the expected term. Of this amount $354,000 relates to 50% of the warrants that vested upon execution of the Agreement and will be amortized on a straight-line basis over the five-year term of the Agreement. The fair value of the remaining 50% of the warrants has been estimated at the date of vesting using the Black-Scholes option pricing model with the following assumptions: expected term equal to 6.00 years; risk-free interest rate of 5.0%; volatility of 95%; and no dividends during the expected term. In December 2000, when the remaining warrants vested, the fair value of the remaining 50% of the warrants of $556,000 was capitalized to prepaid royalties, capitalized software costs and licensed assets and will be amortized over the life of the products to which it relates when these products are released. During the nine months ended March 31, 2001, $31,000 was amortized to cost of revenues. In connection with the Series B redeemable convertible preferred stock offering, the Company issued warrants to purchase 30,000 shares of its common stock at an exercise price of $17.65 per share. The warrants expire on the earlier of either (i) December 2003, (ii) upon the completion of a public F-13 80 offering of common stock with aggregate proceeds greater than $15,000,000 and at a price per share not less than $75 per share or (iii) upon the completion of a subsequent private equity financing or in the event of a change in control, sale or disposition of substantially all of the Company's assets or recapitalization, reclassification or reorganization of the Company's stock resulting in aggregate proceeds greater than $10,000,000 and at a price per share not less than $35 per share. The value of these warrants has been estimated using the Black-Scholes option pricing model with the following assumptions: expected term equal to three years; risk-free interest rate of 5.1%; volatility of 95%; and no dividends during the expected term. The fair value of these warrants of $283,000 was recorded as an issuance cost against the proceeds of the Series B redeemable convertible preferred stock offering. Stock Plans Under the Company's 2000 Stock Incentive Plan adopted on July 10, 2000, the Company may grant options to purchase or directly issue up to 150,000 shares of common stock to employees, directors and consultants at prices not less than the fair market value (as determined by the Board of Directors) at the date of grant for incentive stock options and not less than 85% of fair market value at the date of grant for nonstatutory stock options. These options generally vest over a four year period and expire ten years from the date of grant. The Company has a right to repurchase (at the lesser of the fair market value on the date of repurchase and option exercise price, with the right to repurchase the shares at the original exercise price lapsing ratably in accordance with the vesting schedule of the options granted) common stock issued under option exercises for unvested shares. The right to repurchase generally expires 25% after the first 12 months from the date of grant and then ratably over a 36-month period. The Board of Directors, in their determination of fair market value on the date of grant, takes into consideration many factors including, but not limited to, the Company's financial performance, current economic trends, actions by competitors, market maturity, emerging technologies, near-term backlog and, in certain circumstances, valuation analyses performed by independent appraisers. These valuation analyses utilize generally accepted valuation methodologies such as the income and market approaches to valuing the Company's business. Stock option activity under the stock plans is summarized as follows:
OPTIONS OUTSTANDING ---------------------------- WEIGHTED SHARES AVERAGE AVAILABLE NUMBER OF EXERCISE FOR GRANT SHARES PRICE --------- --------- -------- Balances, June 30, 2000 ......................... -- -- $ -- Reserved ........................................ 150,000 -- -- Granted (weighted average fair value of $1.54 per share) ............................. (83,000) 83,000 3.65 ------- ------- ------- Balances, March 31, 2001 ........................ 67,000 83,000 $ 3.65 ======= ======= =======
Additional information regarding options outstanding as of March 31, 2001 is as follows:
OPTIONS OUTSTANDING ----------------------------------------------------------------------- EXERCISE WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE PRICES NUMBER OF SHARES CONTRACTUAL LIFE (YEARS) EXERCISE PRICE ------------- ---------------- -------------------------- ---------------- $ 2.17 39,500 9.27 $ 2.17 5.00 43,500 9.52 5.00 --------- --------- 83,000 $ 3.65 ========= =========
F-14 81 No options were vested as of March 31, 2001. Deferred Stock Compensation As discussed in Note 1, the Company accounts for its stock-based awards to employees using the intrinsic value method in accordance with APB No. 25. Accordingly, the Company records deferred stock compensation equal to the difference between the grant price and deemed fair value of the Company's common stock on the date of grant. No deferred stock compensation was recorded for the period from October 7, 1999 (inception) through June 30, 2000. Deferred stock compensation aggregated $65,000 for the nine months ended March 31, 2001, and is being amortized to expense over the vesting period of the options, generally four years, using a multiple option award valuation approach, which results in accelerated amortization of the expense resulting in amortization of deferred stock compensation of $19,000 for the nine months ended March 31, 2001. During the nine months ended March 31, 2001, the Company granted options to purchase 5,000 shares of common stock to a nonemployee at a weighted average exercise price of $2.17 per share. These options vest on the date of grant and expire ten years from the date of grant. The fair value of these options at grant date was estimated to be $10,000 using the Black-Scholes option pricing model with the following assumptions: expected term equal to 10 years; risk-free interest rate of 6.1%; volatility of 95%; and no dividends during the expected term. Additional Stock Plan Information Since the Company continues to account for its stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, SFAS No. 123 requires the disclosure of pro forma net income (loss) as if the Company had adopted the fair value method. Under SFAS No. 123, the fair value of stock-based awards is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. The Company's calculations were made using the minimum value pricing model, which requires subjective assumptions, including expected time to exercise, which greatly affects the calculated values. The following weighted average assumptions were used in the model for the nine months ended March 31, 2001: expected life, 4 years; risk-free interest rate, 5.9%; and no dividends during the expected term. The Company's calculations are based on a multiple option award valuation and amortization approach, which results in accelerated amortization of the expense. Forfeitures are recognized as they occur. If the computed fair values of the employee awards had been amortized to expense over the vesting period of the awards, the Company's pro forma net loss would have been $612,000 ($1.96 per share, basic and diluted) for the nine months ended March 31, 2001. 6. INCOME TAXES Due to the Company's net loss position, there was no income tax provision for the period from July 1, 2000 through March 31, 2001 and the period October 7, 1999 (inception) through June 30, 2000. Significant components of the Company's net deferred tax assets consist of:
JUNE 30, MARCH 31, 2000 2001 -------- --------- Deferred tax assets: Deferred stock compensation .............. $ -- $ 21 Reserves and accruals .................... 124 235 Other .................................... (2) 35 Net operating loss carryforwards ......... 203 242 ----- ----- Total deferred tax assets .................... 325 533 Valuation allowance .......................... (325) (533) ----- ----- Net deferred tax asset ....................... $ -- $ -- ===== =====
F-15 82 The Company established a 100% valuation allowance at June 30, 2000 and March 31, 2001 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. At March 31, 2001, the Company has federal and state net operating loss carryforwards of approximately $263,000 and $635,000, respectively, expiring through 2021 and 2011, respectively. Foreign net operating loss carryforwards at March 31, 2001 are approximately $371,000. Current federal and California laws include substantial restrictions on the utilization of net operating losses and credits in the event of an "ownership change" of a corporation. Accordingly, the Company's ability to utilize net operating loss and tax credit carryforwards may be limited as a result of such "ownership change." Such a limitation could result in the expiration of carryforwards before they are utilized. 7. COMPUTATION OF LOSS PER SHARE The following table sets forth the computations of basic and diluted loss per share (in thousands, except per share data):
PERIOD FROM OCTOBER 7, 1999 (INCEPTION) THROUGH NINE MONTHS --------------------------- ENDED JUNE 30, MARCH 31, MARCH 31, 2000 2000 2001 --------------------------------------------- (UNAUDITED) Numerator: Numerator for basic and diluted net loss per share - net loss attributable to common shareholders ............ $(803) $(517) $(575) ====== ====== ====== Denominator: Denominator for basic and diluted net loss per share - weighted average - common shares outstanding ............ 177 174 313 Basic and diluted net loss per share ......................... $(4.54) $(2.97) $(1.84) ====== ====== ======
The following table summarizes common stock equivalents that are not included in the denominator used in the diluted net loss per share calculation because to do so would be antidilutive for the periods indicated (in thousands):
EFFECT OF COMMON STOCK EQUIVALENTS AT: JUNE 30, MARCH 31, MARCH 31, 2000 2000 2001 --------------------------------------------- (UNAUDITED) Series A redeemable convertible preferred stock .............. 11 -- 976 Series B redeemable convertible preferred stock .............. -- -- 101 Options to purchase common stock ............................. -- -- 46 Warrants to purchase common stock ............................ -- -- 47 --- --- ----- Total common stock equivalents ............................... 11 -- 1,170 === === =====
F-16 83 8. EMPLOYEE BENEFIT PLAN In January 2000, the Company adopted a 401(k) tax deferred savings plan (the 401(k) Plan) to provide for retirement of its employees. Employee contributions were limited to $10,500 for calendar year 2000. The Company may make matching contributions and employer profit sharing contributions at the Board of Directors' discretion. For the period from October 7, 1999 (inception) through June 30, 2000, and for the nine months ended March 31, 2001, the Company made employer contributions to the 401(k) Plan amounting to $6,500 and $28,000, respectively. 9. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION As defined by the requirements of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, the Company operates in one reportable segment: the development and publishing of interactive entertainment products. International sales and assets were insignificant for all periods presented. 10. CUSTOMER CONCENTRATIONS The following table summarizes net revenues and accounts receivable for customers which accounted for 10% or more of net revenues or accounts receivable:
NET REVENUES ------------------------------ PERIOD FROM OCTOBER 7, 1999 NINE ACCOUNTS RECEIVABLE (INCEPTION) MONTHS --------------------------- THROUGH ENDED JUNE 30, MARCH 31, JUNE 30, MARCH 31, CUSTOMER 2000 2001 2000 2001 -------- -------- --------- ----------- ------------ A ................... 52% -- 49% -- B ................... -- 29% -- 20% C ................... -- 19% -- 15% D ................... 17% -- 16% 16% E ................... -- 15% -- 12% F ................... -- 11% -- -- G ................... 10% -- 10% --
11. COMMITMENTS AND CONTINGENCIES Under a license agreement entered into between the Company and a production company, the Company will be obligated to issue 14,625 shares of common stock upon the release of a film for which the Company elects to produce software products, up to a total of ten films. As at March 31, 2001, the Company has elected to produce software products for three films under this agreement. As none of these films have been released as at March 31, 2001, the Company is not yet required to issue any stock under this agreement. Under various licensing agreements entered into between the Company and content providers, the Company has contractual marketing commitments to spend $5,250,000 in advertising on the content providers' networks and online mediums. As at March 31, 2001, the Company has made payments totaling $1,150,000 under these agreements. Future minimum annual advertising payments under these contractual marketing commitments are as follows (in thousands):
Year ending March 31, --------------------- 2002.................................. $1,150 2003.................................. 1,650 2004.................................. 1,300 ------ Total $4,100 ======
F-17 84 In connection with a number of licensing and developing agreements, the Company is required to pay guaranteed minimum royalties with respect to these agreements. As at March 31, 2001, the Company has capitalized payments totaling $1,800,000 under these agreements. These guaranteed amounts will be applied against future royalties that may become payable to the respective licensors under the agreement. Future minimum annual advertising payments under these contractual licensing and developing commitments are as follows (in thousands):
Year ending March 31, --------------------- 2002.................................. $1,575 2003.................................. 200 ------ Total $1,775 ======
Under the finance agreement as described in Note 4, a maximum commitment fee of $1,125,000 is payable to the finance company. A portion of the commitment fee is waived based on the Company's usage of the financing agreement and on amounts advanced to the Company. As the Company had already utilized a portion of the amount available under the contract, $504,000 of the total commitment fee has been waived at March 31, 2001. An amount of $621,000 therefore remains as a contingent liability and would be payable before the end of the contract term of December 31, 2001, or earlier, depending on amounts advanced to the Company under the financing agreement. The Company leases its principal facilities under a noncancelable operating lease expiring in 2003. Future minimum annual rental payments under the lease agreement at March 31, 2001 are as follows (in thousands):
Year ending March 31, --------------------- 2002.......................... $ 130 2003.......................... 70 2004.......................... 52 ------ $ 252 ======
Rent expense was $34,950 for the period from October 7, 1999 (inception) through June 30, 2000 and $89,000 for the nine months ended March 31, 2001. 12. RELATED PARTY TRANSACTIONS In October 1999, the Company issued 123,609 shares of common stock to an officer in exchange for a note receivable from the officer. As of March 31, 2001, the Company has recorded a payroll accrual of $394,000 related to two employees of the Company. In each of November 1999 and January 2000, the Company issued an officer a convertible promissory note each in the principal amount of $500,000, and in May 2000 issued the officer an additional convertible promissory note in the principal amount of $47,000. Each note bore interest at 7.0% per annum with principal and accrued interest due on demand after one year from the date of issuance. Each note was automatically convertible into shares of Series A Preferred Stock upon the initial closing of the Company's Series A Preferred Stock financing. In May 2000, the notes were converted and the officer was issued 482,625 shares of Series A Preferred Stock at $2.17 per share. In February 2000, the Company entered into an agreement with a financing company to finance the purchase of materials required to produce products. As a condition of this agreement, an officer of F-18 85 the Company entered into a separate agreement with the financing company to guarantee the Company's obligations under the agreement. In November 2000, the Company entered into a revolving note agreement with a bank. The note is secured by a personal guarantee from an officer of the Company and by a security interest in a money market account maintained at the bank in the name of a director of the Company. The Company incurred legal services of $9,000 and $87,000 for the period from October 7, 1999 (inception) through June 30, 2000 and the nine months ended March 31, 2001, respectively, to a law firm whose partner is also a director of the Company. 13. SUBSEQUENT EVENTS Stock Option Grants In April and May, 2001, the Company granted options to purchase 70,250 shares of its common stock to employees, officers, and directors and in May, 2001 increased the number of shares issuable under its 2000 Stock Incentive Plan to 325,000 shares. Common Stock Issued Under License Agreement In April, 2001, the Company issued 14,625 shares of common stock pursuant to a license agreement with a production company in connection with the release of a film for which the Company intends to develop and publish a title. The Company will capitalize the cost of this issuance of common stock at the fair market value of the common stock and amortize this amount to royalties, software costs, license costs and project abandonment upon the release of the software products. Private Placement of Securities In May, 2001, the Company sold 245,659 shares of its Series C redeemable convertible preferred stock. Proceeds from these sales totaled $5.3 million, net of expenses. These shares of redeemable convertible preferred stock include, among other items, 13,500 warrants to purchase common stock and conversion rights into shares of common stock on a one-for-one basis in connection with a proposed initial public offering of the Company's common stock. The Company will recognize a deemed dividend for the Series C redeemable convertible preferred stock resulting from its beneficial conversion into common stock. F-19 86 [INSIDE BACK COVER] [ARTWORK TO BE INSERTED] [LOGO] 87 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market Listing Fee. SEC registration fee ....................... $ 11,250 NASD filing fee ............................ $ 5,000 Nasdaq National Market listing fee ......... $ 50,000 Printing and engraving costs ............... $ 250,000 Legal fees and expenses .................... $ 400,000 Accounting fees and expenses ............... $ 750,000 Blue Sky fees and expenses ................. $ 5,000 Directors and Officers Insurance ........... $ 600,000 Transfer Agent and Registrar fees .......... $ 20,000 Miscellaneous expenses ..................... $ 108,750 ---------- Total ................................ $2,200,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Section 145 of the General Corporation Law of the State of Delaware, we can indemnify our directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). Our certificate of incorporation provides that, pursuant to Delaware law, our directors shall not be liable for monetary damages for breach of the directors' fiduciary duty of care to us and our stockholders. This provision in the certificate of incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of nonmonetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to us or our stockholders, for acts or omissions not in good faith or involving intentional misconduct or knowing violations of the law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. Our bylaws provide for the indemnification of our directors to the fullest extent permitted by the Delaware General Corporation Law. Our bylaws further provide that our Board of Directors has sole discretion to indemnify our officers and other employees. We may limit the extent of such indemnification by individual contracts with our directors and executive officers, but have not done so. We are not, however, required to indemnify any director or executive officer in connection with any proceeding initiated by us and approved by a majority of our Board of Directors, that alleges (a) unlawful misappropriation of corporate assets, (b) disclosure of confidential information or (c) any other willful breach of such director or executive officer's duty to us or our stockholders. We are required to advance, prior to the final disposition of any proceeding, promptly on request, all expenses incurred by any director or executive officer in connection with that proceeding on receipt of an undertaking by or on behalf of that director or executive officer to repay those amounts if it should be determined ultimately that he or she is not entitled to be indemnified under our bylaws or otherwise. We also have directors' and officers' liability insurance. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following is a summary of our sales of our securities during the past three fiscal years involving sales of our securities that were not registered under the Securities Act of 1933, as amended: II-1 88 In October 1999, we sold in private placements, 123,609 shares of common stock to our Chief Executive Officer and President, Raymond C. Musci, at a price of $0.001 per share. In October 1999, we sold 9,750 shares of common stock at a price per share of $.10 to each of the following investors: (1) Robert E. Lloyd; (2) Tracy Ann Sebastian; (3) Philip L. Rosenberg; (4) Robert W. Holmes, Jr.; (5) Gary Nemetz; and (6) D&S Partners, a California general partnership. In March 2001 we effected a 0.195-for-one stock split. In May 2000, in a private placement, we sold shares of common stock to private investors at a price per share of $0.513 as follows: (1) Anthony R. Williams, 89,897 shares; (2) Robert W. Holmes, Jr., 22,474; (3) Kevin Bermeister, 3,656 shares; (4) Mark Dyne, 3,656 shares; (5) Elie Samaha, 7,312; and (6) FIMAS, L.P., a partnership, 3,656. In May 2000, in a private placement, we sold shares of our Series A convertible, redeemable preferred stock at a price per share of $2.17 to the following investors: (1) Raymond C. Musci, 482,625 shares; (2) Anthony R. Williams, 351,000 shares; (3) Robert W. Holmes, Jr., 87,750 shares; (4) Kevin Bermeister, 10,969 shares; (5) Mark Dyne, 10,969 shares; (6) Elie Samaha, 21,938 shares; and (7) FIMAS, L.P., a partnership, 10,969 shares. In October 2000, we entered into a strategic arrangement with a studio which gives us the exclusive right of first refusal to develop titles based on films produced by that studio and to distribute them worldwide. In connection with this strategic arrangement, we granted the studio a warrant to purchase up to 100,000 shares of common stock. The exercise price for shares issued under the warrant is $17.45 and the term of the warrant is five years from the date of issuance. In December 2000, we entered into an agreement to sell a warrant for 30,000 shares of common stock to PAR Investment Partners, L.P. The exercise price for shares issued under the warrant is $17.65 and the term of the warrant is three years from the date of issuance. In December 2000, in a private placement, we sold shares of our Series B convertible, redeemable preferred stock at a price per share of $17.45 to the following investors: (1) Raymond C. Musci, 28,329 shares; (2) Anthony R. Williams, 28,329 shares; (3) Morgan Keegan Early Stage Fund, L.P., 22,092; (4) Robert W. Holmes, Jr., 11,332 shares; (5) PAR Investment Partners, L.P., 198,301; and (6) Morgan Keegan Employee Investment Fund, L.P., 6,237 shares. In April 2000, we entered into an agreement that gave us the exclusive first look right to review screenplays acquired by a studio and to develop titles based on films produced from those screenplays. Our agreement expires upon the later of three years or the theatrical release of the tenth film on which we base a product. In connection with the agreement, we agreed to issue 14,625 shares of our common stock to the studio following the theatrical release of a film for which we have developed a title, up to a maximum of 146,250 shares. In April 2001, we issued 14,625 shares of common stock to the studio in connection with the release of a film upon which we had based a product. In May 2001, in a private placement, we sold shares of our Series C convertible, redeemable preferred stock at a price per share of $22.553 to the following investors: (1) Raymond C. Musci, 13,302 shares; (2) PAR Investment Partners, L.P., 88,680 shares; (3) Morgan Keegan Early Stage Fund, L.P., 88,680 shares; (4) Anthony R. Williams, 13,302 shares; (5) Robert W. Holmes, Jr., 6,651 shares; (6) Stephen Ambler, 1,109 shares; (7) Joseph Morici, 887 shares; (8) Mark Dyne, 4,434 shares; (9) Kevin Bermeister, 4,434 shares; (10) K&L 2000 LLC, 1,109 shares; (11) Pam Colburn, 1,109 shares; (12) Anthony Neumann, 1,109 shares; (13) Terry Phillips, 13,302 shares; (14) Steven Massarsky, 2,217 shares; (15) David Clark, 4,434 shares; and (16) FIMAS L.P., a partnership, 900 shares. In May 2001, we sold a warrant for 10,000 shares of common stock to K&L 2000 LLC. The exercise price of the warrant is $22.553 per share and the term of the warrant is five years. In May 2001, we sold a warrant for 3,500 shares of common stock to Morgan Keegan Early Stage Fund, L.P. The exercise price for these shares is $22.553 and the term of the warrant is five years from the date of issuance. II-2 89 Each of the above sales was made pursuant to the exemption provided by (1) Rule 506, promulgated by the Commission under the Securities Act of 1933, as amended (the "Securities Act"), or (2) Section 4(2) of the Securities Act. No underwriter was used in connection with these sales. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE (a) Exhibits 1.1 Form of Underwriting Agreement 2.1 Agreement and Plan of Merger dated September 21, 2000 of Bay Area Multimedia, Inc. (a Delaware corporation) and Bay Area Multimedia, Inc. (a California corporation) 3.1 Second Amended and Restated Certificate of Incorporation 3.2 Bylaws of the Registrant 4.1* Specimen Common Stock Certificate 4.2 Warrant to Purchase Shares of Common Stock between the Registrant and Spyglass Entertainment Group, LP. 4.3 Warrant to Purchase Shares of Common Stock, dated December 27, 2000, between the Registrant and PAR Capital Management, Inc. 4.4* Warrant to Purchase Shares of Common Stock between the Registrant and K & L 2000 LLC. 4.5* Warrant to Purchase Shares of Common Stock between the Registrant and Morgan Keegan & Co., Inc. 4.6 Convertible Promissory Note, dated November 24, 1999 between the Registrant and Raymond C. Musci. 4.7 Convertible Promissory Note dated January 7, 2000 between the Registrant and Raymond C. Musci. 4.8 Convertible Promissory Note dated May 25, 2000 between the Registrant and Raymond C. Musci. 5.1* Opinion of Kirkpatrick & Lockhart LLP 10.1 2000 Stock Incentive Plan 10.2 Common Stock Purchase Agreement dated October 9, 1999 between the Registrant and Raymond C. Musci. 10.3 Common Stock Purchase Agreement dated October 25, 1999 between the Registrant and D&S Partners. II-3 90 10.4 Common Stock Purchase Agreement dated October 25, 1999 between the Registrant and Robert Holmes. 10.5 Common Stock Purchase Agreement dated October 25, 1999 between the Registrant and Gary Nemetz. 10.6 Common Stock Purchase Agreement dated October 25, 1999 between the Registrant and Tracy Ann Sebastian. 10.7 Common Stock Purchase Agreement dated December 30, 1999 between the Registrant and Philip L. Rosenberg. 10.8 Series A Preferred Stock and Common Stock Purchase Agreement dated May 17, 2000 among the Registrant and Raymond C. Musci, Anthony R. Williams, Robert Holmes, Mark Dyne, Kevin Bermeister, Franchise Films, and FIMAS L.P. 10.9 Investor Rights Agreement dated May 17, 2000 among the Registrant and Raymond C. Musci, Anthony R. Williams, Robert Holmes, Mark Dyne, Kevin Bermeister, Franchise Films, and FIMAS L.P. 10.10 Common Stock Purchase Agreement dated September 21, 2000 between the Registrant and Bay Area Multimedia, Inc., a California corporation. 10.11 Series B Preferred Stock Purchase Agreement dated December 28, 2000 among the Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony R. Williams, Robert Holmes, and Morgan Keegan Early Stage Fund L.P. 10.12 Co-Sale and Right of First Refusal Agreement dated December 28, 2000 among the Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony R. Williams, Robert Holmes, and Morgan Keegan Early Stage Fund L.P. 10.13 Registration Rights Agreement dated December 28, 2000 among the Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony R. Williams, Robert Holmes, and Morgan Keegan Early Stage Fund L.P. 10.14 Series C Preferred Stock Purchase Agreement dated May 24, 2001 among the Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony R. Williams, Robert Holmes, Morgan Keegan Early Stage Fund L.P., Stephen Ambler, Mark Dyne, Joseph Morici, Kevin Bermeister, K&L 2000 LLC, Pam Colburn, Anthony Neumann, Terry Phillips, Steven Massorsky, Daniel Clark, and FIMAS, L.P. 10.15 Registration Rights Agreement dated May 24, 2001 among the Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony R. Williams, Robert Holmes, Morgan Keegan Early Stage Fund L.P., Stephen Ambler, Mark Dyne, Joseph Morici, Kevin Bermeister, K&L 2000 LLC, Pam Colburn, Anthony Neumann, Terry Phillips, Steven Massorsky, Daniel Clark, and FIMAS, L.P. 10.16 Co-Sale and Right of First Refusal Agreement dated May 24, 2001 among the Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony R. Williams, Robert Holmes, Morgan Keegan Early Stage Fund L.P., Stephen Ambler, Mark Dyne, Joseph Morici, Kevin Bermeister, K&L 2000 LLC, Pam Colburn, Anthony Neumann, Terry Phillips, Steven Massorsky, Daniel Clark, and FIMAS, L.P. 10.17 Master Purchase Order Assignment Agreement dated February 23, 2000 between the Registrant and Transcap Trade Finance. 10.18 Security Agreement and Financing Statement dated February 23, 2000 between the Registrant and Transcap Trade Finance. II-4 91 10.19 Subordination Agreement dated February 23, 2000 between the Registrant, Raymond C. Musci, and Transcap Trade Finance. 10.20 Guaranty and Pledge Agreement dated February 23, 2000 between the Registrant , Raymond C. Musci, and Transcap Trade Finance. 10.21 Master Revolving Note dated November 13, 2000 between the Registrant and Comerica Bank-California. 10.22 Security Agreement dated November 13, 2000 between the Registrant and Comerica Bank-California. 10.23 Letter Agreement dated November 13, 2000 between the Registrant and Comerica Bank-California. 10.24 Guaranty Agreement dated November 13, 2000 between Comerica Bank-California and Raymond C. Musci. 10.25 Letter Agreement dated December 26, 2000 between the Registrant and Comerica Bank-California. 10.26 Sony PlayStation Licensed Publisher Agreement dated February 2, 2000 between the Registrant and Sony Computer Entertainment America, Inc. 10.27 Amendment to the Licensed Publisher Agreement dated April 1, 2000 between the Registrant and Sony Computer Entertainment America, Inc. 10.28 PlayStation 2 Licensed Publisher Agreement dated April 1, 2000 between the Registrant and Sony Computer Entertainment America, Inc. 10.29 PlayStation 2 Development System Agreement dated August 2, 2000 between the Registrant and Sony Computer Entertainment America, Inc. 10.30 Licensed Publisher Agreement for Game Boy, Game Boy Color and Game Boy Pocket dated February 18, 2000 between the Registrant and Nintendo of America, Inc. 10.31 Licensed Publisher Agreement for Nintendo 64 dated February 18, 2000 between the Registrant and Nintendo of America, Inc. 10.32 Confidential License Agreement for Game Boy Advance dated May 21, 2001 between the Registrant and Nintendo of America, Inc. 10.33 Xbox Publisher License Agreement dated November 28, 2000 between the Registrant and Microsoft Corporation. 10.34 Retail License Agreement #12177-PPG dated March 8, 2000 between the Registrant and Warner Bros. Consumer Products. 10.35 Amendment #1 to Retail License Agreement #12177-PPG dated November 27, 2000 between the Registrant and Warner Bros. Consumer Products. 10.36 License Agreement #12697-DEX dated October 4, 2000 between the Registrant and Warner Bros. Consumer Products. 10.37 License Agreement #12698-YOGI dated October 4, 2000 between the Registrant and Warner Bros. Consumer Products. 10.38 License Agreement dated March 31, 2000 between the Registrant and Takara Co., Ltd. II-5 92 10.39 Exclusive Output Agreement dated April 7, 2000 between the Registrant and Franchise Films, Inc. 10.40 First Amendment to Exclusive Output Agreement dated July 10, 2000 between the Registrant and Franchise Films, Inc. 10.41 License Agreement dated July 12, 2000 between the Registrant and Time, Inc. for its Sports Illustrated for Kids division. 10.42 Exclusive Output Agreement dated October 25, 2000 between the Registrant and Spyglass Entertainment Group, L.P. 10.43 Office Lease dated November 15, 1999 between the Registrant and Macanan Investments, L.P. 10.44 Employment Agreement dated October 1, 1999 between the Registrant and Raymond C. Musci. 10.45 Amended and Restated Employment Agreement dated May 24, 2001 between the Registrant and Raymond C. Musci. 10.46 Employment Agreement dated July 1, 2000 between the Registrant and Anthony R. Williams. 10.47 Amended and Restated Employment Agreement dated May 24, 2001 between the Registrant and Anthony R. Williams. 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Kirkpatrick & Lockhart LLP (contained in exhibit 5.1) 24.1 Power of attorney (included on signature page of Registration Statement) 27 Financial Data Schedules * to be filed by amendment. (b) Financial Statement Schedules The following consolidated financial statement schedule is filed as part of this registration statement and should be read with the consolidated financial statements:
Schedule Page -------- ---- Schedule II - Valuation and Qualifying Accounts S-2
Schedules other than those referred to above have been omitted because they are not applicable or not required or because they are not applicable or not required or because the information is included elsewhere in the consolidated financial statements or the related notes. ITEM 17. UNDERTAKINGS The undersigned hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in denominations as required by the underwriters and registered in names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that II-6 93 in the opinion of the Securities and Exchange Commission indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against liabilities, other than the payment by us of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of this issue. The undersigned hereby undertakes that: (1) For 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 this offering of these securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 94 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on June 6, 2001. BAM! Entertainment, Inc. By: /s/ RAYMOND C. MUSCI ------------------------------------- Raymond C. Musci Chief Executive Officer and President 95 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert W. Holmes, Jr. and Raymond C. Musci, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, or any related registration statement filed pursuant to Rule 462 (b) under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and any other regulatory authority, 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 connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their, his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed below by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ RAYMOND C. MUSCI Chief Executive Officer, June 6, 2001 - -------------------------------------------------------- President and Director Raymond C. Musci (Principal Executive Officer) /s/ ANTHONY R. WILLIAMS Vice Chairman of the Board June 6, 2001 - -------------------------------------------------------- Anthony R. Williams /s/ STEPHEN M. AMBLER Chief Financial Officer and June 6, 2001 - -------------------------------------------------------- Vice President of Finance Stephen M. Ambler (Principal Financial and Accounting Officer) /s/ ROBERT W. HOLMES, JR. Chairman of the Board June 6, 2001 - -------------------------------------------------------- Robert W. Holmes, Jr. /s/ GEORGE M. SUNDHEIM, III Secretary and Director June 6, 2001 - -------------------------------------------------------- George M. Sundheim, III /s/ MARK DYNE Director June 6, 2001 - -------------------------------------------------------- Mark Dyne /s/ DAVID E. TOBIN Director June 6, 2001 - -------------------------------------------------------- David E. Tobin /s/ ANTHONY G. WILLIAMS Director June 6, 2001 - -------------------------------------------------------- Anthony G. Williams /s/ STEVEN J. MASSARSKY Director June 6, 2001 - -------------------------------------------------------- Steven J. Massarsky /s/ ROBERT T. SLEZAK Director June 6, 2001 - -------------------------------------------------------- Robert T. Slezak
96 INDEPENDENT AUDITORS' REPORT ON SCHEDULE To the Board of Directors and Stockholders of BAM! Entertainment, Inc. We have audited the consolidated balance sheets of BAM! Entertainment, Inc. and its subsidiaries (the "Company") as of June 30, 2000 and March 31, 2001, and the related consolidated statements of operations, stockholders' equity (deficit) and comprehensive loss, and cash flows for the period from October 7, 1999 (inception) through June 30, 2000 and the nine months ended March 31, 2001 and have issued our report thereon dated June 1, 2001. Our audits also included the consolidated financial statement schedule listed in Item 16(b) of this registration statement. The consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP San Jose, California June 1, 2001 S-1 97 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE - BALANCE - BEGINNING END OF DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD - ----------- --------- --------- ---------- --------- Allowance for doubtful accounts, sales returns and price protection: Period from October 7, 1999 (inception) through June 30, 2000 ................... $ -- $ 77 $ -- $ 77 ===== ===== ===== ===== Nine months ended March 31, 2001 .......... $ 77 $ 838 $(127) $ 788 ===== ===== ===== =====
S-2 98 EXHIBIT INDEX 1.1 Form of Underwriting Agreement 2.1 Agreement and Plan of Merger dated September 21, 2000 of Bay Area Multimedia, Inc. (a Delaware corporation) and Bay Area Multimedia, Inc. (a California corporation) 3.1 Second Amended and Restated Certificate of Incorporation 3.2 Bylaws of the Registrant 4.1* Specimen Common Stock Certificate 4.2 Warrant to Purchase Shares of Common Stock between the Registrant and Spyglass Entertainment Group, LP. 4.3 Warrant to Purchase Shares of Common Stock, dated December 27, 2000, between the Registrant and PAR Capital Management, Inc. 4.4* Warrant to Purchase Shares of Common Stock between the Registrant and K & L 2000 LLC. 4.5* Warrant to Purchase Shares of Common Stock between the Registrant and Morgan Keegan & Co., Inc. 4.6 Convertible Promissory Note, dated November 24, 1999 between the Registrant and Raymond C. Musci. 4.7 Convertible Promissory Note dated January 7, 2000 between the Registrant and Raymond C. Musci. 4.8 Convertible Promissory Note dated May 25, 2000 between the Registrant and Raymond C. Musci. 5.1* Opinion of Kirkpatrick & Lockhart LLP 10.1 2000 Stock Incentive Plan 10.2 Common Stock Purchase Agreement dated October 9, 1999 between the Registrant and Raymond C. Musci. 10.3 Common Stock Purchase Agreement dated October 25, 1999 between the Registrant and D&S Partners. 10.4 Common Stock Purchase Agreement dated October 25, 1999 between the Registrant and Robert Holmes. 10.5 Common Stock Purchase Agreement dated October 25, 1999 between the Registrant and Gary Nemetz. 10.6 Common Stock Purchase Agreement dated October 25, 1999 between the Registrant and Tracy Ann Sebastian. 10.7 Common Stock Purchase Agreement dated December 30, 1999 between the Registrant and Philip L. Rosenberg. 99 10.8 Series A Preferred Stock and Common Stock Purchase Agreement dated May 17, 2000 among the Registrant and Raymond C. Musci, Anthony R. Williams, Robert Holmes, Mark Dyne, Kevin Bermeister, Franchise Films, and FIMAS L.P. 10.9 Investor Rights Agreement dated May 17, 2000 among the Registrant and Raymond C. Musci, Anthony R. Williams, Robert Holmes, Mark Dyne, Kevin Bermeister, Franchise Films, and FIMAS L.P. 10.10 Common Stock Purchase Agreement dated September 21, 2000 between the Registrant and Bay Area Multimedia, Inc., a California corporation. 10.11 Series B Preferred Stock Purchase Agreement dated December 28, 2000 among the Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony R. Williams, Robert Holmes, and Morgan Keegan Early Stage Fund L.P. 10.12 Co-Sale and Right of First Refusal Agreement dated December 28, 2000 among the Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony R. Williams, Robert Holmes, and Morgan Keegan Early Stage Fund L.P. 10.13 Registration Rights Agreement dated December 28, 2000 among the Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony R. Williams, Robert Holmes, and Morgan Keegan Early Stage Fund L.P. 10.14 Series C Preferred Stock Purchase Agreement dated May 24, 2001 among the Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony R. Williams, Robert Holmes, Morgan Keegan Early Stage Fund L.P., Stephen Ambler, Mark Dyne, Joseph Morici, and Kevin Bermeister. 10.15 Registration Rights Agreement dated May 24, 2001 among the Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony R. Williams, Robert Holmes, Morgan Keegan Early Stage Fund L.P., Stephen Ambler, Mark Dyne, Joseph Morici, and Kevin Bermeister. 10.16 Co-Sale and Right of First Refusal Agreement dated May 24, 2001 among the Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony R. Williams, Robert Holmes, Morgan Keegan Early Stage Fund L.P., Stephen Ambler, Mark Dyne, Joseph Morici, and Kevin Bermeister. 10.17 Master Purchase Order Assignment Agreement dated February 23, 2000 between the Registrant and Transcap Trade Finance. 10.18 Security Agreement and Financing Statement dated February 23, 2000 between the Registrant and Transcap Trade Finance. 10.19 Subordination Agreement dated February 23, 2000 between the Registrant, Raymond C. Musci, and Transcap Trade Finance. 10.20 Guaranty and Pledge Agreement dated February 23, 2000 between the Registrant , Raymond C. Musci, and Transcap Trade Finance. 10.21 Master Revolving Note dated November 13, 2000 between the Registrant and Comerica Bank-California. 10.22 Security Agreement dated November 13, 2000 between the Registrant and Comerica Bank-California. 10.23 Letter Agreement dated November 13, 2000 between the Registrant and Comerica Bank-California. 10.24 Guaranty Agreement dated November 13, 2000 between Comerica Bank-California and Raymond C. Musci. 10.25 Letter Agreement dated December 26, 2000 between the Registrant and Comerica Bank-California. 100 10.26 Sony PlayStation Licensed Publisher Agreement dated February 2, 2000 between the Registrant and Sony Computer Entertainment America, Inc. 10.27 Amendment to the Licensed Publisher Agreement dated April 1, 2000 between the Registrant and Sony Computer Entertainment America, Inc. 10.28 PlayStation 2 Licensed Publisher Agreement dated April 1, 2000 between the Registrant and Sony Computer Entertainment America, Inc. 10.29 PlayStation 2 Development System Agreement dated August 2, 2000 between the Registrant and Sony Computer Entertainment America, Inc. 10.30 Licensed Publisher Agreement for Game Boy, Game Boy Color and Game Boy Pocket dated February 18, 2000 between the Registrant and Nintendo of America, Inc. 10.31 Licensed Publisher Agreement for Nintendo 64 dated February 18, 2000 between the Registrant and Nintendo of America, Inc. 10.32 Confidential License Agreement for Game Boy Advance dated May 21, 2001 between the Registrant and Nintendo of America, Inc. 10.33 Xbox Publisher License Agreement dated November 28, 2000 between the Registrant and Microsoft Corporation. 10.34 Retail License Agreement #12177-PPG dated March 8, 2000 between the Registrant and Warner Bros. Consumer Products. 10.35 Amendment #1 to Retail License Agreement #12177-PPG dated November 27, 2000 between the Registrant and Warner Bros. Consumer Products. 10.36 License Agreement #12697-DEX dated October 4, 2000 between the Registrant and Warner Bros. Consumer Products. 10.37 License Agreement #12698-YOGI dated October 4, 2000 between the Registrant and Warner Bros. Consumer Products. 10.38 License Agreement dated March 31, 2000 between the Registrant and Takara Co., Ltd. 10.39 Exclusive Output Agreement dated April 7, 2000 between the Registrant and Franchise Films, Inc. 10.40* First Amendment to Exclusive Output Agreement dated July 10, 2000 between the Registrant and Franchise Films, Inc. 10.41 License Agreement dated July 12, 2000 between the Registrant and Time, Inc. for its Sports Illustrated for Kids division. 10.42 Exclusive Output Agreement dated October 25, 2000 between the Registrant and Spyglass Entertainment Group, L.P. 10.43 Office Lease dated November 15, 1999 between the Registrant and Macanan Investments, L.P. 10.44 Employment Agreement dated October 1, 1999 between the Registrant and Raymond C. Musci. 10.45* Amended and Restated Employment Agreement between the Registrant and Raymond C. Musci. 101 10.46 Employment Agreement dated July 1, 2000 between the Registrant and Anthony R. Williams. 10.47* Amended and Restated Employment Agreement between the Registrant and Anthony R. Williams. 23.1 Consent of Deloitte & Touche LLP, Independent Auditors 23.2 Consent of Kirkpatrick & Lockhart LLP (contained in exhibit 5.1) 24.1 Power of attorney (included on signature page of Registration Statement) 27 Financial Data Schedules * to be filed by amendment. EX-1.1 2 v72115orex1-1.txt EXHIBIT 1.1 1 Exhibit 1.1 UNDERWRITING AGREEMENT June ___, 2001 UBS Warburg LLC Jefferies & Company, Inc., As representatives of the several underwriters named in Schedule A hereto c/o UBS Warburg LLC 299 Park Avenue New York, New York 10171-0026 Ladies and Gentlemen: BAM! Entertainment, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to the underwriters named in Schedule A annexed hereto (the "Underwriters") an aggregate of [________________] shares (the "Firm Shares") of Common Stock, $[______] par value (the "Common Stock"), of the Company. In addition, solely for the purpose of covering over-allotments, the Company proposes to grant to the Underwriters the option to purchase from the Company up to an additional [_____________] shares of Common Stock (the "Additional Shares"). The Firm Shares and the Additional Shares are hereinafter collectively sometimes referred to as the "Shares." The Shares are described in the Prospectus which is referred to below. The Company has filed, in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively called the "Act"), with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1, (File No. [333-______]) including a prospectus, relating to the Shares. The Company has furnished to you, for use by the Underwriters and by dealers, copies of one or more preliminary prospectuses (each thereof being herein called a "Preliminary Prospectus") relating to the Shares. Except where the context otherwise requires, the registration statement, as amended when it becomes effective, including all documents filed as a part thereof, and including any information contained in a prospectus subsequently filed with the Commission pursuant to Rule 424(b) under the Act and deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430(A) under the Act and also including any registration statement filed pursuant to Rule 462(b) under the Act, is herein called the Registration Statement, and the prospectus, in the form filed by the Company with the Commission pursuant to Rule 424(b) under the Act on or before the second business day after the date hereof (or such earlier time as may be required under the Act) or, if no such filing is required, the form of final prospectus included in the Registration Statement at the time it became effective, is herein called the Prospectus. The Company and the Underwriters agree as follows: 2 1. Sale and Purchase. Upon the basis of the warranties and representations and subject to the terms and conditions herein set forth, the Company agrees to sell to the respective Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase from the Company the aggregate number of Firm Shares set forth opposite the name of such Underwriter in Schedule A annexed hereto, in each case at a purchase price of $[______] per Share. The Company is advised by you that the Underwriters intend (i) to make a public offering of their respective portions of the Firm Shares as soon after the effective date of the Registration Statement as in your judgment is advisable and (ii) initially to offer the Firm Shares upon the terms set forth in the Prospectus. You may from time to time increase or decrease the public offering price after the initial public offering to such extent as you may determine. In addition, the Company hereby grants to the several Underwriters the option to purchase, and upon the basis of the warranties and representations and subject to the terms and conditions herein set forth, the Underwriters shall have the right to purchase, severally and not jointly, from the Company, ratably in accordance with the number of Firm Shares to be purchased by each of them (subject to such adjustment as you shall determine to avoid fractional shares), all or a portion of the Additional Shares as may be necessary to cover over-allotments made in connection with the offering of the Firm Shares, at the same purchase price per share to be paid by the Underwriters to the Company for the Firm Shares. This option may be exercised by you on behalf of the several Underwriters at any time on or before the thirtieth day following the date hereof, by written notice to the Company. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised, and the date and time when the Additional Shares are to be delivered (such date and time being herein referred to as the "Additional Time of Purchase"); provided, however, that the Additional Time of Purchase shall not be earlier than the Time of Purchase (as defined below) nor earlier than the second business day(1) after the date on which the option shall have been exercised nor later than the tenth business day after the date on which the option shall have been exercised. The number of Additional Shares to be sold to each Underwriter shall be the number which bears the same proportion to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Underwriter on Schedule A hereto bears to the total number of Firm Shares (subject, in each case, to such adjustment as you may determine to eliminate fractional shares). - -------- (1) As used herein "business day" shall mean a day on which the New York Stock Exchange is open for trading. 2 3 2. Payment and Delivery. Payment of the purchase price for the Firm Shares shall be made to the Company by Federal Funds wire transfer, against delivery of the certificates for the Firm Shares to you through the facilities of the Depository Trust Company ("DTC") for the respective accounts of the Underwriters. Such payment and delivery shall be made at 10:00 A.M., New York City time, on [______________], 2001 (unless another time shall be agreed to by you and the Company or unless postponed in accordance with the provisions of Section 8 hereof). The time at which such payment and delivery are actually made is hereinafter sometimes called the "Time of Purchase." Certificates for the Firm Shares shall be delivered to you in definitive form in such names and in such denominations as you shall specify no later than the second business day preceding the Time of Purchase. For the purpose of expediting the checking of the certificates for the Firm Shares by you, the Company agrees to make such certificates available to you for such purpose at least two full business days preceding the Time of Purchase. Payment of the purchase price for the Additional Shares shall be made at the Additional Time of Purchase in the same manner and at the same office as the payment for the Firm Shares. Certificates for the Additional Shares shall be delivered to you in definitive form in such names and in such denominations as you shall specify no later than the second business day preceding the Additional Time of Purchase. For the purpose of expediting the checking of the certificates for the Additional Shares by you, the Company agrees to make such certificates available to you for such purpose at least one full business day preceding the Additional Time of Purchase. 3. Representations and Warranties of the Company. The Company represents and warrants to each of the Underwriters that: (a) the Company has not received, and has no notice of, any order of the Commission preventing or suspending the use of any Preliminary Prospectus, or instituting or threatening proceedings for that purpose, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and when the Registration Statement became effective, the Registration Statement and the Prospectus fully complied in all material respects with the provisions of the Act, and the Registration Statement does not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement have been so described or filed; provided, however, that the Company makes no warranty or representation with respect to any statement contained in the Registration Statement, the 3 4 Preliminary Prospectus or the Prospectus in reliance upon and in conformity with information concerning the Underwriters and furnished in writing by or on behalf of any Underwriter through you to the Company expressly for use in the Registration Statement, the Preliminary Prospectus or the Prospectus; and the Company has not distributed any offering material in connection with the offering or sale of the Shares other than the Registration Statement, the Preliminary Prospectus or the Prospectus; (b) as of the date of this Agreement, the Company has the authorized and outstanding capitalization as set forth in the section of the Registration Statement, the Preliminary Prospectus and the Prospectus entitled "Capitalization" and, as of the Time of Purchase and the Additional Time of Purchase, as the case may be, the Company shall have the authorized capitalization as set forth under the heading entitled "Pro Forma As Adjusted" in the section of the Registration Statement and the Prospectus entitled "Capitalization"; other than as described in the Prospectus, no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligation into shares of capital stock or ownership interests in the Company are outstanding; all of the issued and outstanding shares of capital stock including Common Stock and Preferred Stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable, have been issued in compliance with all federal and state securities laws and were not issued in violation of any preemptive right, resale right, co-sale right, right of first refusal or similar right; (c) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with full corporate power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement; (d) the Company is duly qualified to do business as a foreign corporation in good standing in each jurisdiction where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on the business, properties, financial condition or results of operation of the Company and its Subsidiaries (as hereinafter defined) taken as a whole (a "Material Adverse Effect"). The Company has no subsidiaries (as defined in the Act) other than [LIST OUT SUBSIDIARIES] (collectively, the "Subsidiaries"); the Company owns [100]% of the outstanding capital stock of [each of the Subsidiaries]; other than the Subsidiaries, the Company does not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity; complete and correct copies of the charter documents, certificates or articles of incorporation and of the bylaws of the Company and the Subsidiaries and all amendments thereto have been delivered to you, and except as set forth in the exhibits to the Registration Statement no changes therein will be made subsequent to the date hereof and prior to the Time of Purchase or, if later, the Additional Time of Purchase; each Subsidiary has been 4 5 duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement; each Subsidiary is duly qualified to do business as a foreign corporation in good standing in each jurisdiction where the ownership or leasing of the properties or the conduct of its business requires such qualification, except where the failure to so qualify would not have a Material Adverse Effect; all of the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and (except as otherwise described in this Section 3(d)) are owned by the Company subject to no security interest, other encumbrance or adverse claims; no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligation into shares of capital stock or ownership interests in the Subsidiaries are outstanding; (e) the Company and each of its Subsidiaries are in compliance in all material respects with the laws, orders, rules, regulations and directives issued or administered by each jurisdiction applicable to it, except where non-compliance will not singly or in the aggregate result in a Material Adverse Effect; (f) each of the agreements (the "Reincorporation Agreements") entered into by the Company in connection with the changing of its state of incorporation from California to Delaware (the "Reincorporation") has been duly and validly authorized, executed and delivered by the Company, are in full force and effect, and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms and, to the knowledge of the Company, is a valid and binding obligation of each other party thereto, enforceable against each party in accordance with its terms. The Reincorporation has been validly effected in accordance with the laws of the states of California and Delaware; (g) neither the Company nor any of its Subsidiaries is in breach of, or in default under (nor has any event occurred which with notice, lapse of time, or both would result in any breach of, or constitute a default under), its respective charter or bylaws or in the performance or observance of any obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, bank loan or credit agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of them or any of their properties is bound, and the execution, delivery and performance of this Agreement, the issuance and sale of the Shares and the consummation of the transactions contemplated hereby will not conflict with, or result in any breach of or constitute a default under (nor constitute any event which with notice, lapse of time, or both would result in any breach of, or constitute a default under), any provisions of the charter or bylaws of the Company or any of its Subsidiaries or under any provision of any license, indenture, mortgage, deed of trust, bank loan or credit agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Company or 5 6 any of its Subsidiaries is a party or by which any of them or their respective properties may be bound or affected, or under any federal, state, local or foreign law, regulation or rule or any decree, judgment or order applicable to the Company or any of its Subsidiaries; (h) this Agreement has been duly authorized, executed and delivered by the Company and is a legal, valid and binding agreement of the Company enforceable in accordance with its terms; (i) the capital stock of the Company, including the Shares, conforms in all material respects to the description thereof contained in the Registration Statement, the Preliminary Prospectus and Prospectus and the certificates for the Shares are in due and proper form and the holders of the Shares will not be subject to personal liability by reason of being such holders; (j) the Shares have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued and fully paid and non-assessable; (k) no approval, authorization, consent or order of or filing with any national, state or local governmental or regulatory commission, board, body, authority or agency is required in connection with the issuance and sale of the Shares or the consummation by the Company of the transaction as contemplated hereby other than registration of the Shares under the Act and any necessary qualification under the securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriters or under the rules and regulations of the National Association of Securities Dealers, Inc. ("NASD"); (l) no person has the right, contractual or otherwise, to cause the Company to issue to it, or register pursuant to the Act, any shares of capital stock of the Company upon the issue and sale of the Shares to the Underwriters hereunder, nor does any person have preemptive rights, co-sale rights, rights of first refusal or other rights to purchase any of the Shares other than those that have been expressly waived prior to the dates hereof; (m) Deloitte & Touche LLP, whose report on the consolidated financial statements of the Company and its Subsidiaries is filed with the Commission as part of the Registration Statement, the Preliminary Prospectus and Prospectus, are independent public accountants as required by the Act; 6 7 (n) each of the Company and its Subsidiaries has all necessary licenses, authorizations, consents and approvals and has made all necessary filings required under any federal, state, local or foreign law, regulation or rule, and has obtained all necessary authorizations, consents and approvals from other persons, in order to conduct its respective business; neither the Company nor any of its Subsidiaries is in violation of, or in default under, any such license, authorization, consent or approval or any federal, state, local or foreign law, regulation or rule or any decree, order or judgment applicable to the Company or any of its Subsidiaries the effect of which could have a Material Adverse Effect; (o) all legal or governmental proceedings, contracts, leases or documents of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement have been so described or filed as required; (p) there are no actions, suits, claims, investigations or proceedings pending or threatened to which the Company or any of its Subsidiaries or any of their respective officers is a party or of which any of their respective properties is subject at law or in equity, or before or by any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency which could result in a judgment, decree or order having a Material Adverse Effect or prevent consummation of the transactions contemplated hereby; (q) the audited financial statements and summary consolidated financial data included in the Registration Statement, the Preliminary Prospectus and the Prospectus present fairly the consolidated financial position of the Company and its Subsidiaries as of the dates indicated and the consolidated results of operations and cash flows of the Company and its Subsidiaries for the periods specified; the financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved; (r) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been (i) any material adverse change, or any development which, in the Company's reasonable judgment, is likely to cause a material adverse change, in the business, properties or assets described or referred to in the Registration Statement, or the results of operations, condition (financial or otherwise), business, prospects or operations of the Company and its Subsidiaries taken as a whole, (ii) any transaction which is material to the Company or its Subsidiaries taken as a whole, except transactions in the ordinary course of business, (iii) any obligation, direct or contingent, which is material to the Company and its Subsidiaries taken as a whole, incurred by the Company or its Subsidiaries, except obligations incurred in the ordinary course of business, (iv) any change in the capital stock or outstanding indebtedness of the Company or its Subsidiaries or (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company. Neither the Company 7 8 nor its Subsidiaries has any material contingent obligation which is not disclosed in the Registration Statement; (s) during the six months prior to the date hereof, neither the Company nor any person acting on behalf of the Company has offered or sold to any person any capital stock, or any securities of the same or a similar class as the Shares, other than the Shares and other than under restrictions and other circumstances so as to ensure that such offers or sales do not become integrated into the offer and sale of the Shares; (t) the Company has obtained the agreement (in the form approved by you) of each of its directors, officers, stockholders, optionholders and other securityholders not to sell, offer to sell, contract to sell, hypothecate, grant any option to sell or otherwise dispose of, directly or indirectly, any shares of Common Stock or securities convertible into or exchangeable for Common Stock or warrants or other rights to purchase Common Stock for a period of 180 days after the date of the Prospectus; (u) the Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (v) the Company and its Subsidiaries have good and marketable title to all property (real and personal) described in the Prospectus as being owned by them, free and clear of all liens, claims, security interests or other encumbrances or defects except such as are described in the Registration Statement and the Prospectus and except as would not individually or in the aggregate have a Material Adverse Effect. All the property being held under lease by the Company and its Subsidiaries is held thereby under valid, subsisting and enforceable leases; (w) each of the Company and its Subsidiaries is insured by insurers of recognized financial responsibility against such losses and risks and in such amount as are customary in the business in which it is engaged. All policies of insurance insuring the Company, the Subsidiaries or any of their businesses, material assets, employees, officers and directors are in full force and effect, and each of the Company and each of its Subsidiaries is in compliance with the terms of such policies in all material respects. There are no claims by the Company or any of its Subsidiaries under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause; 8 9 (x) all statistical and market-related data included in the Prospectus are based on or derived from sources that the Company believes to be reliable and accurate, and the Company has received the written consent to the use of such data from such sources to the extent required; (y) neither the Company nor any of its affiliates has taken, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder, or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares; (z) the Company owns or has obtained licenses (which licenses are enforceable against the Company and, to the Company's best knowledge, the other parties thereto) for the patents, patent applications, inventions, technology, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information systems or procedures), trademarks, trademark registrations, service marks, service mark registrations, mask work rights, trade names, copyrights, and other rights described in the Prospectus as being owned or used by or licensed to the Company or its Subsidiaries or necessary for the conduct of their respective businesses as currently conducted (collectively, the "Intellectual Property"). Each employee of and consultant to the Company has entered into a confidentiality and invention assignment agreement in favor of the Company as a condition of his or her employment or retention in service. Except as set forth in the Prospectus: (i) there are no rights of third parties to any such Intellectual Property inconsistent with the rights of the Company related to such Intellectual Property; (ii) there is no infringement by third parties of any such Intellectual Property owned or exclusively licensed by the Company; (iii) there is no pending or threatened action, suit, proceeding or claim by others challenging the Company's rights in or to any Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (iv) there is no pending or threatened action, suit, proceeding or claim by others challenging the validity or scope of any Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (v) there is no pending or threatened action, suit, proceeding or claim by others that the Company or any of its Subsidiaries infringes or otherwise violates, or would infringe or otherwise violate upon commercialization of its products and product candidates described in the Prospectus, any patent, trademark, copyright, trade secret or other proprietary rights of others, and the Company is unaware of any facts which would form a reasonable basis for any such claim; and (vi) to the Company's knowledge there is no patent or patent application which contains claims that conflict or interfere with or may conflict or interfere with any Intellectual Property described in the Prospectus as being owned by or licensed to the Company or any of its Subsidiaries or that is necessary for the conduct of their respective businesses as currently or contemplated to be conducted; (aa) neither the Company nor any of its Subsidiaries has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the 9 10 environment or hazardous or toxic substances or wastes, pollutants or contaminants, nor any federal or state law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal or state wages and hours laws, nor any provisions of the Employee Retirement Income Security Act or the rules and regulations promulgated thereunder, which violation individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect; (bb) the Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) records (including sales contracts) are kept in accordance with management's general or specific authorization and true and accurate copies are provided to the Company's independent auditors; (iii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iv) access to assets is permitted only in accordance with management's general or specific authorization; and (v) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences; (cc) each of the Company and its Subsidiaries has filed all federal, state, local and foreign tax returns and tax forms required to be filed. Such returns and forms are complete and correct in all material respects, and all taxes shown by such returns or otherwise assessed that are due or payable have been paid, except such taxes as are being contested in good faith and as to which adequate reserves have been provided. All payroll withholdings required to be made by the Company and each of its Subsidiaries with respect to employees have been made. The charges, accruals and reserves on the books of the Company and each of its Subsidiaries in respect of any tax liability for any year not finally determined are, in management's determination, adequate to meet any assessments or reassessments for additional taxes. There have been no tax deficiencies asserted and, to the knowledge of the Company, no tax deficiency might be reasonably asserted or threatened against the Company or any of its Subsidiaries which individually or in the aggregate could have a Material Adverse Effect; and (dd) immediately after the issuance and sale of the Shares to the Underwriters, no shares of preferred stock of the Company shall be issued and outstanding, and no holder of any shares of capital stock, securities convertible into or exchangeable or exercisable for capital stock or options, warrants or other rights to purchase capital stock or any other securities of the Company shall have any existing or future right to acquire any shares of preferred stock of the Company. In addition, any certificate signed by any executive officer of the Company delivered to the Representatives or counsel for the Underwriters in connection with the offering of the Shares 10 11 shall be deemed to be a representation and warranty by the Company, as to matters covered thereby, to each Underwriter. 4. Certain Covenants of the Company. The Company hereby agrees: (a) to furnish such information as may be required and otherwise to cooperate in qualifying the Shares for offering and sale under the securities or blue sky laws of such states as you may designate and to maintain such qualifications in effect so long as required for the distribution of the Shares; provided that the Company shall not be required to qualify as a foreign corporation (unless it is already so qualified) or to consent to the service of process under the laws of any such state (except service of process with respect to the offering and sale of the Shares); and to promptly advise you of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (b) to make available to the Underwriters in New York City, as soon as practicable after the Registration Statement becomes effective, and thereafter from time to time to furnish to the Underwriters, as many copies of the Prospectus (or of the Prospectus as amended or supplemented if the Company shall have made any amendments or supplements thereto after the effective date of the Registration Statement) as the Underwriters may request for the purposes contemplated by the Act; in case any Underwriter is required to deliver a prospectus within the nine-month period referred to in Section 10(a)(3) of the Act in connection with the sale of the Shares, the Company will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; (c) to advise you promptly and (if requested by you) to confirm such advice in writing, (i) when the Registration Statement has become effective and when any post-effective amendment thereto becomes effective and (ii) if Rule 430A under the Act is used, when the Prospectus is filed with the Commission pursuant to Rule 424(b) under the Act (which the Company agrees to file in a timely manner under such Rules); (d) to advise you promptly, confirming such advice in writing, of any request by the Commission for amendments or supplements to the Registration Statement, the Preliminary Prospectus or the Prospectus or for additional information with respect thereto, or of notice of institution of proceedings for, or the entry of a stop order suspending the effectiveness of the Registration Statement and, if the Commission should enter a stop order suspending the effectiveness of the Registration Statement, to make every reasonable effort to obtain the lifting or removal of such order as soon as possible; to advise you promptly of any proposal to amend or supplement the Registration Statement or Prospectus and to file no such amendment or supplement to which you shall object in writing; 11 12 (e) to file promptly all reports and any definitive proxy or information statement required to be filed by the Company with the Commission and otherwise take all actions in order to comply with the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering or sale of the shares, and to promptly notify you of such filing; (f) if necessary or appropriate, to file a registration statement pursuant to Rule 462(b) under the Act; (g) to furnish to you and, upon request, to each of the other Underwriters for a period of five years from the date of this Agreement (i) copies of any reports or other communications which the Company shall send to its stockholders or shall from time to time publish or publicly disseminate, (ii) copies of all annual, quarterly and current reports filed with the Commission on Forms 10-K, 10-Q and 8-K, or such other similar form as may be designated by the Commission, (iii) copies of documents or reports filed with any national securities exchange or authorized quotation system on which any class of securities of the Company is listed, and (iv) such other information as you may reasonably request regarding the Company or its Subsidiaries, in each case as soon as such communications, documents or information becomes available; (h) to advise the Underwriters promptly of the happening of any event known to the Company within the time during which a Prospectus relating to the Shares is required to be delivered under the Act which, in the judgment of the Company, would require the making of any change in the Prospectus then being used so that the Prospectus would not include an untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading and, during such time, to prepare and furnish, at the Company's expense, to the Underwriters promptly such amendments or supplements to such Prospectus as may be necessary to reflect any such change and to furnish you a copy of such proposed amendment or supplement before filing any such amendment or supplement with the Commission; (i) to make generally available to its security holders, and to deliver to you, an earnings statement of the Company (which will satisfy the provisions of Section 11(a) of the Act) covering a period of twelve months beginning after the effective date of the Registration Statement (as defined in Rule 158(c) of the Act) as soon as is reasonably practicable after the termination of such twelve-month period but not later than eighteen months after such effective date; (j) to furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, shareholders' equity and of cash flow of the Company for such fiscal year), accompanied by a copy of the certificate or report thereon of nationally recognized independent certified public accountants; (k) to furnish to you five (5) signed copies of the Registration Statement, as initially filed with the Commission, and of all amendments thereto (including all exhibits thereto) and 12 13 sufficient conformed copies of the foregoing (other than exhibits) for distribution of a copy to each of the other Underwriters; (l) to furnish to you as early as practicable prior to the Time of Purchase and the Additional Time of Purchase, as the case may be, but not later than two business days prior thereto, a copy of the latest available unaudited interim consolidated financial statements, if any, of the Company and its Subsidiaries which have been reviewed by the Company's independent certified public accountants, as stated in their letter to be furnished pursuant to Section 6(b) hereof; (m) to apply the net proceeds from the sale of the Shares in the manner set forth under the caption "Use of Proceeds" in the Prospectus; (n) to furnish to you, before filing with the Commission subsequent to the effective date of the Registration Statement and during the period referred to in paragraph (e) above, a copy of any document proposed to be filed pursuant to Section 13, 14 or 15(d) of the Exchange Act; (o) not to issue, sell, offer or agree to sell, contract to sell, grant any option to sell or otherwise dispose of, directly or indirectly, any shares of capital stock or securities convertible into or exchangeable or exercisable for capital stock or warrants or other rights to purchase capital stock or any other securities of the Company that are substantially similar to capital stock or permit the registration under the Act of any shares of capital stock, except for the registration of the Shares and the sales to the Underwriters pursuant to this Agreement and except for issuances of Common Stock upon the exercise of outstanding options, warrants and debentures described in the Registration Statement or Prospectus, for a period of 180 days after the date hereof, without the prior written consent of UBS Warburg LLC; (p) to use its best efforts to cause the Common Stock to be included for quotation on the Nasdaq National Market; and (q) to pay all costs, expenses, fees and taxes (other than any transfer taxes and fees and disbursements of counsel for the Underwriters except as set forth under Section 5 hereof and (iii), (iv) and (vi) below) in connection with (i) the preparation and filing of the Registration Statement, each Preliminary Prospectus, the Prospectus, and any amendments or supplements thereto, and the printing and furnishing of copies of each thereof to the Underwriters and to dealers (including costs of mailing and shipment), (ii) the registration, issuance, sale and delivery of the Shares, (iii) the word processing and/or printing of this Agreement, any Agreement Among Underwriters, any dealer agreements, any Statements of Information, any Powers of Attorney and any closing documents (including compilations thereof) and the reproduction and/or printing and furnishing of copies of each thereof to the Underwriters and to dealers (including costs of mailing and shipment), (iv) the qualification of the Shares for offering and sale under state laws and the determination of their eligibility for investment under state law as aforesaid (including the legal fees and filing fees and other disbursements of counsel to the Underwriters) and the printing and furnishing of copies of any blue sky surveys or legal 13 14 investment surveys to the Underwriters and to dealers, (v) any listing of the Shares on any securities exchange or qualification of the Shares for quotation on the Nasdaq Stock Market and any registration thereof under the Exchange Act, (vi) the filing for review of the public offering of the Shares by the NASD, including attorneys' fees related thereto, and (vii) the performance of the Company's other obligations hereunder. 5. Reimbursement of Underwriters' Expenses. If the Shares are not delivered for any reason other than the default by one or more of the Underwriters in its or their respective obligations hereunder, the Company shall, in addition to paying the amounts described in Section 4(q) hereof, reimburse the Underwriters for all of their out-of-pocket expenses, including the fees and disbursements of their counsel. 6. Conditions of Underwriters' Obligations. The several obligations of the Underwriters hereunder are subject to the accuracy of the representations and warranties on the part of the Company on the date hereof and at the Time of Purchase (and the several obligations of the Underwriters at the Additional Time of Purchase are subject to the accuracy of the representations and warranties on the part of the Company on the date hereof and at the Time of Purchase (unless previously waived) and at the Additional Time of Purchase, as the case may be), the performance by the Company of its obligations hereunder and to the following additional conditions precedent: (a) The Company shall furnish to you at the Time of Purchase and at the Additional Time of Purchase, as the case may be, a written opinion of Kirkpatrick & Lockhart LLP, counsel for the Company, addressed to the Underwriters, and dated the Time of Purchase or the Additional Time of Purchase, as the case may be, with reproduced copies for each of the other Underwriters and in form satisfactory to Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, stating that: (i) the Company is duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with full corporate power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto), to execute and deliver the Underwriting Agreement and to issue, sell and deliver the Shares as therein contemplated; (ii) each of the Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of its respective jurisdiction of incorporation with full corporate power and authority to own, lease and operate its respective properties and to conduct its respective business; 14 15 (iii) the Company and its Subsidiaries are duly qualified in or licensed by each jurisdiction in which they conduct their respective businesses and in which the failure, individually or in the aggregate, to be so licensed or qualified could have a Material Adverse Effect and the Company and its Subsidiaries are duly qualified, and are in good standing, in each jurisdiction in which they own or lease real property or maintain an office and in which such qualification is necessary; (iv) the Underwriting Agreement has been duly authorized, executed and delivered by the Company and is a legal, valid and binding agreement of the Company enforceable by you in accordance with its terms; (v) the authorized, issued and outstanding capital stock as of _________, 2001 is as set forth under the heading "Capitalization" in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and to our knowledge are fully paid and non-assessable; (vi) the outstanding shares of capital stock of the Company are free of statutory and contractual preemptive rights and have been issued in compliance with all state, federal and foreign securities laws; to the best of such counsel's knowledge, except as described in the Prospectus, there are no outstanding securities of the Company convertible or exchangeable into, or evidencing the right to purchase or subscribe for, any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of a similar character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into, or evidencing the right to purchase or subscribe for, any shares of such stock; (vii) the Shares to be sold by the Company have been duly authorized, and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable; (viii) the Shares, when issued, will be free of statutory and contractual preemptive rights, resale rights, rights of first refusal and similar rights; the certificates for the Shares are in due and proper form and the holders of the Shares will not be subject to personal liability by reason of being such holders; (ix) other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of the Subsidiaries is a party or of which any property of the Company or the Subsidiaries is the subject which are required to be described in the Registration Statement that are not so described; and no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (x) other than the Subsidiaries, the Company does not own or control, directly or indirectly, any corporation, association or other entity; all of the outstanding 15 16 shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and, except as otherwise stated in the Registration Statement, are owned by the Company, in each case subject to no security interest, other encumbrance or adverse claim; to the best of such counsel's knowledge, no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligation into shares of capital stock or ownership interests in the Subsidiaries are outstanding; (xi) the statements set forth under the caption "Description of Capital Stock" in the Prospectus, insofar as such statements purport to summarize certain provisions of the capital stock of the Company, provide a fair summary of such provisions in all material respects; the statements set forth under the captions "Risk Factors--Risks Relating to this Offering -- Anti-takeover provisions in our charder documents and in Delaware law could prevent or delay a change in control and, as a result, negatively impact our stockholders;" "Legal Proceedings;" "Business -Strategic Relationships;" "Management--2000 Stock Incentive Plan," ["--Employee Stock Purchase Plan,"] "--401(k) Retirement Plan" and "--Indemnification of Directors and Officers"; "Certain Transactions" and "Underwriters" (to the extent it is a description of this Agreement) in the Prospectus and in the Registration Statement in Item 15 and in the Registration Statement on Form 8-A relating to the Common Stock filed under the Exchange Act, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, have been reviewed by us, are correct in all material respects and fairly summarize the matters referred to therein to the extent required by the Act or the Exchange Act; (xii) other than as set forth in the Prospectus, there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement; (xiii) the Registration Statement and the Prospectus (except as to the financial statements and schedules and other financial data contained or incorporated by reference therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act and no amendment to the Registration Statement is required to be filed which has not been filed; (xiv) the Registration Statement and all post-effective amendments, if any, have become effective under the Act and, to the best of such counsel's knowledge, no stop order proceedings with respect thereto are pending or threatened under the Act and any required filing of the Prospectus and any supplement thereto pursuant to Rule 424 under the Act has been made in the manner and within the time period required by such Rule 424; (xv) no approval, authorization, consent or order of or filing with any national, state or local governmental or regulatory commission, board, body, authority or 16 17 agency is required in connection with the issuance and sale of the Shares and consummation by the Company of the transactions contemplated hereby other than registration of the Shares under the Act (except such counsel need express no opinion as to any necessary qualification under the state securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriters); (xvi) the execution, delivery and performance of the Underwriting Agreement by the Company and the consummation by the Company of the transactions contemplated thereby do not and will not conflict with, or result in any breach of, or constitute a default under (nor constitute any event which with notice, lapse of time, or both, would result in any breach of or constitute a default under), any provisions of the charter or bylaws of the Company or any of its Subsidiaries or under any provision of any license, indenture, mortgage, deed of trust, bank loan, credit agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of them or their respective properties may be bound or affected, or under any federal, state, local or foreign law, regulation or rule or any decree, judgment or order applicable to the Company or any of its Subsidiaries; (xvii) neither the Company nor any of its Subsidiaries is in violation of its charter or bylaws or is in breach of, or in default under (nor has any event occurred which with notice, lapse of time, or both would result in any breach of, or constitute a default under), any license, indenture, mortgage, deed of trust, bank loan or any other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of them or their respective properties may be bound or affected or under any federal, state, local or foreign law, regulation or rule or any decree, judgment or order applicable to the Company or any of its Subsidiaries; (xviii)there are no contracts, licenses, agreements, leases or documents of a character which are required to be filed as exhibits to the Registration Statement or to be summarized or described in the Prospectus which have not been so filed, summarized or described; (xix) to the best of such counsel's knowledge, there are no actions, suits, claims, investigations or proceedings pending, threatened or contemplated to which the Company or any of its Subsidiaries is subject or of which any of their respective properties, is subject at law or in equity or before or by any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency which are required to be described in the Prospectus but are not so described; (xx) the Company will not, upon consummation of the transactions contemplated by this Agreement, be an "investment company," or a "promoter" or "principal underwriter" for, a "registered investment company," as such terms are defined in the Investment Company Act of 1940, as amended; 17 18 (xxi) the Shares have been approved for quotation on the Nasdaq National Market upon issuance as contemplated by the Underwriting Agreement; (xxii) such counsel believes that the Registration Statement and the Prospectus (except for the financial statements and schedules and other financial data derived therefrom) comply as to form in all material respects with the Act, and nothing has come to the attention of such counsel that causes them to believe that the Registration Statement or any amendment thereto at the time such Registration Statement or amendment became effective contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus or any supplement thereto at the date of such Prospectus or such supplement, and at all times up to and including the Time of Purchase or Additional Time of Purchase, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and schedules and other financial data included in the Registration Statement or Prospectus); (xxiii)the execution and delivery of the Agreement and Plan of Merger (the "Merger Agreement"), dated ______________, 2001 between the Company and Bay Area Multimedia, Inc., a California corporation (the "California Corporation"), effecting the reincorporation of the California Corporation under the laws of the State of Delaware, was duly authorized by all necessary corporate action on the part of each of the California Corporation and the Company; (xxiv) each of the California Corporation and the Company had all corporate power and authority necessary to execute and file the [Certificate of Ownership and Merger] with the Secretary of State of the State of California and the Secretary of State of the State of Delaware and to consummate the reincorporation contemplated by the Merger Agreement, and the Merger Agreement at the time of execution and immediately prior to the effectiveness of the Merger constituted a valid and binding obligation of each of the California Corporation and the Company, subject to the effect of (x) bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent transfer or other similar federal or state laws affecting the rights of creditors and (y) general principles of equity; and (xxv) the [Certificate of Ownership and Merger] has been filed with the Secretary of State of the State of California and the State of Delaware, and is in effect without amendment thereto on the date hereof and all other actions necessary to effect the reincorporation have been taken such that the California Corporation is reincorporated in Delaware as of the date hereof. 18 19 (b) You shall have received from Deloitte & Touche LLP, letters dated, respectively, the date of this Agreement and the Time of Purchase and Additional Time of Purchase, as the case may be, and addressed to the Underwriters (with reproduced copies for each of the Underwriters) in the forms heretofore approved by UBS Warburg LLC. (c) The Company shall have complied with the provisions of Section 4(b) hereof with respect to the furnishing of copies of the Prospectus as soon as practicable after the Registration Statement becomes effective. (d) You shall have received at the Time of Purchase and at the Additional Time of Purchase, as the case may be, the favorable opinion of Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, dated the Time of Purchase or the Additional Time of Purchase, as the case may be, as to the matters referred to in subparagraphs (iv), (vii), and (xiv) of paragraph (a) of this Section 6. In addition, such counsel shall state that such counsel have participated in conferences with officers and other representatives of the Company, counsel for the Company, representatives of the independent public accountants of the Company and representatives of the Underwriters at which the contents of the Registration Statement and Prospectus and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus, on the basis of the foregoing (relying as to materiality to a large extent upon the opinions of officers and other representatives of the Company), no facts have come to the attention of such counsel which lead them to believe that the Registration Statement or any amendment thereto at the time such Registration Statement or amendment became effective contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus as of its date or any supplement thereto as of its date contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no comment with respect to the financial statements and schedules and other financial and statistical data derived therefrom included in the Registration Statement or Prospectus). (e) No amendment or supplement to the Registration Statement or Prospectus shall be filed prior to the time the Registration Statement becomes effective to which you object in writing. (f) The Registration Statement shall become effective, or if Rule 430A under the Act is used, the Prospectus shall have been filed with the Commission pursuant to Rule 424(b) under the Act, at or before 5:00 P.M., New York City time, on the date of this Agreement, unless a later time (but not later than 5:00 P.M., New York City time, on the second full business day after the date of this Agreement) shall be agreed to by the Company and you in writing or by telephone, confirmed in writing; provided, however, that the Company and you and any group of 19 20 Underwriters, including you, who have agreed hereunder to purchase in the aggregate at least 50% of the Firm Shares may from time to time agree on a later date. (g) Prior to the Time of Purchase or the Additional Time of Purchase, as the case may be, (i) no stop order with respect to the effectiveness of the Registration Statement shall have been issued under the Act or proceedings initiated under Section 8(d) or 8(e) of the Act; (ii) the Registration Statement and all amendments thereto, or modifications thereof, if any, shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and (iii) the Prospectus and all amendments or supplements thereto, or modifications thereof, if any, shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading. (h) Between the time of execution of this Agreement and the Time of Purchase or the Additional Time of Purchase, as the case may be, (i) no material and unfavorable change, financial or otherwise (other than as referred to in the Registration Statement and Prospectus), in the business, condition or prospects of the Company and its Subsidiaries taken as a whole shall occur or become known and (ii) no transaction which is material and unfavorable to the Company shall have been entered into by the Company or any of its Subsidiaries. (i) The Company will, at the Time of Purchase or Additional Time of Purchase, as the case may be, deliver to you a certificate of two of its executive officers to the effect that the representations and warranties of the Company as set forth in this Agreement are true and correct as of each such date, that the Company shall perform such of its obligations under this Agreement as are to be performed at or before the Time of Purchase and at or before the Additional Time of Purchase, as the case may be, and the conditions set forth in paragraphs (f) and (g) of this Section 6 have been met. (j) You shall have received signed letters (in the form approved by you), dated the date of this Agreement, from each of the directors, officers, stockholders, optionholders and other securityholders of the Company to the effect that such persons shall not sell, offer or agree to sell, contract to sell, grant any option to sell or otherwise dispose of, directly or indirectly, any shares of Common Stock of the Company or securities convertible into or exchangeable or exercisable for Common Stock or warrants or other rights to purchase Common Stock for a period of 180 days after the date of the Prospectus without the prior written consent of UBS Warburg LLC. (k) The Company shall have furnished to you such other documents and certificates as to the accuracy and completeness of any statement in the Registration Statement and the Prospectus as of the Time of Purchase and the Additional Time of Purchase, as the case may be, as you may reasonably request. 20 21 (l) The Shares shall have been approved for listing for quotation on the Nasdaq National Market, subject only to notice of issuance at or prior to the Time of Purchase or the Additional Time of Purchase, as the case may be. (m) Between the time of execution of this Agreement and the Time of Purchase or Additional Time of Purchase, as the case may be, there shall not have occurred any downgrading, nor shall any notice or announcement have been given or made of (i) any intended or potential downgrading or (ii) any review or possible change that does not indicate an improvement, in the rating accorded any securities of or guaranteed by the Company or any of its Subsidiaries by any "nationally recognized statistical rating organization" as that term is defined in Rule 436(g)(2) under the Act. 7. Effective Date of Agreement; Termination. This Agreement shall become effective (i) if Rule 430A under the Act is not used, when you shall have received notification of the effectiveness of the Registration Statement, or (ii) if Rule 430A under the Act is used, when the parties hereto have executed and delivered this Agreement. The obligations of the several Underwriters hereunder shall be subject to termination in the absolute discretion of you or any group of Underwriters (which may include you) which has agreed to purchase in the aggregate at least 50% of the Firm Shares, if, since the time of execution of this Agreement or the respective dates as of which information is given in the Registration Statement and Prospectus, (i) there has been any material adverse and unfavorable change, financial or otherwise (other than as referred to in the Registration Statement and Prospectus), in the operations, business, condition or prospects of the Company and its Subsidiaries taken as a whole, which would, in your judgment or in the judgment of such group of Underwriters, make it impracticable to market the Shares; or (ii) there shall have occurred any downgrading, or any notice shall have been given of (x) any intended or potential downgrading or (y) any review or possible change that does not indicate an improvement, in the rating accorded any securities of or guaranteed by the Company or any of its Subsidiaries by any "nationally recognized statistical rating organization" as that term is defined in Rule 436(g)(2) under the Act; or (iii) if, at any time prior to the Time of Purchase or, with respect to the purchase of any Additional Shares, the Additional Time of Purchase, as the case may be, trading in securities on the New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market shall have been suspended or limitations or minimum prices shall have been established on the New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market, or if a banking moratorium shall have been declared either by the United States or New York State authorities; or (iv) if the United States shall have declared war in accordance with its constitutional processes or there shall have occurred any material outbreak or escalation of hostilities or other national or international calamity or crisis of such magnitude in its effect on the financial markets of the United States as, in your judgment or in the judgment of such group of Underwriters, to make it impracticable to market the Shares. 21 22 If you or any group of Underwriters elects to terminate this Agreement as provided in this Section 7, the Company and each other Underwriter shall be notified promptly by letter, facsimile or email. If the sale to the Underwriters of the Shares, as contemplated by this Agreement, is not carried out by the Underwriters for any reason permitted under this Agreement or if such sale is not carried out because the Company shall be unable to comply with any of the terms of this Agreement, the Company shall not be under any obligation or liability under this Agreement (except to the extent provided in Sections 4(q), 5 and 9 hereof), and the Underwriters shall be under no obligation or liability to the Company under this Agreement (except to the extent provided in Section 9 hereof) or to one another hereunder. 8. Increase in Underwriters' Commitments. Subject to Sections 6 and 7, if any Underwriter shall default in its obligation to take up and pay for the Firm Shares to be purchased by it hereunder (otherwise than for reasons sufficient to justify the termination of this Agreement under the provisions of Section 7 hereof) and if the number of Firm Shares which all Underwriters so defaulting shall have agreed but failed to take up and pay for does not exceed 10% of the total number of Firm Shares, the non-defaulting Underwriters shall take up and pay for (in addition to the number of Firm Shares they are obligated to purchase pursuant to Section 1 hereof) the number of Firm Shares agreed to be purchased by all such defaulting Underwriters, as hereinafter provided. Such Shares shall be taken up and paid for by such non-defaulting Underwriter or Underwriters in such amount or amounts as you may designate with the consent of each Underwriter so designated or, in the event no such designation is made, such Shares shall be taken up and paid for by all non-defaulting Underwriters pro rata in proportion to the aggregate number of Firm Shares set opposite the names of such non-defaulting Underwriters in Schedule A. Without relieving any defaulting Underwriter from its obligations hereunder, the Company agrees with the non-defaulting Underwriters that they will not sell any Firm Shares hereunder unless all of the Firm Shares are purchased by the Underwriters (or by substituted Underwriters selected by you with the approval of the Company or selected by the Company with your approval). If a new Underwriter or Underwriters are substituted by the Underwriters or by the Company for a defaulting Underwriter or Underwriters in accordance with the foregoing provision, the Company or you shall have the right to postpone the Time of Purchase for a period not exceeding five business days in order that any necessary changes in the Registration Statement and Prospectus and other documents may be effected. The term Underwriter as used in this Agreement shall refer to and include any Underwriter substituted under this Section 8 with like effect as if such substituted Underwriter had originally been named in Schedule A. 22 23 If the aggregate number of Shares which the defaulting Underwriter or Underwriters agreed to purchase exceeds 10% of the total number of Shares which all Underwriters agreed to purchase hereunder, and if neither the non-defaulting Underwriters nor the Company shall make arrangements within the five business day period stated above for the purchase of all the Shares which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter except for the expenses to be borne by the Company pursuant to Section 4 (q) above and without any liability on the part of any non-defaulting Underwriter to the Company. Nothing in this paragraph, and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 9. Indemnity and Contribution. (a) The Company agrees to indemnify, defend and hold harmless each Underwriter, its partners, directors and officers, and any person who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, any such Underwriter or any such person may incur under the Act, the Exchange Act, common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company) or in a Prospectus (the term Prospectus for the purpose of this Section 9 being deemed to include any Preliminary Prospectus, the Prospectus and the Prospectus as amended or supplemented by the Company), or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in either such Registration Statement or Prospectus or necessary to make the statements made therein not misleading, except insofar as any such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by or on behalf of any Underwriter through you to the Company expressly for use with reference to such Underwriter in such Registration Statement or such Prospectus or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or such Prospectus or necessary to make such information not misleading. If any action, suit or proceeding (together, a "Proceeding") is brought against an Underwriter or any such person in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such Underwriter or such person shall promptly notify the Company in writing of the institution of such Proceeding and the Company shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses; provided, however, that the omission to so notify the Company shall not relieve the Company from any liability 23 24 which the Company may have to any Underwriter or any such person or otherwise. Such Underwriter or such controlling person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter or of such person unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such Proceeding or the Company shall not have, within a reasonable period of time in light of the circumstances, employed counsel to have charge of the defense of such Proceeding or such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from, additional to or in conflict with those available to the Company (in which case the Company shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the Company and paid as incurred (it being understood, however, that the Company shall not be liable for the expenses of more than one separate counsel (in addition to any local counsel) in any one Proceeding or series of related Proceedings in the same jurisdiction representing the indemnified parties who are parties to such Proceeding). The Company shall not be liable for any settlement of any such Proceeding effected without its written consent but if settled with the written consent of the Company, the Company agrees to indemnify and hold harmless any Underwriter and any such person from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second sentence of this paragraph, then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without its written consent if (i) such settlement is entered into more than 60 business days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement and (iii) such indemnified party shall have given the indemnifying party at least 30 days' prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding and does not include an admission of fault, culpability or a failure to act, by or on behalf of such indemnified party. (b) Each Underwriter, severally and not jointly, agrees to indemnify, defend and hold harmless the Company, its directors and officers, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, the Company or any such person may incur under the Act, the Exchange Act, common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by or on behalf of such Underwriter through you to the Company expressly for use with reference to such Underwriter in the Registration Statement (or in the Registration Statement as amended by or on behalf of any 24 25 post-effective amendment thereof by the Company) or in the Prospectus, or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or Prospectus or necessary to make such information not misleading. If any Proceeding is brought against the Company or any such person in respect of which indemnity may be sought against any Underwriter pursuant to the foregoing paragraph, the Company or such person shall promptly notify such Underwriter in writing of the institution of such Proceeding and such Underwriter shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses, provided, however, that the omission to so notify such Underwriter shall not relieve such Underwriter, from any liability which such Underwriter may have to the Company or any such person or otherwise. The Company or such person shall have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Company or such person unless the employment of such counsel shall have been authorized in writing by such Underwriter in connection with the defense of such Proceeding or such Underwriter shall not have employed counsel to have charge of the defense of such Proceeding or such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to or in conflict with those available to such Underwriter (in which case such Underwriter shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties, but such Underwriter may employ counsel and participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of such Underwriter), in any of which events such fees and expenses shall be borne by such Underwriter and paid as incurred (it being understood, however, that such Underwriter shall not be liable for the expenses of more than one separate counsel (in addition to any local counsel) in any one Proceeding or series of related Proceedings in the same jurisdiction representing the indemnified parties who are parties to such Proceeding). No Underwriter shall be liable for any settlement of any such Proceeding effected without the written consent of such Underwriter but if settled with the written consent of such Underwriter, such Underwriter agrees to indemnify and hold harmless the Company and any such person from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second sentence of this paragraph, then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without its written consent if (i) such settlement is entered into more than 60 business days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement and (iii) such indemnified party shall have given the indemnifying party at least 30 days' prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding. 25 26 (c) If the indemnification provided for in this Section 9 is unavailable to an indemnified party under subsections (a) and (b) of this Section 9 in respect of any losses, damage, expenses, liabilities or claims referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, damages, expenses, liabilities or claims (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such losses, damages, expenses, liabilities or claims, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and the total underwriting discounts and commissions received by the Underwriters, bear to the aggregate public offering price of the shares. The relative fault of the Company on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, damages, expenses, liabilities and claims referred to in this subsection shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating, preparing to defend or defending any claim or Proceeding. (d) The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in subsection (c) above. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by such Underwriter and distributed to the public were offered to the public exceeds the amount of any damage which such Underwriter has otherwise been required to pay by reason of such untrue statement or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several in proportion to their respective underwriting commitments and not joint. (e) The indemnity and contribution agreements contained in this Section 9 and the covenants, warranties and representations of the Company contained in this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of any 26 27 Underwriter, its partners, directors or officers or any person (including each partner, officer or director of such person) who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, or by or on behalf of the Company, its directors or officers or any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and shall survive any termination of this Agreement or the issuance and delivery of the Shares. The Company and each Underwriter agree promptly to notify each other commencement of any Proceeding against it and, in the case of the Company, against any of the Company's officers or directors in connection with the issuance and sale of the Shares, or in connection with the Registration Statement or Prospectus. 10. Notices. Except as otherwise herein provided, all statements, requests, notices and agreements shall be in writing or by telegram and, if to the Underwriters, shall be sufficient in all respects if delivered or sent to UBS Warburg LLC, 299 Park Avenue, New York, N.Y. 10171-0026, Attention: Syndicate Department and, if to the Company, shall be sufficient in all respects if delivered or sent to the Company at the offices of the Company at 333 West Santa Clara Street, Suite 960, Attention: Chief Financial Officer. 11. Governing Law; Construction. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement ("Claim"), directly or indirectly, shall be governed by, and construed in accordance with, the laws of the State of New York. The Section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement. 12. Submission to Jurisdiction. Except as set forth below, no Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have jurisdiction over the adjudication of such matters, and the Company consents to the jurisdiction of such courts and personal service with respect thereto. The Company hereby consents to personal jurisdiction, service and venue in any court in which any Claim arising out of or in any way relating to this Agreement is brought by any third party against UBS Warburg LLC or any indemnified party. Each of UBS Warburg LLC and the Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) waives all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) in any way arising out of or relating to this Agreement. The Company agrees that a final judgment in any such action, proceeding or counterclaim brought in any such court shall be conclusive and binding upon the Company and may be enforced in any other courts in the jurisdiction of which the Company is or may be subject, by suit upon such judgment. 13. Parties at Interest. The Agreement herein set forth has been and is made solely for the benefit of the Underwriters and the Company and to the extent provided in Section 9 hereof the controlling persons, directors and officers referred to in such section, and their respective successors, assigns, heirs, pursuant representatives and executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such 27 28 purchaser, from any of the Underwriters) shall acquire or have any right under or by virtue of this Agreement. 14. Counterparts. This Agreement may be signed by the parties in one or more counterparts which together shall constitute one and the same agreement among the parties. 15. Successors and Assigns. This Agreement shall be binding upon the Underwriters and the Company and their successors and assigns and any successor or assign of any substantial portion of the Company's and any of the Underwriters' respective businesses and/or assets. 16. Miscellaneous. UBS Warburg LLC, an indirect, wholly owned subsidiary of UBS AG, is not a bank and is separate from any affiliated bank, including any U.S. branch or agency of UBS AG. Because UBS Warburg LLC is a separately incorporated entity, it is solely responsible for its own contractual obligations and commitments, including obligations with respect to sales and purchases of securities. Securities sold, offered or recommended by UBS Warburg LLC are not deposits, are not insured by the Federal Deposit Insurance Corporation, are not guaranteed by a branch or agency, and are not otherwise an obligation or responsibility of a branch or agency. A lending affiliate of UBS Warburg LLC may have lending relationships with issuers of securities underwritten or privately placed by UBS Warburg LLC. To the extent required under the securities laws, prospectuses and other disclosure documents for securities underwritten or privately placed by UBS Warburg LLC will disclose the existence of any such lending relationships and whether the proceeds of the issue will be used to repay debts owed to affiliates of UBS Warburg LLC. 28 29 If the foregoing correctly sets forth the understanding among the Company and the Underwriters, please so indicate in the space provided below for the purpose, whereupon this letter and your acceptance shall constitute a binding agreement among the Company and the Underwriters, severally. Very truly yours, BAM! ENTERTAINMENT, INC. By:_________________________ Name: Title: Accepted and agreed to as of the date first above written, on behalf of themselves and the other several Underwriters named in Schedule A UBS WARBURG LLC JEFFERIES & COMPANY, INC. By: UBS WARBURG LLC By: _________________________ Title: By: _________________________ Title: 29 30 SCHEDULE A Underwriter Number of Firm Shares UBS WARBURG LLC [___________] JEFFERIES & COMPANY, INC. [___________] ------------ Total..................... [-----------] EX-2.1 3 v72115orex2-1.txt EXHIBIT 2.1 1 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER OF BAY AREA MULTIMEDIA, INC., A DELAWARE CORPORATION, AND BAY AREA MULTIMEDIA, INC. A CALIFORNIA CORPORATION THIS AGREEMENT AND PLAN OF MERGER ("Agreement"), executed effective as of SEPTEMBER 21 , 2000, is by and between Bay Area Multimedia, Inc., a Delaware corporation ("BAMI-DE"), and Bay Area Multimedia, Inc., a California corporation ("BAMI-CA"). BAMI-DE and BAMI-CA are sometimes referred to herein as the "Constituent Entities." RECITALS A. BAMI-DE is a corporation duly organized and existing under the laws of the State of Delaware and has an authorized capital of Five Million Nine Hundred Seventy Six Thousand Two Hundred Twenty (5,976,220) shares, Five Million (5,000,000) of which are designed "Common Stock" and Nine Hundred Seventy Six Thousand Two Hundred Twenty (976,220) of which are designated as "Preferred Stock", all of which are designated as "Series A Preferred Stock". As of the date of this Agreement, One Hundred (100) shares of Common Stock were issued and outstanding, and no shares of Series A Preferred Stock were issued and outstanding. B. BAMI-CA is a corporation duly organized and existing under the laws of the State of California and has an authorized capital of 5,976,220 shares, Five Million (5,000,000) of which are designed "Common Stock" and Nine Hundred Seventy Six Thousand Two Hundred Twenty (976,220) of which are designated as "Preferred Stock", all of which are designated as "Series A Preferred Stock". As of the date of this Agreement, Three Hundred Twelve Thousand Seven Hundred Sixty (312,760) shares of Common Stock were issued and outstanding, and Nine Hundred Seventy Six Thousand Two Hundred Twenty (976,220) shares of Series A Preferred Stock were issued and outstanding. C. The shareholders and the Board of Directors of BAMI-CA have approved BAMI-CA's merging with and into BAMI-DE as the disappearing corporation upon the terms and conditions of this Agreement. D. The shareholder and the Directors of BAMI-DE have approved BAMI-DE's merging with BAMICA as the surviving corporation upon the terms and conditions of this Agreement. E. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and to cause the Merger to qualify as a reorganization under the provisions of Section 368(a)(1)(A) and 368(a)(2)(E) of the Code. NOW, THEREFORE, in consideration of the mutual agreements and covenants set forth herein, BAMI-DE and BAMI-CA hereby agree, subject to the terms and conditions hereinafter set forth, as follows: I MERGER 1.1. Merger. In accordance with the provisions of this Agreement and the General Corporation Law of Delaware and the California Corporations Code, BAMI-CA shall be merged with and into BAMI-DE (the "Merger") as the disappearing corporation, the separate existence of BAMI-CA shall cease and BAMI-DE shall survive the Merger and shall continue to be governed by the laws of the State of Delaware, and 1 2 BAMI-DE shall be, and is herein sometimes referred to as, the "Surviving Corporation," and the name of the Surviving Corporation shall be Bay Area Multimedia, Inc. 1.2 Filing and Effectiveness. The Merger shall become effective when the following actions have been completed (the "Effective Date of the Merger"): (a) This Agreement and the Merger shall have been adopted and approved by the shareholders of BAMI-DE and the shareholders of BAMI-CA each in accordance with the applicable requirements of the Delaware General Corporation Law and the California Corporations Code; (b) All of the conditions precedent to the consummation of the Merger specified in this Agreement shall have been satisfied or duly waived by the party entitled to satisfaction thereof; and (c) An executed Certificate of Merger or an executed, acknowledged and certified counterpart of this Agreement meeting the requirements of the Delaware General Corporation Law shall have been filed with the Secretary of the State of Delaware. 1.3 Effect of the Merger. Upon the Effective Date of the Merger, the separate existence of BAMI-CA shall cease and BAMI-DE, as the Surviving Corporation, (i) shall continue to possess all of its assets, rights, powers and property as constituted immediately prior to the Effective Date of the Merger, (ii) shall be subject to all actions previously taken by its Board of Directors and BAMI-DE's Board of Directors, (iii) shall succeed, without other transfer, to all of the assets, rights, powers and property of BAMI-CA in the manner as more fully set forth in Section 259 of the Delaware General Corporation Law, (iv) shall continue to be subject to all of its debts, liabilities and obligations as constituted immediately prior to the Effective Date of the Merger, and (v) shall succeed, without transfer, to all of the debts, liabilities and obligations of BAMI-CA in the same manner as if BAMI-DE had itself incurred them, all as more fully provided under the applicable provisions of the Delaware General Corporation Law. II CHARTER DOCUMENTS, DIRECTORS AND OFFICERS 2.1 Articles of Incorporation. The Certificate of Incorporation of BAMI-DE shall continue in full force and effect as the Certificate of Incorporation of the Surviving Corporation until duly amended in accordance with the provisions thereof and applicable law. 2.2 Bylaws. The Bylaws of BAMI-DE as in effect immediately prior to the Effective Date of the Merger shall continue in full force and effect as the Bylaws of the Surviving Corporation until duly amended in accordance with the provisions thereof and applicable law. 2.3 Directors and Officers. The Directors and officers of BAMI-DE immediately prior to the Effective Date of the Merger shall be the Directors and officers of the Surviving Corporation until their respective successors shall have been duly elected and qualified or until as otherwise provided by law, the Articles of Incorporation of the Surviving Corporation or the Bylaws of the Surviving Corporation. III MANNER OF CONVERSION OF SECURITIES 3.1 BAMI-CA Common Stock, Preferred Stock, Stock Options and Other Convertible Securities. Upon the Effective Date of the Merger, each share of Common Stock of BAMI-CA outstanding immediately prior thereto shall, by virtue of the Merger and without any action by the Constituent Entities, the holder of such interest or any other person, be changed and converted into and exchanged for one (1) fully paid and nonassessable share of Common Stock of the Surviving Corporation. Upon the Effective Date of the Merger, each share of Series A Preferred Stock of BAMI-CA outstanding immediately prior thereto shall, by virtue 2 3 of the Merger and without any action by the Constituent Entities, the holder of such interest or any other person, be changed and converted into and exchanged for one (1) fully paid and nonassessable share of Series A Preferred Stock of the Surviving Corporation. Upon the Effective Date of the Merger, each option to purchase one (1) share of Common Stock of BAMI-CA outstanding immediately prior thereto shall, by virtue of the Merger and without any action by the Constituent Entities, the holder of such option or any other person, be changed and converted into and exchanged for an option to purchase one (1) fully paid and nonassessable share of Common Stock of the Surviving Corporation. 3.2 BAMI-DE Common Stock. Upon the Effective Date of the Merger, each share of Common Stock, $0.001 par value, of BAMI-DE issued and outstanding immediately prior thereto shall, by virtue of the Merger and without any action by BAMI-DE, the holder of such shares or any other person, be canceled and returned to the status of authorized but unissued shares. IV GENERAL 4.1 Further Assurances. From time to time, as and when required by BAMI-DE or by its successors or assigns, there shall be executed and delivered on behalf of BAMI-CA such deeds and other instruments, and there shall be taken or caused to be taken by BAMI-DE and BAMI-CA such further and other actions, as shall be appropriate or necessary in order to vest or perfect in or conform of record or otherwise by BAMI-DE the title to and possession of all the property, interests, assets, rights, privileges, immunities, powers, franchises and authority of BAMI-CA and otherwise to carry out the purposes of this Agreement, and the officers and directors of BAMI-DE are fully authorized in the name and on behalf of BAMI-CA or otherwise to take any and all such action and to execute and deliver any and all such deeds and other instruments. 4.2 Abandonment. At any time before the filing of this Agreement with the Secretary of State of Delaware, this Agreement may be terminated and the Merger may be abandoned for any reason whatsoever by the Board of Directors of BAMI-DE or the Board of Directors of BAMI-CA, or both, notwithstanding the approval of this Agreement by the shareholders of BAMI-CA or by the shareholders of BAMI-DE, or by both. 4.3 Amendment. The Directors of BAMI-DE and the Directors of BAMI-CA may amend this Agreement at any time prior to the filing of this Agreement (or certificate in lieu thereof) with the Secretary of State of California, provided that any amendment made subsequent to the adoption of this Agreement by the shareholders of BAMI-DE and the shareholders of BAMI-CA shall not: (1) alter or change the amount or kind of shares, securities, cash, property and/or rights to be received in exchange for or on conversion of all or any of the shares of any class or series thereof of such Constituent Entity, (2) alter or change any term of the Certificate of Incorporation of the Surviving Corporation to be effected by the Merger, or (3) alter or change any of the terms and conditions of this Agreement if such alteration or change would adversely affect the holders of any class of shares or membership interest or series thereof of such Constituent Entities. 4.4 Agreement. Executed copies of this Agreement will be on file at the principal place of business of the Surviving Corporation at 333 West Santa Clara Street, Suite 930, San Jose, California 95113 and copies thereof will be furnished to any shareholder or member of the Constituent Companies, upon request and without cost. 4.5 Governing Law. This Agreement shall in all respects be construed, interpreted and enforced in accordance with and governed by laws of the State of California. 4.6 Counterparts. In order to facilitate the filing and recording of this Agreement, the same may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 4.7 Tax and Accounting Consequences. It is intended by the parties that the merger shall constitute a reorganization within the meaning of Section 368(a)(1)(A) and 368(a)(2)(E) of the Code. 3 4 IN WITNESS WHEREOF, this Agreement, having first been approved by resolutions of the Board of Directors of BAMI-DE and the Board of Directors of BAMI-CA, is hereby executed on behalf of each of such two companies and attested by their respective officers thereunto duly authorized. BAMI-CA Bay Area Multimedia, Inc., a California corporation By: /S/ RAYMOND C. MUSCI --------------------------------- Raymond C. Musci, President BAMI-DE: Bay Area Multimedia, Inc., a Delaware corporation By: /S/ RAYMOND C. MUSCI --------------------------------- Raymond C. Musci, President EX-3.1 4 v72115orex3-1.txt EXHIBIT 3.1 1 EXHIBIT 3.1 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF BAM! ENTERTAINMENT, INC. BAM! Entertainment, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: 1. The name of the Corporation is BAM! Entertainment, Inc. 2. The original Certificate of Incorporation of the Corporation was filed with the Secretary of the State of Delaware on September 19, 2000, and the Amended and Restated Certificate of Incorporation was filed with the Secretary of the State of Delaware on December 27, 2000. 3. This Amended and Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Sections 141(f), 242, 245 and 228 of the General Corporation Law of the State of Delaware by the unanimous written consent of the Corporation's Board of Directors and the written consent of the Corporation's stockholders, with written notice being provided to all non-consenting stockholders in accordance with Section 228(d) of such law. This Amended and Restated Certificate of Incorporation restates, integrates, amends and supersedes the provisions of the Certificate of Incorporation of this Corporation as previously filed and as the same may have been heretofore amended. 4. The text of the Certificate of Incorporation as previously filed and as the same may have been heretofore amended is hereby restated and further amended to read in its entirety as follows: ARTICLE I: NAME The name of the Corporation is BAM! Entertainment, Inc. (the "Corporation") ARTICLE II: REGISTERED OFFICE AND AGENT The address of the Corporation's registered office in the State of Delaware is 615 South DuPont Highway, Dover, Delaware 19901, County of Kent. The name of its registered agent at such address is National Corporate Research, Inc. ARTICLE III: PURPOSE The purpose or purposes of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware, and to have and exercise all the powers conferred by the laws of the State of Delaware upon corporations formed under the General Corporation Law of the State of Delaware. 2 ARTICLE IV: AUTHORIZED STOCK 1. Authorized Stock. The total authorized capital stock of this Corporation shall be 13,000,000 shares, divided as follows: (i) 10,000,000 shares of Common Stock, par value $0.001 per share (the "Common Stock"), and ii) 3,000,000 shares of preferred stock, par value $0.001 per share (the "Preferred Stock"). The Preferred Stock shall be divided into series. The first series shall consist of 976,220 shares which shall be designated as "Series A Preferred Stock" (the "Series A Preferred Stock"). The second series shall consist of 320,000 shares which shall be designated as "Series B Preferred Stock" (the "Series B Preferred Stock"). The third series shall consist of 443,400 shares which shall be designated as "Series C Preferred Stock" (the "Series C Preferred Stock"). The remaining 1,260,380 shares of Preferred Stock shall be undesignated ("Undesignated Preferred Stock"), subject to the provisions of paragraph (b) of this Article Four. (a) Common Stock. The Common Stock authorized for issuance by the Corporation shall be voting stock, with each share being entitled to one (1) vote. (b) Preferred Stock. The Preferred Stock authorized by this Amended and Restated Certificate of Incorporation shall be divided in series and may be issued from time to time. Except as otherwise provided in this Amended and Restated Certificate of Incorporation, and subject to limitations and requirements prescribed by law, the Board of Directors of the Corporation (the "Board") is expressly authorized, by a vote or written consent of at least a majority of the Board then in office, to provide for the issuance of the Undesignated Preferred Stock in one or more series, each with such designations, preferences, voting powers (or no voting powers), relative, participating, optional or other special rights and privileges and such qualifications, limitations or restrictions thereof as shall be stated in the resolution or resolutions adopted by the Board to create such series, and a Certificate of Designation of said resolution or resolutions shall be filed in accordance with the General Corporation Law of the State of Delaware. The Board is also authorized to decrease the number of shares of any series subsequent to the issuance of such series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. The powers, rights, preferences, restrictions, and other matters relating to the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock are as follows (section references below are to the corresponding sections of paragraph (b) of this Article Four: Section 1. Dividends. (a) Dividends on Series C Preferred Stock. In each calendar year, the holders of the then outstanding shares of Series C Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of any funds and assets of the Corporation legally available therefor, noncumulative dividends at the annual dividend rate of $1.58 per share of -2- 3 Series C Preferred Stock (the "Series C Preferred Dividend"). Series C Preferred Dividends shall be noncumulative, meaning that no holder of Series C Preferred Stock shall have any right to a Series C Preferred Dividend with respect to any share of Series C Preferred Stock if the Corporation shall not declare a dividend with respect to the Series C Preferred Stock during a calendar year, notwithstanding the sufficiency of earnings and profits and/or cash for the payment of such Series C Preferred Dividend, and that Series C Preferred Dividends not declared in prior calendar years shall lapse and not accumulate. (b) Dividends on Series B Preferred Stock. In each calendar year, the holders of the then outstanding shares of Series B Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of any funds and assets of the Corporation legally available therefor, noncumulative dividends at the annual dividend rate of $1.25 per share of Series B Preferred Stock (the "Series B Preferred Dividend"). Series B Preferred Dividends shall be noncumulative, meaning that no holder of Series B Preferred Stock shall have any right to a Series B Preferred Dividend with respect to any share of Series B Preferred Stock if the Corporation shall not declare a dividend with respect to the Series B Preferred Stock during a calendar year, notwithstanding the sufficiency of earnings and profits and/or cash for the payment of such Series B Preferred Dividend, and that Series B Preferred Dividends not declared in prior calendar years shall lapse and not accumulate. (c) Dividends on Series A Preferred Stock. In each calendar year, the holders of the then outstanding shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of any funds and assets of the Corporation legally available therefor, noncumulative dividends at the annual dividend rate of $.031 per share of Series A Preferred Stock (the "Series A Preferred Dividend"). Series A Preferred Dividends shall be noncumulative, meaning that no holder of Series A Preferred Stock shall have any right to a Series A Preferred Dividend with respect to any share of Series A Preferred Stock if the Corporation shall not declare a dividend with respect to the Series A Preferred Stock during a calendar year, notwithstanding the sufficiency of earnings and profits and/or cash for the payment of such Series A Preferred Dividend, and that Series A Preferred Dividends not declared in prior calendar years shall lapse and not accumulate. (d) Priority of Dividends. The holders of Series C Preferred Stock shall have senior preference and priority to the dividends of the Corporation in relation to the Common Stock, the Series A Preferred Stock and the Series B Preferred Stock. No dividends shall be declared or set aside for the Common Stock, the Series A Preferred Stock, the Series B Preferred Stock or any other class or series of the Corporation's capital stock which ranks junior with respect to dividend payments to the Series C Preferred Stock (collectively, the "Junior Stock") (other than dividends of Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, solely additional shares of the Common Stock of the Corporation), and no other distribution shall be made on or with respect to any shares of Junior Stock unless, at the same time or prior thereto, all declared and unpaid dividends on the Series C Preferred Stock shall be declared, set aside and paid on all the then outstanding shares of Series C Preferred Stock and, in the case of any such dividends or distributions declared or paid on shares of Common Stock, an equivalent dividend or distribution is declared or paid or set apart, as the case may be, on the Series C Preferred Stock, payable on the same day as if fully converted into Common Stock. No dividend shall be paid with respect to the Series A Preferred -3- 4 Stock and the Common Stock during any calendar year unless the aggregate amount of the Series B Preferred Dividend for that calendar year shall have been paid or declared and set apart for payment to the holders of the Series B Preferred Stock. No dividend shall be paid with respect to the Common Stock during any calendar year unless the aggregate amount of the Series A Preferred Dividend for that calendar year shall have been paid or declared and set apart for payment to the holders of the Series A Preferred Stock (e) Pro Rata Distribution. All dividends paid with respect to shares of capital stock of the Corporation pursuant to this Section 1 shall be declared and paid pro rata to all the holders of the shares of the class of capital stock outstanding as of the applicable record date with respect to which such dividends shall have been declared. In the event that funds legally available for distribution are insufficient to fully pay the cash dividend due and payable on such dividend payment date to all holders of outstanding capital stock, then all funds legally available for distribution shall be paid in cash to holders of such capital stock (i) first, in accordance with the priority provisions of subparagraph (d) above, and (ii) then, as to each class or series of capital stock, pro rata in accordance with the number of shares of such capital stock held by each such holder. Section 2. Liquidation, Dissolution or Winding Up. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary (each such event, a "Liquidation"), except as provided in paragraph (b) of this Section 2, the holders of shares of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock (collectively, the "Designated Preferred Stock") then outstanding shall be entitled, in the order set forth below and, among each series ratably in proportion to the shares of Designated Preferred Stock of such series held by such holders, to be paid out of the assets of the Corporation available for distribution to its stockholders before payment to the holders of Junior Stock (other than Series A Preferred Stock and Series B Preferred Stock) by reason of their ownership thereof, the greater of (i) an amount in cash (the "Liquidation Preference") (and, to the extent sufficient cash is not available for such payment, property or securities at their fair market value, as determined in good faith by the Board) equal to: (X) $2.17 for each outstanding share of Series A Preferred Stock (the "Original Series A Issue Price"), $17.65 for each outstanding share of Series B Preferred Stock (the "Original Series B Issue Price") and $22.553 for each outstanding share of Series C Preferred Stock (the "Original Series C Issue Price" and, together with the Original Series A Issue Price and the Original Series B Issue Price, the "Original Issue Price") (subject in each case to appropriate adjustment for any stock dividends, combinations, splits, recapitalizations, etc.); plus (Y) an amount per each outstanding share of Series C Preferred Stock equal to seven percent (7%) per annum accruing on the Original Series C Issue Price of such share, as applicable, calculated from the date of issuance of such share until the date of the payment of the Liquidation Preference due to the holder of such share, and an amount per each outstanding share of Series B Preferred Stock equal to seven percent (7%) per annum accruing on the Original Series B Issue Price of such share, as applicable, calculated from the date of issuance of such share until the date of the payment of the Liquidation Preference due to the holder of such share; plus (Z) an amount for each outstanding share of Designated Preferred Stock equal to any declared and unpaid dividends on such share held by such holder; and (ii) such amount as would have been payable in respect of each share of Common Stock (including any fraction thereof) -4- 5 issuable upon conversion of the Designated Preferred Stock of such series held by such holder had such Designated Preferred Stock been converted to Common Stock immediately prior to such Liquidation Event pursuant to the provisions of Section 4(a) hereof (the greater of (i) and (ii), the "Liquidation Price"). (b) If upon any such Liquidation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Designated Preferred Stock the full amount of the Liquidation Preference to which they shall be entitled, then the entire assets of the Corporation shall be distributed first ratably amongst the holders of Series C Preferred Stock until they shall have received their Liquidation Preference, then ratably amongst the holders of Series B Preferred Stock until they shall have received their Liquidation Preference and then ratably amongst the holders of Series A Preferred Stock until they shall have received their Liquidation Preference. (c) After the payment of all preferential amounts required to be paid to the holders of Designated Preferred Stock upon a Liquidation, all remaining assets of the Corporation lawfully available for distribution to stockholders of the Corporation shall be distributed to the holders of the Corporation's Common Stock. Until the full amount of the Liquidation Price shall have been paid or distributed to the holders of the Designated Preferred Stock, there shall be no payment or distribution to the holders of the Corporation's Common Stock without the consent of the holders of a majority of the shares of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock, voting as a single class. (d) Subject to Section 4(j), the holders of not less than the majority of the voting power of the outstanding shares of Designated Preferred Stock (a "Majority Interest") may elect to have treated as a Liquidation: (i) any merger or consolidation of the Corporation into or with another entity (except one in which the holders of capital stock of the Corporation immediately prior to such merger or consolidation continue to hold at least a majority of the voting power of the capital stock of the surviving corporation), (ii) any sale of all or substantially all of the assets of the Corporation, or (iii) any other transaction pursuant to or as a result of which a single person (or group of affiliated persons) acquires or holds capital stock of the Corporation representing a majority of the Corporation's outstanding voting power (a "Change of Control Transaction"). All consideration payable to the stockholders of the Corporation in connection with any such merger, consolidation, or Change of Control Transaction, or all consideration payable to the Corporation and distributable to its stockholders, together with all other available assets of the Corporation (net of obligations owed by the Corporation), in connection with any such asset sale, shall be paid or distributed, as applicable, to the holders of capital stock of the Corporation in accordance with the preferences and priorities set forth in Sections 2(a) and 2(b) above, with such preferences and priorities specifically intended to be applicable in any such merger, consolidation, asset sale, or Change of Control Transaction as if such transaction were a Liquidation. (e) For purposes of this Section 2, all assets of the Corporation other than cash distributed to holders of capital stock shall be valued at their fair market values as determined by the Corporation's Board of Directors in good faith. -5- 6 Section 3. Voting Rights. (a) Each holder of shares of Designated Preferred Stock shall be entitled to votes equal in the aggregate to the number of votes to which the number of whole shares of Common Stock into which such shares of Designated Preferred Stock held by such holder are convertible would be entitled (as adjusted from time to time pursuant to Section 4 hereof), at each meeting of the stockholders of the Corporation (and for purposes of written actions of stockholders in lieu of meetings) with respect to any and all matters presented to the stockholders of the Corporation for their action or consideration, and shall be entitled to notice of any stockholders' meeting in accordance with the bylaws of the Corporation. Except as otherwise provided herein or required by law, holders of shares of Designated Preferred Stock shall vote with the holders of shares of Common Stock and any other class of stock entitled to vote and not as a separate class. Each holder of Common Stock is entitled to one (1) vote per share of Common Stock held by such holder. Holders of the Designated Preferred Stock shall have the right to vote as a class on all matters requiring their vote or approval as a separate class under, and in the manner set forth in, the General Corporation Law of the State of Delaware. Except as otherwise provided herein, any class vote pursuant to this Section 3 or required by law shall be determined by the holders of a majority of the shares of capital stock of such class voting as a class as of the applicable record date. (b) For so long as PAR Capital Management, Inc. and its affiliates (the "PAR Holders") shall own a number of shares of Series B Preferred Stock and Series C Preferred Stock which represents at least five percent (5%) of the aggregate number of shares of the Corporation's capital stock entitled to vote on the election of the Corporation's Board of Directors, then the PAR Holders, voting separately as a class, shall have the right to elect, by vote of a majority of the then outstanding shares of Series B Preferred Stock and the Series C Preferred Stock owned thereby, one (1) individual to be a member of the Board of Directors of the Corporation, which member shall be appointed to the compensation committee and/or any other committee of the Board of Directors for so long as such member shall be a member of the Board of Directors. (c) Except as provided in Section 3(b), the Designated Preferred Stock and Common Stock, voting together, shall elect the balance of the Board of Directors. (d) For so long as at least 150,000 shares of Designated Preferred Stock are outstanding, the Corporation shall not, without first obtaining the consent of the holders of at least a majority of the then outstanding shares of Designated Preferred Stock, voting together as a single class: (i) amend, alter, change or repeal (whether by merger, consolidation, or otherwise) the designations, rights, powers, preferences or privileges of the shares of the Designated Preferred Stock; (ii) increase or decrease the authorized number of shares of Preferred Stock or any series thereof; -6- 7 (iii) create or issue any shares of any class or series of securities (including securities convertible or exchangeable therefor) with any preference pari passu with or superior to the Designated Preferred Stock with respect to dividends or upon liquidation; (iv) redeem any shares of Common Stock (other than pursuant to equity incentive agreements with employees, non-employee directors, consultants and service providers giving the Corporation the right to repurchase shares at the price paid for such shares by such person or entity upon the termination of services (it being agreed that all shares of Common Stock and stock options to issue Common Stock currently outstanding are included under such exclusion)); (v) sell, convey or otherwise dispose of all of its property or business; or merge into or consolidate with any other corporation or effect any transaction or series of transactions in which more than 50% of the voting power of the Corporation is disposed or the Corporation is not the surviving entity; or effect any liquidation, dissolution and/or winding up of the Corporation: provided, however, if the amount of cash and the fair market value of noncash consideration (determined in good faith by the Corporation's Board of Directors) that would be received by holders of the Series C Preferred Stock on account of such transaction if they converted all shares of Series C Preferred Stock owned by them into Common Stock shall be at least four (4) times the amount of the Liquidation Price payable in respect of the Series C Preferred Stock in connection with such transaction (a "Qualified Liquidation" as to Series C Preferred Stock), the consent of the Series C Preferred Stock shall not be required and only the consent of a majority of the Series A Preferred Stock and the Series B Preferred Stock shall be required; provided, however, if the amount of cash and the fair market value of noncash consideration (determined in good faith by the Corporation's Board of Directors) that would be received by holders of the Series B Preferred Stock on account of such transaction if they converted all shares of Series B Preferred Stock owned by them into Common Stock shall be at least four (4) times the amount of the Liquidation Price payable in respect of the Series B Preferred Stock in connection with such transaction (a "Qualified Liquidation" as to Series B Preferred Stock), the consent of the Series B Preferred Stock shall not be required and only the consent of a majority of the Series A Preferred Stock shall be required. (vi) amend or waive any provision of the Corporation's Certificate of Incorporation or Bylaws as amended from time to time relative to the Designated Preferred Stock; (vii) pay or declare any dividend on any shares of Common Stock or Preferred Stock except in accordance with Section 1; or (viii) increase the number of directors constituting the Board of Directors to more than eight (8). (ix) enter into any contract, arrangement or transaction with any of the Corporation's officers, directors or stockholders or persons controlling, controlled by, under common control with or otherwise affiliated with such officer, employee, director or stockholder of the Corporation after the date of the filing of this Amendment and Restated Certificate of Incorporation with the Delaware Secretary of State, unless such contract, arrangement or -7- 8 transaction (a) is on terms that are no less favorable to the Corporation than those the Corporation would have been reasonably likely to obtain as the result of arms-length negotiations with an unrelated third party and (b) has been approved by a majority vote of the disinterested members of the Board; (x) issue an indebtedness of the Corporation in excess of fifteen million dollars ($15,000,000); or (xi) materially change the nature of the Corporation's business. (xii) for so long as a representative of PAR Capital Management, Inc., serves on the compensation committee of the Corporation, the compensation committee shall not enter into a compensation arrangement with a member of senior management or a holder of more than 2% of the then outstanding stock of the Corporation without the unanimous consent of the then members of the compensation committee. (xiii) sell shares of its preferred stock at a price less than $17.65 per share prior to January 1, 2002, which action also shall require the consent of the PAR Holders. Section 4. Conversion at the Option of a Holder. The holders of the Designated Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Subject to Section 4(c), each share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, into such number of fully paid and nonassessable shares of Common Stock as determined by dividing (i) $2.17 in the case of the Series A Preferred Stock, (ii) $17.65 in the case of the Series B Preferred Stock, and (iii) $22.553 in the case of the Series C Preferred Stock by the Conversion Price (defined below) applicable to such share, in effect on the date the certificate is surrendered for conversion. (b) Conversion Price. The Conversion Price at which shares of Common Stock shall be deliverable upon conversion of Preferred Stock shall initially be (i) $2.17 per share for shares of Series A Preferred Stock (the "Series A Conversion Price"), (ii) $17.65 per share for shares of Series B Preferred Stock (the "Series B Conversion Price and (iii) $22.553 per share for shares of Series C Preferred Stock (the "Series C Conversion Price, and, together with the Series A Conversion Price and the Series B Conversion Price, the "Conversion Price".) Such initial Conversion Price, and the corresponding rate at which the respective shares of Designated Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided in this Section 4. (c) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of Designated Preferred Stock. In lieu of any fractional shares to which a holder of Preferred Stock would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Conversion Price for that Series of Designated Preferred Stock. -8- 9 (d) Mechanics of Conversion. (i) In order for a holder of Designated Preferred Stock to convert shares of Designated Preferred Stock, such holder shall surrender the certificate or certificates for such shares of Designated Preferred Stock at the office of the transfer agent for the Designated Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of Designated Preferred Stock represented by such certificate or certificates and stating therein the name or names the holder desires the certificate or certificates for shares of the Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his or its attorney duly authorized in writing. Each date of receipt of such certificates and notice by the transferring agent (or by the Corporation if the Corporation serves as its own transfer agent) shall be a conversion date (each, a "Conversion Date"). The Corporation shall, as soon as practicable after each Conversion Date, issue and deliver at such office to such holder of Designated Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid, together with cash in lieu of any fraction of a share in accordance with paragraph (c) above. Such conversion shall be deemed to have been made immediately prior to the close of business on the applicable Conversion Date, and the person entitled to receive certificates of Common Stock on such date shall be regarded for all corporate purposes as the holder of the number of shares of Common Stock to which he or it is entitled upon the conversion on such Conversion Date. (ii) If the conversion of Designated Preferred Stock is in connection with a Qualified Public Offering or Qualified Liquidation (as defined in Section 5), the conversion may, at the option of any holder tendering shares of Designated Preferred Stock for conversion, be conditioned upon the closing of the Qualified Public Offering or Qualified Liquidation, as the case may be, in which event the person or persons entitled to receive the Common Stock upon such conversion shall not be deemed to have converted such shares until immediately prior to the closing of the Qualified Public Offering or Qualified Liquidation. (iii) The Corporation shall, at all times when any of the Designated Preferred Stock shall remain outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Designated Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. (iv) All shares of Designated Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, shall immediately cease and terminate on the applicable Conversion Date, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor. Any shares of Designated Preferred Stock so converted shall be retired and canceled and shall not be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Designated Preferred Stock accordingly. -9- 10 (e) Adjustments to Conversion Price for Diluting Issues. (i) Special Definitions. For purposes of this Section 5(e), the following definitions shall apply: (A) "Option" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, except for (i) the options and warrants reserved for issuance to management and employees of the Corporation pursuant to the Corporation's Stock Plan (as defined in Section 2.2(a) of that certain Stock Purchase Agreement dated as of May 1, 2001 (the "Stock Purchase Agreement") by and among the Corporation and the purchasers of the Series C Preferred Stock), or options issued in connection with any other employee stock option/stock issuance plan which is approved by the Company's Board of Directors (such options or warrants referred to herein as "Employee Options"), and (ii) the Warrants (as defined in Section 2.2(a) of the Stock Purchase Agreement (the "Warrants")); (B) "Original Issue Date" shall mean the date on which a share of Series C Preferred Stock was first issued. (C) "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to subparagraph (iii) below, deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Common Stock issued or issuable: (1) upon the conversion of shares of Designated Preferred Stock outstanding; (2) as a dividend or distribution on Designated Preferred Stock; (3) by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock; (4) upon the exercise of Employee Options; (5) upon the exercise of the Warrants or any other Options granted or the conversion of the Convertible Securities issued on or prior to the Original Issue Date; or (6) to a bank, financial institution or other institutional lender pursuant to or in connection with any equipment financings or loan or other credit arrangements approved by a majority of the members of the Board or Directors; -10- 11 (7) to a person or entity with whom the Corporation has a business relationship approved by a majority of the members of the Corporation's Board of Directors and not undertaken primarily for equity-raising purposes; or (8) pursuant to the acquisition of another corporation or entity by the Corporation by consolidation, merger, purchase of all or substantially all of the assets, or other reorganization in which the Corporation acquires, in a single transaction or series of transactions, all or substantially all of the assets of such other corporation or entity or more than 50% of the voting power of such other corporation or entity or more than 50% of the equity ownership of such other entity. (E) "Common Stock Equivalents" shall mean options, warrants or other securities or rights (including, without limitation, Options and Convertible Securities) convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock. (ii) No Adjustment of Conversion Price. No adjustment in the number of shares of Common Stock into which Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock is convertible shall be made, by adjustment in the applicable Conversion Price thereof: (A) unless the consideration per share (determined pursuant to subparagraph (v) below) for an Additional Share of Common Stock issued or deemed to be issued pursuant to subparagraph (iii) below by the Corporation is less than the respective Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock or the Series C Preferred Stock, as applicable, in effect on the date of, and immediately prior to, the issuance of such Additional Shares. (iii) Issue of Securities Deemed; Issue of Additional Shares of Common Stock. If the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issuance, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to subparagraph (v) below) of such Additional Shares of Common Stock would be less than the respective Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock or the Series C Preferred Stock in effect on the date of and immediately prior to issuance of such Options or Convertible Securities, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) No further adjustment in the Conversion Price for such Series shall be made upon the subsequent issuance of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; -11- 12 (B) If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the conversion price computed upon the original issuance thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) No readjustment pursuant to clause (B) above shall have the effect of increasing the Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock or the Series C Preferred Stock to an amount which exceeds the Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock or the Series C Preferred Stock on the original adjustment date; (D) In the event of any change in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any Option or Convertible Security, including, but not limited to, a change resulting from the anti-dilution provisions thereof, the Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock then in effect shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities.; and (E) Upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock or the Series C Preferred Stock computed upon the Original Issue Date thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were the shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation upon such exercise; or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange; and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised. -12- 13 (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to subparagraph (iii) above, but excluding shares issued as a dividend or distribution as provided in paragraph (g) below or upon a stock split or combination as provided in paragraph (f) below), for a consideration per share (determined pursuant to subparagraph (v) below) less than the respective Conversion Price for the Series A Preferred, the Series B Preferred Stock or the Series C Preferred Stock in effect on the date of and immediately prior to such issuance, then and in each such case, such Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock or the Series C Preferred Stock, respectively, shall be adjusted, concurrently with such issuance, to a price determined by multiplying such Conversion Price by a fraction, (1) the numerator of which shall be the number of shares of Common Stock and Common Stock Equivalents outstanding immediately prior to such issuance plus the number of shares of Common Stock which the aggregate consideration received (or deemed received) by the Corporation for such issuance would purchase at such Conversion Price; and (2) the denominator of which shall be the number of shares of Common Stock and Common Stock Equivalents outstanding immediately after such issuance. No adjustment of the Conversion Price, however, shall be made in an amount less than $.01 per share, and any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall amount to $.01 per share or more. Any adjustments to the Conversion Price shall be rounded to the nearest $.01 per share. (v) Determination of Consideration. For purposes of this Section 4(e), the consideration received by the Corporation for the issuance of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property. Such consideration shall: (1) insofar as it consists of cash, be computed at the aggregate of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends but before deducting any discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof; (2) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issuance, as is reasonably determined in good faith by the Board; and (3) in the event Additional Shares of Common Stock are issued together with other shares of securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as is reasonably determined in good faith by the Board. (B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been -13- 14 issued pursuant to subparagraph (iii) above, relating to Options and Convertible Securities, shall be determined by dividing: (1) the total amount, if any, received or receivable by the Corporation as consideration for the issuance of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (f) Adjustment for Stock Splits and Combinations. (i) If the Corporation shall at any time or from time to time after the Original Issue Date for the Series C Preferred Stock effect a subdivision of the outstanding Common Stock, the Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock then in effect immediately before that subdivision shall be proportionately decreased. If the Corporation shall at any time or from time to time after the Original Issue Date for the Series C Preferred Stock combine the outstanding shares of Common Stock, the Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (g) Adjustment for Certain Dividends and Distributions. (i) In the event the Corporation at any time, or from time after the Original Issue Date, shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock then in effect by a fraction: (A) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (B) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance -14- 15 or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price for each series of Designated Preferred Stock shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions. (h) Adjustments for Other Dividends and Distributions. In the event the Corporation at any time or from time to time after (i) the Original Issue Date, shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had their shares of Designated Preferred Stock been converted into Common Stock on the date of such event and had thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period giving application to all adjustments called for during such period, under this paragraph with respect to the rights of the holders of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock. (i) Adjustment for Reclassification, Exchange, or Substitution. If the Common Stock issuable upon the conversion of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock, shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares of stock dividend provided for above, or a reorganization, merger, consolidation, or sale of assets provided for below), then and in each such event the holder of each such share of Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock shall have the right thereafter to convert such shares into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification, or other change, by holders of the number of shares of Common Stock into which such shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock might have been converted immediately prior to such reorganization, reclassification, or change, all subject to further adjustment as provided herein. (j) Adjustment for Merger or Reorganization. In case of any consolidation or merger of the Corporation with or into another corporation, each share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall thereafter be convertible into the kind and amount of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock would have been entitled if it had converted its shares immediately prior to such consolidation or merger; and, in such case, appropriate adjustment (as determined in good faith by the Board) shall be -15- 16 made in the application of the provisions in this Section 4 set forth with respect to the rights and interest thereafter of the holders of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock to the end that the provisions set forth in this Section 4 shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock. (k) No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the respective Conversion Rights of the holders of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock against impairment. (l) Notice of Record Date. In the event: (i) that the Corporation shall propose to declare a dividend (or any other distribution) on its Common Stock, whether payable in cash, property, Common Stock or other securities of the Corporation, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) that the Corporation shall propose to subdivide or combine its outstanding shares of Common Stock; (iii) that the Corporation shall propose to effect any reclassification or recapitalization of the Common Stock of the Corporation outstanding (other than a subdivision or combination of its outstanding shares of Common Stock or a stock dividend or stock distribution thereon), or of any consolidation or merger of the Corporation into or with another corporation; or (iv) of the Liquidation of the Corporation; then in connection with each such event, the Corporation shall cause to be filed at its principal office or at the office of the transfer agent of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock , and shall cause to be mailed to each of the holders of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock at their last addresses as shown on the records of the Corporation or such transfer agent, at least ten (10) days prior to the record date specified in (A) below or at least twenty (20) days before the date specified in (B) below, a notice stating: (A) the record date of such dividend, distribution, subdivision or combination, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, subdivision or combination are to be determined, or -16- 17 (B) the date on which such reclassification, consolidation, merger, or Liquidation is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, or Liquidation. (m) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, furnish or cause to be furnished to such holder a similar certificate setting forth (i) such adjustments and readjustments; (ii) the Conversion Price then in effect for that holder's Series of Designated Preferred Stock; and (iii) the number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of that holder's Series of Designated Preferred Stock. (n) Stock to be Reserved. The Corporation will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issuance upon the conversion of Designated Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of the Designated Preferred Stock. The Corporation covenants that all shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and, without limiting the generality of the foregoing, the Corporation covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the Conversion Prices for the Designated Preferred Stock in effect at the time. The Corporation will take all such action as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirement of any national securities exchange upon which the Common Stock may be listed. The Corporation will not take any action which results in any adjustment of the Conversion Price for the Designated Preferred Stock, if the total number of shares of Common Stock issued and issuable after such action upon conversion of the Designated Preferred Stock would exceed the total number of shares of Common Stock then authorized by this Amended and Restated Certificate of Incorporation. (o) Issue Tax. The issuance of certificates for shares of Common Stock upon conversion of the Designated Preferred Stock shall be made without charge to the holders thereof for any issuance tax in respect thereof, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Designated Preferred Stock which is being converted. -17- 18 Section 5. Conversion at a Qualified Public Offering or Qualified Liquidation. (a) Each share of Designated Preferred Stock shall be converted automatically into shares of Common Stock in accordance with Section 4 upon the closing of a Qualified Public Offering or Qualified Liquidation. (b) As of the date and time fixed for conversion, all rights with respect to the Designated Preferred Stock so converted will terminate. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his or its attorney duly authorized in writing. As soon as practicable after the date of such conversion and the surrender of the certificate or certificates for Designated Preferred Stock, the Corporation shall cause to be issued and delivered to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Section 4(c) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. Upon any such conversion, no adjustment to the Conversion Price for each Series of Preferred Stock shall be made for any declared and unpaid dividends on the Designated Preferred Stock converted. (c) All certificates evidencing shares of Designated Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the date such certificates are so required to be surrendered, be deemed to have been retired and canceled and the shares of Designated Preferred Stock represented thereby converted into Common Stock for all purposes as of the date of conversion set forth in paragraph (a) above, notwithstanding the failure of the holder or holders thereof to surrender such certificates. As used herein, the term "Qualified Public Offering" shall mean any firm commitment underwritten initial public offering by the Corporation of shares of Common Stock (as hereafter defined) pursuant to an effective registration statement under the Securities Act of 1933, as amended, or any comparable statement under any similar federal statute then in force, in which the aggregate cash proceeds to be received by the Corporation and selling stockholders from such offering (net of underwriting discounts and commissions) are at least $15,000,000. 2. Authorized Stock After a Qualified Public Offering. Effective as of a Qualified Public Offering, the Corporation's capital stock shall be comprised as follows: (a) Authorized Shares. The aggregate number of shares that the Corporation shall have authority to issue is 150,000,000, (i) 130,000,000 shares of which shall be Common Stock, par value $0.001 per share, and 20,000,000 of which shall be Preferred Stock, par value $0.001 per share. -18- 19 (b) Common Stock. Each share of Common Stock shall have one vote on each matter submitted to a vote of the stockholders of the Corporation. Subject to the provisions of applicable law and the rights of the holders of the outstanding shares of Preferred Stock, if any, the holders of shares of Common Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation, out of the assets of the Corporation legally available therefor, dividends or other distributions, whether payable in cash, property or securities of the Corporation. The holders of shares of Common Stock shall be entitled to receive, in proportion to the number of shares of Common Stock held, the net assets of the Corporation upon dissolution after any preferential amounts required to be paid or distributed to holders of outstanding shares of Preferred Stock, if any, are so paid or distributed. (c) Preferred Stock. Section 1. Series. The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more series. The description of shares of each additional series of Preferred Stock, including any designations, preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption shall be as set forth in resolutions adopted by the Board of Directors. (a) Rights and Preferences. The Board of Directors is expressly authorized, at any time, by adopting resolutions providing for the issuance of, or providing for a change in the number of, shares of any particular series of Preferred Stock and, if and to the extent from time to time required by law, by filing certificates of amendment or designation which are effective without stockholder action, to increase or decrease the number of shares included in each series of Preferred Stock, but not below the number of shares then issued, and to set in any one or more respects the designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms and conditions of redemption relating to the shares of each such series. The authority of the Board of Directors with respect to each series of Preferred Stock shall include, but not be limited to, setting or changing the following: (i) the dividend rate, if any, on shares of such series, the times of payment and the date from which dividends shall be accumulated, if dividends are to be cumulative; (ii) whether the shares of such series shall be redeemable and, if so, the redemption price and the terms and conditions of such redemption; (iii) the obligation, if any, of the Corporation to redeem shares of such series pursuant to a sinking fund; (iv) whether shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes and, if so, the terms and conditions of such -19- 20 conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; (v) whether the shares of such series shall have voting rights, in addition to the voting rights provided by law, and, if so, the extent of such voting rights; (vi) the rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding-up of the Corporation; and (vii) any other relative rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such series. ARTICLE V: LIMITATION OF DIRECTOR LIABILITY A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this ARTICLE V to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law as so amended. ARTICLE VI: BOARD OF DIRECTORS The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the Bylaws of the Corporation. ARTICLE VII: STOCKHOLDER MEETINGS Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE VIII: ELECTION OF DIRECTORS Election of directors at an annual or special meeting of stockholders need not be by written ballot unless the Bylaws of the Corporation shall so provide. A. At each annual meeting of stockholders, directors of the Corporation shall be elected to hold office until the expiration of the term for which they are elected, and until their successors have been duly elected and qualified. At the first annual meeting of stockholders following the closing of the initial public offering (the "First Public Company Annual Meeting") -20- 21 of the Corporation's capital stock pursuant to an effective registration statement filed under the Securities Act of 1933, as amended (the "Initial Public Offering"), the directors of the Corporation shall be divided in accordance with a recommendation made in good faith by the Board of Directors into three classes as nearly equal in size as is practicable, hereby designated as Class I, Class II and Class III. The term of office of the initial Class I directors shall expire at the next succeeding annual meeting of stockholders, the term of office of the initial Class II directors shall expire at the second succeeding annual meeting of stockholders and the term of office of the initial Class III directors shall expire at the third succeeding annual meeting of stockholders. For the purposes hereof, the initial Class I, Class II and Class III directors shall be those directors designated and elected at the First Public Company Annual Meeting. At each annual meeting after the First Public Company Annual Meeting, directors to replace those of a Class whose terms expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting and until their respective successors shall have been duly elected and qualified. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable. B. Vacancies occurring on the Board of Directors for any reason may be filled by vote of a majority of the remaining members of the Board of Directors, although less than a quorum, at a meeting of the Board of Directors. A person so elected by the Board of Directors to fill a vacancy shall hold office until the next succeeding annual meeting of stockholders of the Corporation and until his or her successor shall have been duly elected and qualified. C. Prior to the natural expiration of its term in office and subject to applicable laws, no duly-appointed director may be removed unless cause be shown and then only by affirmative vote of 662/3% of the shares entitled to vote thereon, voting together as a single class. ARTICLE IX: INDEMNIFICATION The Corporation shall have the power to indemnify its officers, directors, employees and agents, and such other persons as may be designated as set forth in the bylaws (collectively, the "Indemnitees"), to the full extent permitted by the Delaware General Corporation Law (the "DGCL"), from and against any and all of the expenses, liabilities or other matters referred to in or covered by the bylaws or the DGCL, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The Corporation may advance expenses incurred by an Indemnitee in advance of the final disposition of an action, suit, proceeding or other matter referred to in or covered by the bylaws or the DGCL, upon receipt of an undertaking by or on behalf of such Indemnitee to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this ARTICLE IX. Any repeal or modification of this ARTICLE IX by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. -21- 22 ARTICLE X: BYLAWS In furtherance and not in limitation of the powers conferred by statute and subject to restrictions set forth herein, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation. ARTICLE XI: STOCKHOLDER ACTION AFTER INITIAL PUBLIC OFFERING Effective upon the closing of the Initial Public Offering, stockholders of the Corporation may not take action by written consent in lieu of a meeting but must take any actions at a duly called annual or special meeting. A special meeting of stockholders may be called only by the Chairman of the Board of Directors, the Chief Executive Officer or by a majority of the members of the Board of Directors. ARTICLE XII: AMENDMENT OR REPEAL OF ARTICLES Except as otherwise provided herein, the Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation. (The remainder of this page is intentionally left blank.) -22- 23 IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be signed by its President as of this 24th day of May, 2001. BAM! ENTERTAINMENT, INC. By: /s/ RAYMOND C. MUSCI ------------------------------- Raymond C. Musci, President EX-3.2 5 v72115orex3-2.txt EXHIBIT 3.2 1 EXHIBIT 3.2 BYLAWS OF BAY AREA MULTIMEDIA, INC. ARTICLE I OFFICES Section 1. The registered office shall be in the City of Dover, County of Kent, State of Delaware. Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders for the election of Directors shall be held in the City of San Jose, State of California, at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of stockholders, commencing with the year 2000, shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a Board of Directors, and transact such other business as may properly be brought before the meeting. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not fewer than ten (10) nor more than sixty (60) days before the date of the meeting. Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the President and shall be called by the President or Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not fewer than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of fifty percent (50%) of the stock issued and outstanding and entitled to 1 2 vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 10. Unless otherwise provided in the certificate of incorporation each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Section 11. Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock 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 thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS Section 1. The number of Directors which shall constitute the whole Board shall be not less than five (5) nor more than seven (7), and the exact number of directors authorized shall be six (6). The number may be changed by resolution of the Board of Directors or by the stockholders at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each Director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. Section 2. Vacancies and new created Directorships resulting from any increase in the authorized number of Directors may be filled by a majority of the Directors then in office, though less than a quorum, or by a sole remaining Director, and the Directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no Directors in office, then an election of Directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created Directorship, the Directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such Directors, summarily order an election to be held to fill any such vacancies or newly created Directorships, or to replace the Directors chosen by the Directors then in office. Section 3. The business of the corporation shall be managed by or under the direction of its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders. 2 3 MEETINGS OF THE BOARD OF DIRECTORS Section 4. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 5. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected Directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the Directors. Section 6. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. Section 7. Special meetings of the Board may be called by the President on two (2) days' notice to each Director by mail or forty-eight (48) hours' notice to each Director either personally or by telegram; special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of two Directors unless the Board consists of only one Director, in which case special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of the sole Director. Section 8. At all meetings of the Board a majority of the Directors shall constitute a quorum for the transaction of business and the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Unless otherwise restricted by the certificate of incorporation of these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 10. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. COMMITTEES OF DIRECTORS Section 11. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the Directors of the corporation. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence of disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, 3 4 adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 12. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. COMPENSATION OF DIRECTORS Section 13. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have the authority to fix the compensation of Directors. The Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as Director. No such payment shall preclude any Director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. REMOVAL OF DIRECTORS Section 14. Unless otherwise restricted by the certificate of incorporation or bylaw, any Director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of Directors. ARTICLE IV NOTICES Section 1. Whenever, under the provisions of the statutes or of the certificate of incorporation or of these bylaws, notice is required to be given to any Director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to Directors may also be given by telegram. Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS Section 1. The officers of the corporation shall be chosen by the Board of Directors and shall be a President, Treasurer and a Secretary. The Board of Directors may elect from among its members a Chairman of the Board and a Vice Chairman of the Board. The Board of Directors may also choose one or more Vice-Presidents, Assistant Secretaries and Assistant Treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise provide. Section 2. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a President, a Treasurer, and a Secretary and may choose Vice Presidents. Section 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall 4 5 be determined from time to time by the Board. Section 4. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 5. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. THE CHAIRMAN OF THE BOARD Section 6. The Chairman of the Board, if any, shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. Section 7. The Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He also shall serve as a spokesperson of the Corporation, have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. The Vice Chairman shall report to the Chairman and shall not have the unilateral authority to obligate the Corporation beyond the financial limits established by the Board of Directors. THE CHIEF EXECUTIVE OFFICER AND VICE-PRESIDENTS Section 8. The Chief Executive Officer shall be responsible for management of the global operations of the Corporation. The CEO shall report directly to the Board of Directors and accepts the responsibility to carry out the stated intent of a majority thereof; and in the absence of the Chairman and Vice Chairman of the Board he shall preside at all meetings of the stockholders and the Board of Directors; he shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. Section 9. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation. Section 10. In the absence of the President or in the event of his inability or refusal to act, the Vice-President, if any, (or in the event there be more than one Vice-President, the Vice-Presidents in the order designated by the Directors, or in the absence of any designation, then in the order of their election) shall perform 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 perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE SECRETARY AND ASSISTANT SECRETARY Section 11. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 12. The Assistant Secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the Secretary or in the event of his inability or refusal to act, perform the duties and exercise 5 6 the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE CHIEF FINANCIAL OFFICER AND ASSISTANT CHIEF FINANCIAL OFFICER Section 13. The Chief Financial Officer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. Section 14. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. Section 15. The Chief Financial Officer is responsible for all accounting and financial reporting matters for the Corporation's worldwide operations. The Chief Financial Officer shall report to the Corporation's Chief Executive Officer on a day-to-day basis, and report to the Corporation's Board and Audit Committee, if any, as events dictate, but no less than quarterly. In the event of a discrepancy between the instructions of the Chief Executive Officer and those of the Audit Committee, the determination of the Audit Committee shall prevail. Section 16. The Chief Financial Officer shall be responsible for providing preliminary consolidated financials to the Board for review prior to the completion of the Auditors' report for each financial quarter. At that time, the Chief Financial Officer will advise the Board of any accounting decisions made by the Chief Financial Officer, or by any senior financial manager reporting to the Chief Financial Officer, which had a material impact on the financials reported. Section 17. If required by the Board of Directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 18. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE VI CERTIFICATE OF STOCK Section 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chairman or Vice-Chairman of the Board of Directors, or the President or a Vice-President and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shares owned by him in the corporation. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the Certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate 6 7 which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 2. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 3. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFER OF STOCK Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. FIXING RECORD DATE Section 5. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholder or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or 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 change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII GENERAL PROVISIONS DIVIDENDS Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the 7 8 provisions of the certificate of incorporation. Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purposes as the Directors shall think conducive to the interest of the corporation, and the Directors may modify or abolish any such reserve in the manner in which it was created. CHECKS Section 3. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. FISCAL YEAR Section 4. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SEAL Section 5. The Board of Directors may adopt a corporate seal having inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. 8 9 INDEMNIFICATION Section 6. The corporation shall, to the fullest extent authorized under the laws of the State of Delaware, as those laws may be amended and supplemented from time to time, indemnify any Director made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of being a Director of the corporation or a predecessor corporation or, at the corporation's request, a Director or officer of another corporation, provided, however, that the corporation shall indemnify any such agent in connection with a proceeding initiated by such agent only if such proceeding was authorized by the Board of Directors of the corporation. The indemnification provided for in this Section 6 shall: (i) not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement or vote of stockholders or disinterested Directors or otherwise, both as to action in their official capacities and as to action in another capacity while holding such office, (ii) continue as to a person who has ceased to be a Director, and (iii) inure to the benefit of the heirs, executors and administrators of such a person. The corporation's obligation to provide indemnification under this Section 6 shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a policy maintained by the corporation or any other person. Expenses incurred by a Director of the corporation in defending a civil or criminal action, suit or proceeding by reason of the fact that he is or was a Director of the corporation (or was serving at the corporation's request as a Director or officer of another corporation) shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Director to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized by relevant sections of the General Corporation Law of Delaware. Notwithstanding the foregoing, the corporation shall not be required to advance such expenses to an agent who is a party to an action, suit or proceeding brought by the corporation and approved by a majority of the Board of Directors of the corporation which alleges willful misappropriation of corporate assets by such agent, disclosure of confidential information in violation of such agent's fiduciary or contractual obligations to the corporation or any other willful and deliberate breach in bad faith of such agent's duty to the corporation or its stockholders. The foregoing provisions of this Section 6 shall be deemed to be a contract between the corporation and each Director who serves in such capacity at any time while this bylaw is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. The Board of Directors in its discretion shall have power on behalf of the corporation to indemnify any person, other than a Director, made a party to any action, suit or proceeding by reason of the fact that he, his testator or intestate, is or was an officer or employee of the corporation. To assure indemnification under this Section 6 of all Directors, officers and employees who are determined by the corporation or otherwise to be or to have been "fiduciaries" of any employee benefit plan of the corporation which may exist from time to time, Section 145 of the General Corporation Law of Delaware shall, for the purposes of this Section 6, be interpreted as follows: an "other enterprise" shall be deemed to include such an employee benefit plan, including without limitation, any plan of the corporation which is governed by the Act of Congress entitled "Employee Retirement Income Security Act of 1974," as amended from time to time; the corporation shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to such Act of Congress shall be deemed "fines." ARTICLE VIII AMENDMENTS Section 1. These bylaws may be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the certificate of incorporation at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal bylaws is 9 10 conferred upon the Board of Directors by the certificate or incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal bylaws. 10 11 CERTIFICATE OF THE SECRETARY OF BAY AREA MULTIMEDIA, INC. I, the undersigned, certify that: 1. I am the duly elected and acting secretary of Bay Area Multimedia, Inc., a Delaware corporation (the "Corporation"). 2. The above bylaws, consisting of 10 pages (not including this page), are the bylaws of this corporation as adopted by the incorporator of the Corporation on _______________ 2000. IN WITNESS WHEREOF, I have subscribed my name on _____________, 2000. ---------------------------------------- George M. Sundheim, III, Secretary 11 EX-4.2 6 v72115orex4-2.txt EXHIBIT 4.2 1 Exhibit 4.2 THIS WARRANT AND THE SHARES OF CAPITAL STOCK PURCHASABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. September __, 2000 BAY AREA MULTIMEDIA, INC. COMMON STOCK PURCHASE WARRANT Warrant to Purchase 100,000 Shares of Common Stock Expiring September __, 2006 THIS CERTIFIES THAT, for value received SPYGLASS ENTERTAINMENT GROUP, LP ("SPYGLASS"), or its successors or assigns (collectively, the "WARRANT HOLDER"), at any time and from time to time on any Business Day on or prior to 5:00 p.m., Pacific Time, on the Expiration Date (as below defined) is entitled to subscribe for and purchase from Bay Area Multimedia, Inc., a Delaware corporation (the "COMPANY"), 100,000 shares of Common Stock at a price per share equal to the Exercise Price. As used herein, the "EXPIRATION DATE" means the sixth anniversary of the Issue Date. 1. Certain Definitions. The following terms, as used herein, have the following meanings: "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with such Person. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Los Angeles, California are authorized by law to close. "Certificate" means the Certificate of Incorporation, dated September 19, 2000, as in effect on the date hereof. "Commission" means the Securities and Exchange Commission or any other Federal agency administering the Securities Act at the time. "Common Stock" means the Company's currently authorized Common Stock and stock of any other class or other consideration into which such currently authorized Common Stock may hereafter have been changed. "Exchange Act" means the Securities Exchange Act of 1934, or any successor Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Exchange Act shall include a reference to the comparable section, if any, of any such successor Federal statute. 1 2 "Exercise Price" means the lesser of (i) $5.00 per share and (ii) in connection with the Company's first equity financing subsequent to the Issue Date where the aggregate proceeds from such financing are in excess of $4,000,000: (x) in the case of Common Stock, the price per share paid for such Common Stock or (y) in the case of an equity financing consisting other securities, the price per share paid for such equity on an as converted basis; in each case, as adjusted from time to time pursuant to Section 5. "Included Picture" shall have the meaning set forth in the Output Agreement. "Interactive Entertainment Rights" shall have the meaning set forth in the Output Agreement. "Issue Date" means October __, 2000. "Output Agreement" shall refer to the Exclusive Output Agreement between SPYGLASS and the Company executed as of the Issue Date. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Securities Act" means the Securities Act of 1933, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Act shall include a reference to the comparable section, if any, of any such successor Federal statute. "Warrant Shares" means the 100,000 shares of Common Stock issued or issuable upon exercise of this Warrant, as adjusted from time to time pursuant to Section 5, or any portion thereof. 2. Exercise of Warrant. This Warrant shall vest and become exercisable in accordance with the following schedule: (a) 50% of the Warrant Shares on the Issue Date; (b) 25% of the Warrant Shares upon receipt by Spyglass from the Company of the written notice of intent to exploit the Interactive Entertainment Rights as set forth in Section 3(b) of the Output Agreement for the first Included Picture; and (c) 25% of the Warrant Shares upon receipt by Spyglass from the Company of the written notice of intent to exploit the Interactive Entertainment Rights as set forth in Section 3(b) of the Output Agreement for the second Included Picture. Subject to the above, the Warrant Holder may exercise this Warrant in whole or for 25,000 or more shares (less than 25,000 only if less than 25,000 remain unexercised and then only for all such shares), at any time or from time to time on any Business Day on or prior to the Expiration Date, by delivering to the Company a duly executed notice (a "Notice of Exercise") in the form of 2 3 Annex A hereto and by payment to the Company of the Exercise Price per Warrant Share, at the election of the Warrant Holder, by wire transfer of immediately available funds to the account of the Company in an amount equal to the product of (i) the Exercise Price times (ii) the number of Warrant Shares as to which this Warrant is being exercised. As soon as practicable but not later than five Business Days after the Company shall have received such Notice of Exercise and payment, the Company shall execute and deliver or cause to be executed and delivered, in accordance with such Notice of Exercise, a certificate or certificates representing the number of shares of Warrant Shares specified in such Notice of Exercise, issued in the name of the Warrant Holder or in such other name or names of any Person or Persons designated in such Notice of Exercise with such additional documentation as the Company may request if the party is other than the Warrant Holder. This Warrant shall be deemed to have been exercised and such share certificate or certificates shall be deemed to have been issued, and such Warrant Holder or other Person or Persons designated in such Notice of Exercise shall be deemed for all purposes to have become a holder of record of the Warrant Shares, as of the date that such Notice of Exercise and payment shall have been received by the Company. The Warrant Holder shall surrender this Warrant Certificate to the Company when it delivers the Notice of Exercise, and in the event of a partial exercise of the Warrant, the Company shall execute and deliver to the Warrant Holder, at the time the Company delivers the share certificate or certificates issued pursuant to such Notice of Exercise, a new Warrant Certificate for the unexercised portion of the Warrant, but in all other respects identical to this Warrant Certificate. Each certificate for Warrant Shares issued upon exercise of this Warrant, unless at the time of exercise such Warrant Shares are registered under the Securities Act, shall bear the following legend: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. Any certificate for Warrant Shares issued at any time in exchange or substitution for any certificate bearing such legend (unless at that time such Warrant Shares are registered under the Securities Act) shall also bear such legend unless, in the written opinion of counsel selected by the holder of such certificate, which counsel and opinion shall be reasonably acceptable to the Company, the Warrant Shares represented thereby need no longer be subject to restrictions on resale under the Securities Act. The Company shall not be required to issue fractions of shares upon an exercise of the Warrant. If any fraction of a share would, but for this restriction, be issuable upon an exercise of the Warrant, in lieu of delivering such fractional share, the Company shall pay to the Warrant Holder, in cash, an amount equal to the same fraction times the Closing Price on the trading day immediately prior to the date of such exercise. 3 4 The Company shall pay all expenses, taxes, excluding income taxes, and owner charges payable in connection with the preparation, issuance and delivery of certificates for the Warrant Shares and any new Warrant Certificates, except (a) the Company shall have no obligation to pay any expenses incurred by the Warrant Holder or any third party receiving a Warrant Certificate and (b) if the certificates for the Warrant Shares or the new Warrant Certificates are to be registered in a name or names other than the name of the Warrant Holder, funds sufficient to pay all transfer taxes payable as a result of such transfer shall be paid by the Warrant Holder at the time of its delivery of the Notice of Exercise or promptly upon receipt of a written request by the Company for payment. 2. Investment Representation. By accepting the Warrant, the Warrant Holder represents that it is acquiring the Warrant for its own account or the account of an Affiliate for investment purposes and not with the view to any sale or distribution, and that the Warrant Holder will not offer, sell or otherwise dispose of the Warrant or the Warrant Shares except under circumstances as will not result in a violation of applicable securities laws. 3. Validity of Warrant and Issuance of Shares. The Company represents and warrants that this Warrant has been duly authorized and is validly issued. The Company further represents and warrants that on the date hereof it is duly authorized and reserved, and the Company hereby agrees that it will at all times until the Expiration Date have duly authorized and reserved, such number of shares of Warrant Shares as will be sufficient to permit the exercise in full of the Warrant, and that all such shares are and will be duly authorized and, when issued upon exercise of the Warrant, will be validly issued, fully paid and non-assessable, and free and clear of all security interests, claims, liens, equities and other encumbrances. The Company further warrants that as of the date hereof, the capitalization of the Company as set forth on Schedule A hereto is true and correct. 5. Adjustments. The Exercise Price shall be subject to adjustment from time to time as follows: (i) Common Stock Reorganizations. (A) In the event the Company should at any time or from time to time after the Issue 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 4 5 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 Exercise Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents. (B) If the number of shares of Common Stock outstanding at any time after the Issue Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Exercise Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (ii) Other Distributions. In the event the Company shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 5(i), then, in each such case for the purpose of this subsection 5(ii), the Warrant Holder shall be entitled to a proportionate share of any such distribution as though they were the holders of the Warrant Shares as of the record date fixed for the determination of the holders of Common Stock entitled to receive such distribution. (iii) No Impairment. The Company will not, by amendment of its Restated Articles or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Exercise Rights of the Warrant Holder against impairment. (iv) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision or combination provided for elsewhere in this Section 5) provision shall be made so that the Warrant Holder shall thereafter be entitled to receive upon the exercise of this Warrant the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of the Warrant Shares would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 5 with respect to the rights of the Warrant Holder after the recapitalization to the end that the provisions of this Section 5 (including adjustment of the Exercise Price then in effect and the number of shares purchasable upon exercise) shall be applicable after that event as nearly equivalent as may be practicable. (v) No Fractional Shares and Certificate as to Adjustments. (A) No fractional shares shall be issued upon the exercise of this Warrant, and the number of shares of Warrant Shares to be issued shall be rounded to the nearest whole share. (B) Upon the occurrence of each adjustment or readjustment of the Exercise Price pursuant to this Section 5, the Company, at its expense, shall promptly compute 5 6 such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to the Warrant Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of the Warrant Holder, furnish or cause to be furnished to the Warrant Holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Exercise Price at the time in effect, and (C) the number of Warrant Shares and the amount, if any, of other property that at the time would be received upon the exercise of this Warrant. (vi) Notices of Record Date or Recapitalization. In the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Company shall mail to the Warrant Holder, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. The Company shall also give notice to the Warrant Holder prior to any recapitalization under Section 5(iii). (vii) If the per share price received in conjunction with the Company's anticipated Series B Preferred Stock offering is less than $5.00 per share, the Exercise Price in effect immediately prior to each such issuance shall be adjusted to a price determined by multiplying such Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares of Common Stock that the aggregate consideration received by the Company for such issuance would purchase at such Exercise Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of shares issued pursuant to the Series B offering. 6. Registration of Warrant Shares. (a) Neither the Warrant nor the Warrant Shares have been registered with the Commission under the Securities Act or qualified for sale pursuant to any state blue sky law, and neither may be sold or transferred without such registration or qualification, except pursuant to an exemption therefrom. No rights shall be hereby granted which are in violation of applicable securities laws or regulations. (b) The holder of this Warrant shall have all the benefits of an Investor under that certain Investor Rights Agreement, dated as of May 17, 2000 (the "Investor Rights Agreement"), between the Company and the parties therein named. The holder of this Warrant shall become a party to the Investor Rights Agreement by entering into a joinder agreement in form satisfactory to the Company and such holder. 7. Transfer of Warrant. This Warrant is freely transferable, in whole or in part, to any Person; provided that no transfer shall be made that (a) does not comply with all applicable federal and state securities laws, or (b) would require registration or qualification of the Warrant pursuant to the Securities Act 6 7 or any applicable state blue sky law; and provided further that the Warrant Holder upon transfer of the Warrant must deliver to the Company a duly executed Warrant Assignment in the form of Annex B hereto, with funds sufficient to pay any transfer tax imposed in connection with such assignment (if any) and upon surrender of this Warrant Certificate to the Company. The Company shall execute and deliver a new Warrant Certificate or Certificates in the form of this Warrant Certificate with appropriate changes to reflect such Assignment, in the name or names of the assignee or assignees specified in the fully executed Warrant Assignment or other instrument of assignment and, if the Warrant Holder's entire interest is not being transferred or assigned, in the name of the Warrant Holder, this Warrant Certificate shall promptly be cancelled. Any transfer or exchange of this Warrant Certificate shall be without charge to the Warrant Holder (except as provided above with respect to income and transfer taxes, if any) and any new Warrant Certificate or Certificates issued shall be dated the date hereof. The terms "WARRANT" and "WARRANT Holder" as used herein include all Warrants into which this Warrant (or any successor Warrant) may be exchanged or issued in connection with the transfer or assignment of this Warrant any successor Warrant) and the holders of those Warrants, respectively. 8. Reporting Rule 144. The Company hereby agrees that it will file any reports required to be filed by it under the Securities Act, the Exchange Act or the rules and regulations adopted by the Commission thereunder and that it will use all reasonable efforts to cooperate with each Warrant Holder and each holder of Warrant Shares in supplying such information concerning the Company as may be necessary for such Warrant Holder or holder to complete and file any information reporting forms currently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Warrants or Warrant Shares. The Company also agrees that it will take such further action, and supply such information (including the information specified by Rule 144A(d) (4) under the Securities Act) as any Warrant Holder may reasonably request to the extent required from time to time to enable the Warrant Holder to sell Warrant Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 or 144A under the Securities Act, as such Rules may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission. Upon the request of the Warrant Holder, the Company will deliver to the Warrant Holder a written statement as to whether it has complied with such reporting requirements. Any other provision of this Warrant notwithstanding, the Company shall not be obligated under any circumstances to cause this Warrant to be listed or quoted on NASDAQ National Market System, any national securities exchange or any other trading system or market, or to be registered under the Securities Act. 9. Lost, Mutilated or Missing Warrant Certificates. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in the case of loss, theft or destruction, upon receipt of indemnification satisfactory to the Company, or, in the case of mutilation, upon surrender and cancellation of the mutilated Warrant Certificate, the Company shall execute and deliver a new Warrant Certificate of like tenor and representing the right to purchase the same aggregate number of Warrant Shares. The recipient of any such Warrant Certificate shall reimburse 7 8 the Company for all reasonable expenses incidental to the replacement of such lost, mutilated or missing Warrant Certificate. 10. Successors and Assigns. All the provisions of this Warrant by or for the benefit of the Company or the Warrant Holder shall bind and inure to the benefit of their respective successors and assigns. 11. Notices. Any notice or other communication hereunder shall be in writing and shall be sufficient if sent by first-class mail or courier, postage prepaid, and addressed as follows: (a) if to the Company, addressed to Bay Area Multimedia, Inc., 333 West Santa Clara Street, Suite 950, San Jose California 95113 Attn: Raymond C. Musci; (b) if to the Warrant Holder, if the Warrant Holder is addressed to it at Spyglass Entertainment Group, L.P., 500 S. Buena Vista St.; Burbank, CA 91521-1855 and (c) if to any party, addressed to such address as such party may hereafter specify to the Company, in the case of any communication to be provided by the Company, or to each Warrant Holder, in the case of any communication to be provided by the Warrant Holder, for the purpose of notice hereunder. 12. Miscellaneous. (a) The Warrant shall not entitle the Warrant Holder, prior to the exercise of the Warrant, to any rights as a shareholder of the Company other than as provided in Section 5(v). (b) The Company shall pay all reasonable expenses of the Warrant Holder, including reasonable fees and disbursements of counsel, in connection with the preparation of the Warrant, any waiver or consent hereunder or any amendment or modification hereof. (c) In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. (d) Without limiting the rights of the Company and the Warrant Holder to pursue all other legal and equitable rights available to such party for the other parties' failure to perform its obligations hereunder, the Company and the Warrant Holder each hereto acknowledge and agree that the remedy at law for any failure to perform any obligations hereunder would be inadequate and that each shall be entitled to specific performance, injunctive relief or other equitable remedies in the event of any such failure. (e) THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, EXCEPT AS OTHERWISE REQUIRED BY MANDATORY PROVISIONS OF LAW. 8 9 (f) The Company (a) agrees that any legal suit, action or proceeding arising out of or relating to this Warrant will be instituted exclusively in the state or federal courts located in the County of San Jose, California, (b) waives any objection which the Company may have now or hereafter based upon forum non conveniens or to the venue of any such suit, action or proceeding, and (c) irrevocably consents to the jurisdiction of the state and federal courts located in the County of Los Angeles, California, in any such suit, action or proceeding. The Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the state and federal courts located in the County of Los Angeles, California, and agrees that service of process upon the Company, mailed by certified mail to the Company's address, will be deemed in every respect effective service of process upon the Company, in any suit, action or proceeding. FURTHER, BOTH THE COMPANY AND THE WARRANT HOLDER HEREBY WAIVE TRIAL BY JURY IN ANY ACTION TO ENFORCE THIS WARRANT. (g) The section headings used herein are for convenience of reference only and shall not be construed in any way to affect the interpretation of any provisions of the Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed its authorized officer, and its corporate seal to be hereunto affixed, and attested by its Secretary, all as of the day and year first above written. BAY AREA MULTIMEDIA, INC. By: ____________________________________ Name: Ray Musci Title: Chief Operating Officer [Seal] Attest: - ----------------------------- Secretary 9 10 ANNEX A Form of Notice of Exercise __________________, 19__ To: Bay Area Multimedia, Inc. Reference is made to the Common Stock Purchase Warrant dated _________, 2000. Terms defined therein are used herein as therein defined. The undersigned, pursuant to the provisions set forth in the Warrant, hereby irrevocably elects and agrees to purchase shares of Common Stock, and makes payment herewith in full therefor at the Exercise Price of $____________ in the following form: - ------------------------------------------. [If said number of shares is less than all of the shares purchasable hereunder, the undersigned hereby requests that a new Warrant Certificate representing the remaining balance of the shares be registered in the name of _________________________________, whose address is ------------------------------- ------------------------------- ------------------------------- The undersigned hereby represents that it is exercising the Warrant for its own account or the account of an Affiliate for investment purposes and not with the view to any sale or distribution and that the Warrant Holder will not offer, sell or otherwise dispose of the Warrant or any underlying Warrant Shares in violation of applicable securities laws. [NAME OF WARRANT HOLDER] By: ______________________________ Name: Title: [ADDRESS OF WARRANT HOLDER] 10 11 ANNEX B Form of Warrant Assignment Reference is made to the Common Stock Purchase Warrant dated __________, 2000, issued by Bay Area Multimedia, Inc. Terms defined therein are used herein as therein defined. FOR VALUE RECEIVED___________________( the "Assignor") hereby sells, assigns and transfers all of the rights of the Assignor as set forth in the Common Stock Purchase Warrant dated ___________, 2000, with respect to the number of Warrant Shares covered thereby as set forth below, to the Assignee(s) as set forth below: Name (s) of Number of Assignee (s) Address (es) Warrant Shares - ------------ ------------ -------------- - ------------------------- ---------------------- ---------------------- - ------------------------- ---------------------- ---------------------- All notices to be given by the Company to the Assignor as Warrant Holder shall be sent to the Assignee(s) at the above listed address(es), and, if the number of shares being hereby assigned is less than all of the shares covered by the Warrant held by the Assignor, then also to the Assignor. In accordance with Section 7 of the Warrant Certificate, the Assignor requests that the Company execute and deliver a new Warrant Certificate or Warrant Certificates in the name or names of the assignee or assignees, as is appropriate, or, if the number of shares being hereby assigned is less than all of the shares covered by the Warrant held by the Assignor, new Warrant Certificates in the name or names of the assignee or the assignees, as is appropriate, and in the name of the Assignor. The undersigned represents that the Assignee has represented to the Assignor that the Assignee is acquiring the Warrant for its own account or the account of an Affiliate for investment purposes and not with the view to any sale or distribution, and that the Assignee will not offer, sell otherwise dispose of the Warrant or the Warrant Shares except under circumstances as will not result in a violation of applicable securities laws. Dated: _________________, 19__ [NAME OF ASSIGNOR] By: ____________________________ Name: Title: [ADDRESS OF ASSIGNOR] 11 12 SCHEDULE A CAPITALIZATION 12 EX-4.3 7 v72115orex4-3.txt EXHIBIT 4.3 1 Exhibit 4.3 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. WARRANT TO PURCHASE SHARES OF CAPITAL STOCK OF BAM! ENTERTAINMENT, INC. This certifies that PAR Capital Management (the "Holder"), for value received, is entitled to purchase from BAM! Entertainment, Inc., a Delaware corporation (the "Company"), having a place of business at 333 W. Santa Clara Blvd., San Jose, CA 95113, 30,000 shares of the Company's Common Stock ("Warrant Shares"), at an exercise price equal to $17.65 (the "Per Share Price"). The Warrant Shares may be purchased after the date set forth at the bottom of this Warrant (the "Exercise Date") until the earlier of (a) 5 p.m. Pacific Standard Time on the third anniversary of the Exercise Date; (b) the close of a "firm commitment" underwritten initial public offering of the Company's Common Stock at a public offering price per share of at least $75 per share (as such amount may be adjusted for stock dividends, combinations, splits, recapitalizations (collectively, "As Adjusted")) and which results in aggregate proceeds to the Company (net of underwriting discounts and commissions) of at least $15 million USD (a "Qualified Public Offering"); or (c) the close of a subsequent private equity financing or "Organic Change" as defined in Section 1.2 below at a price of $35 per share As Adjusted and which results in aggregate proceeds to the Company of at least $10 million USD (the earliest such date shall be referred to as the "Expiration Date") upon surrender to the Company at its principal office (or at such other location as the Company may advise the Holder in writing) of this Warrant properly endorsed with the Form of Subscription attached hereto duly filled in and signed and, if applicable, upon payment in cash or by check of the aggregate Per Share Price for the number of the Warrant Shares for which this Warrant is being exercised determined in accordance with the provisions hereof. The Per Share Price and the number of Warrant Shares purchasable hereunder are subject to adjustment as provided in Section 3 of this Warrant. -1- 2 This Warrant is subject to the following terms and conditions: 1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES. 1.1 EXERCISE DATE. This Warrant is exercisable at the option of the holder of record hereof, at any time or from time to time, from the Exercise Date of the Qualified Financing up to the Expiration Date for all or any part of the shares of Warrant Shares (but not for a fraction of a share) which may be purchased hereunder by the surrender of this Warrant, together with the Subscription Form attached hereto as Exhibit A, duly completed and executed at the principal office of the Company specifying the portion of the Warrant to be exercised and accompanied by payment in full in cash or by check with respect to the Shares of the Warrant Stock being purchased. The Company agrees that the shares of Warrant Shares purchased under this Warrant shall be and are deemed to be issued to the Holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered, properly endorsed, together with the completed, executed Form of Subscription delivered and payment made for such shares. Certificates for the shares of Warrant Shares so purchased, together with any other securities or property to which the Holder hereof is entitled upon such exercise, shall be delivered to the Holder hereof by the Company at the Company's expense within a reasonable time after the rights represented by this Warrant have been so exercised. In case of a purchase of less than all the shares which may be purchased under this Warrant, the Company shall cancel this Warrant and execute and deliver a new Warrant or Warrants of like tenor for the balance of the shares purchasable under the Warrant surrendered upon such purchase to the Holder hereof within a reasonable time. Each stock certificate so delivered shall be in such denominations of Warrant Shares as may be requested by the Holder hereof and shall be registered in the name of such Holder. 1.2 NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, following the Company's initial public offering of the Common Stock, in lieu of exercising this Warrant for cash, the Holder may elect to receive shares of Common Stock equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company, properly endorsed with the Form of Subscription attached hereto duly filled in and signed, in which event the Company shall issue to the Holder that number of shares of Common Stock computed using the following formula: WS = WCS (FMV-PSP) ------------- FMV WHERE: WS equals the number of Warrant Shares to be issued to the Holder WCS equals the number of shares of Common Stock purchasable under this Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation) FMV equals the last closing price of one share of Common Stock immediately prior to the date of exercise PSP equals the Per Share Price (as adjusted to the date of such calculation) of this Warrant 1.3 ORGANIC CHANGE DEFINED. "Organic Change" is any recapitalization, reclassification or reorganization of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets or other transaction shall be effected in such a way that holders of Warrant Shares shall be entitled to receive stock, securities, or other assets or property (an "Organic Change"). 2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company covenants and agrees that all shares of Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, -2- 3 upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any shareholder and free of all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that, during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of authorized but unissued Warrant Shares, or other securities and property, when and as required to provide for the exercise of the rights represented by this Warrant. 3. ADJUSTMENT OF PER SHARE PRICE AND NUMBER OF SHARES. The Per Share Price and the number of shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of certain events described in this Section 3. 3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall at any time subdivide its outstanding shares of Warrant Shares into a greater number of shares, the Per Share Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Warrant Shares of the Company shall be combined into a smaller number of shares, the Per Share Price in effect immediately prior to such combination shall be proportionately increased. 3.2 DIVIDENDS IN WARRANT SHARES, OTHER STOCK, PROPERTY, RECLASSIFICATION. If at any time or from time to time the Holders of Warrant Shares (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received or become entitled to receive, without payment therefor, (a) Warrant Shares or any shares of stock or other securities which are at any time directly or indirectly convertible into or exchangeable for Warrant Shares, or any rights or options to subscribe for, purchase or otherwise acquire any of the foregoing by way of dividend or other distribution, (b) Any cash paid or payable otherwise than as a cash dividend, or (c) Warrant Shares or additional stock or other securities or property (including cash) by way of spinoff, split-up, reclassification, combination of shares or similar corporate rearrangement, (other than shares of Warrant Shares issued as a stock split or adjustments in respect of which shall be covered by the terms of Section 3.1 above), then and in each such case, the Holder hereof shall, upon the exercise of this Warrant, be entitled to receive, in addition to the number of shares of Warrant Shares receivable thereupon, and without payment of any additional consideration therefor, the amount of stock and other securities and property (including cash in the cases referred to in clause (b) above and this clause (c)) which such Holder would hold on the date of such exercise had he been the holder of record of such Warrant Shares as of the date on which holders of Warrant Shares received or became entitled to receive such shares or all other additional stock and other securities and property. 3.3 NO IMPAIRMENT. Except and to the extent as waived or consented to by the Holder, the Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may be necessary or appropriate in order to protect the exercise rights of the Holder against impairment. 3.4 NOTICES OF CHANGE. (a) Immediately upon any adjustment in the number or class of shares subject to this Warrant and of the Per Share Price, the Company shall give written notice thereof to the Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. -3- 4 (b) The Company shall give written notice to the Holder at least ten (10) business days prior to the date on which the Company closes its books or takes a record for determining rights to receive any dividends or distributions. (c) The Company shall give written notice to the Holder at least thirty (30) business days prior to the date on which an Organic Change or an Qualified Public Offering shall take place. 4. ISSUE TAX. The issuance of certificates for shares of Warrant Shares upon the exercise of the Warrant shall be made without charge to the Holder of the Warrant for any issue tax (other than any applicable income taxes) in respect thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the then Holder of the Warrant being exercised. 5. CLOSING OF BOOKS. The Company will at no time close its transfer books against the transfer of any warrant or of any shares of Warrant Shares issued or issuable upon the exercise of any warrant in any manner which interferes with the timely exercise of this Warrant. 6. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive notice as a shareholder of the Company or any other matters or any rights whatsoever as a shareholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised. No provisions hereof, in the absence of affirmative action by the holder to purchase shares of Warrant Shares, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such Holder for the Per Share Price or as a shareholder of the Company, whether such liability is asserted by the Company or by its creditors. 7. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and obligations of the Company, of the holder of this Warrant and of the holder of shares of Warrant Shares issued upon exercise of this Warrant, shall survive the exercise of this Warrant. 8. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 9. NOTICES. 9.1 The Company shall notify the Holder of a Qualified Public Offering or an Organic Change at least fifteen (15) days prior to the occurrence of such an event. 9.2 Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered or shall be sent by certified mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant or such other address as either may from time to time provide to the other. 10. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. All of the obligations of the Company relating to the Warrant Shares issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant. This Warrant may not be assigned without the prior written consent of the Company. -4- 5 11. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. 12. LOST WARRANTS. The Company represents and warrants to the Holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant, the Company, at its expense, will make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. 13. FRACTIONAL SHARES. No fractional shares shall be issued upon exercise of this Warrant. The Company shall, in lieu of issuing any fractional share, pay the holder entitled to such fraction a sum in cash equal to such fraction multiplied by the then effective Per Share Price. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its officers, thereunto duly authorized this 27 day of December, 2000. BAM! ENTERTAINMENT, INC., a Delaware corporation By: /s/ RAYMOND C. MUSCI ----------------------------------- Raymond C. Musci, President -5- 6 EXHIBIT A SUBSCRIPTION FORM Date: _________________, 200_ BAM! Entertainment, Inc. 333 W. Santa Clara Blvd., San Jose, CA 95113 Attn: President Ladies and Gentlemen: The undersigned hereby elects to exercise the warrant issued to it by BAM! Entertainment, Inc. (the "Company") and dated December ___, 2000 Warrant No. ___ (the "Warrant") and to purchase thereunder __________________________________ shares of the Warrant Shares of the Company (the "Shares") at a purchase price of ___________________________________________ Dollars ($__________) per Share or an aggregate purchase price of __________________________________ Dollars ($__________) (the "Purchase Price"). Pursuant to the terms of the Warrant the undersigned has delivered the Purchase Price herewith in full in cash or by certified check or wire transfer. Very truly yours, ________________________________________ By: ____________________________________ Title: _________________________________ i EX-4.6 8 v72115orex4-6.txt EXHIBIT 4.6 1 Exhibit 4.6 THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. BAY AREA MULTIMEDIA, INC. CONVERTIBLE PROMISSORY NOTE $ 500,000 November 24, 1999 For value received, Bay Area Multimedia, Inc., a California corporation (the "Company"), with principal offices at 20760 Monte Sunset Drive, San Jose, California 95120 hereby promises to pay to Raymond C. Musci the sum of Five Hundred Thousand Dollars ($500,000) plus simple interest accrued on unpaid principal at a rate equal to 7% per annum compounded annually from the date of this Note until the principal amount hereof and all interest accrued thereon is paid as provided in Section 3 hereof or is converted, as provided in Section 2 hereof. 1. Definitions. The following definitions shall apply for all purposes of this Note: 1.1"Company" means the "Company" as defined above and includes any corporation that succeeds to, or assumes, the obligations of the Company under this Note. 1.2 "Conversion Price" means the lowest per share selling price of shares of Series A Preferred Stock. 1.3 "Conversion Stock" means the Company's Series A Preferred Stock. 1.4 "Holder" means any person who shall at the time be the registered holder of this Note. 1.5 "Note" means this Convertible Promissory Note. 2. Conversion. 2.1 Upon the first closing of the sale of shares of Series A Preferred Stock, all principal on this Note shall automatically convert into shares of Conversion Stock at the 1 2 Conversion Price, without the need for any further action on the part of the Holder and interest on this Note shall cease; provided, however, that the Holder shall not be entitled to receive the stock certificate representing the shares of Conversion Stock to be issued upon conversion of this Note until the original of this Note is surrendered to the Company. Interest accrued, if any, as of the date of the conversion, shall be payable in cash. 2.2 As soon as practicable after conversion of this Note, the Company at its expense will cause to be issued in the name of and delivered to the Holder, a certificate or certificates for the number of shares of Conversion Stock to which the Holder shall be entitled upon such conversion (bearing such legends as may be required by applicable state and federal securities laws in the opinion of legal counsel of the Company, by the Company's Articles of Incorporation or Bylaws, or by any agreement between the Company and the Holder), together with any other securities and property to which the Holder is entitled upon such conversion under the terms of this Note. No fractional shares will be issued upon conversion of this Note. If upon any conversion of this Note a fraction of a share would otherwise result, then in lieu of such fractional share the Company will pay the cash value of that fractional share, calculated on the basis of the applicable Conversion Price. 3. Payment. The Company may at any time, without premium or penalty, upon at least five days' advance written notice to the Holder, prepay in whole or in part the unpaid principal of this Note, plus any unpaid accrued interest hereunder. All payments will first be applied to the repayment of accrued interest until all then outstanding accrued interest has been paid, and then shall be applied to the repayment of principal. Unless this Note shall have been previously paid in full or converted pursuant to Section 2 hereof, the principal amount of this Note then outstanding, and the interest accrued and unpaid hereunder, shall be due and payable in full on demand by notice duly given in accordance with Section 6.6 of this Note made at any time after the first anniversary of the execution of the Note, which payment shall be delivered to the address of the registered holder of this Note on the books of the Company in lawful money of the United States. 4. No Rights or Liabilities as Shareholder. This Note does not by itself entitle the Holder to any voting rights or other rights as a shareholder of the Company. In the absence of conversion of this Note, no provisions of this Note, and no enumeration herein of the rights or privileges of the Holder, shall cause the Holder to be a stockholder of the Company for any purpose. 5. No Impairment. The Company will not, by amendment of its Articles of Incorporation or Bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, willfully avoid or seek to avoid the observance or performance of any of the terms of this Note, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder under this Note against wrongful impairment. 2 3 6. General Provisions. 6.1 Waivers. The Company and all endorsers of this Note hereby waive notice, presentment, protest and notice of dishonor. 6.2 Attorneys' Fees. In the event any party is required to engage the services of any attorneys for the purpose of enforcing this Note, or any provision thereof, the prevailing party shall be entitled to recover its reasonable expenses and costs in enforcing this Note, including attorneys' fees. 6.3 Transfer. Subject to Section 5.3 of the Purchase Agreement, neither this Note nor any rights hereunder may be assigned, conveyed or transferred, in whole or in part, without the Company's prior written consent; provided, however, that this Note may be assigned, conveyed or transferred without the prior written consent of the Company to any person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Holder, who is not a competitor of the Company and who is an "accredited investor" under Rule 503 of Regulation D promulgated under the Securities Act of 1933, as amended. The rights and obligations of the Company and the Holder under this Note and the Purchase Agreement shall be binding upon and benefit their respective permitted successors, assigns, heirs, administrators and transferees. 6.4 Governing Law. This Note shall be governed by and construed under the internal laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California, without reference to principles of conflict of laws or choice of laws. 6.5 Headings. The headings and captions used in this Note are used for convenience only and are not to be considered in construing or interpreting this Note. All references in this Note to sections and exhibits shall, unless otherwise provided, refer to sections hereof and exhibits attached hereto, all of which exhibits are incorporated herein by this reference. 6.6 Notices. Unless otherwise provided, any notice required or permitted under this Note shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the local postal service, by registered or certified mail, postage prepaid and addressed to the Holder at the last address furnished to the Company by the Holder in writing or, in the case of the Company, at the principal offices of the Company, or at such other address as any party or the Company may designate by giving ten days' advance written notice to all other parties. 6.7 Amendments and Waivers. Any term of this Note may be amended, and the observance of any term of this Note may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Holder. Any amendment or waiver effected in accordance with this Section shall be binding 3 4 upon the Holder and the Company. 6.8 Severability. If one or more provisions of this Note are held to be unenforceable under applicable law, such provision(s) shall be excluded from this Note and the balance of the Note shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS NOTE HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS NOTE ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. [Signature page follows] 4 5 IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name as of the date first above written. COMPANY: Bay Area Multimedia, Inc. By: /s/ RAYMOND C. MUSCI Raymond C. Musci, President AGREED AND ACKNOWLEDGED: HOLDER: /s/ RAYMOND C. MUSCI - ------------------------------ Raymond C. Musci 5 EX-4.7 9 v72115orex4-7.txt EXHIBIT 4.7 1 Exhibit 4.7 THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. BAY AREA MULTIMEDIA, INC. CONVERTIBLE PROMISSORY NOTE $ 500,000 January 7, 2000 For value received, Bay Area Multimedia, Inc., a California corporation (the "Company"), with principal offices at 333 West Santa Clara Boulevard, Suite 930, San Jose, California 95113 hereby promises to pay to Raymond C. Musci the sum of Five Hundred Thousand Dollars ($500,000) plus simple interest accrued on unpaid principal at a rate equal to 7% per annum compounded annually from the date of this Note until the principal amount hereof and all interest accrued thereon is paid as provided in Section 3 hereof or is converted, as provided in Section 2 hereof. 1. Definitions. The following definitions shall apply for all purposes of this Note: 1.1 "Company" means the "Company" as defined above and includes any corporation that succeeds to, or assumes, the obligations of the Company under this Note. 1.2 "Conversion Price" means the lowest per share selling price of shares of Series A Preferred Stock. 1.3 "Conversion Stock" means the Company's Series A Preferred Stock. 1.4 "Holder" means any person who shall at the time be the registered holder of this Note. 1.5 "Note" means this Convertible Promissory Note. 2. Conversion. 2.1 Upon the first closing of the sale of shares of Series A Preferred Stock, all principal on this Note shall automatically convert into shares of Conversion Stock at the 1 2 Conversion Price, without the need for any further action on the part of the Holder and interest on this Note shall cease; provided, however, that the Holder shall not be entitled to receive the stock certificate representing the shares of Conversion Stock to be issued upon conversion of this Note until the original of this Note is surrendered to the Company. Interest accrued, if any, as of the date of the conversion, shall be payable in cash. 2.2 As soon as practicable after conversion of this Note, the Company at its expense will cause to be issued in the name of and delivered to the Holder, a certificate or certificates for the number of shares of Conversion Stock to which the Holder shall be entitled upon such conversion (bearing such legends as may be required by applicable state and federal securities laws in the opinion of legal counsel of the Company, by the Company's Articles of Incorporation or Bylaws, or by any agreement between the Company and the Holder), together with any other securities and property to which the Holder is entitled upon such conversion under the terms of this Note. No fractional shares will be issued upon conversion of this Note. If upon any conversion of this Note a fraction of a share would otherwise result, then in lieu of such fractional share the Company will pay the cash value of that fractional share, calculated on the basis of the applicable Conversion Price. 3. Payment. The Company may at any time, without premium or penalty, upon at least five days' advance written notice to the Holder, prepay in whole or in part the unpaid principal of this Note, plus any unpaid accrued interest hereunder. All payments will first be applied to the repayment of accrued interest until all then outstanding accrued interest has been paid, and then shall be applied to the repayment of principal. Unless this Note shall have been previously paid in full or converted pursuant to Section 2 hereof, the principal amount of this Note then outstanding, and the interest accrued and unpaid hereunder, shall be due and payable in full on demand by notice duly given in accordance with Section 6.6 of this Note made at any time after the first anniversary of the execution of the Note, which payment shall be delivered to the address of the registered holder of this Note on the books of the Company in lawful money of the United States. No Rights or Liabilities as Shareholder. This Note does not by itself entitle the Holder to any voting rights or other rights as a shareholder of the Company. In the absence of conversion of this Note, no provisions of this Note, and no enumeration herein of the rights or privileges of the Holder, shall cause the Holder to be a stockholder of the Company for any purpose. 4. No Impairment. The Company will not, by amendment of its Articles of Incorporation or Bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, willfully avoid or seek to avoid the observance or performance of any of the terms of this Note, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder under this Note against wrongful impairment. 2 3 5. General Provisions. 5.1 Waivers. The Company and all endorsers of this Note hereby waive notice, presentment, protest and notice of dishonor. 5.2 Attorneys' Fees. In the event any party is required to engage the services of any attorneys for the purpose of enforcing this Note, or any provision thereof, the prevailing party shall be entitled to recover its reasonable expenses and costs in enforcing this Note, including attorneys' fees. 5.3 Transfer. Subject to Section 5.3 of the Purchase Agreement, neither this Note nor any rights hereunder may be assigned, conveyed or transferred, in whole or in part, without the Company's prior written consent; provided, however, that this Note may be assigned, conveyed or transferred without the prior written consent of the Company to any person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Holder, who is not a competitor of the Company and who is an "accredited investor" under Rule 503 of Regulation D promulgated under the Securities Act of 1933, as amended. The rights and obligations of the Company and the Holder under this Note and the Purchase Agreement shall be binding upon and benefit their respective permitted successors, assigns, heirs, administrators and transferees. 5.4 Governing Law. This Note shall be governed by and construed under the internal laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California, without reference to principles of conflict of laws or choice of laws. 5.5 Headings. The headings and captions used in this Note are used for convenience only and are not to be considered in construing or interpreting this Note. All references in this Note to sections and exhibits shall, unless otherwise provided, refer to sections hereof and exhibits attached hereto, all of which exhibits are incorporated herein by this reference. 5.6 Notices. Unless otherwise provided, any notice required or permitted under this Note shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the local postal service, by registered or certified mail, postage prepaid and addressed to the Holder at the last address furnished to the Company by the Holder in writing or, in the case of the Company, at the principal offices of the Company, or at such other address as any party or the Company may designate by giving ten days' advance written notice to all other parties. 5.7 Amendments and Waivers. Any term of this Note may be amended, and the observance of any term of this Note may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Holder. Any amendment or waiver effected in accordance with this Section shall be 3 4 binding upon the Holder and the Company. 5.8 Severability. If one or more provisions of this Note are held to be unenforceable under applicable law, such provision(s) shall be excluded from this Note and the balance of the Note shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS NOTE HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS NOTE ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. [Signature page follows] 4 5 IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name as of the date first above written. COMPANY: Bay Area Multimedia, Inc. By: /s/ RAYMOND C. MUSCI Raymond C. Musci, President AGREED AND ACKNOWLEDGED: HOLDER: /s/ RAYMOND C. MUSCI - ------------------------------ Raymond C. Musci 5 EX-4.8 10 v72115orex4-8.txt EXHIBIT 4.8 1 Exhibit 4.8 THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. BAY AREA MULTIMEDIA, INC. CONVERTIBLE PROMISSORY NOTE $ 47,296.25 May 25, 2000 For value received, Bay Area Multimedia, Inc., a California corporation (the "Company"), with principal offices at 333 West Santa Clara Boulevard, Suite 930, San Jose, California 95113 hereby promises to pay to Raymond C. Musci the sum of Forty-Seven Thousand Two Hundred Ninety-Six and 25/100 ($47,296.25) plus simple interest accrued on unpaid principal at a rate equal to 7% per annum compounded annually from the date of this Note until the principal amount hereof and all interest accrued thereon is paid as provided in Section 3 hereof or is converted, as provided in Section 2 hereof. 1. Definitions. The following definitions shall apply for all purposes of this Note: 1.1 "Company" means the "Company" as defined above and includes any corporation that succeeds to, or assumes, the obligations of the Company under this Note. 1.2 "Conversion Price" means the lowest per share selling price of shares of Series A Preferred Stock. 1.3 "Conversion Stock" means the Company's Series A Preferred Stock. 1.4 "Holder" means any person who shall at the time be the registered holder of this Note. 1.5 "Note" means this Convertible Promissory Note. 2. Conversion. 2.1 Upon the first closing of the sale of shares of Series A Preferred Stock, all principal on this Note shall automatically convert into shares of Conversion Stock at the Conversion Price, without the need for any further action on the part of the Holder and interest 1 2 on this Note shall cease; provided, however, that the Holder shall not be entitled to receive the stock certificate representing the shares of Conversion Stock to be issued upon conversion of this Note until the original of this Note is surrendered to the Company. Interest accrued, if any, as of the date of the conversion, shall be payable in cash. 2.2 As soon as practicable after conversion of this Note, the Company at its expense will cause to be issued in the name of and delivered to the Holder, a certificate or certificates for the number of shares of Conversion Stock to which the Holder shall be entitled upon such conversion (bearing such legends as may be required by applicable state and federal securities laws in the opinion of legal counsel of the Company, by the Company's Articles of Incorporation or Bylaws, or by any agreement between the Company and the Holder), together with any other securities and property to which the Holder is entitled upon such conversion under the terms of this Note. No fractional shares will be issued upon conversion of this Note. If upon any conversion of this Note a fraction of a share would otherwise result, then in lieu of such fractional share the Company will pay the cash value of that fractional share, calculated on the basis of the applicable Conversion Price. 3. Payment. The Company may at any time, without premium or penalty, upon at least five days' advance written notice to the Holder, prepay in whole or in part the unpaid principal of this Note, plus any unpaid accrued interest hereunder. All payments will first be applied to the repayment of accrued interest until all then outstanding accrued interest has been paid, and then shall be applied to the repayment of principal. Unless this Note shall have been previously paid in full or converted pursuant to Section 2 hereof, the principal amount of this Note then outstanding, and the interest accrued and unpaid hereunder, shall be due and payable in full on demand by notice duly given in accordance with Section 6.6 of this Note made at any time after the first anniversary of the execution of the Note, which payment shall be delivered to the address of the registered holder of this Note on the books of the Company in lawful money of the United States. 4. No Rights or Liabilities as Shareholder. This Note does not by itself entitle the Holder to any voting rights or other rights as a shareholder of the Company. In the absence of conversion of this Note, no provisions of this Note, and no enumeration herein of the rights or privileges of the Holder, shall cause the Holder to be a stockholder of the Company for any purpose. 5. No Impairment. The Company will not, by amendment of its Articles of Incorporation or Bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, willfully avoid or seek to avoid the observance or performance of any of the terms of this Note, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder under this Note against wrongful impairment. 2 3 6. General Provisions. 6.1 Waivers. The Company and all endorsers of this Note hereby waive notice, presentment, protest and notice of dishonor. 6.2 Attorneys' Fees. In the event any party is required to engage the services of any attorneys for the purpose of enforcing this Note, or any provision thereof, the prevailing party shall be entitled to recover its reasonable expenses and costs in enforcing this Note, including attorneys' fees. 6.3 Transfer. Subject to Section 5.3 of the Purchase Agreement, neither this Note nor any rights hereunder may be assigned, conveyed or transferred, in whole or in part, without the Company's prior written consent; provided, however, that this Note may be assigned, conveyed or transferred without the prior written consent of the Company to any person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Holder, who is not a competitor of the Company and who is an "accredited investor" under Rule 503 of Regulation D promulgated under the Securities Act of 1933, as amended. The rights and obligations of the Company and the Holder under this Note and the Purchase Agreement shall be binding upon and benefit their respective permitted successors, assigns, heirs, administrators and transferees. 6.4 Governing Law. This Note shall be governed by and construed under the internal laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California, without reference to principles of conflict of laws or choice of laws. 6.5 Headings. The headings and captions used in this Note are used for convenience only and are not to be considered in construing or interpreting this Note. All references in this Note to sections and exhibits shall, unless otherwise provided, refer to sections hereof and exhibits attached hereto, all of which exhibits are incorporated herein by this reference. 6.6 Notices. Unless otherwise provided, any notice required or permitted under this Note shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the local postal service, by registered or certified mail, postage prepaid and addressed to the Holder at the last address furnished to the Company by the Holder in writing or, in the case of the Company, at the principal offices of the Company, or at such other address as any party or the Company may designate by giving ten days' advance written notice to all other parties. 6.7 Amendments and Waivers. Any term of this Note may be amended, and the observance of any term of this Note may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Holder. Any amendment or waiver effected in accordance with this Section shall be binding upon the Holder and the Company. 3 4 6.8 Severability. If one or more provisions of this Note are held to be unenforceable under applicable law, such provision(s) shall be excluded from this Note and the balance of the Note shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS NOTE HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS NOTE ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. [Signature page follows] 4 5 IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name as of the date first above written. COMPANY: Bay Area Multimedia, Inc. By: /s/ RAYMOND C. MUSCI Raymond C. Musci, President AGREED AND ACKNOWLEDGED: HOLDER: /s/ RAYMOND C. MUSCI - ------------------------------ Raymond C. Musci 5 EX-10.1 11 v72115orex10-1.txt EXHIBIT 10.1 1 EXHIBIT 10.1 BAY AREA MULTIMEDIA, INC. 2000 STOCK INCENTIVE PLAN 1. Purposes of the Plan. The purposes of this Stock Incentive Plan are to attract and retain the best available personnel, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of the Committees appointed to administer the Plan. (b) "Applicable Laws" means the legal requirements relating to the administration of stock incentive plans, if any, under applicable provisions of federal and state securities laws, the corporate laws of California and, to the extent other than California, the corporate law of the state of the Company's incorporation, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to Awards granted to residents therein. (c) "Award" means the grant of an Option, Restricted Stock, or other right or benefit under the Plan. (d) "Award Agreement" means the written agreement evidencing the grant of an Award executed by the Company and the Grantee, including any amendments thereto. (e) "Board" means the Board of Directors of the Company. (f) "Cause" means the definition of such term specified in the Award Agreement. If no such definition is included in the Award Agreement, then "Cause" shall mean, with respect to the termination by the Company or a Related Entity of the Grantee's Continuous Service, that such termination is for "Cause" as such term is expressly defined in the then-effective written agreement between the Grantee and the Company or such Related Entity, or in the absence of such then-effective written agreement or definition, that such termination is based on, in the determination of the Administrator, the Grantee's: (i) refusal or failure to act in accordance with any specific, lawful direction or order of the Company or a Related Entity; (ii) performance of any act or failure to perform any act in bad faith and to the material detriment of the Company or a Related Entity; (iii) dishonesty, intentional misconduct or material breach of any agreement with the Company or a Related Entity; or (iv) commission of embezzlement, misappropriation of trade secrets or any felony involving dishonesty, breach of trust, or physical or emotional harm to any person. At least 14 calendar days prior to the termination of the Grantee's Continuous Service pursuant to (i) above, the Company shall provide the Grantee with notice of the Company's or such Related Entity's intent to terminate, the reason therefor, and an opportunity for the Grantee to cure such defects in his or her service to the Company's or such Related Entity's satisfaction. During this 14 day (or longer) period, no Award issued to the Grantee under the Plan may be exercised or purchased. (g) "Code" means the Internal Revenue Code of 1986, as amended. 1 2 (h) "Committee" means any committee appointed by the Board to administer the Plan. (i) "Common Stock" means the common stock of the Company. (j) "Company" means Bay Area Multimedia, Inc., a California corporation. (k) "Consultant" means any person (other than an Employee or a Director, solely with respect to rendering services in such person's capacity as a Director) who is engaged by the Company or any Related Entity to render consulting or advisory services to the Company or such Related Entity. (l) "Continuous Service" means that the provision of services to the Company or a Related Entity in any capacity of Employee, Director or Consultant, is not interrupted or terminated. Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Related Entity, or any successor, in any capacity of Employee, Director or Consultant, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of Employee, Director or Consultant (except as otherwise provided in the Award Agreement). An approved leave of absence shall include sick leave, military leave, or any other authorized personal leave. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. (m) "Corporate Transaction" means any of the following transactions to which the Company is a party: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company's subsidiary corporations) in connection with the complete liquidation or dissolution of the Company; (iii) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or (iv) acquisition by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities, but excluding any such transaction that the Administrator determines shall not be a Corporate Transaction. (n) "Director" means a member of the Board or the board of directors of any Related Entity. 2 3 (o) "Disability" means that a Grantee would qualify for benefit payments under the long-term disability policy of the Company or the Related Entity to which the Grantee provides services regardless of whether the Grantee is covered by such policy; provided that if no such long-term disability policy exists, Disability shall mean that a Grantee is permanently unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determinable physical or mental impairment. A Grantee will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Administrator in its discretion. (p) "Employee" means any person, including an Officer or Director, who is an employee of the Company or any Related Entity. The payment of a director's fee by the Company or a Related Entity shall not be sufficient to constitute "employment" by the Company. (q) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (r) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) Where there exists a public market for the Common Stock, the Fair Market Value shall be (A) the closing price for a Share for the last market trading day prior to the time of the determination (or, if no closing price was reported on that date, on the last trading date on which a closing price was reported) on the stock exchange determined by the Administrator to be the primary market for the Common Stock or the Nasdaq National Market, whichever is applicable or (B) if the Common Stock is not traded on any such exchange or national market system, the average of the closing bid and asked prices of a Share on the Nasdaq Small Cap Market for the day prior to the time of the determination (or, if no such prices were reported on that date, on the last date on which such prices were reported), in each case, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (ii) In the absence of an established market for the Common Stock of the type described in (i), above, the Fair Market Value thereof shall be determined by the Administrator in good faith and in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations. (s) "Grantee" means an Employee, Director or Consultant who receives an Award under the Plan. (t) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (u) "Non-Qualified Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (v) "Officer" means a person who is an officer of the Company or a Related Entity within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. 3 4 (w) "Option" means an option to purchase Shares pursuant to an Award Agreement granted under the Plan. (x) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (y) "Plan" means this 2000 Stock Incentive Plan. (z) "Post-Termination Exercise Period" means the period specified in the Award Agreement of not less than thirty (30) days commencing on the date of termination of the Grantee's Continuous Service, or such longer period as may be applicable upon death or Disability. (aa) "Registration Date" means the first to occur of (i) the closing of the first sale to the general public of (A) the Common Stock or (B) the same class of securities of a successor corporation (or its Parent) issued pursuant to a Corporate Transaction in exchange for or in substitution of the Common Stock, pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended; and (ii) in the event of a Corporate Transaction, the date of the consummation of the Corporate Transaction if the same class of securities of the successor corporation (or its Parent) issuable in such Corporate Transaction shall have been sold to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended, on or prior to the date of consummation of such Corporate Transaction. (bb) "Related Entity" means any Parent, Subsidiary and any business, corporation, partnership, limited liability company or other entity in which the Company, a Parent or a Subsidiary holds a substantial ownership interest, directly or indirectly. (cc) "Restricted Stock" means Shares issued under the Plan to the Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions, and other terms and conditions as established by the Administrator. (dd) "Share" means a share of the Common Stock. (ee) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. (a) Subject to the provisions of Section 11(a) below, the maximum aggregate number of Shares which may be issued pursuant to all Awards (including Incentive Stock Options) is 150,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. (b) Any Shares covered by an Award (or portion of an Award) which is forfeited or canceled, expires or is settled in cash, shall be deemed not to have been issued for 4 5 purposes of determining the maximum aggregate number of Shares which may be issued under the Plan. Shares that actually have been issued under the Plan pursuant to an Award shall not be returned to the Plan and shall not become available for future issuance under the Plan, except that if unvested Shares are forfeited, or repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Plan Administrator. With respect to grants of Awards to Employees, Directors, or Consultants, the Plan shall be administered by (A) the Board or (B) a Committee (or a subcommittee of the Committee) designated by the Board, which Committee shall be constituted in such a manner as to satisfy Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. (b) Powers of the Administrator. Subject to Applicable Laws and the provisions of the Plan (including any other powers given to the Administrator hereunder), and except as otherwise provided by the Board, the Administrator shall have the authority, in its discretion: (i) to select the Employees, Directors and Consultants to whom Awards may be granted from time to time hereunder; (ii) to determine whether and to what extent Awards are granted hereunder; (iii) to determine the number of Shares or the amount of other consideration to be covered by each Award granted hereunder; (iv) to approve forms of Award Agreements for use under the Plan; (v) to determine the terms and conditions of any Award granted hereunder; (vi) to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions and to afford Grantees favorable treatment under such rules or laws; provided, however, that no Award shall be granted under any such additional terms, conditions, rules or procedures with terms or conditions which are inconsistent with the provisions of the Plan; (vii) to amend the terms of any outstanding Award granted under the Plan, provided that any amendment that would adversely affect the Grantee's rights under an outstanding Award shall not be made without the Grantee's written consent; (viii) to construe and interpret the terms of the Plan and Awards, including without limitation, any notice of award or Award Agreement, granted pursuant to the Plan; and 5 6 (ix) to take such other action, not inconsistent with the terms of the Plan, as the Administrator deems appropriate. 5. Eligibility. Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. Incentive Stock Options may be granted only to Employees of the Company, a Parent or a Subsidiary. An Employee, Director or Consultant who has been granted an Award may, if otherwise eligible, be granted additional Awards. Awards may be granted to such Employees, Directors or Consultants who are residing in foreign jurisdictions as the Administrator may determine from time to time. 6. Terms and Conditions of Awards. (a) Type of Awards. The Administrator is authorized under the Plan to award any type of arrangement to an Employee, Director or Consultant that is not inconsistent with the provisions of the Plan and that by its terms involves or might involve the issuance of (i) Shares, (ii) an Option or similar right with a fixed or variable price related to the Fair Market Value of the Shares and with an exercise or conversion privilege related to the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or (iii) any other security with the value derived from the value of the Shares. Such awards include, without limitation, Options or sales or bonuses of Restricted Stock, and an Award may consist of one such security or benefit, or two (2) or more of them in any combination or alternative. (b) Designation of Award. Each Award shall be designated in the Award Agreement. In the case of an Option, the Option shall be designated as either an Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options, to the extent of the Shares covered thereby in excess of the foregoing limitation, shall be treated as Non-Qualified Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the grant date of the relevant Option. (c) Conditions of Award. Subject to the terms of the Plan, the Administrator shall determine the provisions, terms, and conditions of each Award including, but not limited to, the Award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, Shares, or other consideration) upon settlement of the Award, payment contingencies, and satisfaction of any performance criteria. The performance criteria established by the Administrator may be based on any one of, or combination of, increase in share price, earnings per share, total shareholder return, return on equity, return on assets, return on investment, net operating income, cash flow, revenue, economic value added, personal management objectives, or other measure of performance selected by the Administrator. Partial achievement of the specified criteria may result in a payment or vesting corresponding to the degree of achievement as specified in the Award Agreement. 6 7 (d) Acquisitions and Other Transactions. The Administrator may issue Awards under the Plan in settlement, assumption or substitution for, outstanding awards or obligations to grant future awards in connection with the Company or a Related Entity acquiring another entity, an interest in another entity or an additional interest in a Related Entity whether by merger, stock purchase, asset purchase or other form of transaction. (e) Deferral of Award Payment. The Administrator may establish one or more programs under the Plan to permit selected Grantees the opportunity to elect to defer receipt of consideration upon exercise of an Award, satisfaction of performance criteria, or other event that absent the election would entitle the Grantee to payment or receipt of Shares or other consideration under an Award. The Administrator may establish the election procedures, the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts, Shares or other consideration so deferred, and such other terms, conditions, rules and procedures that the Administrator deems advisable for the administration of any such deferral program. (f) Award Exchange Programs. The Administrator may establish one or more programs under the Plan to permit selected Grantees to exchange an Award under the Plan for one or more other types of Awards under the Plan on such terms and conditions as determined by the Administrator from time to time. (g) Separate Programs. The Administrator may establish one or more separate programs under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Grantees on such terms and conditions as determined by the Administrator from time to time. (h) Early Exercise. The Award Agreement may, but need not, include a provision whereby the Grantee may elect at any time while an Employee, Director or Consultant to exercise any part or all of the Award prior to full vesting of the Award. Any unvested Shares received pursuant to such exercise may be subject to a repurchase right in favor of the Company or a Related Entity or to any other restriction the Administrator determines to be appropriate. (i) Term of Award. The term of each Award shall be the term stated in the Award Agreement, provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. However, in the case of an Incentive Stock Option granted to a Grantee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Award Agreement. (j) Transferability of Awards. Non-Qualified Stock Options shall be transferable (i) to the extent provided in the Award Agreement and in a manner consistent with Section 260.140.41 of Title 10 of the California Code of Regulations and (ii) by will, and by the laws of descent and distribution. Incentive Stock Options and other Awards may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee. 7 8 (k) Time of Granting Awards. The date of grant of an Award shall for all purposes be the date on which the Administrator makes the determination to grant such Award, or such other date as is determined by the Administrator. Notice of the grant determination shall be given to each Employee, Director or Consultant to whom an Award is so granted within a reasonable time after the date of such grant. 7. Award Exercise or Purchase Price, Consideration and Taxes. (a) Exercise or Purchase Price. The exercise or purchase price, if any, for an Award shall be as follows: (i) In the case of an Incentive Stock Option: (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant; or (B) granted to any Employee other than an Employee described in the preceding paragraph, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. (ii) In the case of a Non-Qualified Stock Option: (A) granted to a person who, at the time of the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant; or (B) granted to any person other than a person described in the preceding paragraph, the per Share exercise price shall be not less than eighty-five percent (85%) of the Fair Market Value per Share on the date of grant. (iii) In the case of the sale of Shares: (A) granted to a person who, at the time of the grant of such Award, or at the time the purchase is consummated, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share purchase price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant; or (B) granted to any person other than a person described in the preceding paragraph, the per Share purchase price shall be not less than eighty-five percent (85%) of the Fair Market Value per Share on the date of grant. 8 9 (iv) In the case of other Awards, such price as is determined by the Administrator. (v) Notwithstanding the foregoing provisions of this Section 7(a), in the case of an Award issued pursuant to Section 6(d), above, the exercise or purchase price for the Award shall be determined in accordance with the principles of Section 424(a) of the Code. (b) Consideration. Subject to Applicable Laws, the consideration to be paid for the Shares to be issued upon exercise or purchase of an Award including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). In addition to any other types of consideration the Administrator may determine, the Administrator is authorized to accept as consideration for Shares issued under the Plan the following: (i) cash; (ii) check; (iii) delivery of Grantee's promissory note with such recourse, interest, security, and redemption provisions as the Administrator determines as appropriate; (iv) if the exercise or purchase occurs on or after the Registration Date, surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require (including withholding of Shares otherwise deliverable upon exercise of the Award) which have a Fair Market Value on the date of surrender or attestation equal to the aggregate exercise price of the Shares as to which said Award shall be exercised (but only to the extent that such exercise of the Award would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price unless otherwise determined by the Administrator); (v) with respect to Options, if the exercise occurs on or after the Registration Date, payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (A) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (B) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction; or (vi) any combination of the foregoing methods of payment. (c) Taxes. No Shares shall be delivered under the Plan to any Grantee or other person until such Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of any foreign, federal, state, or local income and employment tax withholding obligations, including, without limitation, obligations incident to the receipt of Shares or the disqualifying disposition of Shares received on exercise of an Incentive Stock Option. Upon exercise of an Award the Company shall withhold or collect from Grantee an amount sufficient to satisfy such tax obligations. 9 10 8. Exercise of Award. (a) Procedure for Exercise; Rights as a Shareholder. (i) Any Award granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator under the terms of the Plan and specified in the Award Agreement but in the case of an Option, in no case at a rate of less than twenty percent (20%) per year over five (5) years from the date the Option is granted, subject to reasonable conditions such as continued employment. Notwithstanding the foregoing, in the case of an Option granted to an Officer, Director or Consultant, the Award Agreement may provide that the Option may become exercisable, subject to reasonable conditions such as such Officer's, Director's or Consultant's Continuous Service, at any time or during any period established in the Award Agreement. (ii) An Award shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Award by the person entitled to exercise the Award and full payment for the Shares with respect to which the Award is exercised, including, to the extent selected, use of the broker-dealer sale and remittance procedure to pay the purchase price as provided in Section 7(b)(v). Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to Shares subject to an Award, notwithstanding the exercise of an Option or other Award. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in the Award Agreement or Section 11(a), below. (b) Exercise of Award Following Termination of Continuous Service. In the event of termination of a Grantee's Continuous Service for any reason other than Disability or death (but not in the event of a Grantee's change of status from Employee to Consultant or from Consultant to Employee), such Grantee may, but only during the Post-Termination Exercise Period (but in no event later than the expiration date of the term of such Award as set forth in the Award Agreement), exercise the Award to the extent that the Grantee was entitled to exercise it at the date of such termination or to such other extent as may be determined by the Administrator. The Grantee's Award Agreement may provide that upon the termination of the Grantee's Continuous Service for Cause, the Grantee's right to exercise the Award shall terminate concurrently with the termination of Grantee's Continuous Service. The Grantee's Award Agreement may specify a definition of Cause applicable to such Award (which may or may not be the same as the definition of Cause in Section 2). In the event of a Grantee's change of status from Employee to Consultant, an Employee's Incentive Stock Option shall convert automatically to a Non-Qualified Stock Option on the day three (3) months and one day following such change of status. To the extent that the Grantee is not entitled to exercise the Award at the date of termination, or if the Grantee does not exercise such Award to the extent so entitled within the Post-Termination Exercise Period, the Award shall terminate. (c) Disability of Grantee. In the event of termination of a Grantee's Continuous Service as a result of his or her Disability, Grantee may, but only within twelve (12) months from the date of such termination (and in no event later than the expiration date of the 10 11 term of such Award as set forth in the Award Agreement), exercise the Award to the extent that the Grantee was otherwise entitled to exercise it at the date of such termination; provided, however, that if such Disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically convert to a Non-Qualified Stock Option on the day three (3) months and one day following such termination. To the extent that the Grantee is not entitled to exercise the Award at the date of termination, or if Grantee does not exercise such Award to the extent so entitled within the time specified herein, the Award shall terminate. (d) Death of Grantee. In the event of a termination of the Grantee's Continuous Service as a result of his or her death, or in the event of the death of the Grantee during the Post-Termination Exercise Period or during the twelve (12) month period following the Grantee's Termination of Continuous Service as a result of his or her Disability, the Grantee's estate or a person who acquired the right to exercise the Award by bequest or inheritance may exercise the Award, but only to the extent that the Grantee was entitled to exercise the Award as of the date of termination, within twelve (12) months from the date of death (but in no event later than the expiration of the term of such Award as set forth in the Award Agreement). To the extent that, at the time of death, the Grantee was not entitled to exercise the Award, or if the Grantee's estate or a person who acquired the right to exercise the Award by bequest or inheritance does not exercise such Award to the extent so entitled within the time specified herein, the Award shall terminate. 9. Conditions Upon Issuance of Shares. (a) Shares shall not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares pursuant thereto shall comply with all Applicable Laws, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any Applicable Laws. 10. Repurchase Rights. The Award Agreement may grant to the Company the right to repurchase Shares upon termination of the Grantee's Continuous Service. In which case, the Award Agreement shall (or may, with respect to Awards granted or issued to Officers, Directors or Consultants) provide that: (a) the right to repurchase must be exercised, if at all, within ninety (90) days of the termination of the Grantee's Continuous Service (or in the case of Shares issued upon exercise of Awards after the date of termination of the Grantee's Continuous Service, within ninety (90) days after the date of the Award exercise); 11 12 (b) the consideration payable for the Shares upon exercise of such repurchase right shall be made by check or by cancellation of purchase money indebtedness within the ninety (90) day periods specified in Section 10(a); (c) the amount of such consideration shall (i) be equal to the lesser of the Fair Market Value of each Share on the date of repurchase and the original purchase price paid by Grantee for each such Share; provided, that the right to repurchase such Shares at the original purchase price shall lapse at the rate of at least twenty percent (20%) of the Shares subject to the Award per year over five (5) years from the date the Award is granted (without respect to the date the Award was exercised or became exercisable), and (ii) with respect to Shares, other than Shares subject to repurchase at the original purchase price pursuant to clause (i) above, not less than the Fair Market Value of the Shares to be repurchased on the date of repurchase; and (d) the right to repurchase Shares, other than the right to repurchase Shares at the original purchase price pursuant to clause (i) of Section 10(c), shall terminate on the Registration Date. 11. Adjustments Upon Changes in Capitalization or Corporate Transaction. (a) Adjustments upon Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan, the exercise or purchase price of each such outstanding Award, as well as any other terms that the Administrator determines require adjustment shall be proportionately adjusted for (i) any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Shares, or similar transaction affecting the Shares, (ii) any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company, or (iii) as the Administrator may determine in its discretion, any other transaction with respect to Common Stock to which Section 424(a) of the Code applies or a similar transaction; provided, however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator and its determination shall be final, binding and conclusive. Except as the Administrator determines, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of Shares subject to an Award. (b) Corporate Transaction. (i) Termination of Award if Not Assumed. In the event of a Corporate Transaction, each Award will terminate upon the consummation of the Corporate Transaction, unless the Award is assumed by the successor corporation or Parent thereof in connection with the Corporate Transaction. 12 13 (ii) No Acceleration of Award Upon Corporate Transaction. Except as provided otherwise in an individual Award Agreement, in the event of any Corporate Transaction there will not be any acceleration of vesting or exercisability of any Award. 12. Effective Date and Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company, which dates are listed on Exhibit A. It shall continue in effect for a term of ten (10) years unless sooner terminated. Subject to Section 17, below, and Applicable Laws, Awards may be granted under the Plan upon its becoming effective. 13. Amendment, Suspension or Termination of the Plan. (a) The Board may at any time amend, suspend or terminate the Plan. To the extent necessary to comply with Applicable Laws, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) No Award may be granted during any suspension of the Plan or after termination of the Plan. (c) Any amendment, suspension or termination of the Plan (including termination of the Plan under Section 12, above) shall not affect Awards already granted, and such Awards shall remain in full force and effect as if the Plan had not been amended, suspended or terminated, unless mutually agreed otherwise between the Grantee and the Administrator, which agreement must be in writing and signed by the Grantee and the Company. 14. Reservation of Shares. (a) The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. (b) The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 15. No Effect on Terms of Employment/Consulting Relationship. The Plan shall not confer upon any Grantee any right with respect to the Grantee's Continuous Service, nor shall it interfere in any way with his or her right or the Company's right to terminate the Grantee's Continuous Service at any time, with or without cause, and with or without notice. The Company's ability to terminate the employment of a Grantee (whether such employment is at will or pursuant to an employment agreement) is in no way affected by its determination that the Grantee's Continuous Service has been terminated for Cause or not for Cause for the purposes of this Plan. 16. No Effect on Retirement and Other Benefit Plans. Except as specifically provided in a retirement or other benefit plan of the Company or a Related Entity, Awards shall not be 13 14 deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Related Entity, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation. The Plan is not a "Retirement Plan" or "Welfare Plan" under the Employee Retirement Income Security Act of 1974, as amended. 17. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws. Any Award exercised before shareholder approval is obtained shall be rescinded if shareholder approval is not obtained within the time prescribed, and Shares issued on the exercise of any such Award shall not be counted in determining whether shareholder approval is obtained. 18. Information to Grantees. The Company shall provide to each Grantee, during the period for which such Grantee has one or more Awards outstanding, copies of financial statements at least annually. 14 15 EXHIBIT A PLAN HISTORY 1. July 10, 2000 Board adopts Plan with an initial reserve of 150,000 shares. 2. July 7, 2000 Shareholders approve Plan with an initial reserve of 150,000 shares. 15 EX-10.2 12 v72115orex10-2.txt EXHIBIT 10.2 1 EXHIBIT 10.2 BAY AREA MULTIMEDIA, INC. STOCK PURCHASE AGREEMENT THIS AGREEMENT is made and entered into effective as of October 9, 1999, by and between Bay Area Multimedia, Inc., a California corporation (the "CORPORATION"), and Raymond C. Musci, an individual (the "PURCHASER"). THE PARTIES AGREE AS FOLLOWS: I. Sale of Stock. The CORPORATION hereby agrees to sell to the PURCHASER and the PURCHASER hereby agrees to purchase an aggregate of 633,892 shares of the CORPORATION's Common Stock (the "SHARES"), at the price of $.001 per share (the "PURCHASE PRICE"), for an aggregate purchase price of $633.89 payable by transfer of the assets set forth on EXHIBIT A of the 351 Exchange Agreement by and between CORPORATION and PURCHASER of even date herewith (the "ASSETS"). II. Closing. Upon execution of this AGREEMENT, the PURCHASER shall deliver the ASSETS to the CORPORATION, and the CORPORATION shall deliver a duly issued stock certificate for the SHARES to the PURCHASER. III. Investment Representations; Restrictions on Transfer. The PURCHASER represents and warrants to the CORPORATION that: a. The PURCHASER is aware of the CORPORATION's business affairs and financial condition and has acquired sufficient information about the CORPORATION to reach an informed and knowledgeable decision to acquire the SHARES. The PURCHASER has received all information from the CORPORATION which the PURCHASER has requested and deems relevant to an evaluation of the risks and merits of this investment. The PURCHASER has such knowledge and experience in financial and business matters that the PURCHASER is capable of evaluating the merits and risks of investment in the SHARES. The PURCHASER is purchasing the SHARES for investment for the PURCHASER's own account only and not with a view to, or for resale in connection with, any "distribution" within the meaning of the Securities Act of 1933, as amended (the "SECURITIES ACT"). b. The PURCHASER understands that an investment in the CORPORATION is speculative, that any possible benefits from the investment are uncertain, and that the PURCHASER must bear the economic risks of the investment in the CORPORATION for an indefinite period of time. The PURCHASER is able to bear these economic risks and to hold the SHARES for an indefinite period of time. c. The PURCHASER acknowledges and understands that the SHARES constitute "restricted securities" under the SECURITIES ACT and must be held indefinitely 2 unless they are subsequently registered under the SECURITIES ACT or an exemption from such registration is available. The PURCHASER further acknowledges and understands that the CORPORATION is under no obligation to register the SHARES. The PURCHASER understands that the certificate evidencing the SHARES will be imprinted with a legend which prohibits the transfer of the SHARES unless they are registered or such registration is not required in the opinion of counsel satisfactory to the CORPORATION. d. The PURCHASER is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the SECURITIES ACT, which, in substance, permit limited public resale of "restricted securities" acquired in a non-public offering, subject to the satisfaction of certain conditions. The PURCHASER understands that the CORPORATION may not be satisfying, and is not obligated to satisfy, any requirement of Rule 144 at such time as the PURCHASER might wish to sell any of the SHARES, and, if so, the PURCHASER might be precluded from selling any of the SHARES under Rule 144. e. The PURCHASER is a resident of the state of California. IV. Legend. The share certificate evidencing the SHARES issued hereunder shall be endorsed with the following legend (in addition to any legends required under applicable state securities laws): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. V. General Provisions. 1. Governing Law/Entire Agreement. This AGREEMENT shall be governed by the laws of the State of California. This AGREEMENT represents the entire agreement between the parties with respect to the purchase of Common Stock by the PURCHASER and may only be modified or amended in a writing signed by both parties. 2. Notices. Any notice, demand or request required or permitted to be given by either the CORPORATION or the PURCHASER pursuant to the terms of this AGREEMENT shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this AGREEMENT or such other address as a party may request by notifying the other in writing. 3. Attorneys' Fees. Should any litigation be commenced between the parties concerning the rights or obligations of the parties under this AGREEMENT, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for its attorneys' fees in such litigation, This amount shall be determined by the court in such litigation or in a separate action brought for that purpose. 3 4. Post Judgment. In addition to any amount received as attorneys' fees, the prevailing party or parties also shall be entitled to receive from the party or parties held to be liable, an amount equal to the attorneys' fees and costs incurred in enforcing any judgement against such party or parties. This Section is severable from the other provisions of this AGREEMENT and survives any judgment and is not deemed merged into any judgment. 5. Severability. In case any provision of this AGREEMENT shall be invalid, illegal or unenforceable, such provision shall be modified to the minimum extent necessary to make such provision enforceable, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 4 IN WITNESS WHEREOF, the parties have duly executed this AGREEMENT effective as of the date first set forth above. CORPORATION: Bay Area Multimedia, Inc. 20760 Monte Sunset Drive San Jose, CA 95120 By: /s/ RAYMOND C. MUSCI ------------------------------------ Raymond C. Musci, President PURCHASER: /s/ RAYMOND C. MUSCI ---------------------------------------- Raymond C. Musci 20760 Monte Sunset Drive San Jose, CA 95120 5 SPOUSAL CONSENT The undersigned certifies as follows: 1. I am the spouse of Raymond C. Musci. 2. I have received, read and approved the provisions of the foregoing Stock Purchase Agreement between the CORPORATION and my spouse, to which this CONSENT is attached. 3. I agree to be bound by and accept the provisions of the Stock Purchase Agreement, as it may be amended from time to time insofar as those provisions may affect any interest I may have in the CORPORATION, whether the interest is community property or otherwise. I further agree that amendment of the Stock Purchase Agreement shall not require my consent. 4. My spouse shall have full power of management of the shares purchased pursuant to this Stock Purchase Agreement, including any portion of those interests that are our community property; and my spouse has the full right, without my further approval, to exercise my spouse's voting rights as a shareholder in the CORPORATION, and to sell, transfer, encumber, and deal in any manner with such shares. Executed effective as of October 9, 1999. /s/ LAURIE MUSCI --------------------------------- Signature of spouse Laurie Musci --------------------------------- Printed name EX-10.3 13 v72115orex10-3.txt EXHIBIT 10.3 1 EXHIBIT 10.3 BAY AREA MULTIMEDIA, INC. STOCK PURCHASE AGREEMENT THIS AGREEMENT is made and entered into effective as of October 25, 1999, by and between Bay Area Multimedia, Inc., a California corporation (the "CORPORATION"), and D&S Partners, a California general partnership (the "PURCHASER"). THE PARTIES AGREE AS FOLLOWS: 1. Sale of Stock. The CORPORATION hereby agrees to sell to the PURCHASER and the PURCHASER hereby agrees to purchase 50,000 shares of the CORPORATION's Common Stock (the "SHARES"), at the price of $0.10 per share (the "PURCHASE PRICE"), for an aggregate purchase price of $5,000. PURCHASER has rendered services equal to and/or provided funds by cash or check for the PURCHASE PRICE, receipt of which is hereby acknowledged. 2. Closing. Upon execution of this AGREEMENT, the CORPORATION shall deliver a duly issued stock certificate for the SHARES to PURCHASER. 3. RIGHT OF FIRST REFUSAL. 3.1. Right to Purchase. In the event PURCHASER or a subsequent holder of the SHARES (collectively, "HOLDER") proposes to sell, pledge or otherwise transfer any or all of the shares owned by him or her (the "TRANSFER SHARES"), whether voluntarily or involuntarily, the CORPORATION, or its assignee shall have the right to acquire all, but not less than all, of the TRANSFER SHARES under the terms and subject to the conditions set forth in this Section 3 (the "RIGHT OF FIRST REFUSAL"). 3.2. Transfer Notice. Prior to any proposed transfer of the TRANSFER SHARES, the HOLDER shall give a written notice (the "TRANSFER NOTICE") to the CORPORATION describing fully the proposed transfer, including the number of TRANSFER SHARES, the name and address of the proposed transferee (the "PROPOSED TRANSFEREE"), and the proposed transfer price. The TRANSFER NOTICE shall be signed by both the HOLDER and the PROPOSED TRANSFEREE and must constitute a binding commitment of the HOLDER and the PROPOSED TRANSFEREE for the transfer of the TRANSFER SHARES subject only to the RIGHT OF FIRST REFUSAL. 3.3. CORPORATION's Option. Within 30 days of receiving the TRANSFER NOTICE, the CORPORATION shall notify the HOLDER as to whether it will exercise its right to purchase the TRANSFER SHARES. 3.4. Consummation. If the CORPORATION wishes to exercise the RIGHT 2 OF FIRST REFUSAL, the CORPORATION shall so notify the HOLDER within 30 days of receiving the TRANSFER NOTICE and the CORPORATION shall thereupon consummate the sale of the TRANSFER SHARES to the CORPORATION for the FIRST REFUSAL PRICE and on the terms set forth in the TRANSFER NOTICE within 60 days of (i) receiving the TRANSFER NOTICE or (ii) within thirty (30) days of the determination of the FIRST REFUSAL PRICE pursuant to Section 4 below, whichever is later. 3 3.5. FIRST REFUSAL PRICE. a. Price Offered by PROPOSED TRANSFEREE. Subject to Sections 3.6.b and 3.6.c, the "FIRST REFUSAL PRICE" shall be the price described in the TRANSFER NOTICE. b. Not Reflective of Fair Market Value. If the proposed transfer of the TRANSFER SHARES is to be made without consideration, is not a bona fide arm's length transaction (e.g., a transfer to a competitor of the CORPORATION), or does not involve a price freely set by the HOLDER and the PROPOSED TRANSFEREE, the FIRST REFUSAL PRICE shall be the fair market value of the TRANSFER SHARES as determined pursuant to Section 4. c. Cash Equivalent. If the TRANSFER NOTICE provides for the payment for the TRANSFER SHARES other than in cash, the CORPORATION and/or the OTHER SHAREHOLDERS shall have the option of paying for the TRANSFER SHARES by the discounted cash equivalent of the consideration described in the TRANSFER NOTICE, as reasonably determined by the Board. 3.6. Failure of Exercise. If the CORPORATION fails to purchase all of the TRANSFER SHARES in the time period contemplated above, the CORPORATION shall have no right to purchase any of the TRANSFER SHARES and the HOLDER may, not later than 120 days following delivery to the CORPORATION of the TRANSFER NOTICE, conclude a transfer to the PROPOSED TRANSFEREE of the TRANSFER SHARES on the terms and conditions described in the TRANSFER NOTICE. Any proposed transfer on terms and conditions different from those described in the TRANSFER NOTICE, as well as any subsequent proposed transfer by the HOLDER or the PROPOSED TRANSFEREE, shall again be subject to the RIGHT OF FIRST REFUSAL. 3.7. Assignment of Right of First Refusal. The CORPORATION may assign the RIGHT OF FIRST REFUSAL to one or more persons approved by the Board of Directors, who shall have the right to exercise the RIGHT OF FIRST REFUSAL in his own name for his own account. 3.8. Excluded Transfers. The RIGHT OF FIRST REFUSAL shall not apply to a transfer to a trustee for the benefit of the HOLDER's brothers, sisters, ancestors, descendants or spouse, provided that the transferring HOLDER retains full control with respect to the voting rights of such shares and that such transferee shall agree in writing (in a form satisfactory to the Board) to take the stock subject to all the terms of this Section 3 providing for a RIGHT OF FIRST REFUSAL with respect to any subsequent transfer. 3.9. Termination of RIGHT OF FIRST REFUSAL. Notwithstanding anything in this Section 3, this RIGHT OF FIRST REFUSAL shall terminate upon the earlier of: (i) public sale or registration of the SHARES; or (ii) corporate reorganization of the CORPORATION as defined in Internal Revenue Code Section 368(a)(1)(A), (B), or (D). 4 4. FAIR MARKET VALUE. The fair market value of the SHARES shall be determined as of the date of the TRANSFER NOTICE. The parties shall have fifteen (15) days after the date of the TRANSFER NOTICE to agree on the fair market value. If the parties are unable to agree on the fair market value during such period, then the fair market value shall be appraised as follows: Within 5 days of the expiration of the 15 day period, each party shall, at their own cost and by giving notice to the other party, appoint an appraiser with at least 5 years' full-time business appraisal experience (an "APPRAISER") to appraise and set the fair market value of the SHARES. If the higher appraisal is not more than one hundred five percent (105%) of the lower, then the average of their appraised values shall be the fair market value of the SHARES. If the higher appraisal is greater than one hundred five percent (105%) of the lower, then the two APPRAISERS shall appoint a third APPRAISER and the two closest in dollar terms of the three offered values shall be averaged and shall constitute the fair market value of the SHARES. The cost of the third APPRAISER shall be paid equally by the parties. Each APPRAISER shall submit its appraisal within 15 days of its appointment. 5. Investment Representations; Restrictions on Transfer. The PURCHASER represents and warrants to the CORPORATION that: a. The PURCHASER is aware of the CORPORATION's business affairs and financial condition and has acquired sufficient information about the CORPORATION to reach an informed and knowledgeable decision to acquire the SHARES. The PURCHASER has received all information from the CORPORATION which the PURCHASER has requested and deems relevant to an evaluation of the risks and merits of this investment. The PURCHASER has such knowledge and experience in financial and business matters that the PURCHASER is capable of evaluating the merits and risks of investment in the SHARES. The PURCHASER is purchasing the SHARES for investment for the PURCHASER's own account only and not with a view to, or for resale in connection with, any "distribution" within the meaning of the Securities Act of 1933, as amended (the "SECURITIES ACT"). b. The PURCHASER understands that an investment in the CORPORATION is speculative, that any possible benefits from the investment are uncertain, and that the PURCHASER must bear the economic risks of the investment in the CORPORATION for an indefinite period of time. The PURCHASER is able to bear these economic risks and to hold the SHARES for an indefinite period of time. c. The PURCHASER acknowledges and understands that the SHARES constitute "restricted securities" under the SECURITIES ACT and must be held indefinitely unless they are subsequently registered under the SECURITIES ACT or an exemption from such registration is available. The PURCHASER further acknowledges and understands that the CORPORATION is under no obligation to register the SHARES. The PURCHASER understands that the certificate evidencing the SHARES will be imprinted with a legend which prohibits the transfer of the SHARES unless they are registered or such registration is not required in the opinion of counsel satisfactory to the CORPORATION. d. The PURCHASER is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the SECURITIES ACT, which, in substance, permit limited public 5 resale of "restricted securities" acquired in a non-public offering, subject to the satisfaction of certain conditions. The PURCHASER understands that the CORPORATION may not be satisfying, and is not obligated to satisfy, any requirement of Rule 144 at such time as the PURCHASER might wish to sell any of the SHARES, and, if so, the PURCHASER might be precluded from selling any of the SHARES under Rule 144. e. The PURCHASER is a resident of the state of California. 6 6. Legend. The share certificate evidencing the SHARES issued hereunder shall be endorsed with the following legend (in addition to any legends required under applicable state securities laws): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. THESE SECURITIES ARE SUBJECT TO RIGHTS OF FIRST REFUSAL AND OTHER RESTRICTIONS UPON TRANSFER, AS SET FORTH IN ONE OR MORE AGREEMENTS BETWEEN THE REGISTERED HOLDER, THE CORPORATION, AND/OR CERTAIN OF THE OTHER SHAREHOLDERS, COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION. 7. General Provisions. 7.1. Governing Law/Entire Agreement. This AGREEMENT shall be governed by the laws of the State of California. This AGREEMENT represents the entire agreement between the parties with respect to the purchase of Common Stock by the PURCHASER and may only be modified or amended in a writing signed by both parties. 7.2. Notices. Any notice, demand or request required or permitted to be given by either the CORPORATION or the PURCHASER pursuant to the terms of this AGREEMENT shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this AGREEMENT or such other address as a party may request by notifying the other in writing. 7.3. Attorneys' Fees. Should any litigation be commenced between the parties concerning the rights or obligations of the parties under this AGREEMENT, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for its attorneys' fees in such litigation, This amount shall be determined by the court in such litigation or in a separate action brought for that purpose. 7.4. Post Judgment. In addition to any amount received as attorneys' fees, the prevailing party or parties also shall be entitled to receive from the party or parties held to be liable, an amount equal to the attorneys' fees and costs incurred in enforcing any judgement against such party or parties. This Section is severable from the other provisions of this AGREEMENT and survives any judgment and is not deemed merged into any judgment. 7.5. Severability. In case any provision of this AGREEMENT shall be invalid, illegal or unenforceable, such provision shall be modified to the minimum extent necessary to make such provision enforceable, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 7 [SIGNATURE PAGE FOLLOWS] 8 IN WITNESS WHEREOF, the parties have duly executed this AGREEMENT effective as of the date first set forth above. CORPORATION: Bay Area Multimedia, Inc. 20760 Monte Sunset Drive San Jose, CA 95120 By: /s/ RAYMOND C. MUSCI ---------------------------------- Raymond C. Musci, President PURCHASER: D&S Partners 260 Sheridan Avenue, Suite 200 Palo Alto, CA 94306 By: /s/ GEORGE M. SUNDHEIM, III ---------------------------------- George M. Sundheim, III, General Partner EX-10.4 14 v72115orex10-4.txt EXHIBIT 10.4 1 EXHIBIT 10.4 BAY AREA MULTIMEDIA, INC. STOCK PURCHASE AGREEMENT THIS AGREEMENT is made and entered into effective as of October 25, 1999, by and between Bay Area Multimedia, Inc., a California corporation (the "CORPORATION"), and Robert Holmes , an individual (the "PURCHASER"). THE PARTIES AGREE AS FOLLOWS: 1. Sale of Stock. The CORPORATION hereby agrees to sell to the PURCHASER and the PURCHASER hereby agrees to purchase 50,000 shares of the CORPORATION's Common Stock (the "SHARES"), at the price of $0.10 per share (the "PURCHASE PRICE"), for an aggregate purchase price of $5,000. PURCHASER has rendered services equal to and/or provided funds by cash or check for the PURCHASE PRICE, receipt of which is hereby acknowledged. 2. Closing. Upon execution of this AGREEMENT, the CORPORATION shall deliver a duly issued stock certificate for the SHARES to PURCHASER. 3. RIGHT OF FIRST REFUSAL. 3.1. Right to Purchase. In the event PURCHASER or a subsequent holder of the SHARES (collectively, "HOLDER") proposes to sell, pledge or otherwise transfer any or all of the shares owned by him or her (the "TRANSFER SHARES"), whether voluntarily or involuntarily, the CORPORATION, or its assignee shall have the right to acquire all, but not less than all, of the TRANSFER SHARES under the terms and subject to the conditions set forth in this Section 3 (the "RIGHT OF FIRST REFUSAL"). 3.2. Transfer Notice. Prior to any proposed transfer of the TRANSFER SHARES, the HOLDER shall give a written notice (the "TRANSFER NOTICE") to the CORPORATION describing fully the proposed transfer, including the number of TRANSFER SHARES, the name and address of the proposed transferee (the "PROPOSED TRANSFEREE"), and the proposed transfer price. The TRANSFER NOTICE shall be signed by both the HOLDER and the PROPOSED TRANSFEREE and must constitute a binding commitment of the HOLDER and the PROPOSED TRANSFEREE for the transfer of the TRANSFER SHARES subject only to the RIGHT OF FIRST REFUSAL. 3.3. CORPORATION's Option. Within 30 days of receiving the TRANSFER NOTICE, the CORPORATION shall notify the HOLDER as to whether it will exercise its right to purchase the TRANSFER SHARES. 3.4. Consummation. If the CORPORATION wishes to exercise the RIGHT 2 OF FIRST REFUSAL, the CORPORATION shall so notify the HOLDER within 30 days of receiving the TRANSFER NOTICE and the CORPORATION shall thereupon consummate the sale of the TRANSFER SHARES to the CORPORATION for the FIRST REFUSAL PRICE and on the terms set forth in the TRANSFER NOTICE within 60 days of (i) receiving the TRANSFER NOTICE or (ii) within thirty (30) days of the determination of the FIRST REFUSAL PRICE pursuant to Section 4 below, whichever is later. 3 3.5. FIRST REFUSAL PRICE. a. Price Offered by PROPOSED TRANSFEREE. Subject to Sections 3.6.b and 3.6.c, the "FIRST REFUSAL PRICE" shall be the price described in the TRANSFER NOTICE. b. Not Reflective of Fair Market Value. If the proposed transfer of the TRANSFER SHARES is to be made without consideration, is not a bona fide arm's length transaction (e.g., a transfer to a competitor of the CORPORATION), or does not involve a price freely set by the HOLDER and the PROPOSED TRANSFEREE, the FIRST REFUSAL PRICE shall be the fair market value of the TRANSFER SHARES as determined by the Board of Directors in good faith. c. Cash Equivalent. If the TRANSFER NOTICE provides for the payment for the TRANSFER SHARES other than in cash, the CORPORATION and/or the OTHER SHAREHOLDERS shall have the option of paying for the TRANSFER SHARES by the discounted cash equivalent of the consideration described in the TRANSFER NOTICE, as reasonably determined by the Board. 3.6. Failure of Exercise. If the CORPORATION fails to purchase all of the TRANSFER SHARES in the time period contemplated above, the CORPORATION shall have no right to purchase any of the TRANSFER SHARES and the HOLDER may, not later than 120 days following delivery to the CORPORATION of the TRANSFER NOTICE, conclude a transfer to the PROPOSED TRANSFEREE of the TRANSFER SHARES on the terms and conditions described in the TRANSFER NOTICE. Any proposed transfer on terms and conditions different from those described in the TRANSFER NOTICE, as well as any subsequent proposed transfer by the HOLDER or the PROPOSED TRANSFEREE, shall again be subject to the RIGHT OF FIRST REFUSAL. 3.7. Assignment of Right of First Refusal. The CORPORATION may assign the RIGHT OF FIRST REFUSAL to one or more persons approved by the Board of Directors, who shall have the right to exercise the RIGHT OF FIRST REFUSAL in his own name for his own account. 3.8. Excluded Transfers. The RIGHT OF FIRST REFUSAL shall not apply to a transfer to a trustee for the benefit of the HOLDER's brothers, sisters, ancestors, descendants or spouse, provided that the transferring HOLDER retains full control with respect to the voting rights of such shares and that such transferee shall agree in writing (in a form satisfactory to the Board) to take the stock subject to all the terms of this Section 3 providing for a RIGHT OF FIRST REFUSAL with respect to any subsequent transfer. 3.9. Termination of RIGHT OF FIRST REFUSAL. Notwithstanding anything in this Section 3, this RIGHT OF FIRST REFUSAL shall terminate upon the earlier of: (i) public sale or registration of the SHARES; or (ii) corporate reorganization of the CORPORATION as defined in Internal Revenue Code Section 368(a)(1)(A), (B), or (D). 4 4. Investment Representations; Restrictions on Transfer. The PURCHASER represents and warrants to the CORPORATION that: a. The PURCHASER is aware of the CORPORATION's business affairs and financial condition and has acquired sufficient information about the CORPORATION to reach an informed and knowledgeable decision to acquire the SHARES. The PURCHASER has received all information from the CORPORATION which the PURCHASER has requested and deems relevant to an evaluation of the risks and merits of this investment. The PURCHASER has such knowledge and experience in financial and business matters that the PURCHASER is capable of evaluating the merits and risks of investment in the SHARES. The PURCHASER is purchasing the SHARES for investment for the PURCHASER's own account only and not with a view to, or for resale in connection with, any "distribution" within the meaning of the Securities Act of 1933, as amended (the "SECURITIES ACT"). b. The PURCHASER understands that an investment in the CORPORATION is speculative, that any possible benefits from the investment are uncertain, and that the PURCHASER must bear the economic risks of the investment in the CORPORATION for an indefinite period of time. The PURCHASER is able to bear these economic risks and to hold the SHARES for an indefinite period of time. c. The PURCHASER acknowledges and understands that the SHARES constitute "restricted securities" under the SECURITIES ACT and must be held indefinitely unless they are subsequently registered under the SECURITIES ACT or an exemption from such registration is available. The PURCHASER further acknowledges and understands that the CORPORATION is under no obligation to register the SHARES. The PURCHASER understands that the certificate evidencing the SHARES will be imprinted with a legend which prohibits the transfer of the SHARES unless they are registered or such registration is not required in the opinion of counsel satisfactory to the CORPORATION. d. The PURCHASER is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the SECURITIES ACT, which, in substance, permit limited public resale of "restricted securities" acquired in a non-public offering, subject to the satisfaction of certain conditions. The PURCHASER understands that the CORPORATION may not be satisfying, and is not obligated to satisfy, any requirement of Rule 144 at such time as the PURCHASER might wish to sell any of the SHARES, and, if so, the PURCHASER might be precluded from selling any of the SHARES under Rule 144. e. The PURCHASER is a resident of the state of New York. 5. Legend. The share certificate evidencing the SHARES issued hereunder shall be endorsed with the following legend (in addition to any legends required under applicable state securities laws): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES 5 OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. THESE SECURITIES ARE SUBJECT TO RIGHTS OF FIRST REFUSAL AND OTHER RESTRICTIONS UPON TRANSFER, AS SET FORTH IN ONE OR MORE AGREEMENTS BETWEEN THE REGISTERED HOLDER, THE CORPORATION, AND/OR CERTAIN OF THE OTHER SHAREHOLDERS, COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION. 6 6. General Provisions. 6.1. Governing Law/Entire Agreement. This AGREEMENT shall be governed by the laws of the State of California. This AGREEMENT represents the entire agreement between the parties with respect to the purchase of Common Stock by the PURCHASER and may only be modified or amended in a writing signed by both parties. 6.2. Notices. Any notice, demand or request required or permitted to be given by either the CORPORATION or the PURCHASER pursuant to the terms of this AGREEMENT shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this AGREEMENT or such other address as a party may request by notifying the other in writing. 6.3. Attorneys' Fees. Should any litigation be commenced between the parties concerning the rights or obligations of the parties under this AGREEMENT, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for its attorneys' fees in such litigation, This amount shall be determined by the court in such litigation or in a separate action brought for that purpose. 6.4. Post Judgment. In addition to any amount received as attorneys' fees, the prevailing party or parties also shall be entitled to receive from the party or parties held to be liable, an amount equal to the attorneys' fees and costs incurred in enforcing any judgement against such party or parties. This Section is severable from the other provisions of this AGREEMENT and survives any judgment and is not deemed merged into any judgment. 6.5. Severability. In case any provision of this AGREEMENT shall be invalid, illegal or unenforceable, such provision shall be modified to the minimum extent necessary to make such provision enforceable, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. IN WITNESS WHEREOF, the parties have duly executed this AGREEMENT effective as of the date first set forth above. CORPORATION: Bay Area Multimedia, Inc. 20760 Monte Sunset Drive San Jose, CA 95120 By: /s/ RAYMOND C. MUSCI -------------------------------------- Raymond C. Musci, President PURCHASER: 7 /s/ ROBERT HOLMES ----------------------------------------- Robert Holmes 205 Ashbrook Ave Northport, NY 11768 8 SPOUSAL CONSENT The undersigned certifies as follows: 1. I am the spouse of Robert Holmes. 2. I have received, read and approved the provisions of the foregoing Stock Purchase Agreement between the CORPORATION and my spouse, to which this CONSENT is attached. 3. I agree to be bound by and accept the provisions of the Stock Purchase Agreement, as it may be amended from time to time insofar as those provisions may affect any interest I may have in the CORPORATION, whether the interest is community property or otherwise. I further agree that amendment of the Stock Purchase Agreement shall not require my consent. 4. My spouse shall have full power of management of the shares purchased pursuant to this Stock Purchase Agreement, including any portion of those interests that are our community property; and my spouse has the full right, without my further approval, to exercise my spouse's voting rights as a shareholder in the CORPORATION, and to sell, transfer, encumber, and deal in any manner with such shares. Executed effective as of _____________, 1999. --------------------------------- Signature of spouse --------------------------------- Printed name EX-10.5 15 v72115orex10-5.txt EXHIBIT 10.5 1 EXHIBIT 10.5 BAY AREA MULTIMEDIA, INC. STOCK PURCHASE AGREEMENT THIS AGREEMENT is made and entered into effective as of October 25, 1999, by and between Bay Area Multimedia, Inc., a California corporation (the "CORPORATION"), and Gary Nemetz, an individual (the "PURCHASER"). THE PARTIES AGREE AS FOLLOWS: 1. Sale of Stock. The CORPORATION hereby agrees to sell to the PURCHASER and the PURCHASER hereby agrees to purchase 50,000 shares of the CORPORATION's Common Stock (the "SHARES"), at the price of $0.10 per share (the "PURCHASE PRICE"), for an aggregate purchase price of $5,000. PURCHASER has rendered services equal to and/or provided funds by cash or check for the PURCHASE PRICE, receipt of which is hereby acknowledged. 2. Closing. Upon execution of this AGREEMENT, the CORPORATION shall deliver a duly issued stock certificate for the SHARES to PURCHASER. 3. RIGHT OF FIRST REFUSAL. 3.1. Right to Purchase. In the event PURCHASER or a subsequent holder of the SHARES (collectively, "HOLDER") proposes to sell, pledge or otherwise transfer any or all of the shares owned by him or her (the "TRANSFER SHARES"), whether voluntarily or involuntarily, the CORPORATION, or its assignee shall have the right to acquire all, but not less than all, of the TRANSFER SHARES under the terms and subject to the conditions set forth in this Section 3 (the "RIGHT OF FIRST REFUSAL"). 3.2. Transfer Notice. Prior to any proposed transfer of the TRANSFER SHARES, the HOLDER shall give a written notice (the "TRANSFER NOTICE") to the CORPORATION describing fully the proposed transfer, including the number of TRANSFER SHARES, the name and address of the proposed transferee (the "PROPOSED TRANSFEREE"), and the proposed transfer price. The TRANSFER NOTICE shall be signed by both the HOLDER and the PROPOSED TRANSFEREE and must constitute a binding commitment of the HOLDER and the PROPOSED TRANSFEREE for the transfer of the TRANSFER SHARES subject only to the RIGHT OF FIRST REFUSAL. 3.3. CORPORATION's Option. Within 30 days of receiving the TRANSFER NOTICE, the CORPORATION shall notify the HOLDER as to whether it will exercise its right to purchase the TRANSFER SHARES. 3.4. Consummation. If the CORPORATION wishes to exercise the RIGHT 2 OF FIRST REFUSAL, the CORPORATION shall so notify the HOLDER within 30 days of receiving the TRANSFER NOTICE and the CORPORATION shall thereupon consummate the sale of the TRANSFER SHARES to the CORPORATION for the FIRST REFUSAL PRICE and on the terms set forth in the TRANSFER NOTICE within 60 days of (i) receiving the TRANSFER NOTICE or (ii) within thirty (30) days of the determination of the FIRST REFUSAL PRICE pursuant to Section 4 below, whichever is later. 3 3.5. FIRST REFUSAL PRICE. a. Price Offered by PROPOSED TRANSFEREE. Subject to Sections 3.6.b and 3.6.c, the "FIRST REFUSAL PRICE" shall be the price described in the TRANSFER NOTICE. b. Not Reflective of Fair Market Value. If the proposed transfer of the TRANSFER SHARES is to be made without consideration, is not a bona fide arm's length transaction (e.g., a transfer to a competitor of the CORPORATION), or does not involve a price freely set by the HOLDER and the PROPOSED TRANSFEREE, the FIRST REFUSAL PRICE shall be the fair market value of the TRANSFER SHARES as determined by the Board of Directors in good faith. c. Cash Equivalent. If the TRANSFER NOTICE provides for the payment for the TRANSFER SHARES other than in cash, the CORPORATION and/or the OTHER SHAREHOLDERS shall have the option of paying for the TRANSFER SHARES by the discounted cash equivalent of the consideration described in the TRANSFER NOTICE, as reasonably determined by the Board. 3.6. Failure of Exercise. If the CORPORATION fails to purchase all of the TRANSFER SHARES in the time period contemplated above, the CORPORATION shall have no right to purchase any of the TRANSFER SHARES and the HOLDER may, not later than 120 days following delivery to the CORPORATION of the TRANSFER NOTICE, conclude a transfer to the PROPOSED TRANSFEREE of the TRANSFER SHARES on the terms and conditions described in the TRANSFER NOTICE. Any proposed transfer on terms and conditions different from those described in the TRANSFER NOTICE, as well as any subsequent proposed transfer by the HOLDER or the PROPOSED TRANSFEREE, shall again be subject to the RIGHT OF FIRST REFUSAL. 3.7. Assignment of Right of First Refusal. The CORPORATION may assign the RIGHT OF FIRST REFUSAL to one or more persons approved by the Board of Directors, who shall have the right to exercise the RIGHT OF FIRST REFUSAL in his own name for his own account. 3.8. Excluded Transfers. The RIGHT OF FIRST REFUSAL shall not apply to a transfer to a trustee for the benefit of the HOLDER's brothers, sisters, ancestors, descendants or spouse, provided that the transferring HOLDER retains full control with respect to the voting rights of such shares and that such transferee shall agree in writing (in a form satisfactory to the Board) to take the stock subject to all the terms of this Section 3 providing for a RIGHT OF FIRST REFUSAL with respect to any subsequent transfer. 3.9. Termination of RIGHT OF FIRST REFUSAL. Notwithstanding anything in this Section 3, this RIGHT OF FIRST REFUSAL shall terminate upon the earlier of: (i) public sale or registration of the SHARES; or (ii) corporate reorganization of the CORPORATION as defined in Internal Revenue Code Section 368(a)(1)(A), (B), or (D). 4 4. Investment Representations; Restrictions on Transfer. The PURCHASER represents and warrants to the CORPORATION that: a. The PURCHASER is aware of the CORPORATION's business affairs and financial condition and has acquired sufficient information about the CORPORATION to reach an informed and knowledgeable decision to acquire the SHARES. The PURCHASER has received all information from the CORPORATION which the PURCHASER has requested and deems relevant to an evaluation of the risks and merits of this investment. The PURCHASER has such knowledge and experience in financial and business matters that the PURCHASER is capable of evaluating the merits and risks of investment in the SHARES. The PURCHASER is purchasing the SHARES for investment for the PURCHASER's own account only and not with a view to, or for resale in connection with, any "distribution" within the meaning of the Securities Act of 1933, as amended (the "SECURITIES ACT"). b. The PURCHASER understands that an investment in the CORPORATION is speculative, that any possible benefits from the investment are uncertain, and that the PURCHASER must bear the economic risks of the investment in the CORPORATION for an indefinite period of time. The PURCHASER is able to bear these economic risks and to hold the SHARES for an indefinite period of time. c. The PURCHASER acknowledges and understands that the SHARES constitute "restricted securities" under the SECURITIES ACT and must be held indefinitely unless they are subsequently registered under the SECURITIES ACT or an exemption from such registration is available. The PURCHASER further acknowledges and understands that the CORPORATION is under no obligation to register the SHARES. The PURCHASER understands that the certificate evidencing the SHARES will be imprinted with a legend which prohibits the transfer of the SHARES unless they are registered or such registration is not required in the opinion of counsel satisfactory to the CORPORATION. d. The PURCHASER is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the SECURITIES ACT, which, in substance, permit limited public resale of "restricted securities" acquired in a non-public offering, subject to the satisfaction of certain conditions. The PURCHASER understands that the CORPORATION may not be satisfying, and is not obligated to satisfy, any requirement of Rule 144 at such time as the PURCHASER might wish to sell any of the SHARES, and, if so, the PURCHASER might be precluded from selling any of the SHARES under Rule 144. e. The PURCHASER is a resident of the state of California. 5. Legend. The share certificate evidencing the SHARES issued hereunder shall be endorsed with the following legend (in addition to any legends required under applicable state securities laws): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES 5 OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. THESE SECURITIES ARE SUBJECT TO RIGHTS OF FIRST REFUSAL AND OTHER RESTRICTIONS UPON TRANSFER, AS SET FORTH IN ONE OR MORE AGREEMENTS BETWEEN THE REGISTERED HOLDER, THE CORPORATION, AND/OR CERTAIN OF THE OTHER SHAREHOLDERS, COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION. 6 6. General Provisions. 6.1. Governing Law/Entire Agreement. This AGREEMENT shall be governed by the laws of the State of California. This AGREEMENT represents the entire agreement between the parties with respect to the purchase of Common Stock by the PURCHASER and may only be modified or amended in a writing signed by both parties. 6.2. Notices. Any notice, demand or request required or permitted to be given by either the CORPORATION or the PURCHASER pursuant to the terms of this AGREEMENT shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this AGREEMENT or such other address as a party may request by notifying the other in writing. 6.3. Attorneys' Fees. Should any litigation be commenced between the parties concerning the rights or obligations of the parties under this AGREEMENT, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for its attorneys' fees in such litigation, This amount shall be determined by the court in such litigation or in a separate action brought for that purpose. 6.4. Post Judgment. In addition to any amount received as attorneys' fees, the prevailing party or parties also shall be entitled to receive from the party or parties held to be liable, an amount equal to the attorneys' fees and costs incurred in enforcing any judgement against such party or parties. This Section is severable from the other provisions of this AGREEMENT and survives any judgment and is not deemed merged into any judgment. 6.5. Severability. In case any provision of this AGREEMENT shall be invalid, illegal or unenforceable, such provision shall be modified to the minimum extent necessary to make such provision enforceable, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. IN WITNESS WHEREOF, the parties have duly executed this AGREEMENT effective as of the date first set forth above. CORPORATION: Bay Area Multimedia, Inc. 20760 Monte Sunset Drive San Jose, CA 95120 By: /s/ RAYMOND C. MUSCI ---------------------------- Raymond C. Musci, President PURCHASER: /s/ GARY NEMETZ ----------------------------------- Gary Nemetz 2420 Sand Hill Road Suite 101 Menlo Park, CA 94025 7 SPOUSAL CONSENT The undersigned certifies as follows: 1. I am the spouse of Gary Nemetz. 2. I have received, read and approved the provisions of the foregoing Stock Purchase Agreement between the CORPORATION and my spouse, to which this CONSENT is attached. 3. I agree to be bound by and accept the provisions of the Stock Purchase Agreement, as it may be amended from time to time insofar as those provisions may affect any interest I may have in the CORPORATION, whether the interest is community property or otherwise. I further agree that amendment of the Stock Purchase Agreement shall not require my consent. 4. My spouse shall have full power of management of the shares purchased pursuant to this Stock Purchase Agreement, including any portion of those interests that are our community property; and my spouse has the full right, without my further approval, to exercise my spouse's voting rights as a shareholder in the CORPORATION, and to sell, transfer, encumber, and deal in any manner with such shares. Executed effective as of October 25, 1999. /s/ LORETTA M. NEMETZ ----------------------------- Signature of spouse /s/ LORETTA M. NEMETZ ----------------------------- Printed name EX-10.6 16 v72115orex10-6.txt EXHIBIT 10.6 1 EXHIBIT 10.6 BAY AREA MULTIMEDIA, INC. STOCK PURCHASE AGREEMENT THIS AGREEMENT is made and entered into effective as of October 25, 1999, by and between Bay Area Multimedia, Inc., a California corporation (the "CORPORATION"), and Tracy Ann Sebastian, an individual (the "PURCHASER"). THE PARTIES AGREE AS FOLLOWS: 1. Sale of Stock. The CORPORATION hereby agrees to sell to the PURCHASER and the PURCHASER hereby agrees to purchase Tracy Ann Sebastian shares of the CORPORATION's Common Stock (the "SHARES"), at the price of $0.10 per share (the "PURCHASE PRICE"), for an aggregate purchase price of $5,000. PURCHASER has rendered services equal to and/or provided funds by cash or check for the PURCHASE PRICE, receipt of which is hereby acknowledged. 2. Closing. Upon execution of this AGREEMENT, the CORPORATION shall deliver a duly issued stock certificate for the SHARES to PURCHASER. 3. RIGHT OF FIRST REFUSAL. 3.1. Right to Purchase. In the event PURCHASER or a subsequent holder of the SHARES (collectively, "HOLDER") proposes to sell, pledge or otherwise transfer any or all of the shares owned by him or her (the "TRANSFER SHARES"), whether voluntarily or involuntarily, the CORPORATION, or its assignee shall have the right to acquire all, but not less than all, of the TRANSFER SHARES under the terms and subject to the conditions set forth in this Section 3 (the "RIGHT OF FIRST REFUSAL"). 3.2. Transfer Notice. Prior to any proposed transfer of the TRANSFER SHARES, the HOLDER shall give a written notice (the "TRANSFER NOTICE") to the CORPORATION describing fully the proposed transfer, including the number of TRANSFER SHARES, the name and address of the proposed transferee (the "PROPOSED TRANSFEREE"), and the proposed transfer price. The TRANSFER NOTICE shall be signed by both the HOLDER and the PROPOSED TRANSFEREE and must constitute a binding commitment of the HOLDER and the PROPOSED TRANSFEREE for the transfer of the TRANSFER SHARES subject only to the RIGHT OF FIRST REFUSAL. 3.3. CORPORATION's Option. Within 30 days of receiving the TRANSFER NOTICE, the CORPORATION shall notify the HOLDER as to whether it will exercise its right to purchase the TRANSFER SHARES. 3.4. Consummation. If the CORPORATION wishes to exercise the RIGHT 2 OF FIRST REFUSAL, the CORPORATION shall so notify the HOLDER within 30 days of receiving the TRANSFER NOTICE and the CORPORATION shall thereupon consummate the sale of the TRANSFER SHARES to the CORPORATION for the FIRST REFUSAL PRICE and on the terms set forth in the TRANSFER NOTICE within 60 days of (i) receiving the TRANSFER NOTICE or (ii) within thirty (30) days of the determination of the FIRST REFUSAL PRICE pursuant to Section 4 below, whichever is later. 3 3.5. FIRST REFUSAL PRICE. a. Price Offered by PROPOSED TRANSFEREE. Subject to Sections 3.6.b and 3.6.c, the "FIRST REFUSAL PRICE" shall be the price described in the TRANSFER NOTICE. b. Not Reflective of Fair Market Value. If the proposed transfer of the TRANSFER SHARES is to be made without consideration, is not a bona fide arm's length transaction (e.g., a transfer to a competitor of the CORPORATION), or does not involve a price freely set by the HOLDER and the PROPOSED TRANSFEREE, the FIRST REFUSAL PRICE shall be the fair market value of the TRANSFER SHARES as determined by the Board of Directors in good faith. c. Cash Equivalent. If the TRANSFER NOTICE provides for the payment for the TRANSFER SHARES other than in cash, the CORPORATION and/or the OTHER SHAREHOLDERS shall have the option of paying for the TRANSFER SHARES by the discounted cash equivalent of the consideration described in the TRANSFER NOTICE, as reasonably determined by the Board. 3.6. Failure of Exercise. If the CORPORATION fails to purchase all of the TRANSFER SHARES in the time period contemplated above, the CORPORATION shall have no right to purchase any of the TRANSFER SHARES and the HOLDER may, not later than 120 days following delivery to the CORPORATION of the TRANSFER NOTICE, conclude a transfer to the PROPOSED TRANSFEREE of the TRANSFER SHARES on the terms and conditions described in the TRANSFER NOTICE. Any proposed transfer on terms and conditions different from those described in the TRANSFER NOTICE, as well as any subsequent proposed transfer by the HOLDER or the PROPOSED TRANSFEREE, shall again be subject to the RIGHT OF FIRST REFUSAL. 3.7. Assignment of Right of First Refusal. The CORPORATION may assign the RIGHT OF FIRST REFUSAL to one or more persons approved by the Board of Directors, who shall have the right to exercise the RIGHT OF FIRST REFUSAL in his own name for his own account. 3.8. Excluded Transfers. The RIGHT OF FIRST REFUSAL shall not apply to a transfer to a trustee for the benefit of the HOLDER's brothers, sisters, ancestors, descendants or spouse, provided that the transferring HOLDER retains full control with respect to the voting rights of such shares and that such transferee shall agree in writing (in a form satisfactory to the Board) to take the stock subject to all the terms of this Section 3 providing for a RIGHT OF FIRST REFUSAL with respect to any subsequent transfer. 3.9. Termination of RIGHT OF FIRST REFUSAL. Notwithstanding anything in this Section 3, this RIGHT OF FIRST REFUSAL shall terminate upon the earlier of: (i) public sale or registration of the SHARES; or (ii) corporate reorganization of the CORPORATION as defined in Internal Revenue Code Section 368(a)(1)(A), (B), or (D). 4 4. Investment Representations; Restrictions on Transfer. The PURCHASER represents and warrants to the CORPORATION that: a. The PURCHASER is aware of the CORPORATION's business affairs and financial condition and has acquired sufficient information about the CORPORATION to reach an informed and knowledgeable decision to acquire the SHARES. The PURCHASER has received all information from the CORPORATION which the PURCHASER has requested and deems relevant to an evaluation of the risks and merits of this investment. The PURCHASER has such knowledge and experience in financial and business matters that the PURCHASER is capable of evaluating the merits and risks of investment in the SHARES. The PURCHASER is purchasing the SHARES for investment for the PURCHASER's own account only and not with a view to, or for resale in connection with, any "distribution" within the meaning of the Securities Act of 1933, as amended (the "SECURITIES ACT"). b. The PURCHASER understands that an investment in the CORPORATION is speculative, that any possible benefits from the investment are uncertain, and that the PURCHASER must bear the economic risks of the investment in the CORPORATION for an indefinite period of time. The PURCHASER is able to bear these economic risks and to hold the SHARES for an indefinite period of time. c. The PURCHASER acknowledges and understands that the SHARES constitute "restricted securities" under the SECURITIES ACT and must be held indefinitely unless they are subsequently registered under the SECURITIES ACT or an exemption from such registration is available. The PURCHASER further acknowledges and understands that the CORPORATION is under no obligation to register the SHARES. The PURCHASER understands that the certificate evidencing the SHARES will be imprinted with a legend which prohibits the transfer of the SHARES unless they are registered or such registration is not required in the opinion of counsel satisfactory to the CORPORATION. d. The PURCHASER is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the SECURITIES ACT, which, in substance, permit limited public resale of "restricted securities" acquired in a non-public offering, subject to the satisfaction of certain conditions. The PURCHASER understands that the CORPORATION may not be satisfying, and is not obligated to satisfy, any requirement of Rule 144 at such time as the PURCHASER might wish to sell any of the SHARES, and, if so, the PURCHASER might be precluded from selling any of the SHARES under Rule 144. e. The PURCHASER is a resident of the state of California. 5. Legend. The share certificate evidencing the SHARES issued hereunder shall be endorsed with the following legend (in addition to any legends required under applicable state securities laws): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES 5 OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. THESE SECURITIES ARE SUBJECT TO RIGHTS OF FIRST REFUSAL AND OTHER RESTRICTIONS UPON TRANSFER, AS SET FORTH IN ONE OR MORE AGREEMENTS BETWEEN THE REGISTERED HOLDER, THE CORPORATION, AND/OR CERTAIN OF THE OTHER SHAREHOLDERS, COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION. 6 6. General Provisions. 6.1. Governing Law/Entire Agreement. This AGREEMENT shall be governed by the laws of the State of California. This AGREEMENT represents the entire agreement between the parties with respect to the purchase of Common Stock by the PURCHASER and may only be modified or amended in a writing signed by both parties. 6.2. Notices. Any notice, demand or request required or permitted to be given by either the CORPORATION or the PURCHASER pursuant to the terms of this AGREEMENT shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this AGREEMENT or such other address as a party may request by notifying the other in writing. 6.3. Attorneys' Fees. Should any litigation be commenced between the parties concerning the rights or obligations of the parties under this AGREEMENT, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for its attorneys' fees in such litigation, This amount shall be determined by the court in such litigation or in a separate action brought for that purpose. 6.4. Post Judgment. In addition to any amount received as attorneys' fees, the prevailing party or parties also shall be entitled to receive from the party or parties held to be liable, an amount equal to the attorneys' fees and costs incurred in enforcing any judgement against such party or parties. This Section is severable from the other provisions of this AGREEMENT and survives any judgment and is not deemed merged into any judgment. 6.5. Severability. In case any provision of this AGREEMENT shall be invalid, illegal or unenforceable, such provision shall be modified to the minimum extent necessary to make such provision enforceable, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. IN WITNESS WHEREOF, the parties have duly executed this AGREEMENT effective as of the date first set forth above. CORPORATION: Bay Area Multimedia, Inc. 20760 Monte Sunset Drive San Jose, CA 95120 By: /s/ RAYMOND C. MUSCI --------------------------------- Raymond C. Musci, President PURCHASER: /s/ TRACY ANN SEBASTIAN ----------------------------------- Tracy Ann Sebastian 458 North Oakhurst Drive #103 Beverly Hills, CA 90210 7 SPOUSAL CONSENT The undersigned certifies as follows: 1. I am the spouse of Tracy Ann Sebastian. 2. I have received, read and approved the provisions of the foregoing Stock Purchase Agreement between the CORPORATION and my spouse, to which this CONSENT is attached. 3. I agree to be bound by and accept the provisions of the Stock Purchase Agreement, as it may be amended from time to time insofar as those provisions may affect any interest I may have in the CORPORATION, whether the interest is community property or otherwise. I further agree that amendment of the Stock Purchase Agreement shall not require my consent. 4. My spouse shall have full power of management of the shares purchased pursuant to this Stock Purchase Agreement, including any portion of those interests that are our community property; and my spouse has the full right, without my further approval, to exercise my spouse's voting rights as a shareholder in the CORPORATION, and to sell, transfer, encumber, and deal in any manner with such shares. Executed effective as of October 25, 1999. /s/ ROBERT SEBASTIAN ----------------------------- Signature of spouse Robert Sebastian ----------------------------- Printed name EX-10.7 17 v72115orex10-7.txt EXHIBIT 10.7 1 EXHIBIT 10.7 BAY AREA MULTIMEDIA, INC. STOCK PURCHASE AGREEMENT THIS AGREEMENT is made and entered into effective as of December 30, 1999, by and between Bay Area Multimedia, Inc., a California corporation (the "CORPORATION"), and Philip L. Rosenberg, an individual (the "PURCHASER"). THE PARTIES AGREE AS FOLLOWS: 1. Sale of Stock. The CORPORATION hereby agrees to sell to the PURCHASER and the PURCHASER hereby agrees to purchase 50,000 shares of the CORPORATION's Common Stock (the "SHARES"), at the price of $0.10 per share (the "PURCHASE PRICE"), for an aggregate purchase price of $5,000. PURCHASER has rendered services equal to and/or provided funds by cash or check for the PURCHASE PRICE, receipt of which is hereby acknowledged. 2. Closing. Upon execution of this AGREEMENT, the CORPORATION shall deliver a duly issued stock certificate for the SHARES to PURCHASER. 3. RIGHT OF FIRST REFUSAL. 3.1. Right to Purchase. In the event PURCHASER or a subsequent holder of the SHARES (collectively, "HOLDER") proposes to sell, pledge or otherwise transfer any or all of the shares owned by him or her (the "TRANSFER SHARES"), whether voluntarily or involuntarily, the CORPORATION, or its assignee shall have the right to acquire all, but not less than all, of the TRANSFER SHARES under the terms and subject to the conditions set forth in this Section 3 (the "RIGHT OF FIRST REFUSAL"). 3.2. Transfer Notice. Prior to any proposed transfer of the TRANSFER SHARES, the HOLDER shall give a written notice (the "TRANSFER NOTICE") to the CORPORATION describing fully the proposed transfer, including the number of TRANSFER SHARES, the name and address of the proposed transferee (the "PROPOSED TRANSFEREE"), and the proposed transfer price. The TRANSFER NOTICE shall be signed by both the HOLDER and the PROPOSED TRANSFEREE and must constitute a binding commitment of the HOLDER and the PROPOSED TRANSFEREE for the transfer of the TRANSFER SHARES subject only to the RIGHT OF FIRST REFUSAL. 3.3. CORPORATION's Option. Within 30 days of receiving the TRANSFER NOTICE, the CORPORATION shall notify the HOLDER as to whether it will exercise its right to purchase the TRANSFER SHARES. 3.4. Consummation. If the CORPORATION wishes to exercise the RIGHT OF FIRST REFUSAL, the CORPORATION shall so notify the HOLDER within 30 days of receiving the TRANSFER NOTICE and the CORPORATION shall thereupon consummate the sale of the TRANSFER SHARES to the CORPORATION for the FIRST REFUSAL PRICE and on the terms set forth in the TRANSFER NOTICE within 60 days of (i) receiving the TRANSFER NOTICE or (ii) within thirty (30) days of the determination of the FIRST REFUSAL PRICE pursuant to Section 4 below, whichever is later. 2 3.5. FIRST REFUSAL PRICE. a. Price Offered by PROPOSED TRANSFEREE. Subject to Sections 3.6.b and 3.6.c, the "FIRST REFUSAL PRICE" shall be the price described in the TRANSFER NOTICE. b. Not Reflective of Fair Market Value. If the proposed transfer of the TRANSFER SHARES is to be made without consideration, is not a bona fide arm's length transaction (e.g., a transfer to a competitor of the CORPORATION), or does not involve a price freely set by the HOLDER and the PROPOSED TRANSFEREE, the FIRST REFUSAL PRICE shall be the fair market value of the TRANSFER SHARES as determined by the Board of Directors in good faith. c. Cash Equivalent. If the TRANSFER NOTICE provides for the payment for the TRANSFER SHARES other than in cash, the CORPORATION and/or the OTHER SHAREHOLDERS shall have the option of paying for the TRANSFER SHARES by the discounted cash equivalent of the consideration described in the TRANSFER NOTICE, as reasonably determined by the Board. 3.6. Failure of Exercise. If the CORPORATION fails to purchase all of the TRANSFER SHARES in the time period contemplated above, the CORPORATION shall have no right to purchase any of the TRANSFER SHARES and the HOLDER may, not later than 120 days following delivery to the CORPORATION of the TRANSFER NOTICE, conclude a transfer to the PROPOSED TRANSFEREE of the TRANSFER SHARES on the terms and conditions described in the TRANSFER NOTICE. Any proposed transfer on terms and conditions different from those described in the TRANSFER NOTICE, as well as any subsequent proposed transfer by the HOLDER or the PROPOSED TRANSFEREE, shall again be subject to the RIGHT OF FIRST REFUSAL. 3.7. Assignment of Right of First Refusal. The CORPORATION may assign the RIGHT OF FIRST REFUSAL to one or more persons approved by the Board of Directors, who shall have the right to exercise the RIGHT OF FIRST REFUSAL in his own name for his own account. 3.8. Excluded Transfers. The RIGHT OF FIRST REFUSAL shall not apply to a transfer to a trustee for the benefit of the HOLDER's brothers, sisters, ancestors, descendants or spouse, provided that the transferring HOLDER retains full control with respect to the voting rights of such shares and that such transferee shall agree in writing (in a form satisfactory to the Board) to take the stock subject to all the terms of this Section 3 providing for a RIGHT OF FIRST REFUSAL with respect to any subsequent transfer. 3.9. Termination of RIGHT OF FIRST REFUSAL. Notwithstanding anything in this Section 3, this RIGHT OF FIRST REFUSAL shall terminate upon the earlier of: (i) public sale or registration of the SHARES; or (ii) corporate reorganization of the CORPORATION as defined in Internal Revenue Code Section 368(a)(1)(A), (B), or (D). 4. Investment Representations; Restrictions on Transfer. The PURCHASER represents and warrants to the CORPORATION that: a. The PURCHASER is aware of the CORPORATION's business affairs and financial condition and has acquired sufficient information about the CORPORATION to reach an 2 3 informed and knowledgeable decision to acquire the SHARES. The PURCHASER has received all information from the CORPORATION which the PURCHASER has requested and deems relevant to an evaluation of the risks and merits of this investment. The PURCHASER has such knowledge and experience in financial and business matters that the PURCHASER is capable of evaluating the merits and risks of investment in the SHARES. The PURCHASER is purchasing the SHARES for investment for the PURCHASER's own account only and not with a view to, or for resale in connection with, any "distribution" within the meaning of the Securities Act of 1933, as amended (the "SECURITIES ACT"). b. The PURCHASER understands that an investment in the CORPORATION is speculative, that any possible benefits from the investment are uncertain, and that the PURCHASER must bear the economic risks of the investment in the CORPORATION for an indefinite period of time. The PURCHASER is able to bear these economic risks and to hold the SHARES for an indefinite period of time. c. The PURCHASER acknowledges and understands that the SHARES constitute "restricted securities" under the SECURITIES ACT and must be held indefinitely unless they are subsequently registered under the SECURITIES ACT or an exemption from such registration is available. The PURCHASER further acknowledges and understands that the CORPORATION is under no obligation to register the SHARES. The PURCHASER understands that the certificate evidencing the SHARES will be imprinted with a legend which prohibits the transfer of the SHARES unless they are registered or such registration is not required in the opinion of counsel satisfactory to the CORPORATION. d. The PURCHASER is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the SECURITIES ACT, which, in substance, permit limited public resale of "restricted securities" acquired in a non-public offering, subject to the satisfaction of certain conditions. The PURCHASER understands that the CORPORATION may not be satisfying, and is not obligated to satisfy, any requirement of Rule 144 at such time as the PURCHASER might wish to sell any of the SHARES, and, if so, the PURCHASER might be precluded from selling any of the SHARES under Rule 144. e. The PURCHASER is a resident of the state of Illinois. 5. Legend. The share certificate evidencing the SHARES issued hereunder shall be endorsed with the following legend (in addition to any legends required under applicable state securities laws): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. THESE SECURITIES ARE SUBJECT TO RIGHTS OF FIRST REFUSAL AND OTHER RESTRICTIONS UPON TRANSFER, AS SET FORTH IN ONE OR MORE AGREEMENTS BETWEEN THE REGISTERED HOLDER, THE CORPORATION, AND/OR CERTAIN OF THE OTHER SHAREHOLDERS, COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION. 3 4 6. General Provisions. 6.1. Governing Law/Entire Agreement. This AGREEMENT shall be governed by the laws of the State of California. This AGREEMENT represents the entire agreement between the parties with respect to the purchase of Common Stock by the PURCHASER and may only be modified or amended in a writing signed by both parties. 6.2. Notices. Any notice, demand or request required or permitted to be given by either the CORPORATION or the PURCHASER pursuant to the terms of this AGREEMENT shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this AGREEMENT or such other address as a party may request by notifying the other in writing. 6.3. Attorneys' Fees. Should any litigation be commenced between the parties concerning the rights or obligations of the parties under this AGREEMENT, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for its attorneys' fees in such litigation, This amount shall be determined by the court in such litigation or in a separate action brought for that purpose. 6.4. Post Judgment. In addition to any amount received as attorneys' fees, the prevailing party or parties also shall be entitled to receive from the party or parties held to be liable, an amount equal to the attorneys' fees and costs incurred in enforcing any judgement against such party or parties. This Section is severable from the other provisions of this AGREEMENT and survives any judgment and is not deemed merged into any judgment. 6.5. Severability. In case any provision of this AGREEMENT shall be invalid, illegal or unenforceable, such provision shall be modified to the minimum extent necessary to make such provision enforceable, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. IN WITNESS WHEREOF, the parties have duly executed this AGREEMENT effective as of the date first set forth above. CORPORATION: Bay Area Multimedia, Inc. 20760 Monte Sunset Drive San Jose, CA 95120 By: /s/ RAYMOND C. MUSCI -------------------------------- Raymond C. Musci, President PURCHASER: /s/ PHILIP L. ROSENBERG ----------------------------------- Philip L. Rosenberg 2075 Hidden Ridge Highland Park IL 60035 4 5 SPOUSAL CONSENT The undersigned certifies as follows: 1. I am the spouse of Philip L. Rosenberg. 2. I have received, read and approved the provisions of the foregoing Stock Purchase Agreement between the CORPORATION and my spouse, to which this CONSENT is attached. 3. I agree to be bound by and accept the provisions of the Stock Purchase Agreement, as it may be amended from time to time insofar as those provisions may affect any interest I may have in the CORPORATION, whether the interest is community property or otherwise. I further agree that amendment of the Stock Purchase Agreement shall not require my consent. 4. My spouse shall have full power of management of the shares purchased pursuant to this Stock Purchase Agreement, including any portion of those interests that are our community property; and my spouse has the full right, without my further approval, to exercise my spouse's voting rights as a shareholder in the CORPORATION, and to sell, transfer, encumber, and deal in any manner with such shares. Executed effective as of 12-30, 1999. /s/ Mindy Rosenberg ----------------------------- Signature of spouse Mindy Rosenberg ----------------------------- Printed name EX-10.8 18 v72115orex10-8.txt EXHIBIT 10.8 1 EXHIBIT 10.8 BAY AREA MULTIMEDIA, INC. STOCK PURCHASE AGREEMENT FOR UP TO 976,220 SHARES OF SERIES A PREFERRED STOCK 164,530 SHARES OF COMMON STOCK This Agreement is entered into effective as of May 17, 2000 by and among Bay Area Multimedia, Inc., a California corporation (the "Company"), and the purchasers ("Purchasers")listed on the Schedule of Purchasers ("Schedule Of Purchasers") attached as Exhibit A. THE PARTIES AGREE AS FOLLOWS: 1. Authorization and Sale of Stock. 1.1 Authorization. On or before the Initial Closing (as defined below), the Company will have filed with the Secretary of State of California the First Amended and Restated Articles of Incorporation attached hereto as Exhibit 1.1 (the "Restated Articles") to create and authorize 976,220 shares of Series A Preferred Stock (the "Series A Shares") and sufficient shares of Common Stock to provide for the issuance of an additional 164,530 shares of Common Stock (the "Common Shares"). The Series A Shares and the Common Shares hereafter collectively are referred to as the "Shares". 1.2 Issuance and Sale of Series A Shares. Subject to the terms and conditions of this Agreement, at the Closings (as defined below), the Company shall issue and sell to each of the Purchasers, and each of the Purchasers severally agrees to purchase from the Company, the number of Shares specified opposite the name of each Purchaser on the Schedule of Purchasers at a purchase price of $2.17 for each Series A Share and $.513 for each Common Share. 2. Delivery. 2.1 Closing. The closing of the purchase and sale of the Shares to the Purchasers shall take place at one or more closings (the "Closings"). The initial Closing shall be held on May 11, 2000 or such other date as agreed upon by the Purchasers and the Company (the "Initial Closing"); provided, however, that the Initial Closing shall not take place unless and until the aggregate purchase price for the Shares to be purchased at the Initial Closing equals or exceeds $1,200,000. 1 2 2.2 Location. The Closings shall take place at the offices of Doty Sundheim & Gilmore, at 260 Sheridan Avenue, Suite 200, Palo Alto, CA 94306 or such other location as the parties may agree. 2.3 Delivery. (a) At each Closing, each Purchaser shall pay for the Series A Shares by (i) cancellation of indebtedness, (ii) check made payable to the Company, (iii) services rendered, or (iv) wire transfer to the following escrow account: Wire Transfer Instructions: To: CivicBank of Commerce Palo Alto Office 250 Cambridge Avenue, Suite 203 Palo Alto, CA 94306-1549 Routing & Transit #: 121140959 For Credit of: Bay Area Multimedia, Inc. Credit Account #: 3050500791 By Order of: [Name of Sender] (b) At the Closing, the Company will issue to each Purchaser a certificate representing the Series A Shares and/or Common Shares, as appropriate, to be purchased by such Purchaser from the Company (which shall be issued in such Purchaser's name as set forth on the Schedule of Purchasers). 3. Representations and Warranties of the Company. Except as set forth on the attached Exhibit 3, the Company represents and warrants to each Purchaser that: 3.1 Organization and Standing; Charter Documents. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of California and has all requisite corporate power to conduct its business. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties. 3.2 Capitalization. The authorized capital of the Company at the Closing will be as follows: (a) Common Stock. Upon the filing of the Restated Articles, each share of Common Stock shall be converted into .195 share of Common Stock. Upon such filing, 5,000,000 shares of Common Stock are authorized for issuance 123,609 of common shares will 2 3 be duly and validly authorized, validly issued and outstanding, fully paid, and nonassessable. Upon such filing, up to 976,220 additional shares of Common Stock will be reserved for issuance upon conversion of the Series A Shares which, when issued, such Shares will be fully paid and nonassessable. The Company has commitments to issue up to 139,875 shares pursuant to business agreements. The Company also has reserved 150,000 shares of Common Stock for issuance primarily pursuant to the Company's Stock Option Plan. (b) Preferred Stock. Upon the filing of the Restated Articles 976,220 shares of Preferred Stock (the "Preferred Stock") will be authorized for issuance of which, 976,220 shares shall be designated as Series A Preferred Stock, up to all of which will be sold pursuant to this Agreement. No Series A Shares will be issued and outstanding prior to the Initial Closing. (c) Except as set forth herein and in Exhibit 3, there are no options, warrants, conversion privileges, preemptive rights or other rights, presently outstanding or any Agreements to create any such rights to purchase any of the authorized but unissued stock of the Company. 3.3 Subsidiaries. The Company does not presently own or control, directly or indirectly, any other corporation, association, or other business entity. The Company is not a participant in any joint venture or partnership. 3.4 Authorization. All corporate action on the part of the Company and its officers, directors and shareholders that is necessary for the authorization, execution and delivery of this Agreement and related documents ((collectively, the "Transaction Documents") by the Company, for the performance of the Company's obligations hereunder and thereunder, and for the authorization, issuance, and delivery of the Shares and the shares of Common Stock issuable upon conversion of the Series A Shares has been taken; and this Agreement, when executed and delivered, shall constitute a valid and legally binding obligation of the Company. 3.5 Validity of Series A Shares. The Shares and the shares of Common Stock issuable upon conversion of the Series A Shares, when issued, sold and delivered in accordance with the terms of this Agreement, will be duly and validly issued, fully paid, and nonassessable. 3.6 Governmental Consents. All consents, approvals, orders, or authorizations of, or registrations, qualifications, designations, declarations, or filings with, any federal or state governmental authority on the part of the Company required in connection with the consummation of the transactions contemplated by this Agreement shall have been obtained prior to and be effective as of each Closing with the exceptions of a notice pursuant to Section 25102(f) of the California Corporations Code and similar filing requirements from different jurisdictions, which will be filed immediately following each Closing. 3.7 Compliance with Other Instruments. The Company is not in violation or default of any provision of its Certificate of Incorporation or Bylaws, each in effect on and as of each Closing, or, in any material respect, of any provision of any instrument, contract, order, 3 4 judgment or decree to which it is a party or by which it is bound, or, to its knowledge, of any provision of any federal or state statute, rule, or governmental regulation applicable to the Company. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not result in any such violation, be in conflict with or constitute, with or without the passage of time and giving of notice, a default under any such provision, or result in the creation or imposition of any lien, claim, or encumbrance on any asset of the Company. 3.8 Litigation. There is no action, suit, proceeding, or investigation pending or currently threatened against the Company that questions the validity of this Agreement or the right of the Company to enter into it, or to consummate the transactions contemplated hereby, or that might result, either individually or in the aggregate, in any material adverse changes in the assets, conditions, affairs, or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment, or decree of any court or government agency or instrumentality. There is no action, suit, proceeding, or investigation by the Company currently pending or that the Company intends to initiate. 3.9 Information; Misleading Statements. The Company has provided each Purchaser with all the information that such Purchaser has requested for deciding whether to purchase the Shares and all information that the Company believes is reasonably necessary to enable such Purchaser to make such decision. No representation, warranty, or statement by the Company in this Agreement or in any written statement or certificate furnished or to be furnished to the Purchasers pursuant to this Agreement contains or will contain any untrue statement of a material fact or, when taken together, omits or will omit to state a material fact necessary to make the statements made herein or therein not misleading. 3.10 No Material Adverse Change. No Material Adverse Effect has occurred or exists, and no event or circumstance has occurred that with notice or the passage of time or both is reasonably likely to result in a Material Adverse Effect with respect to the Company. There have been no Material Adverse Effects, which would effect the transactions contemplated by the Transaction Documents. "Material Adverse Effect" means any adverse effect on the business, operations, properties, prospects, or financial condition of the entity with respect to which such term is used and which is (either alone or together with all other adverse effects) material to such entity, and any material adverse effect on the transactions contemplated under the Transaction Documents. 3.11 No Undisclosed Liabilities. The Company has no liabilities or obligations other than those liabilities represented in the financial statements of the Company distributed to Purchasers or liabilities incurred in the ordinary course of the Company's businesses, which liabilities, individually or in the aggregate, do not or would not have a Material Adverse Effect on the Company. 4 5 3.12 Intellectual Property. The Company owns or has licenses to use all patents, copyrights and trademarks ("Intellectual Property") associated with its business. The Company has all Intellectual Property rights which are needed to conduct the business of the Company as it is now being conducted and as proposed to be conducted. The Company has no reason to believe that the Intellectual Property rights which it owns are invalid or unenforceable or that the use of such Intellectual Property by the Company infringes upon or conflicts with any right of any third party, and neither the Company nor its agents have received notice of any such infringement or conflict. The Company has no knowledge of any infringement of its Intellectual Property by any third party. 3.13 Certain Transactions. Except as disclosed on Schedule 3.13, none of the officers, directors or employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental or sale of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director or any such employee has a substantial interest or is an officer, director, trustee or partner. 3.14 Employees. To the Company's knowledge, no employee of the Company is in violation of any term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of such employee with the Company or any other party because of the nature of the business conducted or to be conducted by the Company. Each employee of the Company with access to confidential or proprietary information has executed a confidentiality agreement. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract. 4. Representations and Warranties of the Purchasers. 4.1 Authorization. Each Purchaser represents and warrants severally and not jointly that this Agreement, when executed and delivered by it, will constitute a valid and legally binding obligation of such Purchaser. 4.2 Legal Investment. Each Purchaser represents and warrants that the purchase of the Shares will be legally permitted by all laws and regulations to which the Purchaser is subject. Furthermore, each Purchaser represents that it has the power and authority to enter into and perform the Agreement. 5 6 4.3 Purchase for Own Account. Each Purchaser represents that it is acquiring the Shares solely for its own account and beneficial interest for investment and not for sale or with a view to distribution of the Shares or any part thereof, has no present intention of selling (in connection with a distribution or otherwise), granting any participation in or otherwise distributing the same, and does not presently have reason to anticipate a change in such intention. Each Purchaser also represents that the entire legal and beneficial interest of the Shares it is purchasing is being purchased for the account of the Purchaser, or its Nominee which has been identified to the Company and is reasonably acceptable to Company, only and neither in whole nor in part for any other person, and that any transfer of the Shares will be made in compliance with the Securities Act of 1933, as amended (the "Act"), the California Corporate Securities Law of 1968, to the extent applicable, and all other applicable securities laws. 4.4 Information and Sophistication. Each Purchaser acknowledges that it has received all the information it has requested from the Company and considers necessary or appropriate for deciding whether to purchase Shares. Each Purchaser represents that such Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and to obtain any additional information necessary to verify the accuracy of the information given the Purchaser. 4.5 Ability to Bear Economic Risk. Each Purchaser acknowledges that investment in the Series A Shares involves a high degree of risk, and represents that it is able, without materially impairing its financial condition, to hold the Shares for an indefinite period of time and to suffer a complete loss on its investment. 4.6 Restricted Securities; Limitation on Disposition. (a) Restricted. Each Purchaser understands that the Shares it is purchasing are characterized as "RESTRICTED SECURITIES" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering, and that under such laws and applicable regulations such securities may be resold without registration under the Act only in certain limited sets of circumstances. In this connection, each Purchaser represents that it is familiar with Securities and Exchange Commission ("SEC") Rule 144, as presently in effect. Each Purchaser understands that prior to the Initial Public Offering of the Company's Common Stock (as defined in the Investors Rights Agreement), the Company will be under no obligation to make public the information necessary for the Purchasers to obtain the benefits of Rule 144. (b) Disposition. Without limiting the foregoing, each Purchaser agrees that it will in no event make any disposition of any of the Shares unless and until: (i) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with said registration statement; or 6 7 (ii) The Purchaser shall have notified the Company of the details of the proposed disposition and, if the Company so reasonably requests, shall have provided the Company with an opinion of counsel for the Purchaser (reasonably acceptable to the Company) to the effect that such disposition will not require registration of the Shares under the Act. (c) Legends. Each Purchaser understands that the Company's stock transfer records will be noted to reflect the restrictions on transferability of the Shares contained herein and that certificates evidencing the Shares may bear one or more of the following legends: (i) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED." (ii) Any legend imposed or required pursuant to applicable state securities law. 5. Conditions of the Purchasers' Obligations at Closing. The obligations of each Purchaser to the Company under this Agreement are subject to the fulfillment, on or before the applicable Closing of each of the following conditions, unless otherwise waived: 5.1 Representations and Warranties. The representations and warranties of the Company set forth in Section 3 of this Agreement shall be true and correct in all material respects on and as of the applicable Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 5.2 No Prohibitions. There shall be no injunctions or other legal impediments which prohibit the transactions contemplated by this Agreement or the Investors Rights Agreement. 5.3 Performance. The Company shall have performed and complied with all covenants, Agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the applicable Closing. 5.4 Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall be obtained and effective as of each applicable Closing, including but not limited to securing qualification of the Shares or a reasonably acceptable exemption from qualification with regard to the applicable securities law of any state. 7 8 5.5 Investors Rights Agreement. The appropriate parties shall have executed and delivered the Investors Rights Agreement in substantially the form attached hereto as Exhibit 5.5. 6. Conditions of the Company's Obligations at Closing. The obligations of the Company to the Purchasers under this Agreement are subject to the fulfillment, on or before each applicable Closing of each of the following conditions, unless otherwise waived: 6.1 Representations and Warranties. The representations and warranties of the Purchasers set forth in Section 4 of this Agreement shall be true and correct in all materials respects on and as of the applicable Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 6.2 Performance. The Purchasers shall have performed and complied with all covenants, Agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by the Purchasers on or before each applicable Closing. 6.3 Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall be obtained and effective as of each applicable Closing. 7. Fees and Expenses. The company shall pay the reasonable fees and expenses of Doty Sundheim & Gilmore as counsel to the Company. The Purchasers shall bear their own expenses in connection with the negotiation, execution, delivery and performance of this Agreement and the transactions contemplated hereby. 8. Miscellaneous. 8.1 Survival. The warranties and representations of the Company contained in or made pursuant to this Agreement shall survive both the execution and delivery of this Agreement and each applicable Closing. 8.2 Entire Agreement. This Agreement constitutes the entire Agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth in this Agreement. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any third party any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 8.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to Agreements performed entirely within the State of California. 8 9 8.4 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one (1) and the same instrument. 8.5 Notices. Any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid. Notices to the Company shall be addressed to the Company at Bay Area Multi Media, Inc., 333 West Santa Clara Blvd., Suite 930, San Jose, CA 95113. Notices to a Purchaser shall be mailed to Purchaser at its address shown on the Schedule of Purchasers, or at such other address as such party may designate by ten (10) days advance written notice to the other party. 8.6 Indemnity. Each party shall indemnify each other party against any loss, cost or damages (including reasonable attorney's fees) incurred as a result of such parties' breach of any representation, warranty, covenant or agreement contained in the Transaction Documents or incurred in connection with the enforcement of this indemnity. 8.7 Attorneys' Fees. Should any litigation be commenced between the parties concerning the rights or obligations of the parties under this Agreement, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for its attorneys' fees in such litigation. This amount shall be determined by the court in such litigation or in a separate action brought for that purpose. 8.8 Post Judgment. In addition to any amount received as attorneys' fees, the prevailing party also shall be entitled to receive from the party held to be liable, an amount equal to the attorneys' fees and costs incurred in enforcing any judgement against such party. This Section is severable from the other provisions of this Agreement and survives any judgment and is not deemed merged into any judgment. 9 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. Company: Bay Area Multimedia, Inc., a California corporation By: /s/ RAYMOND C. MUSCI ----------------------------------------------- Raymond C. Musci, President Purchasers: Mark Dyne --------------------------------------------------- Printed Name Address: ------------------------------------------- --------------------------------------------------- /s/ ROBERT HOLMES --------------------------------------------------- Printed Name Robert Holmes Address: 205 Asheroken Avenue ------------------------------------------- Northport, NY 11768-1120 --------------------------------------------------- Purchasers: Franchise Films /s/ ELIE SAMAHA --------------------------------------------------- Printed Name Elie Samaha Address: 8228 Sunset Boulevard ------------------------------------------- Suite 308, Los Angeles, CA 90046 --------------------------------------------------- FIMAS, L.P. --------------------------------------------------- Printed Name /s/ GM SUNDHEIM, G.P. Address: ------------------------------------------- --------------------------------------------------- Purchasers: Raymond Musci --------------------------------------------------- Printed Name Address: 20760 Monte Sunset Dr. ------------------------------------------- San Jose, CA 95120 --------------------------------------------------- Purchasers: /s/ ANTHONY R. WILLIAMS Anthony R. Williams --------------------------------------------------- Printed Name Address: 243 W 11th St., ------------------------------------------- NY 10014 --------------------------------------------------- Purchasers: /s/ KEVIN BERMEISTER Kevin Bermeister --------------------------------------------------- Printed Name Address: 6355 Topanga Canyon Blvd #120 ------------------------------------------- Woodland Hills CA 91367 --------------------------------------------------- SIGNATURE PAGE TO THE BAY AREA MULTIMEDIA, INC. STOCK PURCHASE AGREEMENT 10 11 EXHIBIT A SCHEDULE OF PURCHASERS
AGGREGATE AGGREGATE COMMON SERIES A STOCK SERIES A PREFERRED INVESTING ENTITY NAME AND COMMON PURCHASE PREFERRED PURCHASE AGGREGATE ADDRESS STOCK PRICE STOCK PRICE CONSOLIDATED - -------------------------------------- -------- ------------- --------- ------------- ------------- Raymond Musci 502,800 $1,047,296.25 $1,047,296.25 20760 Monte Sunset Drive San Jose, CA 95120 Anthony Williams 89,870 $ 46,117.16 351,000 $ 761,670.00 $ 807,787.16 243 W. 11th Street New York, NY 10014 Robert Holmes 22,474 $ 11,529.16 87,750 $ 190,417.50 $ 201,946.66 205 Asharoken Avenue Northport, NY 11768 Brilliant Digital Entertainment 3,656 $ 1,875.53 10,969 $ 23,802.73 $ 25,678.26 c/o Mark Dyne 6355 Topanga Canyon Blvd., Suite 120 Woodland Hills, CA 91367 Brilliant Digital Entertainment 3,656 $ 1,875.53 10,969 $ 23,802.73 $ 25,678.26 c/o Kevin Bermeister 6355 Topanga Canyon Blvd., Suite 120 Woodland Hills, CA 91367 Franchise Films 7,312 $ 3,751.06 21,938 $ 47,605.46 $ 51,356.52 c/o Elie Samaha and Gerrard Getz 8591 Wonderland Avenue Los Angeles, CA 90046 FIMAS, L.P. A Partnership 3,656 $ 1,875.53 10,969 $ 23,802.73 $ 25,678.26 George M. Sundheim, General Partner 1920 Barbara Drive Palo Alto, CA 94303 TOTAL 130,624 $ 67,023.97 996,395 $2,118,397.40 $2,202,801.30
i 12 EXHIBIT 1.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION ii 13 EXHIBIT 3 EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES iii 14 EXHIBIT 5.5 INVESTORS RIGHTS AGREEMENT iv EX-10.9 19 v72115orex10-9.txt EXHIBIT 10.9 1 EXHIBIT 10.9 BAY AREA MULTIMEDIA, INC. INVESTOR RIGHTS AGREEMENT May 17, 2000 2 TABLE OF CONTENTS SECTION 1 Restrictions on Transferability; Registration Rights 1 1.1. Certain Definitions.............................................................1 1.2. Restrictions....................................................................3 1.3. Restrictive Legend..............................................................3 1.4. Consent.........................................................................4 1.5. Notice of Proposed Transfers....................................................4 1.6. Requested Registration..........................................................4 1.7. Company Registration............................................................6 1.8. Registration on Form S 3........................................................7 1.9. Limitations on Subsequent Registration Rights...................................8 1.10. Expenses of Registration.......................................................8 1.11. Registration Procedures........................................................9 1.12. Indemnification...............................................................10 1.13. Information by Holder.........................................................12 1.14. Rule 144 Reporting............................................................12 1.15. Transfer of Registration Rights...............................................12 1.16. Standoff Agreement............................................................13 1.17. Termination of Rights.........................................................13 SECTION 2 Affirmative Covenants of the Company.............................................13 2.1. Financial Information..........................................................13 2.2. Inspection.....................................................................14 2.3. Assignment of Rights to Financial Information..................................14 2.4. Termination of Covenants.......................................................14 2.5. Right of First Offer........................................................... SECTION 3 Miscellaneous....................................................................14 3.1. Voting Agreement...............................................................14 3.2. Assignment.....................................................................14 3.3. Third Parties..................................................................15 3.4. Additional Purchasers..........................................................15 3.5. Amendment and Supersession of the Rights Agreement.............................15 3.6. Governing Law..................................................................15 3.7. Counterparts...................................................................15 3.8. Notices........................................................................15 3.9. Severability...................................................................16 3.10. Amendment and Waiver..........................................................16 3.11. Effect of Amendment or Waiver.................................................16 3.12. Rights of Holders............................................................. 3.13. Delays or Omissions........................................................... EXHIBITS: Exhibit A: Schedule of Investors
i 3 INVESTOR RIGHTS AGREEMENT THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is entered into as of May 17, 2000, among Bay Area Multimedia, Inc., a California corporation (the "Company"), and the individuals and entities listed on Exhibit A attached hereto (the "Investors" or individually the "Investor"). RECITALS A. The Company is issuing up to 976,220 shares of Series A Preferred Stock and 164,530 shares of Common Stock to the purchasers of stock pursuant to a Stock Purchase Agreement of even date herewith (the "Stock Purchase Agreement"). B. The Company desires to grant certain registration and information rights to the Shareholders (as defined below). NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties agree as follows: SECTION 1 Restrictions on Transferability; Registration Rights 1.1. Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: (a) "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (b) "Conversion Shares" means the Common Stock issued or issuable upon conversion of the Series A Preferred Stock. (c) "Common Stock" means Common Stock of the Company issued pursuant to the Stock Purchase Agreement. 1 4 (d) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. (e) "Holder" shall mean any shareholder of the Company holding Registrable Securities and any person holding securities convertible into or exchangeable for Registrable Securities. (f) "Initiating Holders" shall mean any Holders holding, in the aggregate, at least 50% of the Conversion Shares. (g) "Preferred Stock" means the shares of Series A Preferred Stock issued pursuant to the Series A Agreement. (h) The terms "register", "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. (i) "Registrable Securities" means the Conversion Shares, the Common Stock and any Common Stock of the Company issued or issuable in respect of the Conversion Shares or Common Stock or other securities issued or issuable upon conversion of the Preferred Stock or upon any stock split, stock dividend, recapitalization, or similar event, or any Common Stock otherwise issued or issuable with respect to the Preferred Stock, the Conversion Shares or the Common Stock; provided, however, that shares of Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (a) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (b) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale. (j) "Registration Expenses" shall mean all expenses incurred by the Company in complying with Sections 1.6, 1.7 and 1.8 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). (k) "Restricted Securities" shall mean the securities of the Company required to bear the legend set forth in Section 1.3 hereof. (l) "Rule 144" shall mean Rule 144 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. 2 5 (m) "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. (n) "Selling Expenses" shall mean all selling commissions and stock transfer taxes applicable to the securities registered by the Holders and all fees and disbursements of counsel for the Holders (as limited by Section 1.10), but shall not include underwriting discounts and commissions. (o) "Shareholders" shall mean the Investors and any permitted transferees, collectively. 1.2. Restrictions. The Restricted Securities shall not be sold, assigned, transferred or pledged except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. The Investors will cause any proposed purchaser, assignee, transferee or pledgee of the Restricted Securities to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement. 1.3. Restrictive Legend. Each certificate representing (i) the Preferred Stock, (ii) the Conversion Shares, (iii) the Common Stock, and (iv) any other securities issued in respect of the securities referenced in clauses (i), (ii) and (iii) upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the provisions of Section 1.5 below) be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. THESE CONDITIONS TO TRANSFER SHALL TERMINATE ON THE 180TH DAY FOLLOWING THE EFFECTIVE DATE OF THE COMPANY'S INITIAL PUBLIC OFFERING. 3 6 1.4. Consent. The Investors and each Holder consents to the Company making a notation on its records and giving instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer established in this Section 1. 1.5. Notice of Proposed Transfers. The holder of each certificate representing Restricted Securities, by acceptance thereof, agrees to comply in all respects with the provisions of this Section 1. Prior to any proposed sale, assignment, transfer or pledge of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and shall be accompanied at such holder's expense by either (i) a written opinion of legal counsel who shall, and whose legal opinion shall, be reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, or (iii) any other evidence reasonably satisfactory to counsel to the Company, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. The Company will not require such a legal opinion or "no action" letter in any transaction which counsel to the Company reasonably concludes is in compliance with Rule 144. Each certificate evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made to a person or entity not affiliated with the Company pursuant to Rule 144, the appropriate restrictive legend set forth in Section 1.3 above, except that such certificate shall not bear such restrictive legend if, in the opinion of counsel for such holder and the Company, such legend is not required in order to establish compliance with any provisions of the Securities Act. 1.6. Requested Registration. (a) Request for Registration. If the Company shall receive a written request from the Initiating Holders that the Company effect any registration, qualification or compliance with respect to all or any portion of the issued and issuable Registrable Securities and having an anticipated aggregate offering price of such registration, qualification or compliance, net of standard underwriting discounts, of not less than $5,000,000, the Company will: (i) promptly give twenty (20) days prior written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its best efforts to effect such registration, qualification or compliance (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue 4 7 sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within thirty (30) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 1.6: (1) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (2) Prior to the earlier of (a) six (6) months following the effective date of the Initial Public Offering or (b) May 15, 2005; (3) During the period starting with the date sixty (60) days prior to the Company's estimated date of filing of, and ending on the date three (3) months immediately following the effective date of, any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective and that the Company's estimate of the date of filing such registration statement is made in good faith; (4) After the Company has effected one (1) such registrations pursuant to this subparagraph 1.6(a) and such registration has been declared or ordered effective; or (5) If the Company shall furnish to such Holders a certificate, signed by the President of the Company, stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for a registration statement to be filed in the near future, then the Company's obligation to use its best efforts to register, qualify or comply under this Section 1.6 shall be deferred for a period not to exceed one hundred twenty (120) days from the date of receipt of written request from the Initiating Holders; provided, however, that the Company may not utilize this right more than once. Subject to the foregoing clauses (1) through (6), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders. (b) Underwriting. In the event that a registration pursuant to Section 1.6 is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the notice given pursuant to Section 1.6(a)(i). The right of any 5 8 Holder to registration pursuant to Section 1.6 shall be conditioned upon such Holder's participation in the underwriting arrangements required by this Section 1.6(b) and the inclusion of such Holder's Registrable Securities in the underwriting, to the extent requested, to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Initiating Holders (which managing underwriter shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 1.6, if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all Holders of Registrable Securities and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement, provided, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest 100 shares. If any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Initiating Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration, and such Registrable Securities shall not be transferred in a public distribution prior to ninety (90) days after the effective date of such registration. 1.7. Company Registration. (a) Notice of Registration. If at any time or from time to time, the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders other than (i) a registration relating solely to employee benefit plans, or (ii) a registration relating solely to a Commission Rule 145 transaction, the Company will: (i) promptly give to each Holder twenty (20) days prior written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests made within fifteen (15) days after receipt of such written notice from the Company by any Holder, but only to the extent that such inclusion will not diminish the number of securities included by holders of the Company's securities who have demanded such registration. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise 6 9 the Holders as a part of the written notice given pursuant to Section 1.7(a)(i). In such event, the right of any Holder to registration pursuant to Section 1.7 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 1.7, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the number of Registrable Securities to be included in the registration and underwriting (up to the exclusion of all Registrable Securities in the event of the Company's Initial Public Offering), on a pro rata basis based on the total number of securities (including, without limitation, Registrable Securities) entitled to registration pursuant to registration rights granted to the participating Holders by the Company; provided, however, that if such offering is not the initial offering of shares to the public, no such reduction may reduce the number of securities being sold by the Holders to less than twenty-five percent (25%) of the shares being sold in such offering. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder or other holder to the nearest 100 shares. If any Holder or other holder disapproves of the terms of any such underwriting, he or she may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution prior to ninety (90) days after the effective date of the registration statement relating thereto. For any Holder that is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "Holder," and any pro rata reduction with respect to such "Holder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "Holder," as defined in this sentence. (c) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 1.7 prior to the effectiveness of such registration, whether or not any Holder has elected to include securities in such registration. 1.8. Registration on Form S-3. (a) If any Initiating Holders request in writing that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of the Registrable Securities, the reasonably anticipated aggregate price to the public of which, net of underwriting discounts and commissions, would exceed $1,500,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use its best efforts to cause such Registrable Securities to be registered for the offering on such form. The Company will (i) promptly give written notice of the proposed registration to all other Holders, and (ii) as soon as practicable, use its best efforts to effect such registration (including, without limitation, the execution of an undertaking to file 7 10 post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within thirty (30) days after receipt of such written notice from the Company. (b) Notwithstanding the foregoing, the Company shall not be obligated to take any action pursuant to this Section 1.8: (i) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (ii) during the period starting with the date sixty (60) days prior to the Company's estimated date of filing of, and ending on the date six (6) months immediately following the effective date of, a registration statement (other than with respect to a registration statement relating to a Rule 145 transaction, an offering solely to employees or any other registration which is not appropriate for the registration of Registrable Securities), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; (iii) if the Company has effected a registration pursuant to this subsection 1.8 within the prior 12 months; (iv) if the anticipated aggregate offering price of such registration is less than $1,500,000; or (v) if the Company shall furnish to such Holder a certificate signed by the President of the Company stating that, in the good faith judgment of the Board of Directors, it would be seriously detrimental to the Company or its shareholders for registration statements to be filed in the near future, then the Company's obligation to use its best efforts to file a registration statement shall be deferred for a period not to exceed ninety (90) days from the receipt of the request to file such registration by such Holder or Holders. 1.9. Limitations on Subsequent Registration Rights. From and after the date hereof, the Company shall not, without the consent of the holders of a majority of the then outstanding Registrable Securities, enter into any agreement granting any holder or prospective holder of any securities of the Company registration rights with respect to such securities which such new registration rights, including standoff obligations, are superior to the registration rights granted Holders hereunder. 1.10. Expenses of Registration. All Registration Expenses incurred in connection with any registration pursuant to Sections 1.6, 1.7 and 1.8 and the reasonable cost of one special legal counsel to represent all of the Holders together in any such registration shall be borne by the Company. If a registration proceeding is begun upon the request of Initiating Holders pursuant to Section 1.6, but such request is subsequently withdrawn, then the Holders of Registrable Securities to have been registered may either: (i) bear all Registration Expenses of such proceeding, pro rata on the basis of the number of shares to have been registered, in which case the Company shall be deemed not to have effected a registration pursuant to subparagraph 1.6(a) of this Agreement; or (ii) require the Company to bear all Registration Expenses of such proceeding, in which case the Company shall be deemed to have effected a 8 11 registration pursuant to subparagraph 1.6(a) of this Agreement. Notwithstanding the foregoing, however, if at the time of the withdrawal, the Holders have learned of a material adverse change in the condition, business or prospects of the Company from that known to the Holders at the time of their request, then the Holders shall not be required to pay any of said Registration Expenses. In such case, the Company shall be deemed not to have effected a registration pursuant to subparagraph 1.6(a) of this Agreement. Unless otherwise stated, all other Selling Expenses relating to securities registered on behalf of the Holders shall be borne by the Holders of the registered securities included in such registration pro rata on the basis of the number of shares so registered. 1.11. Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Section 1, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) Prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for at least one hundred eighty (180) days or until the distribution described in the registration statement has been completed; and (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus 9 12 included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange or market system on which similar securities issued by the Company are then listed. (h) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. (i) Use its best efforts to furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.12. Indemnification. (a) The Company will indemnify each Holder, each of its officers and directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 1, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, preliminary prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation or any alleged violation by the Company of any rule or regulation promulgated under the Securities Act or the Exchange Act or any state securities law applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers and directors, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, as such 10 13 expenses are incurred, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder or controlling person and stated to be specifically for use therein. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each person who controls the Company within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, persons or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, as such expenses are incurred, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the indemnity agreement contained in this Subsection 1.12(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and provided further, that the total amounts payable in indemnity by a Holder under this Subsection 1.12(b) in respect of any claim, loss, damage, liability or action, shall not exceed the net proceeds received by such Holder in the registered offering out of which such claim, loss, damage, liability or action arises. (c) Each party entitled to indemnification under this Section 1.12 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense; provided, however, that an Indemnified Party (together with all other Indemnified Parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the Indemnifying Party, if representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnified Party and any other party represented by such counsel in such proceeding. The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 1 unless the 11 14 failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.12. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 1.13. Information from Holder. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders, the Registrable Securities held by them and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 1. 1.14. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Exchange Act; and (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements). (c) So long as Holder owns any Registrable Securities, to furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effected date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the 1934 Act (at any time after it has become subject to the reporting requirements of the 1934 Act), a copy of the more recent annual or quarterly report of the Company, and such other reports and documents of the Company as a Holder may reasonably in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration (at any time after the Company has become subject to the reporting requirements of the 1934 Act). 1.15. Transfer of Registration Rights. The rights to cause the Company to register securities granted Holders under Sections 1.6, 1.7 and 1.8 may be assigned to a transferee or assignee reasonably acceptable to the Company in connection with any transfer or assignment of Registrable Securities by a Holder; provided that (a) such transfer may otherwise be effected in accordance with applicable securities laws, (b) notice of such assignment is given to the Company, and (c) such transferee or assignee (i) is a wholly-owned subsidiary or constituent partner (including limited partners, retired partners, spouses and ancestors, lineal 12 15 descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) of such Holder, or (ii) acquires from such Holder at least 500,000 shares of Common Stock, Preferred Stock, Conversion Shares or Registrable Securities (as appropriately adjusted for stock splits and the like), (d) if the proposed transferee is a competitor of the Company, the consent of the Company shall be required. 1.16. Standoff Agreement. Each Holder agrees in connection with any registration of the Company's securities (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, not to sell, make any short sale of, loan, pledge (or otherwise encumber or hypothecate), grant any option for the purchase of, or otherwise directly or indirectly dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of the Company and such managing underwriters for 180 days following the effective date of the registration statement for such offering; provided, however, that the Holders shall not be subject to such lockup unless the then current key employees, officers and directors of the Company who own stock of the Company shall also be bound by such restrictions. 1.17. Termination of Registration Rights. The rights of any particular Holder to cause the Company to register securities under Sections 1.6, 1.7 and 1.8 shall terminate with respect to such Holder after the earlier of either (i) the fifth anniversary of the effective date of the Company's Initial Public Offering or (ii) such date when all remaining Registrable Securities held or entitled to be held by such Holder may be sold in reliance on Rule 144 promulgated under the Securities Act during any ninety day period. SECTION 2. Affirmative Covenants of the Company The Company hereby covenants and agrees as follows: 2.1 Financial Information. The Company will furnish the following reports: (a) To each Investor, as soon as practicable after the end of each fiscal year, and in any event within ninety (90) days thereafter, audited consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such fiscal year, and consolidated statements of income and cash flows of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by independent public accountants of national standing selected by the Company; and (b) As soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, unaudited balance sheets of the Company and its subsidiaries, if any, as of the end of each such quarter, and consolidated statements of income and cash flows of the Company and its subsidiaries, if any, for each such quarter, all prepared in accordance with generally accepted accounting principles; and 13 16 (c) Furnish to such Investor as soon as practicable, and in any case within forty-five (45) days after the end of each calendar month (except the last month of the Company's fiscal year), monthly unaudited financial statements, including an unaudited Balance Sheet, an unaudited Statement of Income and an unaudited Statement of Cash Flows, together with a comparison to the Company's operating plan and budget and statements of the Chief Financial Officer of the Company explaining any significant differences in the statements from the Company's operating plan and budget for the month covered and stating that such statements fairly present the consolidated financial position and consolidated financial results of the Company for the month covered; and (d) The Company shall also furnish to such Investor, within a reasonable time of its preparation, amendments to the annual budget, if any. 2.2. Inspection. The Company shall permit an Investor holding at least 50,000 or more Registrable Shares, at such Investor's expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by such Investor; provided, however, that the Company shall not be obligated pursuant to this Section 2.2 to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. 2.3. Assignment of Rights to Financial Information. The rights granted pursuant to Section 2.1 may be assigned by an Investor to a third party who acquires at least 50,000 Registrable Shares (as adjusted for any stock splits, consolidations and the like) from such Investor and who is not a competitor, or affiliated in any manner with a competitor, of the Company, provided that the Company receives notice twenty (20) days prior to such assignment. 2.4. Termination of Covenants. The covenants set forth in Sections 2.1 through 2.3 shall terminate on, and be of no further force or effect after, the closing of the Initial Public Offering. SECTION 3 Miscellaneous 3.1. Assignment. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. 3.2. Third Parties. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. 14 17 3.3. Additional Purchasers. Any additional purchasers of shares of the Company's Series A Preferred Stock allowed under the terms of the Stock Purchase Agreement shall become a party to this Agreement by signing a counterpart hereof, and shall thereupon be considered an Investor hereunder, and each party to this Agreement consents thereto. Any other person or entity shall become a party to this Agreement as an Investor, with the written consent of the Company and of Holders of a majority of the Registrable Securities, by signing a counterpart hereof and shall thereupon be considered an Investor hereunder and each party to this Agreement consents thereto. The Company shall promptly deliver to each party an amended list which includes the additional Investors. 3.4. Governing Law. This Agreement shall be governed by and construed under the laws of the State of California. 3.5. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3.6. Notices. Any notice required or permitted by this Agreement shall be in writing and shall be sent by prepaid registered or certified mail, return receipt requested, addressed to the other party at the address shown below or at such other address for which such party gives notice hereunder. Such notice shall be deemed to have been given three (3) days after deposit in the mail. Company: Bay Area Multimedia, Inc. 333 West Santa Clara Street, Suite 950 San Jose, California 95113 Attn.: Raymond C. Musci With copy to: Doty Sundheim & Gilmore 260 Sheridan Avenue, Suite 200 Palo Alto, CA 94306 Attn: George M. Sundheim, III 3.7. Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, portions of such provisions, or such provisions in their entirety, to the extent necessary, shall be severed from this Agreement, and the balance of this Agreement shall be enforceable in accordance with its terms. 3.8. Amendment and Waiver. Any provision of this Agreement may be amended with the written consent of the Company and the Holders of more than (50%) of the issued and issuable Registrable Securities. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder and the Company. In addition, the Company may waive performance of any obligation owing to it, as to some or all of the Holders, or agree to accept alternatives to such performance, without obtaining the consent of any Holder. In the event that an underwriting agreement is entered into between the Company and any 15 18 Holder, and such underwriting agreement contains terms differing from this Agreement, as to any such Holder the terms of such underwriting agreement shall govern. 3.9. Effect of Amendment or Waiver. The Holders and their successors and assigns acknowledge that by the operation of Section 3.10 hereof the Holders of more than fifty percent (50%) of the issued and issuable Registrable Securities, acting in conjunction with the Company, will have the right and power to diminish or eliminate any or all rights or increase any or all obligations pursuant to this Agreement. 3.10. Rights of Holders. Each Holder shall have the absolute right to exercise or refrain from exercising any right or rights that such Holder may have by reason of this Agreement, including, without limitation, the right to consent to the waiver or modification of any obligation under this Agreement, and such Holder shall not incur any liability to any other holder of any securities of the Company as a result of exercising or refraining from exercising any such right or rights. 3.11. Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party to this Agreement, upon any breach or default of the other party, shall impair any such right, power or remedy of such non-breaching party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any holder, shall be cumulative and not alternative. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY: BAY AREA MULTIMEDIA, INC. By: /s/ RAYMOND C. MUSCI ---------------------------------- Raymond C. Musci, President 16 19 COUNTERPART SIGNATURE PAGE Bay Area Multimedia, Inc. INVESTOR RIGHTS AGREEMENT INVESTOR: If the signatory is an individual, please sign and print your name to the right and print your address below. ------------------------------ (Printed Name) Address: ------------------------------ - ------------------------------------ Signature(s) - ------------------------------------ Date: , 2000 - ------------------------------------ ------------- If the signatory is an organization, please Name of Organization: print the legal name of the organization and have an authorized person sign to the FIMAS, L.P. right and print your address below. ------------------------------ Address: - ------------------------------------ By: /s/ GM Sundheim III --------------------------- - ------------------------------------ Title: G.P. ----------------------- - ------------------------------------ Date: 5/17 , 2000 ------------- 17 20 COUNTERPART SIGNATURE PAGE Bay Area Multimedia, Inc. INVESTOR RIGHTS AGREEMENT INVESTOR: If the signatory is an individual, please sign and print your name to the right and print your address below. Anthony R. Williams ------------------------------ (Printed Name) Address: /s/ Anthony R. Williams 243 W 11th St. ------------------------------ - ------------------------------------ Signature(s) NY 10014 - ------------------------------------ Date: , 2000 - ------------------------------------ --------------- If the signatory is an organization, please Name of Organization: print the legal name of the organization and have an authorized person sign to the right and print your address below. ------------------------------ Address: - ------------------------------------ By: --------------------------- - ------------------------------------ Title: ------------------------ - ------------------------------------ Date: , 2000 -------------- 17 21 COUNTERPART SIGNATURE PAGE Bay Area Multimedia, Inc. INVESTOR RIGHTS AGREEMENT INVESTOR: If the signatory is an individual, please sign and print your name to the right and print your address below. Kevin Bermeister ------------------------------ (Printed Name) Address: /s/ Kevin Bermeister 6355 Topanga Canyon Blvd #120 ------------------------------ - ------------------------------------ Signature(s) Woodland Hills CA 91367 - ------------------------------------ Date: , 2000 - ------------------------------------ -------------- If the signatory is an organization, please Name of Organization: print the legal name of the organization and have an authorized person sign to the right and print your address below. ------------------------------ Address: - ------------------------------------ By: --------------------------- - ------------------------------------ Title: ------------------------ - ------------------------------------ Date: , 2000 -------------- 17 22 COUNTERPART SIGNATURE PAGE Bay Area Multimedia, Inc. INVESTOR RIGHTS AGREEMENT INVESTOR: If the signatory is an individual, please sign and print your name to the right and print your address below. Robert Holmes ------------------------------ (Printed Name) Address: /s/ Robert Holmes 205 Asheroken Avenue ------------------------------ - ------------------------------------ Signature(s) Northport, NY 11768-1120 - ------------------------------------ Date: , 2000 - ------------------------------------ -------------- If the signatory is an organization, please Name of Organization: print the legal name of the organization and have an authorized person sign to the right and print your address below. ------------------------------ Address: - ------------------------------------ By: --------------------------- - ------------------------------------ Title: ------------------------ - ------------------------------------ Date: , 2000 -------------- 18 23 COUNTERPART SIGNATURE PAGE Bay Area Multimedia, Inc. INVESTOR RIGHTS AGREEMENT INVESTOR: If the signatory is an individual, please sign and print your name to the right and print your address below. Raymond C. Musci ------------------------------ (Printed Name) Address: /s/ Raymond C. Musci 20760 Monte Sunset Drive ------------------------------ - ------------------------------------ Signature(s) San Jose, CA - ------------------------------------ 95120 Date: , 2000 - ------------------------------------ -------------- If the signatory is an organization, please Name of Organization: print the legal name of the organization and have an authorized person sign to the right and print your address below. ------------------------------ Address: - ------------------------------------ By: --------------------------- - ------------------------------------ Title: ------------------------ - ------------------------------------ Date: , 2000 -------------- 19 24 COUNTERPART SIGNATURE PAGE Bay Area Multimedia, Inc. INVESTOR RIGHTS AGREEMENT INVESTOR: If the signatory is an individual, please sign and print your name to the right and print your address below. Mark Dyne ------------------------------ (Printed Name) Address: /s/ Mark Dyne ------------------------------ - ------------------------------------ Signature(s) - ------------------------------------ Date: , 2000 - ------------------------------------ -------------- If the signatory is an organization, please Name of Organization: print the legal name of the organization and have an authorized person sign to the right and print your address below. ------------------------------ Address: - ------------------------------------ By: --------------------------- - ------------------------------------ Title: ------------------------ - ------------------------------------ Date: , 2000 -------------- 20 EX-10.10 20 v72115orex10-10.txt EXHIBIT 10.10 1 Exhibit 10.10 BAY AREA MULTIMEDIA, INC. STOCK PURCHASE AGREEMENT This Agreement is made and entered into this 21st day of September, 2000, by and between Bay Area Multimedia, Inc., a Delaware corporation (the "Corporation"), and Bay Area Multimedia, Inc., a California Corporation ("Purchaser"). THE PARTIES AGREE AS FOLLOWS: 1. Sale of Stock. The Corporation hereby agrees to sell to Purchaser and Purchaser hereby agrees to purchase an aggregate of 1,000 shares of the Corporation's Common Stock (the "Shares"), at the price of $.001 per share (the "Purchase Price"), for an aggregate purchase price of $1.00 payable by check. 2. Closing. Upon execution of this Agreement, Purchaser shall deliver a check to the Corporation, and the Corporation shall deliver a duly issued stock certificate for the Shares to Purchaser. 3. Investment Representations; Restrictions on Transfer. 3.1. Investment Representations. Purchaser represents and warrants to the Corporation that: (a) Purchaser is aware of the Corporation's business affairs and financial condition and has acquired sufficient information about the Corporation to reach an informed and knowledgeable decision to acquire the Shares. Purchaser has received all information from the Corporation which Purchaser has requested and deems relevant to an evaluation of the risks and merits of this investment. Purchaser has such knowledge and experience in financial and business matters that Purchaser is capable of evaluating the merits and risks of investment in the Shares. Purchaser is purchasing the Shares for investment for Purchaser's own account only and not with a view to, or for resale in connection with, any "distribution" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). (b) Purchaser understands that an investment in the Corporation is speculative, that any possible benefits from the investment are uncertain, and that Purchaser must bear the economic risks of the investment in the Corporation for an indefinite period of time. Purchaser is able to bear these economic risks and to hold the Shares for an indefinite period of time. (c) Purchaser acknowledges and understands that the Shares constitute "restricted securities" under the Securities Act and must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is 2 available. Purchaser further acknowledges and understands that the Corporation is under no obligation to register the Shares. Purchaser understands that the certificate evidencing the Shares will be imprinted with a legend which prohibits the transfer of the Shares unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Corporation. (d) Purchaser is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired in a non-public offering, subject to the satisfaction of certain conditions. Purchaser understands that the Corporation may not be satisfying, and is not obligated to satisfy, any requirement of Rule 144 at such time as Purchaser might wish to sell any of the Shares, and, if so, Purchaser might be precluded from selling any of the Shares under Rule 144. Notwithstanding this Section 3.1(d), Purchaser acknowledges and agrees to the restrictions set forth in Section 3.2. (e) Purchaser is an entity with its principal place of business in the State of California. 3.2. Hold Back Agreement. Purchaser agrees, in connection with the Corporation's initial underwritten public offering of the Corporation's securities: (a) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock of the Corporation held by Purchaser (other than those shares included in the registration) without the prior written consent of the Corporation or the underwriters managing such initial underwritten public offering of the Corporation's securities for 180 days from the effective date of such registration, and (b) further agrees to execute any agreement reflecting (a) above as may be requested by the underwriters at the time of the public offering. 4. Legend. The share certificate evidencing the Shares issued hereunder shall be endorsed with the following legend (in addition to any legends required under applicable state securities laws): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. 5. General Provisions. 5.1. Governing Law/Entire Agreement. This Agreement shall be governed by the laws of the State of California. This Agreement represents the entire agreement between the parties with respect to the purchase of Common Stock by Purchaser and may only be modified or amended in a writing signed by both parties. 5.2. Notices. Any notice, demand or request required or permitted to be given by either the Corporation or Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or two (2) days after deposit in the U.S. 3 mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. 5.3. Arbitration. Any dispute between the parties arising out of this Agreement shall be submitted to final and binding arbitration in the City of San Jose, California, under the Commercial Arbitration Rules of the American Arbitration Association then in effect (the "AAA Rules"), upon written notification and demand of either party. The following provisions shall be applicable to any such proceedings and shall control to the extent of any inconsistency with the AAA Rules: (a) In the demand for arbitration, the American Arbitration Association shall be requested to submit a list of prospective arbitrators consisting of persons experienced in matters involving business contracts. In any arbitration pursuant to this Section, the award shall be rendered by a single arbitrator appointed jointly by the parties, or if the parties cannot agree to a single arbitrator within 30 days after the commencement of the arbitration proceeding, by an arbitrator appointed in accordance with the AAA Rules. For purposes of this Section, "commencement of the arbitration proceeding" shall be deemed to be the date on which a written demand for arbitration is received by the American Arbitration Association from one of the parties. (b) The provisions of California Code of Civil Procedure Section 1283.05 and the laws of the State of California are incorporated herein and shall be applicable to the arbitration. (c) In making the award, the arbitrator shall award recovery of costs and expenses of the arbitration and reasonable attorney's fees to the prevailing party. (d) Any award may be entered as a judgement in any court of competent jurisdiction. Should judicial proceedings be commenced to enforce or carry out this provision or any arbitration award, the prevailing party in such proceedings shall be entitled to reasonable attorney's fees and costs in addition to other relief. (e) Either party shall have the right, prior to receiving an arbitration award, to obtain preliminary relief from a court of competent jurisdiction to: (i) avoid injury or prejudice to that party; (ii) or to protect the rights of any party; or (iii) to maintain the status quo as it existed immediately prior to the dispute. (f) Service of any notices in the course of any arbitration shall be sufficient if given as provided in the Notice Section of this Agreement. 5.4. Attorneys' Fees. If any litigation, arbitration or other proceeding be commenced between the parties concerning the rights or obligations of the parties under this Agreement, the party prevailing in such proceeding shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for its attorneys' fees in such proceeding. This amount shall be determined by the court, arbitrator or other applicable person in such proceeding or in a separate action brought for that purpose. 4 5.5. Post Judgment. In addition to any amount received as attorneys' fees, the prevailing party or parties also shall be entitled to receive from the party or parties held to be liable, an amount equal to the attorneys' fees and costs incurred in enforcing any judgement against such party or parties. This Section is severable from the other provisions of this Agreement and survives any judgment and is not deemed merged into any judgment. 5.6. Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, such provision shall be modified to the minimum extent necessary to make such provision enforceable, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 5 IN WITNESS WHEREOF, the parties have duly executed this Agreement effective as of the date first set forth above. Corporation: Bay Area Multimedia, Inc., a Delaware corporation 333 West Santa Clara Boulevard San Jose, CA 95113 /s/ RAYMOND C. MUSCI By: ____________________________________ Raymond C. Musci, President Purchaser: Bay Area Multimedia, Inc., a California corporation 333 West Santa Clara Boulevard San Jose, CA 95113 /s/ RAYMOND C. MUSCI By: __________________________________ Raymond C. Musci, President EX-10.11 21 v72115orex10-11.txt EXHIBIT 10.11 1 Exhibit 10.11 BAM! ENTERTAINMENT, INC. SERIES B STOCK PURCHASE AGREEMENT DECEMBER 28, 2000 2 EXHIBITS Exhibit A - Amended and Restated Certificate of Incorporation Exhibit B - Registration Rights Agreement Exhibit C - Proprietary Information and Inventions Agreement Exhibit D - Bylaws of the Company Exhibit E - Opinion of Counsel to the Company Exhibit F - Co-Sale and Right of First Refusal Agreement SCHEDULES Schedule 1 - Schedule of Purchasers Schedule 2.2(a) - Contingent Reserved Common Shares Schedule 2.2(d) - Stockholders and Option Holders List Schedule 2.3 - Subsidiaries Schedule 2.7 - Litigation Schedule 2.8(a) - Material Intellectual Property Schedule 2.8(b) - Certain IP Agreements Schedule 2.10 - Agreements Schedule 2.10(b) - Nonbinding Contracts Schedule 2.11 - Liabilities Schedule 2.13 - Conflicts Schedule 2.17 - Employee Benefit Plans Schedule 2.24 - Financial Statements Schedule 2.25(d) - Changes; Contracts/Agreements Schedule 2.25(e) - Changes; Compensation/Agreements with employees, representatives, agents, officers, directors or stockholders Schedule 2.25(i) - Changes; Loans/Guarantees 3 SERIES B STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of December 28, 2000, is entered into by and among BAM! Entertainment, Inc., a Delaware corporation (with its predecessors and successors, the "Company"), and the parties listed on Schedule 1 hereto (each, individually, a "Purchaser" and, collectively, the "Purchasers"). WITNESSETH: A. The Company, successor in interest to Bay Area Multimedia, Inc., a California corporation and formerly known as Bay Area Multimedia, Inc., a Delaware corporation. B. Subject to the terms and conditions set forth herein, the Company desires to issue and sell to the Purchasers, and the Purchasers severally desire to purchase from the Company, shares of the Company's Series B Preferred Stock, par value $0.001 per share, for an aggregate purchase price of up to $5,648,000, as partially set forth on Schedule 1 attached hereto. C. The Purchasers and the Company desire to set forth their mutual agreements with respect to such purchase and sale and to establish various rights and obligations in connection therewith. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Purchase and Sale of Preferred Stock.. 1.1 Sale and Issuance of Series B Preferred Stock. (a) The Company shall adopt and file with the Secretary of State of the State of Delaware on or before the Closing (as defined below) the Amended and Restated Certificate of Incorporation of the Company in the form attached hereto as Exhibit A (the "Restated Certificate"). (b) Subject to the terms and conditions of this Agreement, each Purchaser severally (but not jointly) agrees to purchase at the Closing, and the Company agrees to sell and issue to such Purchaser at the Closing, such number of shares of the Company's Series B Preferred Stock, par value $0.001 per share, as set forth opposite such Purchaser's name on Schedule 1 attached hereto, at a purchase price of $17.65 per share, and for the total purchase price indicated with respect to such Purchaser on Schedule 1, representing an aggregate purchase price of up to $5,648,000 for all Purchasers. The shares of Series B Preferred Stock to be issued to the Purchasers pursuant to this Agreement shall hereinafter be referred to as the "Series B Preferred Stock." 1.2 Closing; Delivery. The closing of the purchase and sale of the Series B Preferred Stock (the "Closing") shall take place at one or more closings. All Closings shall be held at the offices of Doty Sundheim & Gilmore, 260 Sheridan Avenue, Suite 200, Palo Alto, 1 4 California. The first Closing shall occur at 9:00 a.m. Pacific Standard Time on December 28, 2000 or at such other time and place as the Company and the Purchasers mutually agree upon, orally or in writing (the "Initial Closing", on such date, the "Closing Date"). The subsequent Closings shall occur at such times as approved of by the parties to such Closing. At each Closing, the Company shall deliver to each Purchaser a certificate registered in the name of such Purchaser representing the Series B Preferred Stock being purchased thereby against payment of the purchase price therefor, which shall be payable by certified check or by wire transfer of immediately available funds to an account designated by the Company, as specified in Schedule 1 hereto. The Company and each Purchaser shall take such additional actions and execute and deliver such additional agreements and other instruments and documents as may be reasonably necessary or appropriate to effect the transactions contemplated by this Agreement in accordance with its terms. 1.3 Use of Proceeds. The Company shall apply the proceeds received hereunder from the sale of the Series B Preferred Stock to pay for the reasonable expenses of the Company associated with the issuance of the Series B Preferred Stock, to fund continued product and service development, to fund a broader market launch of the Company's services, to build corporate infrastructure and for working capital purposes. 1.4 Reservation of Additional Shares of Series B Preferred Stock. As set forth in the Restated Certificate, the Company has reserved a total of 320,000 shares of its Series B Preferred Stock, par value $0.001 per share, for issuance and sale pursuant to this Agreement. 2. Representations, Warranties and Covenants of the Company. The Company hereby represents and warrants to, and covenants with, each of the Purchasers, as follows: 2.1 Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and to execute, deliver and perform this Agreement the "Co-Sale and Right of First Refusal Agreement" and the "Registration Rights Agreement" (as defined below) (collectively, the "Transaction Agreements"), and to carry out the transactions contemplated by each of the Transaction Agreements. The Company is duly qualified to transact business and is in good standing in the State of California and in each other jurisdiction in which the failure to be so qualified would have a material adverse effect on the business (as now conducted), financial or other condition, operating results, assets or properties of the Company (each such effect, a "Material Adverse Effect"). 2.2 Capitalization. The authorized capital stock of the Company consists, or will consist, immediately prior to the Closing, of: (a) 10,000,000 shares of common stock, par value $0.001 per share (the "Common Stock"), of which 312,760 shares are issued and outstanding. All of the issued and outstanding shares of Common Stock have been duly authorized, are fully-paid and nonassessable and were issued in compliance with all applicable federal and state securities laws. The Company has reserved 976,220 shares of Common Stock for issuance upon conversion of the Series A Preferred Stock (as defined below), 320,000 shares of Common Stock for issuance 2 5 upon conversion of the Company's Series B Preferred Stock, par value $0.001 per share, 150,000 shares of Common Stock for issuance pursuant to the exercise of options issued or reserved for issuance under stock incentive plans currently effective (the "Stock Plan") and 30,000 shares of Common Stock for issuance upon exercise of warrants to purchase Common Stock issued to PAR Capital, (30,000 shares) (the "PAR Warrant") and Morgan Keegan & Company, Inc. (the "Placement Agent") (0 shares) (the foregoing warrants including the PAR Warrant being collectively called the "Warrants") and shares issuable upon exercise of the Warrants being collectively called the "Warrant Shares"). Except as set forth in Schedule 2.2(a), there are no other Common Shares to be issued (the "Contingent Reserved Common Shares"). (b) 3,000,000 shares of Preferred Stock with a par value of $0.001 per share (the "Preferred Stock"), of which 976,220 shares have been designated as Series A Convertible Preferred Stock (the "Series A Preferred Stock"), all of which are issued and outstanding, and 320,000 shares have been designated as Series B Preferred Stock, all of which will be issued and outstanding upon the Closing. (c) Except for (A) the conversion privileges of the Series A Preferred Stock, (B) the conversion privileges of the Series B Preferred Stock, (C) currently authorized options to purchase 81,750 shares of Common Stock granted to employees pursuant to the Stock Plan, (D) the Warrants and the (E) Contingent Reserved Common Shares (collectively, the "Common Stock Equivalents"): (i) no subscription right, warrant, option, convertible security or other right or interest (contingent or otherwise) to purchase or acquire any shares of capital stock, of the Company is authorized, issued or outstanding; (ii) the Company does not have any obligation (contingent or otherwise) to issue any (a) subscription right, warrant, option, convertible security or other such right or interest or (b) to issue or distribute to holders of any shares of its capital stock any evidences of indebtedness or assets of the Company; and (iii) the Company does not have any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or make any other distribution in respect thereof. (d) Attached hereto as Schedule 2.2(d) is a true and complete list of the stockholders of the Company and all holders of any options or warrants of the Company, showing the number of shares of capital stock, options or warrants of the Company held by each such person as of the date hereof. Except as provided in Schedule 2.2(a), Schedule 2.2(d), and identified in Section 2.2(a), there are no other holders of any subscription right, option, warrant, convertible security or other right or interest that is convertible into or exercisable for shares of capital stock of the Company, and there are no statutory or, to the Company's knowledge, contractual stockholders preemptive rights, rights of first refusal or any similar rights relating to the acquisition of the capital stock of the Company. 2.3 Subsidiaries. Except as specified in Schedule 2.3, the Company does not have any subsidiaries or own or control, directly or indirectly, any interest in any other corporation, partnership, limited liability company, joint venture, association, trust, estate, limited liability partnership, joint stock company, unincorporated organization or government or any agency or political subdivision thereof, or other entity or organization (each of the foregoing, together with any individual, being sometimes referred to herein as a "Person"). Schedule 2.3 sets forth, as of the Initial Closing and giving effect to the transactions contemplated hereby, a 3 6 complete and current list of the outstanding equity interests and the stockholders of the Company's subsidiaries. 2.4 Authorization. All corporate action on the part of the Company, its directors, officers and stockholders necessary for the authorization, execution and delivery of this Agreement and the Registration Rights Agreement in the form attached hereto as Exhibit B (the "Registration Rights Agreement"), the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance and delivery of shares of the Series B Preferred Stock pursuant to the terms of this Agreement and the Common Stock issuable upon conversion of the Series B Preferred Stock has been taken or will be taken prior to the Closing, and the Transaction Agreements, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms except: (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditors' rights generally; (ii) as limited by laws or equitable principles relating to the availability of specific performance, injunctive relief, or other equitable remedies; or (iii) to the extent the indemnification provisions contained in the Registration Rights Agreement may be limited by applicable federal or state securities laws. 2.5 Compliance with Securities Laws; Valid Issuance of Securities. The Series B Preferred Stock being issued to the Purchasers hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully-paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement and applicable federal and state securities laws. Shares of the Common Stock issuable upon conversion of the Series B Preferred Stock purchased hereunder have been duly and validly reserved for issuance, and upon issuance in accordance with the terms of the Restated Certificate, shall be duly and validly issued, fully-paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Registration Rights Agreement and applicable federal and state securities laws. 2.6 Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, foreign, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by the Transaction Agreements, except for filings pursuant to applicable state securities laws and Regulation D of the Securities Act of 1933, as amended (the "Securities Act"). 2.7 Litigation. Except as set forth on Schedule 2.7, there is no action, suit, proceeding or investigation pending or, to the best of the Company's knowledge, currently overtly threatened against the Company or any of its subsidiaries, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitations, actions, suits, proceedings or investigations pending or threatened involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or expressly subject to the provisions of any order, writ, injunction, judgment or decree of any 4 7 court, administrative agency, government agency or instrumentality. There is no action, suit or proceeding by the Company currently pending or which the Company intends to initiate. 2.8 Intellectual Property. (a) To the best knowledge of the Company, the Company has sufficient title and ownership of, or rights by license or other agreement to, all patents, patent applications, trademarks, service marks, trade names, domain names, URLs, copyrights, trade secrets, software, source codes, object codes and other intellectual property rights used by the Company in its business or necessary to conduct its business as currently conducted ("Intellectual Property"). The Company has not received any written communications alleging that the Company has violated or, by conducting its business as now conducted, would violate any of the rights in the Intellectual Property of any other Person. The Company is not aware that any of its employees are obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of the Company or that would conflict with the Company's business as currently conducted. The Company has not licensed any of the Intellectual Property to any other Person, nor does any other Person have an option or any other right to acquire any of the Intellectual Property other than in the ordinary course of business (except for the Intellectual Property that is in the public domain). Schedule 2.8(a) sets forth a list of the Company's intellectual property. (b) All licenses or agreements listed in Schedule 2.8(b) (the "Certain IP Agreements") are in full force and effect and to the best knowledge of the Company there is no default by any party thereto. True and complete copies of all Certain IP Agreements, and any amendments thereto, have been made available to the Purchasers, and to the best knowledge of the Company, the licensors under the Certain IP Agreements which the Company is granted rights, to the best of the Company's knowledge, have all requisite power and authority to grant the rights purported to be conferred thereby. None of the products manufactured and sold, nor any process or know-how used, by the Company under the Certain IP Agreements infringes or is alleged to infringe any patent, trademark, service mark, trade name, copyright or other proprietary right or is a derivative work based on the work of any other person. 2.9 Compliance with Other Instruments. The Company is not in violation or in default of any provisions of (i) its Certificate of Incorporation, as amended, or Bylaws or (ii) of any order, writ, injunction, judgment, instrument, decree or contract to which it is a party or by which it is bound or (iii) to the Company's knowledge of any provision of federal or state statute, rule or regulation applicable to the Company which violations or defaults would in the case of the items described in clauses (ii) and (iii), either individually or in the aggregate, have a Material Adverse Effect. The execution, delivery and performance of the Transaction Agreements and the consummation of the transactions contemplated hereby or thereby do not and will not, with or without the passage of time and/or the giving of notice: (a) result in any such violation or conflict with or constitute a default under any such provision, order, writ, injunction, judgment, instrument, decree or contract or any such statute, rule or regulation; (b) result in the creation of any lien, security interest, charge or encumbrance upon the capital stock or any assets of the Company; or (c) give any third party the right to modify, terminate or 5 8 accelerate any obligation under any such provision, order, writ, injunction, judgment, instrument, decree or contract. 2.10 Agreements. Schedule 2.10 sets forth a list of all material agreements, contracts, understandings or commitments, written or oral (collectively, "Material Agreements"), to which the Company is a party or by which it is bound. As used herein, Material Agreements shall mean: (a) Agreements, contracts, understandings or commitments between the Company and any of its subsidiaries, officers, directors or affiliates or any of such officers', directors' or affiliates' immediate family members. (b) Agreements, contracts, understandings or commitments to which the Company or any of its affiliates is a party or by which it is bound that involve obligations (contingent or otherwise) of, or payments to, the Company in excess of, $250,000. All of such agreements, contracts understanding or commitments are valid, binding and in full force and effect with respect to the Company or any of its subsidiaries, except as set forth on Schedule 2.10(b), and there has been no material default by the Company under any of the foregoing nor to the Company's knowledge has there been any material default by any other party thereto. 2.11 Absence of Undisclosed Liabilities. Except as set forth on Schedule 2.11, since the Statement Date (as hereafter defined) the Company and any of its subsidiaries has not: (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of the Company's capital stock; (ii) incurred any indebtedness on behalf of the Company for money borrowed or incurred any other liabilities in excess of $50,000 individually, or in excess of $100,000 in the aggregate to any one creditor; (iii) made any loans or advances to any Person in the name of or with respect to the Company, other than ordinary advances for expenses incurred in the ordinary course of business consistent with past practices; or (iv) sold, exchanged or otherwise disposed of any of the Company's assets or rights, other than in the ordinary course of business consistent with past practices. 2.12 Disclosure. None of the representations or warranties of the Company contained in this Agreement, the schedules and exhibits attached hereto, nor any certificate furnished or to be furnished to the Purchasers at Closing (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. 2.13 No Conflict of Interest. The Company is not indebted, directly or indirectly, to any of its subsidiaries or officers or directors of the Company or its subsidiaries, or to the knowledge of the Company or its subsidiaries any member of such officers' or directors' respective spouses or immediate family members, for any amount whatsoever. Except as set forth on Schedule 2.13 attached hereto, none of the Company's subsidiaries or officers or directors of the Company or its subsidiaries, or to the knowledge of the Company or its subsidiaries any member of such officers' or directors' immediate families (x) are, directly or 6 9 indirectly, indebted to the Company or, (y) have any direct or indirect ownership interest in any Person (A) with which the Company is affiliated or (B) with which the Company has a material business relationship, or (C) which competes with the Company; except that for purposes of this clause (y), officers, directors and/or stockholders of the Company may own stock in (but not exceeding five percent (5%) of the outstanding capital stock of) any publicly traded companies that may compete with the Company. To the best of the Company's knowledge, none of the Company's officers or directors or any members of their immediate families are, directly or indirectly, interested in any material contract of the Company. The Company is not a guarantor or indemnitor of any indebtedness of any other Person. 2.14 Registration Rights and Voting Rights. Except as contemplated in the Registration Rights Agreement, there are no agreements, written or oral, between the Company and any Person relating to the registration of its capital stock under federal or state securities laws, including piggyback registration rights. To the knowledge of the Company, no stockholders of the Company have entered into any agreements with respect to the voting of shares of the capital stock of the Company. 2.15 Private Placement. Subject to and in reliance in part on the truth and accuracy of the Purchasers' representations set forth in this Agreement, the offer, sale and issuance of the Series B Preferred Stock as contemplated by this Agreement is exempt from the registration requirements of the Securities Act and any applicable state securities laws, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.16 Title to Property and Assets. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and which do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and holds a valid leasehold interest free of any liens, claims or encumbrances. 2.17 Employee Benefit Plans. Except as specified in Schedule 2.17, the Company does not have any employee benefit plan and is not a party to any multiemployer plan as such terms are defined in the Employee Retirement Income Security Act of 1974, as amended. 2.18 Tax Returns and Audits. Each of the Company and, to the Company's knowledge, any of its subsidiaries has accurately prepared and timely filed all material federal, state, foreign, local and other tax returns required by law to be filed by each of them, has paid or made provision for the payment of all taxes shown to be due and all additional assessments, and adequate provisions have been made and are reflected in the Company's financial statements in all material respects to the extent required by generally accepted accounting principles applied on a consistent basis and as in effect in the United States ("GAAP") for all current taxes and other charges to which the Company or its subsidiaries is subject and which are not currently due and payable. There are no additional assessments or adjustments pending or, to the knowledge of the Company, threatened against the Company or its subsidiaries for any period, and to the Company's knowledge, there is no basis for any such assessment or adjustment that would be material. 7 10 2.19 Labor Agreements and Actions. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, contract, commitment, agreement or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company, threatened, which could have a Material Adverse Effect, nor is the Company aware of any labor organization activity involving the employees, representatives or agents of the Company. The Company has complied in all material respects with all applicable federal and state equal employment opportunity laws and regulations and with all other laws and regulations related to employment and labor issues. The Company has not received any notice of any plan of any key employee to terminate his or her employment with the Company. 2.20 Proprietary Information and Inventions Agreements. Each current employee, consultant and officer of the Company has executed an agreement with the Company regarding confidentiality and proprietary information substantially in the form attached as Exhibit C. The Company, after reasonable investigation, is not aware that any of its current employees or consultants is in violation thereof, and the Company will use commercially reasonable efforts to prevent any such violation. To the Company's knowledge, no consultants to or vendors of the Company have had any access to confidential information of the Company who are not bound by non-disclosure agreements. 2.21 Permits. The Company has all franchises, permits, licenses and any other governmental authorizations necessary for the conduct of its business as now being conducted, the lack of which could have a Material Adverse Effect. The Company is not in default in any material respect under any of such franchises, permits, licenses or other authorizations. 2.22 Corporate Documents. The Restated Certificate and Bylaws of the Company are in the form provided to each of the Purchasers. As of the Closing, the Bylaws of the Company shall be in the form of the Bylaws attached hereto as Exhibit D. The copy of the minute books of the Company provided to the Purchasers contains minutes of all meetings of directors and stockholders of the Company and all actions by written consent without a meeting by the directors and stockholders of the Company since the date of the incorporation of the Company, and reflects all actions by the directors (and any committee of directors) and stockholders of the Company with respect to all transactions referred to in such minutes accurately in all material respects. 2.23 Real Property Holding Corporation. Neither the Company nor its subsidiary is a United States real property holding corporation within the meaning of Internal Revenue Code Section 897(c)(2) and Section 1.897-2(c) of the Treasury Regulations promulgated thereunder. 2.24 Financial Statements. The Company has made available to the Purchasers (i) an audited balance sheet as of June 30, 2000; (ii) an audited income statement as of June 30, 2000; (iii) an unaudited balance sheet as of September 30, 2000 (the "Statement Date"); and (iv) an unaudited income statement for the three months ended September 30, 2000, copies of which are included as Schedule 2.24 (the "Financial Statements"). The Financial Statements have been 8 11 prepared from the books and records of the Company and are complete and correct in all material respects and fairly present the consolidated financial condition and operating results of the Company as of the Statement Date and for the period presented. Except as set forth in the Financial Statements, the Company does not have any material liabilities, contingent or otherwise, other than (i) liabilities paid or incurred in the ordinary course of business subsequent to the Statement Date, and (ii) obligations under contracts and commitments incurred in the ordinary course of business. 2.25 Changes. Since the Statement Date and except as contemplated by this Agreement and the exhibits and schedules hereto, there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except for changes in the ordinary course of business or that have not resulted in a Material Adverse Effect; (b) any damage, destruction or loss to property, whether or not covered by insurance, resulting in a Material Adverse Effect; (c) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company except in the ordinary course of business or that has not resulted in a Material Adverse Effect; (d) any material change to a material contract or agreement by which the Company or any of its assets are bound or subject, except as specified in Schedule 2.25(d); (e) any material change in any compensation arrangement or agreement with any employee, representative, agent, officer, director or stockholder of the Company, except as specified in Schedule 2.25(e); (f) any resignation or termination of employment of any officer, director or key employee of the Company and to the best of the Company's knowledge, the Company does not know of any impending resignation or termination of employment of any such officer, director or key employee; (g) receipt of notice that there has been a loss of, or material order cancellation by, any major advertiser or major customer of the Company other than in the ordinary course of business; (h) any mortgage, pledge, transfer of a security interest in, lien or encumbrance, created by the Company, with respect to any of its capital stock, properties or assets, except liens for taxes not yet due or payable; (i) any loans or guarantees made by the Company to or for the benefit of its employees, representatives, agents, officers or directors, or any members of their immediate families, other than ordinary advances for expenses incurred in the ordinary course of business, except as specified in Schedule 2.25(i); 9 12 (j) any declaration, setting aside or payment or other distribution in respect to any of the Company's capital stock, or any direct or indirect redemption, purchase, or other acquisition of any of such capital stock by the Company other than the purchase of capital stock of officers, directors or employees who have terminated their relationship with the Company; or (k) any arrangement or commitment by the Company to do anything described in this Section 2.25. 2.26 Environmental and Safety Laws. The Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety where such violation, is likely to result in a Material Adverse Effect, and no material expenditures are presently required by the Company in order to comply with any such applicable statute, law or regulation. 2.27 FCPA. The Company has complied in all material respects with the United States Foreign Corrupt Practices Act of 1977, as amended (the "FCPA"), in obtaining any consents, licenses, approvals, authorizations, rights, and privileges in connection with the conduct of its business, and has otherwise conducted its business with all material respects in compliance with the FCPA. The Company's internal management and accounting practices and controls are adequate to ensure compliance in all material respects with the FCPA. 2.28 Projections. The projections provided to the Purchasers by the Company were made in good faith and were based upon reasonable assumptions when made. 3. Representations and Warranties of Purchasers. Each Purchaser hereby, severally and not jointly, represents and warrants to the Company, with respect to itself only, that: 3.1 Accredited Investor; Authorization. Such Purchaser is an "accredited investor" within the meaning of Rule 501 promulgated under the Securities Act and has the corporate, partnership or individual, as the case may be, power and authority to enter into and perform this Agreement and the other Transaction Agreements to which it is a party and to consummate the transactions contemplated hereby and thereby. This Agreement has been duly authorized, executed and delivered by such Purchaser and constitutes the legal, valid and binding obligation of such Purchaser, enforceable in accordance with its terms accordance except: (i) as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditors' rights generally; or (ii) as such enforceability may be limited by laws or equitable principles relating to the availability of specific performance, injunctive relief, or other equitable remedies. 3.2 No Conflict With Other Agreements. The execution, delivery and performance of the Transaction Agreements to which such Purchaser is a party and the consummation of the transactions contemplated hereby or thereby will not, with or without the passage of time and/or the giving of notice, result in a violation or default of any provisions of such Purchaser's charter, bylaws, partnership agreement, certificate of limited partnership, limited liability company agreement, certificate of formation or other organizational document or 10 13 of any order, writ, injunction, judgment, instrument, decree or contract to which it is a party or by which it is bound or, to its knowledge, of any material provision of federal or state statute, rule or regulation applicable to such Purchaser. 3.3 Investment Experience. Such Purchaser is a regular purchaser of securities and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Company. 3.4 Distribution. The Series B Preferred Stock (and the Common Stock issuable upon conversion thereof) is being acquired for such Purchaser's own account, and not as nominee or agent, for the present intention of holding such securities for purposes of investment and not with a view to or for resale in connection with any distribution thereof. Such Purchaser further represents, severally and not jointly, that it understand and agrees that, until registered under the Securities Act or transferred pursuant to the provisions of Rule 144 as promulgated by the Securities and Exchange Commission, all certificates evidencing any of the Series B Preferred Stock (and the Common Stock issuable upon conversion thereof), whether upon initial issuance or upon any transfer thereof, shall bear legends, prominently stamped or printed thereon, reading substantially as follows: (a) Federal Legend. THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THESE SECURITIES UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF THE ACT. (b) any legend required by applicable state securities laws. The Company need not register a transfer of legended Series B Preferred Stock, and may also instruct its transfer agent not to register the transfer of the Series B Preferred Stock, unless the conditions specified in the foregoing legends are satisfied. 3.5 Disclosure of Information. Such Purchaser has received all the information it considers necessary or appropriate for deciding whether to purchase the Series B Preferred Stock. Such Purchaser further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Series B Preferred Stock and the business, properties, prospects and financial condition of the Company. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Purchasers to rely thereon. 3.6 Restricted Securities. Such Purchaser understands that the shares of Series B Preferred Stock it is purchasing are characterized as "restricted securities" under the federal 11 14 securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Act only in certain limited circumstances. In this connection, such Purchaser represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act of 1933, as amended. 3.7 Further Representations by Foreign Purchasers. If a Purchaser is not a United States person, such Purchaser hereby represents that he or she has satisfied himself or herself as to the full observance of the laws of his or her jurisdiction in connection with any invitation to subscribe for shares of Series B Preferred Stock or any use of this Agreement, including (i) the legal requirements within his jurisdiction for the purchase of shares of Series B Preferred Stock, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale, or transfer of shares of Series B Preferred Stock. Such Purchaser's subscription and payment for, and his or her continued beneficial ownership of shares of Series B Preferred Stock, will not violate any applicable securities or other laws of his or her jurisdiction. 3.8 Not Formed for Investment. Such Purchaser was not formed for the purpose of making an investment in the Company. 4. Conditions of Purchasers' Obligations at the Closing. The obligations of each Purchaser to the Company under this Agreement are subject to the fulfillment, on or before the Closing of each of the following conditions, unless otherwise waived in writing by such Purchaser. 4.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true and correct in all material respects on and as of the Initial Closing. 4.2 Performance. The Company shall have performed and complied in all material respects with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by the Company on or before the Closing. 4.3 Compliance Certificate. The President of the Company shall deliver to each Purchaser at the Closing a certificate certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled. 4.4 Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series B Preferred Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 12 15 4.5 Opinion of Company Counsel. The Purchasers shall have received from Doty Sundheim & Gilmore, counsel for the Company, an opinion, dated as of the Closing, in substantially the form of Exhibit E attached hereto. 4.6 Supporting Documents. The Purchasers shall have received the following: (a) A copy of resolutions of the Board of Directors of the Company authorizing and approving the Transaction Agreements and copies of resolutions of the Board of Directors and stockholders of the Company authorizing and approving the adoption of the Restated Certificate that is contemplated by this Agreement, all such resolutions to be certified by the Secretary of the Company; (b) A Certificate of Incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers authorized to execute the Transaction Agreements and further certifying that the Restated Certificate and Bylaws of the Company delivered to the Purchasers at the time of the execution of this Agreement have been validly adopted and have not been amended or modified except as required by this Agreement; and (c) Such additional supporting documentation and other information with respect to the transactions contemplated hereby as any Purchaser or its legal counsel may reasonably request. 4.7 Board of Directors. As of the Initial Closing, the Company's Board of Directors shall consist of no more than 8 members. Effective as of the time of the Initial Closing, by appropriate action of the Board of Directors and/or the Stockholders of the Company, one person designated by PAR Capital Management, Inc. ("PAR" and such designee the "PAR Designee") shall be elected or appointed to the Company's Board of Directors. All other members of the Company's Board of Directors (not to exceed 8 in number) shall remain as members of the Board of Directors, subject to the provisions of the Company's Restated Certificate and Bylaws as from time to time in effect. 4.8 Registration Rights Agreement. The Company, each Purchaser that is a party thereto and the other parties thereto shall have executed and delivered the Registration Rights Agreement in substantially the form attached hereto as Exhibit B. 4.9 Restated Certificate. The Company shall have filed the Restated Certificate with the Secretary of State of Delaware on or prior to the date of the Closing, which shall continue to be in full force and effect as of the date of the Closing. 4.10 Employment Agreements. The members of the Company's senior management shall have entered into a Proprietary Information and Inventions Agreement in the form attached hereto as Exhibit C. 4.11 Co-Sale and Right of First Refusal Agreement. The Company, Raymond C. Musci, Anthony Williams and each Purchaser shall have executed and delivered the Co-Sale and Right of First Refusal Agreement substantially in the form attached hereto as Exhibit F. 13 16 4.12 PAR Warrant. The Company shall have validly issued the PAR Warrant. 5. Conditions of the Company's Obligations at the Closing. The obligations of the Company to each Purchaser under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived by the Company in writing; provided, however, that the non-fulfillment of a condition by a Purchaser will not relieve the Company of its obligation to each other fulfilling Purchaser. 5.1 Representations and Warranties. The representations and warranties of such Purchaser contained in Section 3 shall be true and correct on and as of the date of the Closing with the same effect as though such representations and warranties had been made on and as of the date of Closing. 5.2 Performance. All covenants, agreements and conditions contained in this Agreement to be performed by such Purchaser on or prior to the Closing shall have been performed or complied with. 5.3 Registration Rights Agreement. Such Purchaser shall have executed and delivered the Registration Rights Agreement in substantially the form attached hereto as Exhibit B. 5.4 Payment of Purchase Price. Each Purchaser shall have delivered the purchase price specified in Section 1.1 of this Agreement. 5.5 Qualifications. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series B Preferred Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 6. Post-Closing Covenants. The Company and Purchasers agree as follows with respect to the period following the Closing. 6.1 Financial Reporting. The Company shall provide Purchasers with the following periodic reports: (a) as soon as available, but in any event within forty five (45) days after the end of each quarter accounting period in each fiscal year, unaudited statements of income, operations and cash flows of the Company for such quarterly period and unaudited balance sheets of the Company as of the end of such quarter period and all such statements shall be prepared in accordance with generally accepted accounting principles ("GAAP") (provided, however, that such statements need not comply with the footnote disclosure requirements of GAAP); (b) as soon as available, but in any event within forty-five (45) days after the end of each quarterly accounting period in each fiscal year, unaudited statements of income, operations and cash flows of the Company for such quarterly period and unaudited balance sheets of the Company as of the end of such quarterly period and all such statements shall be prepared in accordance with GAAP (provided, however, that such statements need not comply with the footnote disclosure requirements of GAAP); and (c) as soon as available, but in any event within ninety (90) days after the end of each fiscal year, audited statements of income, operations, retained earnings and cash flows of the Company for such fiscal year and audited balance sheets of the Company as of the end of such fiscal year, all prepared in accordance with GAAP, all in 14 17 reasonable detail and duly certified by the accountants, who shall have given the Company an opinion, unqualified as to the scope of the audit, regarding such statements. 6.2 Participation Rights. Purchasers shall have the right, but not the obligation, to participate pro rata (on the same terms and at the same price) in any offering and sale of stock (common or preferred) made by the Company to any person or entity after the date of this Agreement (the "Purchaser Participation Right"); provided, however, that this Section 6.3 shall not apply in the case of the grant of options to officers, directors and employees pursuant to the terms of the Stock Plan, the purchase of Common Stock upon the exercise of such options or the purchase of Warrant Shares upon the exercise of the Warrants. The Purchaser Participation Right shall expire and terminate upon the successful completion by the Company of a Qualified Public Offering and shall not apply in the event of a Qualified Public Offering. 6.3 Compensation Committee. PAR Designee shall be a member of the Company's Compensation Committee (the "Compensation Committee"). All compensation arrangement of the Company's key employees, officers and directors shall be approved by the Compensation Committee; provided, however, that so long as less than a majority of the Compensation Committee consists of outside directors such approval shall require an affirmative vote or consent of the PAR Designee. For the purpose of this Section 6.3, "outside directors" shall not include any director employed by the Company or who hold (individually or through an entity or entities) at least 1% of the outstanding capital stock of the Company. 7. Miscellaneous. 7.1 Survival of Warranties. The representations, warranties and covenants of the Company and the Purchasers contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and each Closing. 7.2 Transfer; Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. 7.3 No Third Party Beneficiaries. Nothing express or implied in this Agreement is intended to confer, nor shall anything herein confer, upon any other than the parties hereto and the respective successors or assigns of such parties, any rights, remedies, obligations or liabilities whatsoever. 7.4 GOVERNING LAW. THE LAWS OF THE STATE OF CALIFORNIA SHALL GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF LAW. 7.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 15 18 7.6 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.7 Notices. Any notice required or permitted by this Agreement shall be in writing and shall be deemed given upon delivery, when delivered personally or by overnight courier or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, addressed to the party to be notified at such party's address as set forth below or on Schedule 1 hereto, or as subsequently modified by written notice, and: (a) if to the Company: BAM! Entertainment, Inc. 333 West Santa Clara Street Suite 930 San Jose, California 95113 Attention: Raymond C. Musci Facsimile: (408) 298-9600 with a copy to: Doty Sundheim & Gilmore 260 Sheridan Avenue Suite 200 Palo Alto, California 94306 Attention: George M. Sundheim III, Esq. Facsimile: (650) 327-0101 (b) if to PAR: PAR Capital Management, Inc. One Financial Center, Suite 1600 Boston, MA 02111 Attention: David Tobin Facsimile: (617) 556-8875 with a copy to: Goodwin, Proctor & Hoar, LLP Exchange Place Boston, MA 02109 Attention: Jeffrey C. Hadden Facsimile: (617) 523-1231 (c) To any other Purchaser: The address reflected on the signature page to this Agreement or, in any such case, at such other address or addresses as shall have been furnished in writing by such party to the other parties to this Agreement. 16 19 7.8 Finder's Fee. Each party represents that it neither is nor will be obligated for any finder's fee(s) or commission in connection with this transaction for which any other party hereto could become liable. Each Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of any finder's fee(s) (and the costs and expenses of defending against such liability or asserted liability) for which such Purchaser or any of its officers, partners, employees, or representatives is responsible. The Company has engaged Morgan Keegan as placement agent for the shares of Series B Preferred Stock being sold hereunder and shall be responsible for the payment of all fees and other amounts payable to Morgan Keegan in connection therewith. The Company agrees to indemnify and hold harmless each Purchaser from any liability for any commission or compensation in the nature of a finder's fee(s) (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees, or representatives is responsible. 7.9 Expenses. Each party shall bear its own cost and expenses incurred with respect to this Agreement and the documents referred to herein including attorney fees. 7.10 Amendments and Waivers. Any term of this Agreement may be amended or waived, and this Agreement may be terminated, with the written consent of the Company and Purchasers representing at least a majority of the outstanding Series B Preferred Stock (or the Common Stock issuable upon conversion thereof) purchased hereunder. Any amendment or waiver effected in accordance with this Section 7.10 shall be binding upon the Purchasers and each holder or transferee of the Series B Preferred Stock (or the Common Stock issuable upon conversion thereof), each future holder of all such securities, and the Company. 7.11 Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, and all such remaining provisions hereof shall be enforceable in accordance with their terms. 7.12 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any holder of any of the Series B Preferred Stock (or the Common Stock issuable upon conversion thereof) or to the Company, upon any breach or default of the Company or by any Purchaser under this Agreement, shall impair any such right, power or remedy of any Purchaser or the Company, as the case may be, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Purchaser or the Company, as the case may be, of any breach or default under this Agreement, or any waiver on the part of any Purchaser or the Company, as the case may be, of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 17 20 7.13 Entire Agreement. This Agreement, the Registration Rights Agreement and the other documents referred to herein to which any Purchaser is a party constitute the entire agreement among the parties hereto pertaining to the subject matter hereof, and this Agreement supersedes all prior agreements and understanding among the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective duly authorized officers or representatives as of the date first written above. COMPANY: BAM! ENTERTAINMENT, INC. By: /s/ RAYMOND C. MUSCI ------------------------------------- Raymond C. Musci, President By: /s/ GEORGE M. SUNDHEIM, III ------------------------------------- George M. Sundheim, III, Secretary PURCHASERS: PAR CAPITAL MANAGEMENT, INC. By: /s/ DAVID E. TOBIN ------------------------------------- Name: David E. Tobin Title: Analyst MORGAN KEEGAN EARLY STAGE FUND, L.P. By: MERCHANT BANKERS, INC. as the general partner of Morgan Keegan Early Stage Fund, L.P. By: /s/ K. JENKINS ---------------------------------- Name: K. Jenkins Title: M.D. /s/ RAYMOND C. MUSCI ------------------------------- Raymond C. Musci /s/ ANTHONY WILLIAMS ------------------------------- Anthony Williams /s/ ROBERT HOLMES ------------------------------- Robert Holmes 18 21 EXHIBIT A Form of Amended and Restated Certificate of Incorporation i 22 EXHIBIT B Registration Rights Agreement ii 23 EXHIBIT C Form of Proprietary Information and Inventions Agreement iii 24 EXHIBIT D Bylaws of the Company iv 25 EXHIBIT E Form of Opinion of Counsel to the Company v 26 EXHIBIT F Co-Sale and Right of First Refusal Agreement vi 27 SCHEDULE 1 Schedule of Purchasers
- ---------------------------------------------------------------------------------------------------- NUMBER OF SHARES OF PURCHASE PURCHASER SERIES B PREFERRED STOCK PRICE - ---------------------------------------------------------------------------------------------------- PAR Capital Management, Inc. 198,301 $3,500,012.70 - ---------------------------------------------------------------------------------------------------- Raymond C. Musci 28,329 $500,006.85 - ---------------------------------------------------------------------------------------------------- Anthony Williams 28,329 $500,006.85 - ---------------------------------------------------------------------------------------------------- Morgan Keegan Early Stage Fund, L.P. 28,329 $500,006.85 - ---------------------------------------------------------------------------------------------------- Robert Holmes 11,332 $200,009.80 - ---------------------------------------------------------------------------------------------------- TOTALS 294,620 5,200,043.05
vii 28 SCHEDULE 2.2(a) Contingent Reserved Common Shares Franchise Films, Inc. 173,520 Spyglass Entertainment Group, L.P. 100,000
viii 29 SCHEDULE 2.2(d) Stockholders and Option Holders List COMMON STOCKHOLDERS Raymond C. Musci 123,609 Robert E. Lloyd 9,750 Tracy Ann Sebastian 9,750 Philip L. Rosenberg 9,750 Robert Holmes 32,224 Gary Nemetz 9,750 D&S Partners, a California General Partnership 9,750 Anthony Williams 89,897 Kevin Bermeister 3,656 Mark Dyne 3,656 Elie Samaha 7,312 FIMAS, L.P., a Partnership 3,656 Spyglass Entertainment Group, L.P. 50,000 PREFERRED SERIES A STOCKHOLDERS Raymond C. Musci 482,625 Anthony Williams 351,000 Robert Holmes 87,750 Kevin Bermeister 10,969 Mark Dyne 10,969 Elie Samaha 21,938 FIMAS, L.P., a Partnership 10,969 OPTION HOLDERS Robin Cairns 2,500 Aaron Endo 7,500 Lynnie Nojadera 3,500 Joe Morici 5,000 Hideo Oishi 5,000 Mark Dyne 4,000 Robert Holmes 4,000 Robert Lloyd 4,000 Scott Smith 1,250 George M. Sundheim, III 4,000 Sherri Zook 2,500 Joe Booth 6,000 Lisa Cheney Bolcato 4,500 Pierson Lippard 4,000
ix 30 Matt Wilkinson 4,000 Samuel Allen 2,500 Pete Johnson 2,500 Kevin Watts 2,500 Richard Coles 1,250 Paul Hodge 1,250 Karl D'Costa 1,250 Mark Harris 1,250 Mikel Barron Bilbao 1,250 Rachel Segens 1,250 Charlie Hasdell 1,250 Jake Noakes 1,250 Thomas Woodley 1,250 Doug Day 1,250
x 31 SCHEDULE 2.3 Subsidiaries BAM Studios (Europe) Ltd. 2 shares issued to BAM! Entertainment Limited (Pound Sterling1 per share) BAM Entertainment Ltd. 2 shares issued to BAM! Entertainment, Inc. (Pound Sterling1 per share) xi 32 SCHEDULE 2.7 Litigation None. xii 33 SCHEDULE 2.8(a) Material Intellectual Property Trademark application attached. List of attached agreements. xiii 34 SCHEDULE 2.8(b) Certain IP Agreements PowerPuff Girls license with Warner Brothers (8/16/00 -- 8/16/03) Sports Illustrated, Inc. for Kids with Time (7/12/00) Franchise Films Output Agreement (4/7/00 -- 4/7/03) Spyglass Entertainment Group, L.P. Output Agreement (10/1/00 -- 10/1/05) xiv 35 SCHEDULE 2.10 Agreements List of agreements attached. xv 36 SCHEDULE 2.10(b) Non-binding Agreements See attached list. xvi 37 SCHEDULE 2.11 Liabilities None. xvii 38 SCHEDULE 2.13 Conflicts Directors: Mark Dynes: Chairman & CEO of Brilliant Digital Entertainment (BDE - AMEX), beneficial owner of roughly 8% of the common stock outstanding, owns and/or controls roughly 40% of Infogrames/OziSoft, a video game distributor in Australia; also holds approximately 2% of Titus. Robert Lloyd: Board member of Rare Co., Ltd (a UK software developer, principally owned by Nintendo Co., Ltd.; Board member of Retro, Inc.(a developer based in Austin, Texas) working for Nintendo; and consults extensively for Nintendo of America, Inc. Robert Holmes: GBA, LLC - managing member of investment venture into Ripcord, some Southpeak; PCH, LLC - managing member investment venture; Entertainment Brands, Inc. Director, shareholder; Ripcord Games - Director, shareholder (1/3); Northport Ventures venture company; Acclaim Entertainment - contractual representatives and stock; Take Two stock remaining from early private placement; Business Incubation Group - no current conflict, (some emulator proposals that involve Raymond C. Musci); iBuyline, Inc. - ESD company sold to aggregator; NTN communications - shareholder - mini games and wireless. Raymond C. Musci: Director of Brilliant Digital Entertainment. Raymond C. Musci and Anthony Williams each have $500,000 in individual accounts at Comerica Bank which funds are retained by Comerica Bank as security for a loan made by Comerica Bank to the Company. At the Closing, such funds will be irreversably transferred to a Company account at Comerica Bank. Such transfer of funds will constitute the consideration for the shares purchased by Raymond C. Musci and Anthony Williams. xviii 39 SCHEDULE 2.17 Employee Benefit Plans BAM! 401(k) Plan Summary Plan Description attached. U.K. Employees are not entitled to participate in the BAM! 401(K) Plan, but an equivalent European pension plan is planned. xix 40 SCHEDULE 2.24 Financial Statements Financial Statements attached. xx 41 SCHEDULE 2.25(d) Changes; Contracts/Agreements First Amendment to Master Purchase Order Assignment Agreement and Warner Bros. License Agreement #12177-PPG (Powerpuff Girls)-Amendment #1 attached. xxi 42 SCHEDULE 2.25(e) Changes; Compensation/Agreements with employees, representatives, agents, officers, directors or stockholders Changes to compensation arrangement or agreement with any employee, representative, agents, officer, director or stockholder attached. xxii 43 SCHEDULE 2.25(i) Changes; Loans/Guarantee Comerica loan documents attached. xxiii EX-10.12 22 v72115orex10-12.txt EXHIBIT 10.12 1 EXHIBIT 10.12 BAM! ENTERTAINMENT, INC. CO-SALE AND RIGHT OF FIRST REFUSAL AGREEMENT This Co-Sale and Right of First Refusal Agreement (the "Agreement") is made and entered into as of December 28, 2000, by and among BAM! Entertainment, Inc., a Delaware corporation (the "Company"), Raymond C. Musci ("Musci") and Anthony Williams ("Williams") and each purchaser listed on Exhibit A hereto which Purchasers include Musci and Williams (the "Purchasers"), RECITALS A. Musci and Williams (each a "Founder") are the beneficial owners of an aggregate of 213,506 shares of the Common Stock and upon the consummation of the transaction described in the "Purchase Agreement" (as defined below), will own 833,625 shares of Series A Preferred Stock and 56,658 shares of Series B Preferred Stock of the Company. (Such shares of Common Stock hereafter is referred to as the "Common Stock" and such shares of Series A and Series B Preferred Stock are referred to as the "Preferred Stock". B. Purchasers are purchasing shares of the Company's Series B Preferred Stock (the "Series B Stock") pursuant to that certain Series B Preferred Stock Purchase Agreement (the "Purchase Agreement") of even date herewith. C. Purchasers purchasing the Series B Preferred Stock were induced to do so in part by the Company's and Founders' agreement to enter into this Agreement. D. The parties desire to enter into this Agreement in order to grant co-sale and right of first refusal rights to the Purchasers. AGREEMENT Now, therefore, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree hereto as follows: 1. Definitions. Any capitalized terms not defined herein shall have the meanings ascribed to them in the Purchase Agreement. 2. Representations And Warranties. 2.1 Representations and Warranties of the Founders. Each of the Founders, individually and not jointly, hereby represents, warrants and covenants to the Company and the Purchasers as follows: (a) such Founder has full authority, power and capacity to enter into this Agreement and perform its obligations hereunder; (i) does not require such founder to obtain any approval, consent or waiver of, or to make any filing with, any Person that has not been obtained or made; and (ii) does not and will not result in a breach of, constitute 1 2 a default under, accelerate any obligation under or give rise to a right of termination of any indenture or loan or credit agreement or any other material agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration award to which such Founder is a party or by which the property of such Founder is bound or affected, or result in the creation or imposition of any mortgage, pledge, lien, security interest or other charge or encumbrance on any of the assets or properties of such Founder. 2.2 Representations and Warranties of the Company. The Company hereby represents, warrants and covenants to the Founders and the Purchasers as follows: (a) the Company has full corporate authority and power to enter into this Agreement and perform its obligations hereunder; (b) this Agreement constitutes the valid and binding obligation of the Company enforceable against it in accordance with its terms, except: (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions may be limited by applicable federal or state securities laws; and (c) the execution, delivery and performance by the Company of this Agreement: (i) to the best of its knowledge, does not and will not violate any laws, rules or regulations of the United States or any state or other jurisdiction applicable to the Company, or require the Company to obtain any approval, consent or waiver of, or to make any filing with, any Person that has not been obtained or made; and (ii) does not and will not result in a breach of, constitute a default under, accelerate any obligation under or give rise to a right of termination of any indenture or loan or credit agreement or any other material agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration award to which the Company is a party or by which the property of the Company is bound or affected, or result in the creation or imposition of any mortgage, pledge, lien, security interest or other charge or encumbrance on any of the assets or properties of the Company. 3. Restrictions On Transfer; Co-Sale Provisions. The following provisions of this Section 3 shall terminate immediately upon, and shall not apply with respect to, a Qualified Public Offering (as defined in the Company's Amended and Restated Certificate of Incorporation (the "Restated Certificate")). 3.1 Restrictions on Transfer. Each Founder agrees that such Founder will not, directly or indirectly transfer, donate, sell, assign, pledge, hypothecate or grant security interest in (each a "Transfer") all or any portion of the Common Stock now owned or hereafter acquired by such Founder, except in connection with, and strictly in compliance with the conditions of this Section 3. "Transferred" means the accomplishment of a Transfer, and "Transferee" means the recipient of a Transfer. 3.2 Permitted Transfers. 2 3 Notwithstanding anything herein to the contrary, the provisions of Section 3.3 shall not apply to either of the Transfers listed below, provided that in each case the Transferee shall have entered into a Joinder Agreement in substantially the form attached hereto as Exhibit B providing that all Common Stock so Transferred shall continue to be subject to all provisions of this Agreement as if such Shares were still held by such Founder, except that no further Transfer shall thereafter be permitted hereunder except in compliance with Section 3.3: (a) Transfers by any Founder to the spouse, children or siblings of such Founder or to a trust or family limited partnership for the benefit of any of them; and (b) Transfers upon the death of any Founder to such Founder's heirs, executors or administrators or to a trust under such Founder's will, or Transfers between such Founder and such Founder's guardian or conservator. Notwithstanding anything to the contrary in this Agreement or any failure by a Transferee under this Section 3.2 to execute a Joinder Agreement, such Transferee shall take any Common Stock so Transferred subject to all provisions of this Agreement as if such Common Stock were still held by the Founder making such Transfer, whether or not they so agree in writing. 3.3 Co-Sale Option of Purchasers. In the event that any of the Founders entertains a bona fide offer to purchase all or any portion of the Common Stock held by such Founder (a "Transaction Offer") from any other person (a "Buyer"), such Founder (a "Transferring Founder") may Transfer such Common Stock only pursuant to and in accordance with the following provisions of this Section 3.3: (a) Co-Sale Notice. The Transferring Founder shall cause the Transaction Offer and all of the terms thereof to be reduced to writing and shall promptly notify the Company and each of the Purchasers of such Transferring Founder's desire to effect the Transaction Offer and otherwise comply with the provisions of this Section 3.3 (the "Co-Sale Notice"). To the extent one or more Purchasers exercise their co-sale option (the "Co-Sale Option") in accordance with this Section 3.3, the number of Common Stock that the Transferring Founder may Transfer in the Transaction Offer shall be correspondingly reduced. (b) Purchaser Acceptance. Each of the Purchasers shall have the right to exercise its Co-Sale Option by giving written notice of such intent to participate (the "Co-Sale Acceptance Notice") to the Transferring Founder within ten (10) days after receipt by such Purchaser of the Co-Sale Notice (the "Co-Sale Election Period"). Each Co-Sale Acceptance Notice shall indicate the maximum number of shares subject thereto which the Purchaser wishes to sell, including the number of shares it would sell if one or more other Purchasers do not elect to participate in the sale on the terms and conditions stated in the Offer Notice. Any Purchaser holding Series B Series B Preferred Stock shall be permitted to sell to the relevant Buyer in connection with any exercise of the Co-Sale Option, at its option, (i) shares of Common Stock acquired upon conversion of such Series B Series B Preferred Stock, (ii) an option to acquire Common Stock when such Purchaser receives the same upon conversion of such Series B Series B Preferred Stock, with the same effect as if Common Stock were being conveyed, (iii) shares of 3 4 Series B Preferred Stock and (iv) shares of Common Stock upon exercise of any warrant held by such Purchaser (each of the foregoing, the "Purchaser Shares"). (c) Allocation of Shares. Each Purchaser shall have the right to sell a portion of its Purchaser Shares pursuant to the Transaction Offer which is equal to or less than the product obtained by multiplying the total number of Purchaser Shares available for sale to the Buyer subject to the Transaction Offer by a fraction, the numerator of which is the total number of Purchaser Shares owned by such Purchaser and the denominator of which is the total number of Purchaser Shares and Shares held by all Purchasers and the Transferring Founder, in each case as of the date of the Offer Notice, subject to increase as hereinafter provided. (d) Co-Sale Closing. Within ten (10) calendar days after the end of the Co-Sale Election Period, the Transferring Founder shall promptly notify each participating Purchaser of the number of Purchaser Shares held by such Purchaser that will be included in the sale and the date on which the Transaction Offer will be consummated, which shall be no later than the later of (i) thirty (30) calendar days after the end of the Co-Sale Election Period and (ii) the satisfaction of any governmental approval or filing requirements, if any. Each participating Purchaser may effect its participation in any Transaction Offer hereunder by delivery to the Buyer, or to the Transferring Founder for delivery to the Buyer, of one or more instruments or certificates, properly endorsed for transfer, representing the Purchaser Shares it elects to sell pursuant thereto. At the time of consummation of the Transaction Offer, the Buyer shall remit directly to each participating Purchaser that portion of the sale proceeds to which the participating Purchaser is entitled by reason of its participation with respect thereto. No Shares may be purchased by the Buyer from the Transferring Founder unless the Buyer simultaneously purchases from the participating Purchasers all of the Purchaser Shares that they have elected to sell pursuant to this Section 3.3. (e) Liability of Purchasers. No Purchaser shall be required to make any representations or warranties or to provide any indemnities in connection therewith other than with respect to title to the Purchaser Shares being conveyed. (f) Sale to Third Party. Any Shares held by a Transferring Founder that are the subject of the Transaction Offer and that the Transferring Founder desires to Transfer following compliance with this Section 3.3, may be sold to the Buyer only during the period specified in Section 3.3(d) and only on terms no more favorable to the Transferring Founder than those contained in the Offer Notice. Promptly after such Transfer, the Transferring Founder shall notify the Company, which in turn shall promptly notify all the Purchasers, of the consummation thereof and shall furnish such evidence of the completion and time of completion of the Transfer and of the terms thereof as may reasonably be requested by a Majority Interest. In the event that the Transaction Offer is not consummated within the period required by this Section 3.3 or the Buyer fails timely to remit to each participating Purchaser its respective portion of the sale proceeds, the Transaction Offer shall be deemed to lapse, and any Transfer of Shares pursuant to such Transaction Offer shall be in violation of the provisions of this Agreement unless the Transferring Founder sends a new Offer Notice and once again complies with the provisions of Section 3.3 with respect to such Transaction Offer. (g) Contemporaneous Transfers. 4 5 If two or more Founders propose concurrent Transfers that are subject to this Article III, then the relevant provisions of Section 3.3 shall apply separately to each such proposed Transfer. 3.4 Effect of Prohibited Transfers. If any Transfer is made or attempted contrary to the provisions of this Agreement, such purported Transfer shall be void ab initio; the Company and the other parties hereto shall have, in addition to any other legal or equitable remedies which they may have, the right to enforce the provisions of this Agreement by actions for specific performance (to the extent permitted by law); and the Company shall have the right to refuse to recognize any Transferee as one of its stockholders for any purpose. 4. Restrictions on Transfer; Right of First Refusal. 4.1 Notice of Transfer. If a Founder proposes to Transfer any Preferred Stock owned by him, then such Founder shall promptly give written notice (the "Notice") to each of the Purchasers (for purposes of this Section only, "Purchasers" shall exclude the Founder attempting to sell his shares of Preferred Stock) at least thirty-five (35) days prior to the closing of such Transfer. The Notice shall describe in reasonable detail the proposed Transfer including, without limitation, the number of shares of Preferred Stock to be transferred, the nature of such Transfer, the consideration to be paid, and the name and address of each prospective purchaser or transferee. In the event that the Transfer is being made pursuant to the provisions of Section 5, the Notice shall state under which section the Transfer is being made. 4.2 Purchaser Right of First Refusal. (a) Each Purchaser shall have the right, exercisable upon written notice to the Founder (the "Purchaser Notice") within fifteen (15) days after the receipt of the Notice, to purchase its pro rata share of the Preferred Stock subject to the Notice and on the same terms and conditions as set forth therein. The Purchasers who so exercise their rights (the "Participating Purchasers") shall effect the purchase of the Preferred Stock, including payment of the purchase price, not more than ten (10) days after delivery of the Purchaser Notice, and at such time the Founder shall deliver to the Purchasers the certificate(s) representing the Preferred Stock to be purchased by the Participating Purchasers, each certificate to be properly endorsed for transfer. (b) Each Purchaser's pro rata share shall be equal to the product obtained by multiplying (x) the aggregate number of shares of Preferred Stock covered by the Notice and (y) a fraction, the numerator of which is the number of shares (on a fully diluted and converted basis) owned by the Participating Purchaser at the time of the Transfer and the denominator of which is the total number of shares (on a fully diluted and converted basis) owned by all of the Purchasers at the time of the Transfer. (c) In the event that not all of the Purchasers elect to purchase their pro rata share of the Founder Stock available pursuant to their rights under Section 4.2(a) within the time period set forth therein, then the Founder shall promptly give written notice to each of the Participating Purchasers (the "Overallotment Notice"), which shall set forth the number of 5 6 shares of Preferred Stock not purchased by the other Purchasers, and shall offer such Participating Purchasers the right to acquire such unsubscribed shares. The Participating Purchasers shall have five (5) days after receipt of the Overallotment Notice to deliver a written notice to the Founder (the "Participating Purchasers Overallotment Notice") of its election to purchase its pro rata share of the unsubscribed shares on the same terms and conditions as set forth in the Notice. For purposes of this Section 4.2(c) the denominator described in clause (y) of subsection 4.2(b) above shall be the total number of shares owned by all Participating Purchasers at the time of Transfer. The Participating Purchasers shall then effect the purchase of the Preferred Stock, including payment of the purchase price, not more than five (5) days after delivery of the Participating Purchasers Overallotment Notice to the Founder, and at such time, the Founder shall deliver to the Participating Purchasers the certificates representing the Preferred Stock to be purchased by the Participating Purchasers, each certificate to be properly endorsed for transfer. 5. Exempt Transfers. 5.1 Securities Act. Notwithstanding the foregoing, the provisions of Sections 2 and 3 shall not apply to the sale of any Stock to the public pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"). 5.2 Bylaws. This Agreement is subject to, and shall in no manner limit the right which the Company may have to repurchase securities from Musci and Williams pursuant to (i) a stock restriction agreement or other agreement between the Company and Musci and Williams and (ii) any right of first refusal set forth in the Bylaws of the Company. 6. Legend. 6.1 Certificate. Each certificate representing shares of Common Stock now or hereafter owned by a Founder or issued to any person in connection with a transfer pursuant to Section 2.2 hereof shall be endorsed with the following legend: "THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN CO-SALE AGREEMENT BY AND BETWEEN THE SHAREHOLDER, THE COMPANY AND CERTAIN HOLDERS OF STOCK OF THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY." 6.2 Instruct. The Purchasers agree that the Company may instruct its transfer agent to impose transfer restrictions on the shares represented by certificates bearing the legend referred to in Section 5.1 above to enforce the provisions of this Agreement and the Company agrees to promptly do so. The legend shall be removed upon termination of this Agreement. 7. Miscellaneous. 6 7 7.1 Conditions to Exercise of Rights. Exercise of the Purchasers' rights under this Agreement shall be subject to and conditioned upon, and the Company shall use their best efforts to assist each party in, compliance with applicable laws. 7.2 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 7.3 Amendment. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only by the written consent of (i) the Company, (ii) each of the Founders and (iii) a majority in interest of the Purchasers. Any amendment or waiver effected in accordance with this Section 6.3 shall be binding upon each Purchaser, the Company, Musci, Williams and their successors and assigns. 7.4 Assignment of Rights. This Agreement constitutes the entire agreement between the parties relative to the specific subject matter hereof. Any previous agreement among the parties relative to the specific subject matter hereof is superseded by this Agreement. This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives. 7.5 Term. This Agreement shall continue in full force and effect from the date hereof through the earliest of the following dates, on which date it shall terminate in its entirety: (a) on the date of and immediately prior to the closing of a firmly underwritten public offering of the Common Stock pursuant to a registration statement filed with the Securities and Exchange Commission, and declared effective under the Securities Act, that results in the conversion of the Company's preferred stock. (b) on the date of and immediately prior to the closing of a sale, lease, or other disposition of all or substantially all of the Company's assets or the Company's merger into or consolidation with any other corporation or other entity, or any other corporate reorganization, in which the holders of the Company's outstanding voting stock immediately prior to such transaction own, immediately after such transaction, securities representing less than a majority of the voting power of the corporation or other entity surviving such transaction, provided that this Section 6.5(b) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Company. 7.6 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt, or (iv) three (3) days after deposit in first class U.S. mail, return receipt requested. All communications shall be sent to the party to be notified at the address as set forth on the signature page hereof or at such other address as such party may designate by ten (10) days advance written notice to the other parties hereto. 7 8 7.1 Severability. In the event one or more of the provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 7.8 Entire Agreement. This Agreement and the Exhibits hereto, along with the Purchase Agreement and each of the Exhibits and Schedules thereto, constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 7.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 8 9 The foregoing Co-Sale Agreement is hereby executed as of the date first above written. COMPANY: BAM! Entertainment, Inc. By: /s/ RAYMOND C. MUSCI ----------------------------------- Raymond C. Musci, President Musci /s/ RAYMOND C. MUSCI ---------------------------------------- Raymond C. Musci Williams /s/ ANTHONY WILLIAMS ---------------------------------------- Anthony Williams SERIES B PURCHASERS: PAR CAPITAL MANAGEMENT, INC. By: /s/ DAVID E. TOBIN ------------------------------------ Name: David E. Tobin Title: Analyst MORGAN KEEGAN EARLY STAGE FUND, L.P. By: MERCHANT BANKERS, INC. as the general partner of Morgan Keegan Early Stage Fund, L.P. By: /s/ K. JENKINS -------------------------------- Name: K. Jenkins Title: M.D. 9 10 /s/ RAYMOND C. MUSCI ------------------------------------ Raymond C. Musci /s/ ANTHONY WILLIAMS ------------------------------------ Anthony Williams /s/ ROBERT HOLMES ------------------------------------ Robert Holmes 10 EX-10.13 23 v72115orex10-13.txt EXHIBIT 10.13 1 EXHIBIT 10.13 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into as of December 28, 2000, by and among BAM! Entertainment, Inc., a Delaware corporation (the "Company"), the entities (the "Holders") identified in the Holder Schedule attached hereto as Schedule 1 (the ""Holder Schedule"). WITNESSETH: WHEREAS, the Company has entered into that certain Stock Purchase Agreement, dated as of the date hereof (the "Stock Purchase Agreement"), with certain entities (the "Investors") pursuant to which the Company has agreed to issue and sell to such Investors shares of the Company's Series B Preferred Stock, par value $0.001 per share (the "Series B Preferred Stock"); and WHEREAS, the Company has agreed to grant certain registration rights with respect to the shares of the Company's Common Stock (the "Primary Shares") issuable upon conversion of the Series B Preferred Stock issued to the Investors pursuant to the Stock Purchase Agreement and upon conversion of the Company's Series A Convertible Preferred Stock issued and outstanding as of the date of this Agreement (the "Series A Preferred Stock"); WHEREAS, the Company has entered into an engagement letter agreement (the "Placement Agreement") with the Placement Agent dated August 7, 2000 pursuant to which the Company has agreed to issue to the Placement Agent warrants (the "Placement Warrants") to purchase an aggregate of 2% of shares sold of Common Stock (the "Placement Warrant Shares"); WHEREAS, pursuant to the Placement Agreement the Company has agreed to register under the Securities Act the Placement Warrant Shares to the same extent as the Primary Shares; WHEREAS, the Company has issued a warrant to purchase 30,000 Series B Preferred Stock to Par Capital Management, Inc. (the "Par Warrant") dated December 27, 2000; NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE 1 DEFINITIONS As used herein, the following terms shall have the following respective meanings: 1.1 "Commission" shall mean the Securities and Exchange Commission, or any other successor federal agency at the time administering the Securities Act. 1 2 1.2 "Common Stock" shall mean the Company's common stock, par value $0.001 per share. 1.3 "Exchange Act" shall mean the Securities and Exchange Act of 1934, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. 1.4 "Holders" shall mean the entities listed on Schedule 1 and any transferee thereof who holds Registrable Securities, and any other person or entity that shall have executed this Agreement in accordance with Article 10 hereof and whose name appears on the Holder Schedule attached hereto as Schedule 1. 1.5 "Initial Public Offering" means the closing of a firm commitment underwritten initial public offering, pursuant to an effective registration statement under the Securities Act, covering the offer and sale by the Company of Common Stock to the public. 1.6 "Preferred Stock Initiating Holders" shall mean either (a) the Holders of Series B Preferred Stock representing greater than 50% of the shares of the Series B Registrable Securities underlying such Series B Preferred Stock who comply with the applicable requirements of Article 2 or Article 4 ("Series B Initiating Holders") or (b) the Holders of Series A Preferred Stock representing greater than 50% of the Shares of the Series A Preferred Stock who comply with the applicable requirements of Article 2 or Article 4 ("Series A Initiating Holders"). 1.7 The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing with the Commission a registration statement in compliance with the Securities Act, and the declaration or ordering by the Commission of the effectiveness of such registration statement. 1.8 "Registrable Securities" means any and all shares of Common Stock: (i) issued or issuable upon conversion of the Series B Preferred Stock or of the Series A Preferred Stock; (ii) issued or issuable with respect to the Series B Preferred Stock or the Series A Preferred Stock upon any stock split, stock dividend, recapitalization, reclassification, merger, consolidation or other similar event; (iii) issued or issuable upon exercise of the Placement Warrants and PAR Warrants; and (iv) otherwise held or acquired by any of the Holders, excluding in all cases, however, Registrable Securities sold by a Holder to the public pursuant to a registered offering or pursuant to Rule 144 promulgated under the Securities Act. 1.9 "Registration Expenses" shall mean all expenses incurred by the Company in complying with Articles 2, 3 and 4 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of legal counsel for the Company, fees and disbursements of one special legal counsel for the selling Holders, exchange listing fees, NASD fees, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). 2 3 1.10 "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. 1.11 "Selling Expenses" shall mean all underwriting fees, discounts, selling commissions and stock transfer taxes applicable to the Registrable Securities registered by the Holders. 1.12 "Series A Preferred Stockholder" shall mean any Holder or Holders of the Company's Series A Convertible Preferred Stock, par value $0.001 per share. 1.13 "Series A Registrable Securities" means any and all shares of Common Stock: (i) issued or issuable upon conversion of the Series A Preferred Stock; or (ii) issued or issuable with respect to the Series A Preferred Stock upon any stock split, stock dividend, recapitalization, reclassification, merger, consolidation or other similar event. 1.14 "Series B Preferred Stockholder" shall mean any Holder or Holders of the Company's Series B Preferred Stock, par value $0.001 per share. 1.15 "Series B Registrable Securities" means any and all shares of Common Stock: (i) issued or issuable upon conversion of the Series B Preferred Stock; or (ii) issued or issuable with respect to the Series B Preferred Stock upon any stock split, stock dividend, recapitalization, reclassification, merger, consolidation or other similar event. ARTICLE 2 REQUESTED REGISTRATION 2.1 Request for Registration. Beginning on the date which is 180 days following the consummation of an Initial Public Offering Preferred Stock Initiating Holders may, subject to Sections 2.1(b) and 2.2, request registration in accordance with this Article 2. In the event the Company shall receive from the Preferred Stock Initiating Holders a written request that the Company effect any registration, qualification or compliance with respect to Registrable Securities, the Company will: (a) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (b) use its best efforts to effect such registration, qualification or compliance as soon as practicable (including, without limitation, undertaking to file post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with applicable regulations issued under the Securities Act, and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the 3 4 Company within 15 days after the receipt of the written notice from the Company described in Section 2.1(a). (c) The Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request of the Preferred Stock Initiating Holders; provided, however, that if the Company shall furnish to such Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company and its stockholders for such registration statement to be filed, the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Initiating Holders; provided, further, that the Company shall not be permitted to exercise such deferral right under this Section 2.1(c) or Section 4.1(b) hereof more than twice in any 365 -day period. 2.2 Maximum Number of Demand Registrations. The Company is obligated to effect two (2) demand registrations initiated by the Series B Initiating Holders and one (1) demand registration initiated by the Series A Initiating Holders pursuant to Section 2. 2.3 Underwriting. (a) The distribution of the Registrable Securities covered by the request of the Preferred Initiating Holders shall be effected by means of the method of distribution selected by the Holders holding a majority of the Registrable Securities covered by such registration. If such distribution is effected by means of an underwriting, the right of any Holder to registration pursuant to this Article 2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise agreed by the Preferred Stock Initiating Holders) to the extent provided herein. (b) If such distribution is effected by means of an underwriting, the Company (together with all Holders proposing to distribute their securities through such underwriting) shall enter into an underwriting agreement in customary form with a managing underwriter of nationally recognized standing selected for such underwriting by the Holders holding a majority of the Registrable Securities covered by such registration and approved by the Company, which approval shall not be unreasonably withheld. Notwithstanding any other provision of this Article 2, if the managing underwriter advises the Preferred Stock Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the underwriters may exclude shares requested to be included in such registration. The number of shares of Registrable Securities to be included in the registration and underwriting shall be allocated first amongst (i) the Holders who have requested registration of Registrable Securities plus (ii) those joining the request pursuant to Section 2.1(b) in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement and then amongst any Holders exercising their rights under Article 3 hereof with respect thereto in proportion, as nearly as practicable, to the respective amount of Registrable Securities held by such holders at the time of the filing of the registration statement. No Registrable Securities excluded from the underwriting by reason of the managing underwriter's marketing limitation shall be included in such registration. 4 5 (c) If any Holder disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Preferred Stock Initiating Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration; provided, however, that if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used in determining the underwriter limitation in this Section 2.3. 2.4 Inclusion of Shares by Company. If the distribution of Registrable Securities is being effected by means of an underwriting and if the managing underwriter has not limited the number of Registrable Securities to be underwritten, the Company may include securities for its own account or for the account of others in such registration if the managing underwriter so agrees. The inclusion of such shares shall be on the same terms as the registration of shares held by the Preferred Stock Initiating Holders. In the event that the underwriters exclude some of the securities to be registered, the securities to be sold for the account of the Company and any other holders shall be excluded in their entirety prior to the exclusion of any Registrable Securities. ARTICLE 3 COMPANY REGISTRATION 3.1 Notice of Registration to Holders. If at any time or from time to time the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders, including, without limitation, pursuant to Article 2 or Article 4 hereof, other than (i) a registration relating solely to employee benefit plans on Form S-8 (or any successor form) or (ii) a registration relating solely to a Commission Rule 145 transaction on Form S-4 (or any successor form), the Company will: (a) promptly give to each Holder written notice thereof, and (b) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 30 days after receipt of such written notice from the Company described in Section 3.1(a), by any Holder or Holders. 3.2 Underwriting. (a) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 3.1(a). In such event, the right of any Holder to registration pursuant to this Article 3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such 5 6 underwriting shall (together with the Company) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. (b) Notwithstanding any other provision of this Article 3, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may exclude some or all Registrable Securities from such registration and underwriting. The Company shall so advise all Holders of Registrable Securities, and the number of shares of Common Stock to be included in such registration shall be allocated as follows: first, for the account of the Company, all shares of Common Stock proposed to be sold by the Company; second, for the account of the Holders participating in such registration, in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held be all such Holders of Registrable Securities; third, for the account of any other stockholders of the Company not holding Registrable Securities participating in such registration, the number of shares of Common Stock requested to be included in the registration. No Registrable Securities excluded from the underwriting by reason of the underwriters' marketing limitation shall be included in such registration. (c) The Company shall so advise all Holders and the other holders distributing their securities through such underwriting of any such limitation, and the number of shares of Registrable Securities held by Holders that may be included in the registration. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. (d) The Company shall have the right to terminate or withdraw any registration initiated by it under this Article 3 prior to the effectiveness of such registration, whether or not a Holder has elected to include Registrable Securities in such registration. ARTICLE 4 REGISTRATION ON FORM S-3 4.1 Request for Registration. (a) In addition to the rights set forth in Articles 2 and 3 hereof, if Preferred Stock Initiating Holders request that the Company file a registration statement on Form S-3 (or any successor to Form S-3) for a public offering of shares of Registrable Securities having an aggregate offering price of at least $3,000,000 (based on the then current market price) and the Company is a registrant entitled to use Form S-3 (or any successor form to Form S-3) to register such shares for such an offering, the Company shall use its best efforts to cause such shares to be registered for the offering as soon as practicable on Form S-3 (or any such successor form to Form S-3). (b) The Company shall file a registration statement on Form S-3 covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request of the Holders; provided, however, that if the Company shall furnish to such Holders a 6 7 certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company and its stockholders for such registration statement to be filed on or before the date filing would be required, and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Holders; provided, further, that the Company shall not be permitted to exercise such deferral right under this Section 4.1(b) or Section 2.1(c) hereof more than twice in any 365 day period. (c) The Company is obligated to effect one (1) registration initiated by the Series B Initiating Holders and one (1) registration initiated by the Series A Initiating Holders during any twelve-month period pursuant to this Section 4.1. 4.2 Underwriting. (a) The distribution of the Registrable Securities covered by the registration on Form S-3 shall be effected by means of the method of distribution selected by the Holders holding a majority of the Registrable Securities covered by such registration. If such distribution is effected by means of an underwriting, the right of any Holder to registration pursuant to this Article 4 shall be conditioned upon such Holder's participation in such underwriting, if any, and the inclusion of such Holder's Registrable Securities in such underwriting. (b) If the distribution of the Registrable Securities pursuant to this Section 4.2 is effected by means of an underwriting, the Company (together with all Holders proposing to distribute their securities through such underwriting) shall enter into an underwriting agreement in customary form with a managing underwriter of nationally recognized standing selected for such underwriting by a majority in interest of the Holders requesting registration on Form S-3 and approved by the Company, which approval shall not be unreasonably withheld. Notwithstanding any other provision of this Article 4, if the managing underwriter advises the Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the underwriters may exclude some or all of the shares requested to be included in such registration, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement. No Registrable Securities excluded from the underwriting by reason of the managing underwriter's marketing limitation shall be included in such registration. (c) If the distribution of the Registrable Securities pursuant to this Section 4.2 is effected by means of an underwriting and if any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration; provided, however, that if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included 7 8 Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used in determining the underwriter limitation in this Section 4.2. 4.3 Inclusion of Shares by Company. If the distribution of the Registrable Securities pursuant to this Article 4 is effected by means of an underwriting and if the managing underwriter has not limited the number of Registrable Securities to be underwritten, the Company may include securities for its own account or for the account of others in such registration if the managing underwriter so agrees and if the number of Registrable Securities held by Holders requesting registration on Form S-3 which would otherwise have been included in such registration and underwriting will not thereby be limited. The inclusion of such shares shall be on the same terms as the registration of shares held by the Holders requesting such registration. In the event that the underwriters exclude some of the securities to be registered on Form S-3, the securities to be sold for the account of the Company and any other holders shall be excluded in their entirety prior to the exclusion of any Registrable Securities. ARTICLE 5 EXPENSES OF REGISTRATION All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Article 2, Article 3 and Article 4 hereof shall be borne by the Company. All Selling Expenses relating to Registrable Securities registered pursuant to Article 2, Article 3 and Article 4 hereof shall be borne by the Holders of such Registrable Securities pro rata on the basis of the number of shares so registered. ARTICLE 6 REGISTRATION PROCEDURE 6.1 Registration Procedures. If and whenever the Company is required by the provisions of this Agreement to use its best efforts to promptly effect the registration of any of its securities under the Securities Act, the Company will: (a) use its best efforts diligently to prepare and file with the Commission a registration statement on the appropriate form under the Securities Act with respect to such securities, which form shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the Commission to be filed therewith, and use its best efforts to cause such registration statement to become and remain effective until completion of the proposed offering; (b) use its best efforts to diligently prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective until the Holder or Holders have completed the distribution described in such registration statement and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all securities covered by such registration statement whenever the seller or sellers of such securities shall desire to sell or otherwise dispose of the same, but only to the extent provided in 8 9 this Agreement; (c) furnish to each selling holder and the underwriters, if any, such number of copies of such registration statement, any amendments thereto, any documents incorporated by reference therein, the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such selling holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such selling holder; (d) use its best efforts to register or qualify the securities covered by such registration statement under such other securities or state blue sky laws of such jurisdictions as each selling holder shall request, and do any and all other acts and things which may be necessary under such securities or blue sky laws to enable such selling holder to consummate the public sale or other disposition in such jurisdictions of the securities owned by such selling holder, except that the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (e) within a reasonable time before each filing of the registration statement or prospectus or amendments or supplements thereto with the Commission, furnish to counsel selected by the holders of Registrable Securities copies of such documents proposed to be filed, which documents shall be subject to the approval of such counsel; (f) immediately notify each selling holder of Registrable Securities, such selling holder's counsel and any underwriter and (if requested by any such Person) confirm such notice in writing, of the happening of any event which makes any statement made in the registration statement or related prospectus untrue or which requires the making of any changes in such registration statement or prospectus so that they will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in the light of the circumstances under which they were made not misleading; and, as promptly as practicable thereafter, prepare and file with the Commission and furnish a supplement or amendment to such prospectus so that, as thereafter deliverable to the purchasers of such Registrable Securities, such prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (g) use its best efforts to prevent the issuance of any order suspending the effectiveness of a registration statement, and if one is issued use its best efforts to obtain the withdrawal of any order suspending the effectiveness of a registration statement at the earliest possible moment; (h) if requested by the managing underwriter or underwriters (if any), any selling holder, or such selling holder's counsel, promptly incorporate in a prospectus supplement or post-effective amendment such information as such Person requests to be included therein, including, without limitation, with respect to the securities being sold by such selling holder to such underwriter or underwriters, the purchase price being paid therefor by such underwriter or underwriters and with respect to any other terms of an underwritten offering of the securities to 9 10 be sold in such offering, and promptly make all required filings of such prospectus supplement or post-effective amendment; (i) make available to each selling holder, any underwriter participating in any disposition pursuant to a registration statement, and any attorney, accountant or other agent or representative retained by any such selling holder or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information requested by any such Inspector in connection with such registration statement; (j) enter into any reasonable underwriting agreement required by the proposed underwriter(s) for the selling holders, if any, and use its best efforts to facilitate the public offering of the securities; (k) furnish to each prospective selling holder a signed counterpart, addressed to the prospective selling holder, of (A) an opinion of counsel for the Company, dated the effective date of the registration statement, and (B) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in the registration statement, covering substantially the same matters with respect to the registration statement (and the prospectus included therein) and (in the case of the accountants' letter) with respect to events subsequent to the date of the financial statements, as are customarily covered (at the time of such registration) in opinions of the Company's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities; (l) cause the securities covered by such registration statement to be listed on the securities exchange or quoted on the quotation system on which the Common Stock of the Company is then listed or quoted (or if the Common Stock is not yet listed or quoted, then on such exchange or quotation system as the selling holders of Registrable Securities and the Company shall determine); (m) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission and make generally available to its security holders, in each case as soon as practicable, but not later than 30 days after the close of the period covered thereby, an earnings statement of the Company which will satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any comparable successor provisions); (n) otherwise cooperate with the underwriter(s), the Commission and other regulatory agencies and take all actions and execute and deliver or cause to be executed and delivered all documents necessary to effect the registration of any securities under this Agreement; and 10 11 (o) during the period when the prospectus is required to be delivered under the Securities Act, promptly file all documents required to be filed with the Commission pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act. ARTICLE 7 INDEMNIFICATION 7.1 The Company will indemnify each Holder, each of its officers and directors and partners, and each person controlling any such persons within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, or any amendment or supplement thereof, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein, a material fact required to be stated therein or necessary to make the statements therein, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act or any state securities laws applicable to the Company and relating to action or inaction by the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers and directors and partners and each person controlling any such persons, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by such Holder or underwriter and expressly intended for use in such registration statement, prospectus, or any amendment or supplement thereof. 7.2 Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers, directors, partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, or any amendment or supplement thereto, incident to any such registration, qualification or compliance or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, partners, 11 12 underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, or amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Holder and expressly intended for use in such registration statement, prospectus, or any amendment or supplement thereof; provided, however, that the obligations of each Holder hereunder shall be limited to an amount equal to the proceeds to such Holder of Registrable Securities sold as contemplated herein. 7.3 Each party entitled to indemnification under this Section 7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld). The Indemnified Party may participate in such defense at such party's expense; provided, however, that the Indemnifying Party shall bear the expense of such defense of the Indemnified Party if representation of both parties by the same counsel would be inappropriate due to actual or potential conflicts of interest. The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement, unless such failure is prejudicial to the ability of the Indemnifying Party to defend the action. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation, and no Indemnified Party shall, except with the consent of each Indemnifying Party, consent to any judgement or enter into any settlement with respect to any claim for which it is seeking indemnification hereunder. 7.4 THE INDEMNIFICATION PROVISIONS PROVIDED FOR IN THIS AGREEMENT HAVE BEEN EXPRESSLY NEGOTIATED IN EVERY DETAIL, ARE INTENDED TO BE GIVEN FULL AND LITERAL EFFECT, AND SHALL BE APPLICABLE WHETHER OR NOT THE LIABILITIES, OBLIGATIONS, CLAIMS, JUDGMENTS, LOSSES, COSTS, EXPENSES OR DAMAGES IN QUESTION ARISE OR AROSE SOLELY OR IN PART FROM THE ACTIVE, PASSIVE OR CONCURRENT NEGLIGENCE, STRICT LIABILITY, OR OTHER FAULT OF ANY INDEMNIFIED PARTY. THE PARTIES HERETO ACKNOWLEDGE THAT THIS STATEMENT COMPLIES WITH THE "EXPRESS NEGLIGENCE RULE" AND CONSTITUTES CONSPICUOUS NOTICE. NOTHING IN THIS CONSPICUOUS NOTICE IS INTENDED TO PROVIDE OR ALTER THE RIGHTS AND OBLIGATIONS OF THE PARTIES, ALL OF WHICH ARE SPECIFIED ELSEWHERE IN THIS AGREEMENT. 12 13 ARTICLE 8 RULE 144 REPORTING With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of securities of the Company to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to: 8.1 Make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; and 8.2 Use commercially reasonable efforts to then file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and 8.3 So long as a Holder owns any Registrable Securities, furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration. ARTICLE 9 TRANSFER OF REGISTRATION RIGHTS The rights to cause the Company to register Registrable Securities granted Holders under Articles 2, 3 and 4 hereof may be assigned in connection with any transfer or assignment of at least 50,000 shares of the Holder's Registrable Securities. All transferees and assignees of the rights to cause the Company to register Registrable Securities granted Holders under Articles 2, 3 and 4 hereof, as a condition to the transfer of such rights, shall agree in writing to be bound by the agreements set forth herein. ARTICLE 10 LIMITATIONS ON REGISTRATION RIGHTS GRANTED TO OTHER SECURITIES The parties hereto agree that additional holders may, with the consent of the Company, the holders of a majority of the Registrable Securities then outstanding, the holders of a majority of the Series B Preferred Stock then outstanding and the holders of a majority of the Series A Preferred Stock then outstanding, be added as parties to this Agreement with respect to any or all 13 14 securities of the Company held by them; provided, however, that from and after the date of this Agreement, the Company shall not without the prior written consent of the holders of a majority of the Registrable Securities then outstanding and the holders of a majority of the Series B Preferred Stock then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company providing for the grant to such holder of registration rights superior to, or pari passu with, those granted herein. Any additional parties shall execute a counterpart of this Agreement, and upon execution by such additional parties and by the Company, shall be considered Holders for purposes of this Agreement, and shall be added to the Schedule of Registration Rights Holders. ARTICLE 11 PRIOR AGREEMENT The Investor Rights Agreement entered into among the Company and the entities listed therein dated May 17, 2000 is hereby terminated. ARTICLE 12 MISCELLANEOUS 12.1 GOVERNING LAW. THE LAWS OF THE STATE OF CALIFORNIA SHALL GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT, REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF LAW. 12.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 12.3 Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject matter hereof. 12.4 Termination. In addition, the right of any Holder to request registration or inclusion in any registration shall not be exercisable by a Holder during any period in which after the closing of the Initial Public Offering of Common Stock of the Company, all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may be sold under Rule 144 under the Securities Act within any 90-day period. 12.5 Notices. All notices, requests, consents, and other communications hereunder shall be in writing and shall be deemed effectively given and received when delivered in person or by national overnight courier service or by certified or registered mail, return receipt requested, or by telecopier, addressed as follows: 14 15 (a) if to the Company, at BAM Entertainment, Inc. 333 West Santa Clara Ave. Suite 95113 San Jose, CA Attention: Ray Musci Facsimile: (408) 298-9600 with a copy to: Doty Sundheim and Gilmore Attention: George M. Sundheim, III Facsimile: (650) 327-0100 (b) To any Holder: The address reflected in Schedule 1 hereto, as applicable, or such other address or addresses as shall have been furnished in writing by such party to the Company and to the other parties to this Agreement. 12.6 Severability. The invalidity, illegality or unenforceability of one or more of the provisions of this Agreement in any jurisdiction shall not affect the validity, legality or enforceability of the remainder of this Agreement in such jurisdiction or the validity, legality or enforceability of this Agreement, including any such provision, in any other jurisdiction, it being intended that all rights and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by law. 12.7 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 12.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together constitute one instrument. 12.9 "Market Stand-Off" Agreement. Each Holder agrees, if requested by the Company and underwriter of Common Stock of the Company in connection with the Company's Initial Public Offering not to sell or otherwise transfer or dispose of any Common Stock of the Company held by such Holder (other than to donees, partners or affiliates of the Holder who agree to be similarly bound) during the one hundred eighty (180) day period following the effective date of a registration statement of the Company filed under the Securities Act without the prior consent of such underwriter; provided, however, that this Section 11.9 shall only apply to the Holders if all executive officers and directors of the Company then holding Common Stock of the Company (or options to acquire Common Stock) and all persons owning more than one percent (1%) of Common Stock of the Company shall also have agreed to enter into similar agreements. Such agreement shall be in writing in a form reasonably satisfactory to the Company and such underwriter. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of such one hundred eighty (180) day period. 15 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective duly authorized officers or representatives as of the date first written above. BAM! ENTERTAINMENT, INC. By: /s/ RAYMOND C. MUSCI --------------------------------------- Raymond C. Musci, President By: /s/ GEORGE M. SUNDHEIM, III --------------------------------------- George M. Sundheim, III, Secretary PAR CAPITAL MANAGEMENT, INC. By: /s/ DAVID E. TOBIN --------------------------------------- Name: David E. Tobin Title: Analyst MORGAN KEEGAN EARLY STAGE FUND, L.P. By: MERCHANT BANKERS, INC. as the general partner of Morgan Keegan Early Stage Fund, L.P. By: /s/ K. JENKINS ---------------------------------- Name: K. Jenkins Title: M.D. /s/ RAYMOND C. MUSCI -------------------------------------------- Raymond C. Musci /s/ ANTHONY WILLIAMS -------------------------------------------- Anthony Williams /s/ ROBERT HOLMES -------------------------------------------- Robert Holmes 16 17 Schedule 1 Series A Preferred Stockholders: - -------------------------------
Name Number of Shares ---- ---------------- Raymond C. Musci 482,625 Anthony Williams 351,000 Robert Holmes 87,750 Kevin Bermeister 10,969 Mark Dyne 10,969 Elie Samaha 21,938 FIMAS, L.P., a Partnership 10,969
Series B Preferred Stockholders: - -------------------------------
Name Number of Shares ---- ---------------- PAR Capital Management, Inc. 198,301 Raymond C. Musci 28,329 Anthony Williams 28,329 Morgan Keegan Early Stage Fund, L.P. 28,329 Robert Holmes 11,332
i EX-10.14 24 v72115orex10-14.txt EXHIBIT 10.14 1 EXHIBIT 10.14 BAM! ENTERTAINMENT, INC. SERIES C STOCK PURCHASE AGREEMENT MAY 24, 2001 2 EXHIBITS Exhibit A - Second Amended and Restated Certificate of Incorporation Exhibit B - Registration Rights Agreement Exhibit C - Proprietary Information and Inventions Agreement Exhibit D - Bylaws of the Company Exhibit E - Opinion of Counsel to the Company Exhibit F - Co-Sale and Right of First Refusal Agreement
SCHEDULES Schedule 1 - Schedule of Purchasers Schedule 2.2(a) - Contingent Reserved Common Shares Schedule 2.2(d) - Stockholders and Option Holders List Schedule 2.3 - Subsidiaries Schedule 2.7 - Litigation Schedule 2.8(a) - Material Intellectual Property Schedule 2.8(b) - Certain IP Agreements Schedule 2.10 - Material Agreements Schedule 2.10(b) - Nonbinding Contracts Schedule 2.11 - Liabilities Schedule 2.13 - Conflicts Schedule 2.17 - Employee Benefit Plans Schedule 2.24 - Financial Statements Schedule 2.25(d) - Changes; Contracts/Agreements Schedule 2.25(e) - Changes; Compensation/Agreements with employees, representatives, agents, officers, directors or stockholders Schedule 2.25(i) - Changes; Loans/Guarantees
3 SERIES C STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of May 24, 2001, is entered into by and among BAM! Entertainment, Inc., a Delaware corporation (with its predecessors and successors, the "Company"), and the parties listed on Schedule 1 hereto (each, individually, a "Purchaser" and, collectively, the "Purchasers"). WITNESSETH: A. The Company, successor in interest to Bay Area Multimedia, Inc., a California corporation, was formerly known as Bay Area Multimedia, Inc., a Delaware corporation. B. Subject to the terms and conditions set forth herein, the Company desires to issue and sell to the Purchasers, and the Purchasers severally desire to purchase from the Company, shares of the Company's Series C Preferred Stock, par value $0.001 per share, for an aggregate purchase price of up to $10,000,000, as partially set forth on Schedule 1 attached hereto. C. The Purchasers and the Company desire to set forth their mutual agreements with respect to such purchase and sale and to establish various rights and obligations in connection therewith. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Purchase and Sale of Preferred Stock.. 1.1 Sale and Issuance of Series C Preferred Stock. (a) The Company shall adopt and file with the Secretary of State of the State of Delaware on or before the Closing (as defined below) the Amended and Restated Certificate of Incorporation of the Company in the form attached hereto as Exhibit A (the "Restated Certificate"). (b) Subject to the terms and conditions of this Agreement, each Purchaser severally (but not jointly) agrees to purchase at the Closing, and the Company agrees to sell and issue to such Purchaser at the Closing, such number of shares of the Company's Series C Preferred Stock, par value $0.001 per share, as set forth opposite such Purchaser's name on Schedule 1 attached hereto, at a purchase price of $22.553 per share, and for the total purchase price indicated with respect to such Purchaser on Schedule 1, representing an aggregate purchase price of up to $10,000,000 for all Purchasers. The shares of Series C Preferred Stock to be issued to the Purchasers pursuant to this Agreement shall hereinafter be referred to as the "Series C Preferred Stock." 1.2 Closing; Delivery. The closing of the purchase and sale of the Series C Preferred Stock (the "Closing") shall take place at one or more closings. All Closings shall be held at the offices of Doty Sundheim & Gilmore, 260 Sheridan Avenue, Suite 200, Palo Alto, 1 4 California. The first Closing shall occur at 9:00 a.m. Pacific Standard Time on May 4, 2001, or at such other time and place as the Company and the Purchasers mutually agree upon, orally or in writing (the "Initial Closing" and the "Closing Date"). The subsequent Closings shall occur at such times as approved of by the parties to such Closing. At each Closing, the Company shall deliver to each Purchaser a certificate registered in the name of such Purchaser representing the Series C Preferred Stock being purchased thereby against payment of the purchase price therefor, which shall be payable by check or by wire transfer of immediately available funds to an account designated by the Company. The Company and each Purchaser shall take such additional actions and execute and deliver such additional agreements and other instruments and documents as may be reasonably necessary or appropriate to effect the transactions contemplated by this Agreement in accordance with its terms. 1.3 Use of Proceeds. The Company shall apply the proceeds received hereunder from the sale of the Series C Preferred Stock to pay for the reasonable expenses of the Company associated with the issuance of the Series C Preferred Stock, to fund continued product and service development, to fund a broader market launch of the Company's services, to build corporate infrastructure and for general working capital purposes. 1.4 Reservation of Additional Shares of Series C Preferred Stock. As set forth in the Restated Certificate, the Company has reserved a total of 443,400 shares of its Series C Preferred Stock, par value $0.001 per share, for issuance and sale pursuant to this Agreement. 2. Representations, Warranties and Covenants of the Company. The Company hereby represents and warrants to, and covenants with, each of the Purchasers, as follows: 2.1 Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and to execute, deliver and perform this Agreement, the "Co-Sale and Right of First Refusal Agreement" and the "Registration Rights Agreement" (as defined in Section 2.4 below) (collectively, the "Transaction Agreements"), and to carry out the transactions contemplated by each of the Transaction Agreements. The Company is duly qualified to transact business and is in good standing in the State of California and in each other jurisdiction in which the failure to be so qualified would have a material adverse effect on the business (as now conducted), financial or other condition, operating results, assets or properties of the Company (each such effect, a "Material Adverse Effect"). 2.2 Capitalization. The authorized capital stock of the Company consists, or will consist, immediately prior to the Closing, of: (a) 10,000,000 shares of common stock, par value $0.001 per share (the "Common Stock"), of which 327,385 shares are issued and outstanding. All of the issued and outstanding shares of Common Stock have been duly authorized, are fully-paid and nonassessable and were issued in compliance with all applicable federal and state securities laws. The Company has reserved 976,220 shares of Common Stock for issuance upon conversion of the Series A Preferred Stock (as defined below), 320,000 shares of Common Stock for issuance upon conversion of the Company's Series B Preferred Stock, par value $0.001 per share, 443,400 2 5 shares of Common Stock for issuance upon conversion of the Company's Series C Preferred Stock, par value $0.001 per share, 325,000 shares of Common Stock for issuance pursuant to the exercise of options issued or reserved for issuance under stock incentive plans currently effective (the "Stock Plan"), 43,500 shares of Common Stock for issuance upon exercise of warrants to purchase Common Stock issued to PAR Capital (30,000 shares), K&L 2000 LLC (10,000 shares) and Morgan Keegan & Company, Inc. (3,500 shares) (the foregoing warrants being collectively called the "Warrants") and shares issuable upon exercise of the Warrants being collectively called the "Warrant Shares"). Except as set forth in Schedule 2.2(a), there are no other Common Shares to be issued (the "Contingent Reserved Common Shares"). (b) 3,000,000 shares of Preferred Stock with a par value of $0.001 per share (the "Preferred Stock"), of which 976,220 shares have been designated as Series A Convertible Preferred Stock (the "Series A Preferred Stock"), all of which are issued and outstanding, 320,000 shares have been designated as Series B Preferred Stock (the "Series B Preferred Stock"), 294,620 of which are issued and outstanding, and 443,400 shares have been designated as Series C Preferred Stock (the "Series C Preferred Stock"), all of which may be issued and outstanding upon the Closing. (c) Except for (A) the conversion privileges of the Series A Preferred Stock, (B) the conversion privileges of the Series B Preferred Stock, (C) the conversion privileges of the Series C Preferred Stock, (D) currently authorized options to purchase 110,750 shares of Common Stock granted to employees pursuant to the Stock Plan, (E) the Warrants and the (F) Contingent Reserved Common Shares (collectively, the "Common Stock Equivalents"): (i) no subscription right, warrant, option, convertible security or other right or interest (contingent or otherwise) to purchase or acquire any shares of capital stock, of the Company is authorized, issued or outstanding; (ii) the Company does not have any obligation (contingent or otherwise) (a) to issue any subscription right, warrant, option, convertible security or other such right or interest or (b) to issue or distribute to holders of any shares of its capital stock any evidences of indebtedness or assets of the Company; and (iii) the Company does not have any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or make any other distribution in respect thereof. (d) Attached hereto as Schedule 2.2(d) is a true and complete list of the stockholders of the Company and all holders of any options or warrants of the Company, showing the number of shares of capital stock, options or warrants of the Company held by each such person as of the date hereof. Except as provided in Schedule 2.2(a) and Schedule 2.2(d), there are no other holders of any subscription right, option, warrant, convertible security or other right or interest that is convertible into or exercisable for shares of capital stock of the Company, and there are no statutory or, to the Company's knowledge, contractual stockholders' preemptive rights, rights of first refusal or any similar rights relating to the acquisition of the capital stock of the Company. 2.3 Subsidiaries. Except as specified in Schedule 2.3, the Company does not have any subsidiaries or own or control, directly or indirectly, any interest in any other corporation, partnership, limited liability company, joint venture, association, trust, estate, limited liability partnership, joint stock company, unincorporated organization or government or 3 6 any agency or political subdivision thereof, or other entity or organization (each of the foregoing, together with any individual, being sometimes referred to herein as a "Person"). Schedule 2.3 sets forth, as of the Initial Closing and giving effect to the transactions contemplated hereby, a complete and current list of the outstanding equity interests and the stockholders of the Company's subsidiaries. 2.4 Authorization. All corporate action on the part of the Company, its directors, officers and stockholders necessary for the authorization, execution and delivery of this Agreement and the Registration Rights Agreement in the form attached hereto as Exhibit B, the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance and delivery of shares of the Series C Preferred Stock pursuant to the terms of this Agreement and the Common Stock issuable upon conversion of the Series C Preferred Stock has been taken or will be taken prior to the Closing, and the Transaction Agreements, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms except: (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditors' rights generally; (ii) as limited by laws or equitable principles relating to the availability of specific performance, injunctive relief, or other equitable remedies; or (iii) to the extent the indemnification provisions contained in the Registration Rights Agreement may be limited by applicable federal or state securities laws. 2.5 Compliance with Securities Laws; Valid Issuance of Securities. The Series C Preferred Stock being issued to the Purchasers hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully-paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement and applicable federal and state securities laws. Shares of the Common Stock issuable upon conversion of the Series C Preferred Stock purchased hereunder have been duly and validly reserved for issuance, and upon issuance in accordance with the terms of the Restated Certificate, shall be duly and validly issued, fully-paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Registration Rights Agreement and applicable federal and state securities laws. 2.6 Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, foreign, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by the Transaction Agreements, except for filings pursuant to applicable state securities laws and Regulation D of the Securities Act of 1933, as amended (the "Securities Act"). 2.7 Litigation. Except as set forth on Schedule 2.7, there is no action, suit, proceeding or investigation pending or, to the best of the Company's knowledge, currently overtly threatened against the Company or any of its subsidiaries, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitations, actions, suits, proceedings or investigations pending or threatened involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their 4 7 obligations under any agreements with prior employers. The Company is not a party or expressly subject to the provisions of any order, writ, injunction, judgment or decree of any court, administrative agency, government agency or instrumentality. There is no action, suit or proceeding by the Company currently pending or which the Company intends to initiate. 2.8 Intellectual Property. (a) To the best knowledge of the Company, the Company has sufficient title and ownership of, or rights by license or other agreement to, all patents, patent applications, trademarks, service marks, trade names, domain names, URLs, copyrights, trade secrets, software, source codes, object codes and other intellectual property rights used by the Company in its business or necessary to conduct its business as currently conducted ("Intellectual Property"). The Company has not received any written communications alleging that the Company has violated or, by conducting its business as now conducted, would violate any of the rights in the Intellectual Property of any other Person. The Company is not aware that any of its employees are obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of the Company or that would conflict with the Company's business as currently conducted. The Company has not licensed any of the Intellectual Property to any other Person, nor does any other Person have an option or any other right to acquire any of the Intellectual Property other than in the ordinary course of business (except for the Intellectual Property that is in the public domain). Schedule 2.8(a) sets forth a list of the Company's material intellectual property. (b) All licenses or agreements listed in Schedule 2.8(b) (the "Certain IP Agreements") are in full force and effect and to the best knowledge of the Company there is no default by any party thereto. True and complete copies of all Certain IP Agreements, and any amendments thereto, have been made available to the Purchasers, and to the best knowledge of the Company, the licensors under the Certain IP Agreements to which the Company is granted rights, to the best of the Company's knowledge, have all requisite power and authority to grant the rights purported to be conferred thereby. None of the products manufactured and sold, nor any process or know-how used, by the Company under the Certain IP Agreements infringes or is alleged to infringe any patent, trademark, service mark, trade name, copyright or other proprietary right or is a derivative work based on the work of any other person. 2.9 Compliance with Other Instruments. The Company is not in violation or in default of any provisions of (i) its Certificate of Incorporation, as amended, or Bylaws or (ii) any order, writ, injunction, judgment, instrument, decree or contract to which it is a party or by which it is bound or (iii) to the Company's knowledge, any provision of a federal or state statute, rule or regulation applicable to the Company, which violations or defaults would in the case of the items described in clauses (ii) and (iii), either individually or in the aggregate, have a Material Adverse Effect. The execution, delivery and performance of the Transaction Agreements and the consummation of the transactions contemplated hereby or thereby do not and will not, with or without the passage of time and/or the giving of notice: (a) result in any such violation or conflict with or constitute a default under any such provision, order, writ, injunction, judgment, instrument, decree or contract or any such statute, rule or regulation; (b) 5 8 result in the creation of any lien, security interest, charge or encumbrance upon the capital stock or any assets of the Company; or (c) give any third party the right to modify, terminate or accelerate any obligation under any such provision, order, writ, injunction, judgment, instrument, decree or contract. 2.10 Agreements. Schedule 2.10 sets forth a list of all material agreements, contracts, understandings or commitments, written or oral (collectively, "Material Agreements"), to which the Company is a party or by which it is bound. As used herein, Material Agreements shall mean: (a) Agreements, contracts, understandings or commitments between the Company and any of its subsidiaries, officers, directors or affiliates or any of such officers', directors' or affiliates' immediate family members. (b) Agreements, contracts, understandings or commitments to which the Company or any of its affiliates is a party or by which it is bound that involve obligations (contingent or otherwise) of, or payments to, the Company in excess of, $250,000. All of such agreements, contracts understanding or commitments are valid, binding and in full force and effect with respect to the Company or any of its subsidiaries, except as set forth on Schedule 2.10(b), and there has been no material default by the Company under any of the foregoing nor to the Company's knowledge has there been any material default by any other party thereto. 2.11 Absence of Undisclosed Liabilities. Except as set forth on Schedule 2.11, since the Statement Date (as hereafter defined), the Company and any of its subsidiaries has not: (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of the Company's capital stock; (ii) incurred any indebtedness on behalf of the Company for money borrowed or incurred any other liabilities in excess of $50,000 individually, or in excess of $100,000 in the aggregate to any one creditor; (iii) made any loans or advances to any Person in the name of or with respect to the Company, other than ordinary advances for expenses incurred in the ordinary course of business consistent with past practices; or (iv) sold, exchanged or otherwise disposed of any of the Company's assets or rights, other than in the ordinary course of business consistent with past practices. 2.12 Disclosure. None of the representations or warranties of the Company contained in this Agreement, the schedules and exhibits attached hereto, nor any certificate furnished or to be furnished to the Purchasers at Closing (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. 2.13 No Conflict of Interest. The Company is not indebted, directly or indirectly, to any of its subsidiaries or officers or directors of the Company or its subsidiaries or, to the knowledge of the Company or its subsidiaries, such officers' or directors' respective spouses or immediate family members, for any amount whatsoever. Except as set forth on Schedule 2.13 attached hereto, none of the Company's subsidiaries or officers or directors of the 6 9 Company or its subsidiaries or, to the knowledge of the Company or its subsidiaries, no member of such officers' or directors' immediate families (x) are, directly or indirectly, indebted to the Company or, (y) have any direct or indirect ownership interest in any Person (A) with which the Company is affiliated or (B) with which the Company has a material business relationship, or (C) which competes with the Company; except that for purposes of this clause (y), officers, directors and/or stockholders of the Company may own stock in (but not exceeding five percent (5%) of the outstanding capital stock of) any publicly traded companies that may compete with the Company. To the best of the Company's knowledge, none of the Company's officers or directors or any members of their immediate families are, directly or indirectly, interested in any material contract of the Company. The Company is not a guarantor or indemnitor of any indebtedness of any other Person. 2.14 Registration Rights and Voting Rights. Except as contemplated in the Registration Rights Agreement, there are no agreements, written or oral, between the Company and any Person relating to the registration of its capital stock under federal or state securities laws, including piggyback registration rights. To the knowledge of the Company, no stockholders of the Company have entered into any agreements with respect to the voting of shares of the capital stock of the Company. 2.15 Private Placement. Subject to and in reliance in part on the truth and accuracy of the Purchasers' representations set forth in this Agreement, the offer, sale and issuance of the Series C Preferred Stock as contemplated by this Agreement is exempt from the registration requirements of the Securities Act and any applicable state securities laws, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.16 Title to Property and Assets. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and which do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and holds a valid leasehold interest free of any liens, claims or encumbrances. 2.17 Employee Benefit Plans. Except as specified in Schedule 2.17, the Company does not have any employee benefit plan and is not a party to any multiemployer plan as such terms are defined in the Employee Retirement Income Security Act of 1974, as amended. 2.18 Tax Returns and Audits. The Company and, to the Company's knowledge, any of its subsidiaries has accurately prepared and timely filed all material federal, state, foreign, local and other tax returns required by law to be filed by each of them, has paid or made provision for the payment of all taxes shown to be due and all additional assessments, and adequate provisions have been made and are reflected in the Company's financial statements in all material respects to the extent required by generally accepted accounting principles applied on a consistent basis and as in effect in the United States ("GAAP") for all current taxes and other charges to which the Company or its subsidiaries is subject and which are not currently due and payable. There are no additional assessments or adjustments pending or, to the knowledge of the Company, threatened against the Company or its subsidiaries for any period, and to the 7 10 Company's knowledge, there is no basis for any such assessment or adjustment that would be material. 2.19 Labor Agreements and Actions. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral contract, commitment, agreement or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending or, to the knowledge of the Company, threatened, which could have a Material Adverse Effect, nor is the Company aware of any labor organization activity involving the employees, representatives or agents of the Company. The Company has complied in all material respects with all applicable federal and state equal employment opportunity laws and regulations and with all other laws and regulations related to employment and labor issues. The Company has not received any notice of any plan of any key employee to terminate his or her employment with the Company. 2.20 Proprietary Information and Inventions Agreements. Each current employee, consultant and officer of the Company has executed an agreement with the Company regarding confidentiality and proprietary information substantially in the form attached as Exhibit C. The Company, after reasonable investigation, is not aware that any of its current employees or consultants is in violation thereof, and the Company will use commercially reasonable efforts to prevent any such violation. To the Company's knowledge, no consultants to or vendors of the Company have had any access to confidential information of the Company who are not bound by non-disclosure agreements. 2.21 Permits. The Company has all franchises, permits, licenses and any other governmental authorizations necessary for the conduct of its business as now being conducted, the lack of which could have a Material Adverse Effect. The Company is not in default in any material respect under any of such franchises, permits, licenses or other authorizations. 2.22 Corporate Documents. The Restated Certificate and Bylaws of the Company are in the form provided to each of the Purchasers. As of the Closing, the Bylaws of the Company shall be in the form of the Bylaws attached hereto as Exhibit D. The copy of the minute book of the Company provided to the Purchasers contains minutes of all meetings of directors and stockholders of the Company and all actions by written consent without a meeting by the directors and stockholders of the Company since the date of the incorporation of the Company, and reflects all actions by the directors (and any committee of directors) and stockholders of the Company with respect to all transactions referred to in such minutes accurately in all material respects. 2.23 Real Property Holding Corporation. Neither the Company nor any of its subsidiaries is a United States real property holding corporation within the meaning of Internal Revenue Code Section 897(c)(2) and Section 1.897-2(c) of the Treasury Regulations promulgated thereunder. 2.24 Financial Statements. The Company has made available to the Purchasers (i) an audited balance sheet as of June 30, 2000; (ii) an audited income statement as of June 30, 8 11 2000; (iii) an unaudited balance sheet as of March 31, 2001 (the "Statement Date"); and (iv) an unaudited income statement for the three months ended March 31, 2001, copies of which are included as Schedule 2.24 (the "Financial Statements"). The Financial Statements have been prepared from the books and records of the Company and are complete and correct in all material respects and fairly present the consolidated financial condition and operating results of the Company as of the Statement Date and for the period presented. Except as set forth in the Financial Statements, the Company does not have any material liabilities, contingent or otherwise, other than (i) liabilities paid or incurred in the ordinary course of business subsequent to the Statement Date, and (ii) obligations under contracts and commitments incurred in the ordinary course of business. 2.25 Changes. Since the Statement Date and except as contemplated by this Agreement and the exhibits and schedules hereto, there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except for changes in the ordinary course of business or that have not resulted in a Material Adverse Effect; (b) any damage, destruction or loss to property, whether or not covered by insurance, resulting in a Material Adverse Effect; (c) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company except in the ordinary course of business or that has not resulted in a Material Adverse Effect; (d) any material change to a material contract or agreement by which the Company or any of its assets are bound or subject, except as specified in Schedule 2.25(d); (e) any material change in any compensation arrangement or agreement with any employee, representative, agent, officer, director or stockholder of the Company, except as specified in Schedule 2.25(e); (f) any resignation or termination of employment of any officer, director or key employee of the Company and, to the best of the Company's knowledge, the Company does not know of any impending resignation or termination of employment of any such officer, director or key employee; (g) receipt of notice that there has been a loss of, or material order cancellation by, any major advertiser or major customer of the Company other than in the ordinary course of business; (h) any mortgage, pledge, transfer of a security interest in, lien or encumbrance, created by the Company, with respect to any of its capital stock, properties or assets, except liens for taxes not yet due or payable; (i) any loans or guarantees made by the Company to or for the benefit of its employees, representatives, agents, officers or directors, or any members of their 9 12 immediate families, other than ordinary advances for expenses incurred in the ordinary course of business, except as specified in Schedule 2.25(i); (j) any declaration, setting aside or payment or other distribution in respect to any of the Company's capital stock, or any direct or indirect redemption, purchase, or other acquisition of any of such capital stock by the Company other than the purchase of capital stock of officers, directors or employees who have terminated their relationship with the Company; or (k) any arrangement or commitment by the Company to do anything described in this Section 2.25. 2.26 Environmental and Safety Laws. The Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety where such violation is likely to result in a Material Adverse Effect, and no material expenditures are presently required by the Company in order to comply with any such applicable statute, law or regulation. 2.27 FCPA. The Company has complied in all material respects with the United States Foreign Corrupt Practices Act of 1977, as amended (the "FCPA"), in obtaining any consents, licenses, approvals, authorizations, rights, and privileges in connection with the conduct of its business, and has otherwise conducted its business in all material respects in compliance with the FCPA. The Company's internal management and accounting practices and controls are adequate to ensure compliance in all material respects with the FCPA. 2.28 Projections. Any projections provided to the Purchasers by the Company were made in good faith and were based upon reasonable assumptions when made. 3. Representations and Warranties of Purchasers. Each Purchaser hereby, severally and not jointly, represents and warrants to the Company, with respect to itself only, that: 3.1 Accredited Investor; Authorization. Such Purchaser is an "accredited investor" within the meaning of Rule 501 promulgated under the Securities Act and has the corporate, partnership or individual, as the case may be, power and authority to enter into and perform this Agreement and the other Transaction Agreements to which it is a party and to consummate the transactions contemplated hereby and thereby. This Agreement has been duly authorized, executed and delivered by such Purchaser and constitutes the legal, valid and binding obligation of such Purchaser, enforceable in accordance with its terms except: (i) as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditors' rights generally; or (ii) as such enforceability may be limited by laws or equitable principles relating to the availability of specific performance, injunctive relief, or other equitable remedies. 3.2 No Conflict With Other Agreements. The execution, delivery and performance of the Transaction Agreements to which such Purchaser is a party and the consummation of the transactions contemplated hereby or thereby will not, with or without the passage of time and/or the giving of notice, result in a violation or default of any provisions of such Purchaser's charter, bylaws, partnership agreement, certificate of limited partnership, 10 13 limited liability company agreement, certificate of formation or other organizational document or of any order, writ, injunction, judgment, instrument, decree or contract to which it is a party or by which it is bound or, to its knowledge, of any material provision of a federal or state statute, rule or regulation applicable to such Purchaser. 3.3 Investment Experience. Such Purchaser is a regular purchaser of securities and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Company. 3.4 Distribution. The Series C Preferred Stock (and the Common Stock issuable upon conversion thereof) is being acquired for such Purchaser's own account, and not as nominee or agent, for the present intention of holding such securities for purposes of investment and not with a view to or for resale in connection with any distribution thereof. Such Purchaser further represents, severally and not jointly, that it understand and agrees that, until registered under the Securities Act or transferred pursuant to the provisions of Rule 144 as promulgated by the Securities and Exchange Commission, all certificates evidencing any of the Series C Preferred Stock (and the Common Stock issuable upon conversion thereof), whether upon initial issuance or upon any transfer thereof, shall bear legends, prominently stamped or printed thereon, reading substantially as follows: (a) Federal Legend. THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THESE SECURITIES UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF THE ACT. (b) any legend required by applicable state securities laws. The Company need not register a transfer of legended Series C Preferred Stock, and may also instruct its transfer agent not to register the transfer of the Series C Preferred Stock, unless the conditions specified in the foregoing legends are satisfied. 3.5 Disclosure of Information. Such Purchaser has received all the information it considers necessary or appropriate for deciding whether to purchase the Series C Preferred Stock. Such Purchaser further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Series C Preferred Stock and the business, properties, prospects and financial condition of the Company. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Purchasers to rely thereon. 11 14 3.6 Restricted Securities. Such Purchaser understands that the shares of Series C Preferred Stock it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Act only in certain limited circumstances. In this connection, such Purchaser represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act of 1933, as amended. 3.7 Further Representations by Foreign Purchasers. If a Purchaser is not a United States person, such Purchaser hereby represents that he or she has satisfied himself or herself as to the full observance of the laws of his or her jurisdiction in connection with any invitation to subscribe for shares of Series C Preferred Stock or any use of this Agreement, including (i) the legal requirements within his jurisdiction for the purchase of shares of Series C Preferred Stock, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale, or transfer of shares of Series C Preferred Stock. Such Purchaser's subscription and payment for, and his or her continued beneficial ownership of shares of Series C Preferred Stock, will not violate any applicable securities or other laws of his or her jurisdiction. 3.8 Not Formed for Investment. Such Purchaser was not formed for the purpose of making an investment in the Company. 4. Conditions of Purchasers' Obligations at the Closing. The obligations of each Purchaser to the Company under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived in writing by such Purchaser. 4.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true and correct in all material respects on and as of the Initial Closing. 4.2 Performance. The Company shall have performed and complied in all material respects with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by the Company on or before the Closing. 4.3 Compliance Certificate. The President of the Company shall deliver to each Purchaser at the Closing a certificate certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled. 4.4 Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series C Preferred Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 12 15 4.5 Opinion of Company Counsel. The Purchasers shall have received from Doty Sundheim & Gilmore, counsel for the Company, an opinion, dated as of the Closing, in substantially the form of Exhibit E attached hereto. 4.6 Supporting Documents. The Purchasers shall have received the following: (a) A copy of resolutions of the Board of Directors of the Company authorizing and approving the Transaction Agreements and copies of resolutions of the Board of Directors and stockholders of the Company authorizing and approving the adoption of the Restated Certificate that is contemplated by this Agreement, all such resolutions to be certified by the Secretary of the Company; (b) A Certificate of Incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers authorized to execute the Transaction Agreements and further certifying that the Restated Certificate and Bylaws of the Company delivered to the Purchasers at the time of the execution of this Agreement have been validly adopted and have not been amended or modified except as required by this Agreement; and (c) Such additional supporting documentation and other information with respect to the transactions contemplated hereby as any Purchaser or its legal counsel may reasonably request. 4.7 Board of Directors. As of the Initial Closing, the Company's Board of Directors shall consist of no more than 8 members. Effective as of the time of the Initial Closing, by appropriate action of the Board of Directors and/or the Stockholders of the Company, one person designated by PAR Capital Management, Inc. ("PAR" and such designee the "PAR Designee") shall be elected or appointed to the Company's Board of Directors, if not already on the Board of Directors. All other members of the Company's Board of Directors (not to exceed 7 in number) shall remain as members of the Board of Directors, subject to the provisions of the Company's Restated Certificate and Bylaws as from time to time in effect. 4.8 Registration Rights Agreement. The Company, each Purchaser that is a party thereto and the other parties thereto shall have executed and delivered the Registration Rights Agreement in substantially the form attached hereto as Exhibit B. 4.9 Restated Certificate. The Company shall have filed the Restated Certificate with the Secretary of State of Delaware on or prior to the date of the Closing, which shall continue to be in full force and effect as of the date of the Closing. 4.10 Employment Agreements. The members of the Company's senior management shall have entered into a Proprietary Information and Inventions Agreement in the form attached hereto as Exhibit C. 4.11 Co-Sale and Right of First Refusal Agreement. The Company, Raymond C. Musci, Anthony R. Williams and each Purchaser shall have executed and delivered the Co-Sale and Right of First Refusal Agreement substantially in the form attached hereto as Exhibit F. 13 16 5. Conditions of the Company's Obligations at the Closing. The obligations of the Company to each Purchaser under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived by the Company in writing; provided, however, that the non-fulfillment of a condition by a Purchaser will not relieve the Company of its obligation to each other fulfilling Purchaser. 5.1 Representations and Warranties. The representations and warranties of such Purchaser contained in Section 3 shall be true and correct on and as of the date of the Closing with the same effect as though such representations and warranties had been made on and as of the date of Closing. 5.2 Performance. All covenants, agreements and conditions contained in this Agreement to be performed by such Purchaser on or prior to the Closing shall have been performed or complied with. 5.3 Registration Rights Agreement. Such Purchaser shall have executed and delivered the Registration Rights Agreement in substantially the form attached hereto as Exhibit B. 5.4 Payment of Purchase Price. Each Purchaser shall have delivered the purchase price specified in Section 1.1 of this Agreement. 5.5 Qualifications. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series C Preferred Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 6. Post-Closing Covenants. The Company and Purchasers agree as follows with respect to the period following the Closing. 6.1 Financial Reporting. The Company shall provide Purchasers with the following periodic reports: (a) as soon as available, but in any event within forty five (45) days after the end of each quarter accounting period in each fiscal year, unaudited statements of income, operations and cash flows of the Company for such quarterly period and unaudited balance sheets of the Company as of the end of such quarter period and all such statements shall be prepared in accordance with GAAP (provided, however, that such statements need not comply with the footnote disclosure requirements of GAAP); and (b) as soon as available, but in any event within ninety (90) days after the end of each fiscal year, audited statements of income, operations, retained earnings and cash flows of the Company for such fiscal year and audited balance sheets of the Company as of the end of such fiscal year, all prepared in accordance with GAAP, all in reasonable detail and duly certified by the accountants, who shall have given the Company an opinion, unqualified as to the scope of the audit, regarding such statements. 6.2 Participation Rights. Purchasers shall have the right, but not the obligation, to participate pro rata (on the same terms and at the same price) in any offering and sale of stock (common or preferred) made by the Company to any person or entity after the date 14 17 of this Agreement (the "Purchaser Participation Right"); provided, however, that this Section 6.2 shall not apply in the case of the grant of options to officers, directors and employees pursuant to the terms of the Stock Plan, the purchase of Common Stock upon the exercise of such options or the purchase of Warrant Shares upon the exercise of the Warrants. The Purchaser Participation Right shall expire and terminate upon the successful completion by the Company of a Qualified Public Offering (as defined in Exhibit A) and shall not apply in the event of a Qualified Public Offering. 6.3 Compensation Committee. PAR Designee shall be a member of the Company's Compensation Committee (the "Compensation Committee"). All compensation arrangements of the Company's key employees, officers and directors shall be approved by the Compensation Committee; provided, however, that so long as less than a majority of the Compensation Committee consists of outside directors such approval shall require an affirmative vote or consent of the PAR Designee. For the purpose of this Section 6.3, "outside directors" shall not include any director employed by the Company or who holds (individually or through an entity or entities) at least 1% of the outstanding capital stock of the Company. 7. Miscellaneous. 7.1 Survival of Warranties. The representations, warranties and covenants of the Company and the Purchasers contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and each Closing. 7.2 Transfer; Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. 7.3 No Third Party Beneficiaries. Nothing express or implied in this Agreement is intended to confer, nor shall anything herein confer, upon any other than the parties hereto and the respective successors or assigns of such parties, any rights, remedies, obligations or liabilities whatsoever. 7.4 Governing Law. THE LAWS OF THE STATE OF CALIFORNIA SHALL GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF LAW. 7.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 7.6 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.7 Notices. Any notice required or permitted by this Agreement shall be in writing and shall be deemed given upon delivery, when delivered personally or by overnight courier or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. 15 18 mail, as certified or registered mail, with postage prepaid, addressed to the party to be notified at such party's address as set forth below or on Schedule 1 hereto, or as subsequently modified by written notice, and: (a) if to the Company: BAM! Entertainment, Inc. 333 West Santa Clara Street Suite 930 San Jose, California 95113 Attention: Raymond C. Musci Facsimile: (408) 298-9600 with a copy to: Doty Sundheim & Gilmore 260 Sheridan Avenue Suite 200 Palo Alto, California 94306 Attention: George M. Sundheim III, Esq. Facsimile: (650) 327-0101 (b) if to PAR: PAR Capital Management, Inc. One Financial Center, Suite 1600 Boston, MA 02111 Attention: David Tobin Facsimile: (617) 556-8875 with a copy to: Goodwin, Proctor & Hoar, LLP Exchange Place Boston, MA 02109 Attention: Jeffrey C. Hadden Facsimile: (617) 523-1231 (c) To any other Purchaser: The address reflected on the signature page to this Agreement or at such other address or addresses as shall have been furnished in writing by such party to the other parties to this Agreement. 7.8 Finder's Fee. Each party represents that it neither is nor will be obligated for any finder's fee(s) or commission in connection with this transaction for which any other party hereto could become liable. Each Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of any finder's fee(s) (and the costs and expenses of defending against such liability or asserted liability) for which such Purchaser or any of its officers, partners, employees, or representatives is 16 19 responsible. The Company has engaged Morgan Keegan as placement agent for the shares of Series C Preferred Stock being sold hereunder and shall be responsible for the payment of all fees and other amounts payable to Morgan Keegan in connection therewith. The Company agrees to indemnify and hold harmless each Purchaser from any liability for any commission or compensation in the nature of a finder's fee(s) (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees, or representatives is responsible. 7.9 Expenses. Each party shall bear its own cost and expenses incurred with respect to this Agreement and the documents referred to herein including attorney's fees. 7.10 Amendments and Waivers. Any term of this Agreement may be amended or waived, and this Agreement may be terminated, with the written consent of the Company and Purchasers representing at least a majority of the outstanding Series C Preferred Stock (or the Common Stock issuable upon conversion thereof) purchased hereunder. Any amendment or waiver effected in accordance with this Section 7.10 shall be binding upon the Purchasers and each holder or transferee of the Series C Preferred Stock (or the Common Stock issuable upon conversion thereof), each future holder of all such securities, and the Company. 7.11 Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, and all such remaining provisions hereof shall be enforceable in accordance with their terms. 7.12 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any holder of any of the Series C Preferred Stock (or the Common Stock issuable upon conversion thereof) or to the Company, upon any breach or default of the Company or by any Purchaser under this Agreement, shall impair any such right, power or remedy of any Purchaser or the Company, as the case may be, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Purchaser or the Company, as the case may be, of any breach or default under this Agreement, or any waiver on the part of any Purchaser or the Company, as the case may be, of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 17 20 7.13 Entire Agreement. This Agreement, the Registration Rights Agreement and the other documents referred to herein to which any Purchaser is a party constitute the entire agreement among the parties hereto pertaining to the subject matter hereof, and this Agreement supersedes all prior agreements and understanding among the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective duly authorized officers or representatives as of the date first written above. COMPANY: BAM! ENTERTAINMENT, INC. By: /s/ RAYMOND C. MUSCI ---------------------------------------- Raymond C. Musci, President By: /s/ GEORGE M. SUNDHEIM, III ---------------------------------------- George M. Sundheim, III, Secretary PURCHASERS: PAR CAPITAL MANAGEMENT, INC. By: /s/ DAVID E. TOBIN ---------------------------------------- Name: David E. Tobin Title: Vice President MORGAN KEEGAN EARLY STAGE FUND, L.P. By: MERCHANT BANKERS, INC. as the general partner of Morgan Keegan Early Stage Fund, L.P. By: /s/ MINOR PERKINS ------------------------------------ Name: Minor Perkins Title: Vice President /s/ RAYMOND C. MUSCI -------------------------------------------- Raymond C. Musci /s/ ANTHONY R. WILLIAMS -------------------------------------------- Anthony R. Williams /s/ ROBERT HOLMES -------------------------------------------- Robert Holmes 18 21 /s/ STEPHEN AMBLER ---------------------------------------- Stephen Ambler /s/ JOSEPH MORICI ---------------------------------------- Joseph Morici /s/ MARK DYNE ---------------------------------------- Mark Dyne /s/ KEVIN BERMEISTER ---------------------------------------- Kevin Bermeister /s/ ANTHONY NEUMANN ---------------------------------------- Anthony Neumann FIMAS, a Partnership By: /s/ GEORGE M. SUNDHEIM, III ----------------------------------- Name: George M. Sundheim, III Its: General Partner /s/ PAMELA COLBURN ---------------------------------------- Pamela Colburn /s/ TERRY PHILLIPS ---------------------------------------- Terry Phillips /s/ DAVID P. CLARK ---------------------------------------- David P. Clark /s/ STEVEN J. MASSARSKY ---------------------------------------- Steven J. Massarsky K&L 2000 LLC By: /s/ PAUL W. SWEENEY, JR. ----------------------------------- Name: Paul W. Sweeney, Jr. Title: Admin. Partner -- LA 19 22 EXHIBIT A Form of Second Amended and Restated Certificate of Incorporation i 23 EXHIBIT B Registration Rights Agreement ii 24 EXHIBIT C Form of Proprietary Information and Inventions Agreement iii 25 EXHIBIT D Bylaws of the Company iv 26 EXHIBIT E Form of Opinion of Counsel to the Company v 27 EXHIBIT F Co-Sale and Right of First Refusal Agreement vi 28 SCHEDULE 1 Schedule of Purchasers
NUMBER OF SHARES OF PURCHASE PURCHASER SERIES C PREFERRED STOCK PRICE --------- ------------------------ ---------- PAR Capital Management, Inc. 88,680 $2,000,000 Raymond C. Musci 13,302 $ 300,000 Anthony R. Williams 13,302 $ 300,000 Morgan Keegan Early Stage Fund, L.P. 88,680 $2,000,000 Robert Holmes 6,651 $ 150,000 Stephen Ambler 1,109 $ 25,000 Joseph Morici 887 $ 20,000 Mark Dyne 4,434 $ 100,000 Kevin Bermeister 4,434 $ 100,000 K & L 2000 LLC 1,109 $ 25,000 Pam Colburn 1,109 $ 25,000 Anthony Neumann 1,109 $ 25,000 Terry Phillips 13,302 $ 300,000 Steve Massarsky 2,217 $ 50,000 David Clark 4,434 $ 100,000 FIMAS, L.P., a Partnership 900 $ 20,297.70 TOTAL 245,659 $5,540,297.70
vii 29 SCHEDULE 2.2(a) Contingent Reserved Common Shares Franchise Films, Inc. 131,625 Spyglass Entertainment Group, L.P. 100,000
viii 30 SCHEDULE 2.2(d) Stockholders and Option Holders List COMMON STOCKHOLDERS Raymond C. Musci 123,609 Robert E. Lloyd 9,750 Tracy Ann Sebastian 9,750 Philip L. Rosenberg 9,750 Robert Holmes 32,224 Gary Nemetz 9,750 D&S Partners, a California General Partnership 9,750 Anthony R. Williams 89,897 Kevin Bermeister 3,656 Mark Dyne 3,656 Elie Samaha 7,312 FIMAS, L.P., a Partnership 3,656 Franchise Films, Inc. 14,625 PREFERRED SERIES A STOCKHOLDERS Raymond C. Musci 482,625 Anthony R. Williams 351,000 Robert Holmes 87,750 Kevin Bermeister 10,969 Mark Dyne 10,969 Elie Samaha 21,938 FIMAS, L.P., a Partnership 10,969 PREFERRED SERIES B STOCKHOLDERS PAR Capital Management, Inc 198,301 Raymond C. Musci 28,329 Anthony R. Williams 28,329 Morgan Keegan Early Stage Fund, L.P. 22,092 Robert Holmes, Jr 11,332 Morgan Keegan Employee Investment Fund, L.P. 6,237 OPTION HOLDERS Robin Cairns 2,500 Aaron Endo 7,500 Lynnie Nojadera 3,500 Joe Morici 5,000 Hideo Oishi 5,000
ix 31 Mark Dyne 4,000 Robert Holmes 4,000 Robert Lloyd 4,000 Scott Smith 1,250 George M. Sundheim, III 4,000 Sherri Zook 2,500 Joe Booth 6,000 Lisa Cheney Bolcato 4,500 Pierson Lippard 4,000 Matt Wilkinson 4,000 Samuel Allen 2,500 Pete Johnson 2,500 Kevin Watts 2,500 Richard Coles 1,250 Paul Hodge 1,250 Karl D'Costa 1,250 Mark Harris 1,250 Mikel Barron Bilbao 1,250 Rachel Segens 1,250 Charlie Hasdell 1,250 Jake Noakes 1,250 Thomas Woodley 1,250 Doug Day 1,250 Michael Jacobsen 1,250 Jeff Pena 2,500 Stephen Ambler 12,750 Susan Kramer 2,500 David Blundell 1,250 Matthew Cooling 1,250 Marcus Fielding 1,250 Anne-Christine Gasc 1,250 James Hawkins 1,250 Ciaran Rooney 1,250 Magnolia Tsele 1,250 Andrew Williams 1,250 WARRANT HOLDERS PAR Capital 30,000 K & L 2000 10,000
x 32 SCHEDULE 2.3 Subsidiaries BAM Studios (Europe) Ltd. 2 shares issued to BAM! Entertainment Limited (1 Pound Sterling) per share BAM Entertainment Ltd. 2 shares issued to BAM! Entertainment, Inc. (1 Pound Sterling) per share xi 33 SCHEDULE 2.7 Litigation In a letter dated May 21, 2001, Nintendo of North America and Spike Co., Ltd. received a letter from counsel to World Wrestling Federation Entertainment, Inc. ("WWFE") claiming a yet to be released game "Fire ProWrestling" (the "Game") violated certain WWFE intellectual property rights and demanding that each of them cease the US distribution of the Game. The Company, which holds the rights to the US version of the Game, believes that the Game slated for sale in North America does not violate WWFE's rights as the US version does not contain references to the characters, moves or wrestling organizations mentioned in the letter. xii 34 SCHEDULE 2.8(a) Material Intellectual Property Trademark application attached. List of attached agreements. xiii 35 SCHEDULE 2.8(b) Certain IP Agreements PowerPuff Girls license with Warner Brothers (8/16/00 -- 8/16/03) Sports Illustrated, Inc. for Kids with Time (7/12/00) Franchise Films Output Agreement (4/7/00 -- 4/7/03) Spyglass Entertainment Group, L.P. Output Agreement (10/1/00 -- 10/1/05) xiv 36 SCHEDULE 2.10 Agreements List of agreements attached. xv 37 SCHEDULE 2.10(b) Non-binding Agreements See attached list. xvi 38 SCHEDULE 2.11 Liabilities None. xvii 39 SCHEDULE 2.13 Conflicts Directors: Mark Dynes: Chairman & CEO of Brilliant Digital Entertainment (BDE - AMEX), beneficial owner of roughly 8% of the common stock outstanding, owns and/or controls roughly 40% of Infogrames/OziSoft, a video game distributor in Australia; also holds approximately 2% of Titus. Robert Holmes: GBA, LLC - managing member of investment venture into Ripcord, some Southpeak; PCH, LLC - managing member investment venture; Entertainment Brands, Inc. - Director, shareholder; Ripcord Games Director, shareholder (1/3); Northport Ventures - venture company; Acclaim Entertainment - contractual representatives and stock; Take Two - stock remaining from early private placement; Business Incubation Group no current conflict, (some emulator proposals that involve Raymond C. Musci); iBuyline, Inc. - ESD company sold to aggregator; NTN communications - shareholder - mini games and wireless. Raymond C. Musci: Director of Brilliant Digital Entertainment. xviii 40 SCHEDULE 2.17 Employee Benefit Plans BAM! 401(k) Plan Summary Plan Description attached. U.K. Employees are not entitled to participate in the BAM! 401(K) Plan, but an equivalent European pension plan is planned. xix 41 SCHEDULE 2.24 Financial Statements Financial Statements attached. xx 42 SCHEDULE 2.25(d) Changes; Contracts/Agreements First Amendment to Master Purchase Order Assignment Agreement (attached). Second Amendment to Master Purchase Order Assignment Agreement (attached). Third Amendment to Master Purchase Order Assignment Agreement (attached). Warner Bros. License Agreement #12177-PPG (Powerpuff Girls)-Amendment #1 (attached). xxi 43 SCHEDULE 2.25(e) Changes; Compensation/Agreements with employees, representatives, agents, officers, directors or stockholders Changes to compensation arrangement or agreement with any employee, representative, agents, officer, director or stockholder attached. xxii 44 SCHEDULE 2.25(i) Changes; Loans/Guarantee Comerica loan documents attached. xxiii EX-10.15 25 v72115orex10-15.txt EXHIBIT 10.15 1 EXHIBIT 10.15 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into as of May 24, 2001, by and among BAM! Entertainment, Inc., a Delaware corporation (the "Company"), the persons and entities (the "Holders") identified in the Holder Schedule attached hereto as Schedule 1 (the "Holder Schedule"). WITNESSETH: WHEREAS, the Company has entered into that certain Stock Purchase Agreement, dated as of the date hereof (the "Stock Purchase Agreement"), with certain entities (the "Investors") pursuant to which the Company has agreed to issue and sell to such Investors shares of the Company's Series C Preferred Stock, par value $0.001 per share (the "Series C Preferred Stock"); and WHEREAS, the Company has agreed to grant certain registration rights with respect to the shares of the Company's Common Stock (the "Primary Shares") issuable upon conversion of the Series C Preferred Stock issued to the Investors pursuant to the Stock Purchase Agreement and upon conversion of the Company's Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock issued and outstanding as of the date of this Agreement (the "Series A Preferred Stock" and the "Series B Preferred Stock" respectively); WHEREAS, the Company has issued a warrant to purchase 30,000 shares of Common Stock to Par Capital Management, Inc. (the "Par Warrant") dated December 27, 2000; NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE 1 DEFINITIONS As used herein, the following terms shall have the following respective meanings: 1.1 "Commission" shall mean the Securities and Exchange Commission, or any other successor federal agency at the time administering the Securities Act. 1.2 "Common Stock" shall mean the Company's common stock, par value $0.001 per share. 1.3 "Exchange Act" shall mean the Securities and Exchange Act of 1934, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. 1 2 1.4 "Holders" shall mean the persons and entities listed on Schedule 1 and any transferee thereof who holds Registrable Securities, and any other person or entity that shall have executed this Agreement in accordance with Article 10 hereof and whose name appears on the Holder Schedule attached hereto as Schedule 1. 1.5 "Initial Public Offering" means the closing of a firm commitment underwritten initial public offering, pursuant to an effective registration statement under the Securities Act, covering the offer and sale by the Company of Common Stock to the public. 1.6 "Preferred Stock Initiating Holders" shall mean (a) the Holders of Series C and Series B Preferred Stock representing greater than 50% of the shares of the Series C and Series B Registrable Securities underlying such Preferred Stock who comply with the applicable requirements of Article 2 or Article 4 ("Series B and C Initiating Holders"), or (b) the Holders of Series A Preferred Stock representing greater than 50% of the shares of the Series A Registrable Securities underlying such Preferred Stock who comply with the applicable requirements of Article 2 or Article 4 ("Series A Initiating Holders"). 1.7 The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing with the Commission a registration statement in compliance with the Securities Act, and the declaration or ordering by the Commission of the effectiveness of such registration statement. 1.8 "Registrable Securities" means any and all shares of Common Stock: (i) issued or issuable upon conversion of the Series C Preferred Stock, the Series B Preferred Stock or the Series A Preferred Stock; (ii) issued or issuable with respect to the Series C Preferred Stock, the Series B Preferred Stock or the Series A Preferred Stock upon any stock split, stock dividend, recapitalization, reclassification, merger, consolidation or other similar event; (iii) issued or issuable upon exercise of the PAR Warrant; and (iv) otherwise held or acquired by any of the Holders, excluding in all cases, however, Registrable Securities sold by a Holder to the public pursuant to a registered offering or pursuant to Rule 144 promulgated under the Securities Act. 1.9 "Registration Expenses" shall mean all expenses incurred by the Company in complying with Articles 2, 3 and 4 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of legal counsel for the Company, fees and disbursements of one special legal counsel for the selling Holders, exchange listing fees, NASD fees, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). 1.10 "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. 1.11 "Selling Expenses" shall mean all underwriting fees, discounts, selling commissions and stock transfer taxes applicable to the Registrable Securities registered by the Holders. 2 3 1.12 "Series A Preferred Stockholder" shall mean any Holder or Holders of the Company's Series A Convertible Preferred Stock, par value $0.001 per share. 1.13 "Series A Registrable Securities" means any and all shares of Common Stock: (i) issued or issuable upon conversion of the Series A Preferred Stock; or (ii) issued or issuable with respect to the Series A Preferred Stock upon any stock split, stock dividend, recapitalization, reclassification, merger, consolidation or other similar event. 1.14 "Series B Preferred Stockholder" shall mean any Holder or Holders of the Company's Series B Preferred Stock, par value $0.001 per share. 1.15 "Series B Registrable Securities" means any and all shares of Common Stock: (i) issued or issuable upon conversion of the Series B Preferred Stock; or (ii) issued or issuable with respect to the Series B Preferred Stock upon any stock split, stock dividend, recapitalization, reclassification, merger, consolidation or other similar event. 1.16 "Series C Preferred Stockholder" shall mean any Holder or Holders of the Company's Series C Preferred Stock, par value $0.001 per share. 1.17 "Series C Registrable Securities" means any and all shares of Common Stock: (i) issued or issuable upon conversion of the Series C Preferred Stock; or (ii) issued or issuable with respect to the Series C Preferred Stock upon any stock split, stock dividend, recapitalization, reclassification, merger, consolidation or other similar event. ARTICLE 2 REQUESTED REGISTRATION 2.1 Request for Registration. Beginning on the date which is 180 days following the consummation of an Initial Public Offering, Preferred Stock Initiating Holders may, subject to Sections 2.1(b) and 2.2, request registration in accordance with this Article 2. In the event the Company shall receive from the Preferred Stock Initiating Holders a written request that the Company effect any registration, qualification or compliance with respect to Registrable Securities, the Company will: (a) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (b) use its best efforts to effect such registration, qualification or compliance as soon as practicable (including, without limitation, undertaking to file post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with applicable regulations issued under the Securities Act, and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the 3 4 Company within 15 days after the receipt of the written notice from the Company described in Section 2.1(a). (c) The Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request of the Preferred Stock Initiating Holders; provided, however, that if the Company shall furnish to such Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company and its stockholders for such registration statement to be filed, the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Initiating Holders; provided, further, that the Company shall not be permitted to exercise such deferral right under this Section 2.1(c) or Section 4.1(b) hereof more than twice in any 365-day period. 2.2 Maximum Number of Demand Registrations. The Company is obligated to effect two (2) demand registrations initiated by the Series B and C Initiating Holders, and one (1) demand registration initiated by the Series A Initiating Holders pursuant to Section 2. 2.3 Underwriting. (a) The distribution of the Registrable Securities covered by the request of the Preferred Initiating Holders shall be effected by means of the method of distribution selected by the Holders holding a majority of the Registrable Securities covered by such registration. If such distribution is effected by means of an underwriting, the right of any Holder to registration pursuant to this Article 2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise agreed by the Preferred Stock Initiating Holders) to the extent provided herein. (b) If such distribution is effected by means of an underwriting, the Company (together with all Holders proposing to distribute their securities through such underwriting) shall enter into an underwriting agreement in customary form with a managing underwriter of nationally recognized standing selected for such underwriting by the Holders holding a majority of the Registrable Securities covered by such registration and approved by the Company, which approval shall not be unreasonably withheld. Notwithstanding any other provision of this Article 2, if the managing underwriter advises the Preferred Stock Initiating Holders in writing that market factors require a limitation of the number of shares to be underwritten, then the underwriters may exclude shares requested to be included in such registration. The number of shares of Registrable Securities to be included in the registration and underwriting shall be allocated first amongst (i) the Holders who have requested registration of Registrable Securities plus (ii) those joining the request pursuant to Section 2.1(b) in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement and then amongst any Holders exercising their rights under Article 3 hereof with respect thereto in proportion, as nearly as practicable, to the respective amount of Registrable Securities held by such holders at the time of the filing of the registration statement. No Registrable Securities excluded from the underwriting by reason of the managing underwriter's market limitation shall be included in such registration. 4 5 (c) If any Holder disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Preferred Stock Initiating Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration; provided, however, that if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used in determining the underwriter limitation in this Section 2.3. 2.4 Inclusion of Shares by Company. If the distribution of Registrable Securities is being effected by means of an underwriting and if the managing underwriter has not limited the number of Registrable Securities to be underwritten, the Company may include securities for its own account or for the account of others in such registration if the managing underwriter so agrees. The inclusion of such shares shall be on the same terms as the registration of shares held by the Preferred Stock Initiating Holders. In the event that the underwriters exclude some of the securities to be registered, the securities to be sold for the account of the Company and any other holders shall be excluded in their entirety prior to the exclusion of any Registrable Securities. ARTICLE 3 COMPANY REGISTRATION 3.1 Notice of Registration to Holders. If at any time or from time to time the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders, including, without limitation, pursuant to Article 2 or Article 4 hereof, other than (i) a registration relating solely to employee benefit plans on Form S-8 (or any successor form) or (ii) a registration relating solely to a Commission Rule 145 transaction on Form S-4 (or any successor form), the Company will: (a) promptly give to each Holder written notice thereof, and (b) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 30 days after receipt of such written notice from the Company described in Section 3.1(a), by any Holder or Holders. 3.2 Underwriting. (a) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 3.1(a). In such event, the right of any Holder to registration pursuant to this Article 3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such 5 6 underwriting shall (together with the Company) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. (b) Notwithstanding any other provision of this Article 3, if the managing underwriter determines that market factors require a limitation of the number of shares to be underwritten, the underwriter may exclude some or all Registrable Securities from such registration and underwriting. The Company shall so advise all Holders of Registrable Securities, and the number of shares of Common Stock to be included in such registration shall be allocated as follows: first, for the account of the Company, all shares of Common Stock proposed to be sold by the Company; second, for the account of the Holders participating in such registration, in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by all such Holders of Registrable Securities; third, for the account of any other stockholders of the Company not holding Registrable Securities participating in such registration, the number of shares of Common Stock requested to be included in the registration. No Registrable Securities excluded from the underwriting by reason of the underwriters' market limitation shall be included in such registration. (c) The Company shall so advise all Holders and the other holders distributing their securities through such underwriting of any such limitation, and the number of shares of Registrable Securities held by Holders that may be included in the registration. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. (d) The Company shall have the right to terminate or withdraw any registration initiated by it under this Article 3 prior to the effectiveness of such registration, whether or not a Holder has elected to include Registrable Securities in such registration. ARTICLE 4 REGISTRATION ON FORM S-3 4.1 Request for Registration. (a) In addition to the rights set forth in Articles 2 and 3 hereof, if Preferred Stock Initiating Holders (as defined for this Article below) request that the Company file a registration statement on Form S-3 (or any successor to Form S-3) for a public offering of shares of Registrable Securities having an aggregate offering price of at least $3,000,000 (based on the then current market price) and the Company is a registrant entitled to use Form S-3 (or any successor form to Form S-3) to register such shares for such an offering, the Company shall use its best efforts to cause such shares to be registered for the offering as soon as practicable on Form S-3 (or any such successor form to Form S-3). For purposes of this Article only, the term "Preferred Stock Initiating Holders" shall mean (a) the Holders of Series C Preferred Stock representing greater than 50% of the shares of the Series C Registrable Securities underlying such Preferred Stock who comply with the applicable requirements of this Article ("Series C Initiating Holders"), (b) the Holders of Series B Preferred Stock representing greater than 50% of 6 7 the Shares of the Series B Preferred Stock who comply with the applicable requirements of this Article ("Series B Initiating Holders") or (c) the Holders of Series A Preferred Stock representing greater than 50% of the shares of the Series A Registrable Securities underlying such Preferred Stock who comply with the applicable requirements of this Article ("Series A Initiating Holders"). (b) The Company shall file a registration statement on Form S-3 covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request of the Holders; provided, however, that if the Company shall furnish to such Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be detrimental to the Company and its stockholders for such registration statement to be filed on or before the date filing would be required, and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Holders; provided, further, that the Company shall not be permitted to exercise such deferral right under this Section 4.1(b) or Section 2.1(c) hereof more than twice in any 365 day period. (c) The Company is obligated to effect one (1) registration initiated by the Series C Initiating Holders, one (1) registration initiated by the Series B Initiating Holders, and one (1) registration initiated by the Series A Initiating Holders during any twelve-month period pursuant to this Section 4.1. 4.2 Underwriting. (a) The distribution of the Registrable Securities covered by the registration on Form S-3 shall be effected by means of the method of distribution selected by the Holders holding a majority of the Registrable Securities covered by such registration. If such distribution is effected by means of an underwriting, the right of any Holder to registration pursuant to this Article 4 shall be conditioned upon such Holder's participation in such underwriting, if any, and the inclusion of such Holder's Registrable Securities in such underwriting. (b) If the distribution of the Registrable Securities pursuant to this Section 4.2 is effected by means of an underwriting, the Company (together with all Holders proposing to distribute their securities through such underwriting) shall enter into an underwriting agreement in customary form with a managing underwriter of nationally recognized standing selected for such underwriting by a majority in interest of the Holders requesting registration on Form S-3 and approved by the Company, which approval shall not be unreasonably withheld. Notwithstanding any other provision of this Article 4, if the managing underwriter advises the Holders in writing that market factors require a limitation of the number of shares to be underwritten, then the underwriters may exclude some or all of the shares requested to be included in such registration, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders at the time of filing the registration statement. No Registrable Securities excluded 7 8 from the underwriting by reason of the managing underwriter's marketing limitation shall be included in such registration. (c) If the distribution of the Registrable Securities pursuant to this Section 4.2 is effected by means of an underwriting and if any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriter and the Holders. The Registrable Securities and/or other securities so withdrawn shall also be withdrawn from registration; provided, however, that if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used in determining the underwriter limitation in this Section 4.2. 4.3 Inclusion of Shares by Company. If the distribution of the Registrable Securities pursuant to this Article 4 is effected by means of an underwriting and if the managing underwriter has not limited the number of Registrable Securities to be underwritten, the Company may include securities for its own account or for the account of others in such registration if the managing underwriter so agrees and if the number of Registrable Securities held by Holders requesting registration on Form S-3 which would otherwise have been included in such registration and underwriting will not thereby be limited. The inclusion of such shares shall be on the same terms as the registration of shares held by the Holders requesting such registration. In the event that the underwriters exclude some of the securities to be registered on Form S-3, the securities to be sold for the account of the Company and any other holders shall be excluded in their entirety prior to the exclusion of any Registrable Securities. ARTICLE 5 EXPENSES OF REGISTRATION All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Article 2, Article 3 and Article 4 hereof shall be borne by the Company. All Selling Expenses relating to Registrable Securities registered pursuant to Article 2, Article 3 and Article 4 hereof shall be borne by the Holders of such Registrable Securities pro rata on the basis of the number of shares so registered. ARTICLE 6 REGISTRATION PROCEDURE 6.1 Registration Procedures. If and whenever the Company is required by the provisions of this Agreement to use its best efforts to promptly effect the registration of any of its securities under the Securities Act, the Company will: (a) use its best efforts diligently to prepare and file with the Commission a registration statement on the appropriate form under the Securities Act with respect to such 8 9 securities, which form shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the Commission to be filed therewith, and use its best efforts to cause such registration statement to become and remain effective until completion of the proposed offering; (b) use its best efforts to diligently prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective until the Holder or Holders have completed the distribution described in such registration statement and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all securities covered by such registration statement whenever the seller or sellers of such securities shall desire to sell or otherwise dispose of the same, but only to the extent provided in this Agreement; (c) furnish to each selling holder and the underwriters, if any, such number of copies of such registration statement, any amendments thereto, any documents incorporated by reference therein, the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such selling holder may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such selling holder; (d) use its best efforts to register or qualify the securities covered by such registration statement under such other securities or state blue sky laws of such jurisdictions as each selling holder shall request, and do any and all other acts and things which may be necessary under such securities or blue sky laws to enable such selling holder to consummate the public sale or other disposition in such jurisdictions of the securities owned by such selling holder, except that the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (e) within a reasonable time before each filing of the registration statement or prospectus or amendments or supplements thereto with the Commission, furnish to counsel selected by the holders of Registrable Securities copies of such documents proposed to be filed, which documents shall be subject to the approval of such counsel; (f) immediately notify each selling holder of Registrable Securities, such selling holder's counsel and any underwriter and (if requested by any such Person) confirm such notice in writing, of the happening of any event which makes any statement made in the registration statement or related prospectus untrue or which requires the making of any changes in such registration statement or prospectus so that they will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in the light of the circumstances under which they were made not misleading; and, as promptly as practicable thereafter, prepare and file with the Commission and furnish a supplement or amendment to such prospectus so that, as thereafter deliverable to the purchasers of such Registrable Securities, such prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; 9 10 (g) use its best efforts to prevent the issuance of any order suspending the effectiveness of a registration statement, and if one is issued use its best efforts to obtain the withdrawal of any order suspending the effectiveness of a registration statement at the earliest possible moment; (h) if requested by the managing underwriter or underwriters (if any), any selling holder, or such selling holder's counsel, promptly incorporate in a prospectus supplement or post-effective amendment such information as such Person requests to be included therein, including, without limitation, with respect to the securities being sold by such selling holder to such underwriter or underwriters, the purchase price being paid therefor by such underwriter or underwriters and with respect to any other terms of an underwritten offering of the securities to be sold in such offering, and promptly make all required filings of such prospectus supplement or post-effective amendment; (i) make available to each selling holder, any underwriter participating in any disposition pursuant to a registration statement, and any attorney, accountant or other agent or representative retained by any such selling holder or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information requested by any such Inspector in connection with such registration statement; (j) enter into any reasonable underwriting agreement required by the proposed underwriter(s) for the selling holders, if any, and use its best efforts to facilitate the public offering of the securities; (k) furnish to each prospective selling holder a signed counterpart, addressed to the prospective selling holder, of (A) an opinion of counsel for the Company, dated the effective date of the registration statement, and (B) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in the registration statement, covering substantially the same matters with respect to the registration statement (and the prospectus included therein) and (in the case of the accountants' letter) with respect to events subsequent to the date of the financial statements, as are customarily covered (at the time of such registration) in opinions of the Company's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities; (l) cause the securities covered by such registration statement to be listed on the securities exchange or quoted on the quotation system on which the Common Stock of the Company is then listed or quoted (or if the Common Stock is not yet listed or quoted, then on such exchange or quotation system as the selling holders of Registrable Securities and the Company shall determine); (m) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission and make generally available to its security holders, in each case 10 11 as soon as practicable, but not later than 30 days after the close of the period covered thereby, an earnings statement of the Company which will satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any comparable successor provisions); (n) otherwise cooperate with the underwriter(s), the Commission and other regulatory agencies and take all actions and execute and deliver or cause to be executed and delivered all documents necessary to effect the registration of any securities under this Agreement; and (o) during the period when the prospectus is required to be delivered under the Securities Act, promptly file all documents required to be filed with the Commission pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act. ARTICLE 7 INDEMNIFICATION 7.1 The Company will indemnify each Holder, each of its officers and directors and partners, and each person controlling any such persons within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, or any amendment or supplement thereof, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein, a material fact required to be stated therein or necessary to make the statements therein, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act or any state securities laws applicable to the Company and relating to action or inaction by the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers and directors and partners and each person controlling any such persons, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by such Holder or underwriter and expressly intended for use in such registration statement, prospectus, or any amendment or supplement thereof. 7.2 Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such 11 12 Holder, each of its officers, directors, partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, or any amendment or supplement thereto, incident to any such registration, qualification or compliance or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, partners, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, or amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Holder and expressly intended for use in such registration statement, prospectus, or any amendment or supplement thereof; provided, however, that the obligations of each Holder hereunder shall be limited to an amount equal to the proceeds to such Holder of Registrable Securities sold as contemplated herein. 7.3 Each party entitled to indemnification under this Section 7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld). The Indemnified Party may participate in such defense at such party's expense; provided, however, that the Indemnifying Party shall bear the expense of such defense of the Indemnified Party if representation of both parties by the same counsel would be inappropriate due to actual or potential conflicts of interest. The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement, unless such failure is prejudicial to the ability of the Indemnifying Party to defend the action. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation, and no Indemnified Party shall, except with the consent of each Indemnifying Party, consent to any judgement or enter into any settlement with respect to any claim for which it is seeking indemnification hereunder. 7.4 THE INDEMNIFICATION PROVISIONS PROVIDED FOR IN THIS AGREEMENT HAVE BEEN EXPRESSLY NEGOTIATED IN EVERY DETAIL, ARE INTENDED TO BE GIVEN FULL AND LITERAL EFFECT, AND SHALL BE APPLICABLE WHETHER OR NOT THE LIABILITIES, OBLIGATIONS, CLAIMS, JUDGMENTS, LOSSES, COSTS, EXPENSES OR DAMAGES IN QUESTION ARISE OR AROSE SOLELY OR IN PART FROM THE ACTIVE, PASSIVE OR 12 13 CONCURRENT NEGLIGENCE, STRICT LIABILITY, OR OTHER FAULT OF ANY INDEMNIFIED PARTY. THE PARTIES HERETO ACKNOWLEDGE THAT THIS STATEMENT COMPLIES WITH THE "EXPRESS NEGLIGENCE RULE" AND CONSTITUTES CONSPICUOUS NOTICE. NOTHING IN THIS CONSPICUOUS NOTICE IS INTENDED TO PROVIDE OR ALTER THE RIGHTS AND OBLIGATIONS OF THE PARTIES, ALL OF WHICH ARE SPECIFIED ELSEWHERE IN THIS AGREEMENT. ARTICLE 8 RULE 144 REPORTING With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of securities of the Company to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to: 8.1 Make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; and 8.2 Use commercially reasonable efforts to then file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and 8.3 So long as a Holder owns any Registrable Securities, furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration. ARTICLE 9 TRANSFER OF REGISTRATION RIGHTS The rights to cause the Company to register Registrable Securities granted Holders under Articles 2, 3 and 4 hereof may be assigned in connection with any transfer or assignment of at least 50,000 shares of the Holder's Registrable Securities. All transferees and assignees of the rights to cause the Company to register Registrable Securities granted Holders under Articles 2, 3 and 4 hereof, as a condition to the transfer of such rights, shall agree in writing to be bound by the agreements set forth herein. 13 14 ARTICLE 10 LIMITATIONS ON REGISTRATION RIGHTS GRANTED TO OTHER SECURITIES The parties hereto agree that additional holders may, with the consent of the Company, the holders of a majority of the Registrable Securities then outstanding, the holders of a majority of the Series C Preferred Stock then outstanding, the holders of a majority of the Series B Preferred Stock then outstanding and the holders of a majority of the Series A Preferred Stock then outstanding, be added as parties to this Agreement with respect to any or all securities of the Company held by them; provided, however, that from and after the date of this Agreement, the Company shall not without the prior written consent of the holders of a majority of the Registrable Securities then outstanding and the holders of a majority of the Series C Preferred Stock then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company providing for the grant to such holder of registration rights superior to, or pari passu with, those granted herein. Any additional parties shall execute a counterpart of this Agreement, and upon execution by such additional parties and by the Company, shall be considered Holders for purposes of this Agreement, and shall be added to the Schedule of Registration Rights Holders. ARTICLE 11 PRIOR AGREEMENT The Investor Rights Agreement entered into by the Company and the persons and entities listed therein dated December 28, 2000 is hereby terminated. ARTICLE 12 MISCELLANEOUS 12.1 Governing Law. THE LAWS OF THE STATE OF CALIFORNIA SHALL GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT, REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF LAW. 12.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 12.3 Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject matter hereof. 14 15 12.4 Termination. In addition, the right of any Holder to request registration or inclusion in any registration shall not be exercisable by a Holder during any period in which after the closing of the Initial Public Offering of Common Stock of the Company, all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may be sold under Rule 144 under the Securities Act within any 90-day period. 12.5 Notices. All notices, requests, consents, and other communications hereunder shall be in writing and shall be deemed effectively given and received when delivered in person or by national overnight courier service or by certified or registered mail, return receipt requested, or by telecopier, addressed as follows: (a) if to the Company: BAM! Entertainment, Inc. 333 West Santa Clara Avenue Suite 95113 San Jose, CA Attention: Ray Musci Facsimile: (408) 298-9600 with a copy to: Doty Sundheim and Gilmore Attention: George M. Sundheim, III Facsimile: (650) 327-0100 (b) To any Holder: The address reflected in Schedule 1 hereto, as applicable, or such other address or addresses as shall have been furnished in writing by such party to the Company and to the other parties to this Agreement. 12.6 Severability. The invalidity, illegality or unenforceability of one or more of the provisions of this Agreement in any jurisdiction shall not affect the validity, legality or enforceability of the remainder of this Agreement in such jurisdiction or the validity, legality or enforceability of this Agreement, including any such provision, in any other jurisdiction, it being intended that all rights and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by law. 12.7 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 12.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together constitute one instrument. 12.9 "Market Stand-Off" Agreement. Each Holder agrees, if requested by the Company and underwriter of Common Stock of the Company in connection with the Company's Initial Public Offering, not to sell or otherwise transfer or dispose of any Common Stock of the Company held by such Holder (other than to donees, partners or affiliates of the Holder who agree to be similarly bound) during the one hundred eighty (180) day period following the 15 16 effective date of a registration statement of the Company filed under the Securities Act without the prior consent of such underwriter; provided, however, that this Section 12.9 shall only apply to the Holders if all executive officers and directors of the Company then holding Common Stock of the Company (or options to acquire Common Stock) and all persons owning more than one percent (1%) of Common Stock of the Company shall also have agreed to enter into similar agreements. Such agreement shall be in writing in a form reasonably satisfactory to the Company and such underwriter. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of such one hundred eighty (180) day period. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective duly authorized officers or representatives as of the date first written above. COMPANY: BAM! ENTERTAINMENT, INC. By: /s/ RAYMOND C. MUSCI ---------------------------------------- Raymond C. Musci, President By: /s/ GEORGE M. SUNDHEIM, III ---------------------------------------- George M. Sundheim, III, Secretary PURCHASERS: PAR CAPITAL MANAGEMENT, INC. By: /s/ DAVID E. TOBIN ---------------------------------------- Name: David E. Tobin Title: Vice President MORGAN KEEGAN EARLY STAGE FUND, L.P. By: MERCHANT BANKERS, INC. as the general partner of Morgan Keegan Early Stage Fund, L.P. By: /s/ Minor Perkins ------------------------------------ Name: Minor Perkins Title: Vice President 16 17 /s/ RAYMOND C. MUSCI ------------------------------------ Raymond C. Musci /s/ ANTHONY R. WILLIAMS ------------------------------------ Anthony R. Williams /s/ ROBERT HOLMES, JR. ------------------------------------ Robert Holmes, Jr. /s/ STEPHEN AMBLER ------------------------------------ Stephen Ambler /s/ JOSEPH MORICI ------------------------------------ Joseph Morici /s/ MARK DYNE ------------------------------------ Mark Dyne /s/ KEVIN BERMEISTER ------------------------------------ Kevin Bermeister FIMAS, a Partnership By: /s/ GEORGE M. SUNDHEIM, III --------------------------------- Name: George M. Sundheim, III Title: General Partner /s/ ANTHONY NEUMANN ------------------------------------ Anthony Neumann /s/ PAMELA COLBURN ------------------------------------ Pamela Colburn /s/ TERRY PHILLIPS ------------------------------------ Terry Phillips /s/ STEVEN J. MASSARSKY ------------------------------------ Steven J. Massarsky /s/ DAVID P. CLARK ------------------------------------ David P. Clark K&L 2000 LLC By: /s/ PAUL W. SWEENEY, JR. --------------------------------- Name: Paul W. Sweeney, Jr. Title: Admin. Partner -- LA OTHER PREFERRED HOLDERS: /s/ ELIE SAMAHA ------------------------------------ Elie Samaha FIMAS, L.P. By: /s/ GEORGE M. SUNDHEIM, III --------------------------------- Name: George M. Sundheim, III Title: General Partner 17 18 Schedule 1 Series A Preferred Stockholders:
Name Number of Shares ---- ---------------- Raymond C. Musci 482,625 Anthony R. Williams 351,000 Robert Holmes 87,750 Kevin Bermeister 10,969 Mark Dyne 10,969 Elie Samaha 21,938 FIMAS, L.P., a Partnership 10,969
Series B Preferred Stockholders:
Name Number of Shares ---- ---------------- PAR Capital Management, Inc. 198, 301 Raymond C. Musci 28,329 Anthony R. Williams 28,329 Morgan Keegan Early Stage Fund, L.P. 22,092 Robert Holmes 11,332 Morgan Keegan Employee Investment Fund, L.P. 6,237
Series C Preferred Stockholders:
Name Number of Shares ---- ---------------- PAR Capital Management, Inc. 88,680 Raymond C. Musci 13,302 Anthony R. Williams 13,302 Morgan Keegan Early Stage Fund, L.P. 88,680 Robert Holmes 6,651 Stephen Ambler 1,109 Joseph Morici 887 Mark Dyne 4,434 Kevin Bermeister 4,434 K&L 2000 LLC 1,109 Pam Colburn 1,109 Anthony Neumann 1,109 Terry Phillips 13,302 Steve Massarasky 2,217 David Clark 4,434 FIMAS, L.P., a Partnership 900
i EX-10.16 26 v72115orex10-16.txt EXHIBIT 10.16 1 EXHIBIT 10.16 BAM! ENTERTAINMENT, INC. CO-SALE AND RIGHT OF FIRST REFUSAL AGREEMENT This Co-Sale and Right of First Refusal Agreement (the "Agreement") is made and entered into as of May 24, 2001, by and among BAM! Entertainment, Inc., a Delaware corporation (the "Company"), Raymond C. Musci ("Musci") and Anthony R. Williams ("Williams") and each Series C Stock purchaser listed on Exhibit A hereto, including Musci and Williams (the "Purchasers"), and all other holders of the Company's Preferred Stock (collectively, with the Purchasers, the "Preferred Holders"). RECITALS A. Musci and Williams (each a "Founder") are the beneficial owners of an aggregate of 213,506 shares of the Common Stock and upon the consummation of the transaction described in the "Purchase Agreement" (as defined below), will own 833,625 shares of Series A Preferred Stock, 56,658 shares of Series B Preferred Stock of the Company and 26,604 shares of Series C Preferred Stock of the Company. (Such shares of Common Stock hereafter are referred to as the "Common Stock" and such shares of Series A, Series B and Series C Preferred Stock are referred to as the "Preferred Stock". B. Purchasers are purchasing shares of the Company's Series C Preferred Stock (the "Series C Stock") pursuant to that certain Series C Preferred Stock Purchase Agreement (the "Purchase Agreement") of even date herewith. C. Purchasers purchasing the Series C Stock were induced to do so in part by the Company's and Founders' agreement to enter into this Agreement. D. The parties desire to enter into this Agreement in order to grant co-sale and right of first refusal rights to the Preferred Holders. AGREEMENT Now, therefore, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree hereto as follows: 1. Definitions. Any capitalized terms not defined herein shall have the meanings ascribed to them in the Purchase Agreement. 2. Representations And Warranties. 2.1 Representations and Warranties of the Founders 1 2 Each of the Founders, individually and not jointly, hereby represents, warrants and covenants to the Company and the Preferred Holders as follows: (a) such Founder has full authority, power and capacity to enter into this Agreement and perform its obligations hereunder; (i) does not require such founder to obtain any approval, consent or waiver of, or to make any filing with, any Person that has not been obtained or made; and (ii) does not and will not result in a breach of, constitute a default under, accelerate any obligation under or give rise to a right of termination of any indenture or loan or credit agreement or any other material agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration award to which such Founder is a party or by which the property of such Founder is bound or affected, or result in the creation or imposition of any mortgage, pledge, lien, security interest or other charge or encumbrance on any of the assets or properties of such Founder. 2.2 Representations and Warranties of the Company The Company hereby represents, warrants and covenants to the Founders and the Preferred Holders as follows: (a) the Company has full corporate authority and power to enter into this Agreement and perform its obligations hereunder; (b) this Agreement constitutes the valid and binding obligation of the Company enforceable against it in accordance with its terms, except: (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions may be limited by applicable federal or state securities laws; and (c) the execution, delivery and performance by the Company of this Agreement: (i) to the best of its knowledge, does not and will not violate any laws, rules or regulations of the United States or any state or other jurisdiction applicable to the Company, or require the Company to obtain any approval, consent or waiver of, or to make any filing with, any Person that has not been obtained or made; and (ii) does not and will not result in a breach of, constitute a default under, accelerate any obligation under or give rise to a right of termination of any indenture or loan or credit agreement or any other material agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration award to which the Company is a party or by which the property of the Company is bound or affected, or result in the creation or imposition of any mortgage, pledge, lien, security interest or other charge or encumbrance on any of the assets or properties of the Company. 3. Restrictions On Transfer; Co-Sale Provisions. The following provisions of this Section 3 shall terminate immediately upon, and shall not apply with respect to, a Qualified Public Offering (as defined in the Company's Amended and Restated Certificate of Incorporation (the "Restated Certificate")). 3.1 Restrictions on Transfer. Each Founder agrees that such Founder will not, directly or indirectly, transfer, donate, sell, assign, pledge, hypothecate or grant a security interest in (each a "Transfer") all or any portion of the Common Stock now owned or hereafter acquired by such Founder, except in connection with and strictly in compliance with the conditions of this Section 3. "Transferred" means the accomplishment of a Transfer, and "Transferee" means the recipient of a Transfer. 2 3 3.2 Permitted Transfers. Notwithstanding anything herein to the contrary, the provisions of Section 3.3 shall not apply to either of the Transfers listed below, provided that in each case the Transferee shall have entered into a Joinder Agreement in substantially the form attached hereto as Exhibit B providing that all Common Stock so Transferred shall continue to be subject to all provisions of this Agreement as if such Shares were still held by such Founder, except that no further Transfer shall thereafter be permitted hereunder except in compliance with Section 3.3: (a) Transfers by any Founder to the spouse, children or siblings of such Founder or to a trust or family limited partnership for the benefit of any of them; and (b) Transfers upon the death of any Founder to such Founder's heirs, executors or administrators or to a trust under such Founder's will, or Transfers between such Founder and such Founder's guardian or conservator. Notwithstanding anything to the contrary in this Agreement or any failure by a Transferee under this Section 3.2 to execute a Joinder Agreement, such Transferee shall take any Common Stock so Transferred subject to all provisions of this Agreement as if such Common Stock were still held by the Founder making such Transfer, whether or not they so agree in writing. 3.3 Co-Sale Option of Purchasers. In the event that any of the Founders entertains a bona fide offer to purchase all or any portion of the Common Stock held by such Founder (a "Transaction Offer") from any other person (a "Buyer"), such Founder (a "Transferring Founder") may Transfer such Common Stock only pursuant to and in accordance with the following provisions of this Section 3.3: (a) Co-Sale Notice. The Transferring Founder shall cause the Transaction Offer and all of the terms thereof to be reduced to writing and shall promptly notify the Company and each of the Preferred Holders of such Transferring Founder's desire to effect the Transaction Offer and otherwise comply with the provisions of this Section 3.3 (the "Co-Sale Notice"). To the extent one or more Preferred Holders exercise their co-sale option (the "Co-Sale Option") in accordance with this Section 3.3, the number of Common Stock that the Transferring Founder may Transfer in the Transaction Offer shall be correspondingly reduced. (b) Purchaser Acceptance. Each of the Preferred Holders shall have the right to exercise its Co-Sale Option by giving written notice of such intent to participate (the "Co-Sale Acceptance Notice") to the Transferring Founder within ten (10) days after receipt by such Purchaser of the Co-Sale Notice (the "Co-Sale Election Period"). Each Co-Sale Acceptance Notice shall indicate the maximum number of shares subject thereto which the Preferred Holder wishes to sell, including the number of shares it would sell if one or more other Purchasers do not elect to participate in the sale on the terms and conditions stated in the Offer Notice. Any Preferred Holder holding Preferred Stock shall be permitted to sell to the relevant Buyer in connection with any exercise of the Co-Sale Option, at its option, (i) shares of Common Stock acquired upon conversion of such Preferred Stock, (ii) an option to acquire Common Stock when such Preferred Holder receives the same upon conversion of such Preferred Stock, with the same effect as if Common Stock were being conveyed, (iii) shares of Preferred Stock and (iv) 3 4 shares of Common Stock upon exercise of any warrant held by such Preferred Holder (each of the foregoing, the "Holder Shares"). (c) Allocation of Shares. Each Preferred Holder shall have the right to sell a portion of its Holder Shares pursuant to the Transaction Offer which is equal to or less than the product obtained by multiplying the total number of Holder Shares available for sale to the Buyer subject to the Transaction Offer by a fraction, the numerator of which is the total number of Holder Shares owned by such Purchaser and the denominator of which is the total number of Holder Shares and Shares held by all Purchasers and the Transferring Founder, in each case as of the date of the Offer Notice, subject to increase as hereinafter provided. (d) Co-Sale Closing. Within ten (10) calendar days after the end of the Co-Sale Election Period, the Transferring Founder shall promptly notify each participating Preferred Holder of the number of Holder Shares held by such Preferred Holder that will be included in the sale and the date on which the Transaction Offer will be consummated, which shall be no later than the later of (i) thirty (30) calendar days after the end of the Co-Sale Election Period and (ii) the satisfaction of any governmental approval or filing requirements, if any. Each participating Preferred Holder may effect its participation in any Transaction Offer hereunder by delivery to the Buyer, or to the Transferring Founder for delivery to the Buyer, of one or more instruments or certificates, properly endorsed for transfer, representing the Holder Shares it elects to sell pursuant thereto. At the time of consummation of the Transaction Offer, the Buyer shall remit directly to each participating Preferred Holder that portion of the sale proceeds to which the participating Preferred Holder is entitled by reason of its participation with respect thereto. No Shares may be purchased by the Buyer from the Transferring Founder unless the Buyer simultaneously purchases from the participating Preferred Holders all of the Holder Shares that they have elected to sell pursuant to this Section 3.3. (e) Liability of Purchasers. No Purchaser shall be required to make any representations or warranties or to provide any indemnities in connection therewith other than with respect to title to the Holder Shares being conveyed. (f) Sale to Third Party. Any Shares held by a Transferring Founder that are the subject of the Transaction Offer, and that the Transferring Founder desires to Transfer following compliance with this Section 3.3, may be sold to the Buyer only during the period specified in Section 3.3(d) and only on terms no more favorable to the Transferring Founder than those contained in the Offer Notice. Promptly after such Transfer, the Transferring Founder shall notify the Company, which in turn shall promptly notify all the Preferred Holders, of the consummation thereof and shall furnish such evidence of the completion and time of completion of the Transfer and of the terms thereof. In the event that the Transaction Offer is not consummated within the period required by this Section 3.3 or the Buyer fails timely to remit to each participating Preferred Holder its respective portion of the sale proceeds, the Transaction Offer shall be deemed to lapse, and any Transfer of Shares pursuant to such Transaction Offer shall be in violation of the provisions of this Agreement unless the Transferring Founder sends a new Offer Notice and once again complies with the provisions of Section 3.3 with respect to such Transaction Offer. (g) Contemporaneous Transfers. 4 5 If two or more Founders propose concurrent Transfers that are subject to this Article III, then the relevant provisions of Section 3.3 shall apply separately to each such proposed Transfer. 3.4 Effect of Prohibited Transfers. If any Transfer is made or attempted contrary to the provisions of this Agreement, such purported Transfer shall be void ab initio; the Company and the other parties hereto shall have, in addition to any other legal or equitable remedies which they may have, the right to enforce the provisions of this Agreement by actions for specific performance (to the extent permitted by law); and the Company shall have the right to refuse to recognize any Transferee as one of its stockholders for any purpose. 4. Restrictions on Transfer; Right of First Refusal. 4.1 Notice of Transfer. If a Founder proposes to Transfer any Preferred Stock owned by him, then such Founder shall promptly give written notice (the "Notice") to each of the Preferred Holders (for purposes of this Section only, "Preferred Holder" shall exclude the Founder attempting to sell his shares of Preferred Stock) at least thirty-five (35) days prior to the closing of such Transfer. The Notice shall describe in reasonable detail the proposed Transfer including, without limitation, the number of shares of Preferred Stock to be transferred, the nature of such Transfer, the consideration to be paid, and the name and address of each prospective purchaser or transferee. In the event that the Transfer is being made pursuant to the provisions of Section 5, the Notice shall state under which section the Transfer is being made. 4.2 Purchaser Right of First Refusal. (a) Each Preferred Holder shall have the right, exercisable upon written notice to the Founder (the "Preferred Holder Notice") within fifteen (15) days after the receipt of the Notice, to purchase its pro rata share of the Preferred Stock subject to the Notice and on the same terms and conditions as set forth therein. The Preferred Holders who so exercise their rights (the "Participating Preferred Holders") shall effect the purchase of the Preferred Stock, including payment of the purchase price, not more than ten (10) days after delivery of the Preferred Holder Notice, and at such time the Founder shall deliver to the Preferred Holders the certificate(s) representing the Preferred Stock to be purchased by the Participating Holders, each certificate to be properly endorsed for transfer. (b) Each Preferred Holder's pro rata share shall be equal to the product obtained by multiplying (x) the aggregate number of shares of Preferred Stock covered by the Notice and (y) a fraction, the numerator of which is the number of shares of Common Stock (on a fully diluted and converted basis) owned by the Participating Preferred Holder at the time of the Transfer and the denominator of which is the total number of shares of Common Stock (on a fully diluted and converted basis) owned by all of the Preferred Holders at the time of the Transfer. (c) In the event that not all of the Preferred Holders elect to purchase their pro rata share of the Founder Stock available pursuant to their rights under Section 4.2(a) within the time period set forth therein, then the Founder shall promptly give written notice to 5 6 each of the Participating Preferred Holders (the "Overallotment Notice"), which shall set forth the number of shares of Preferred Stock not purchased by the other Preferred Holders, and shall offer such Participating Preferred Holders the right to acquire such unsubscribed shares. The Participating Preferred Holders shall have five (5) days after receipt of the Overallotment Notice to deliver a written notice to the Founder (the "Participating Preferred Holders Overallotment Notice") of its election to purchase its pro rata share of the unsubscribed shares on the same terms and conditions as set forth in the Notice. For purposes of this Section 4.2(c) the denominator described in clause (y) of subsection 4.2(b) above shall be the total number of shares owned by all Participating Preferred Holders at the time of Transfer. The Participating Preferred Holders shall then effect the purchase of the Preferred Stock, including payment of the purchase price, not more than five (5) days after delivery of the Participating Preferred Holders Overallotment Notice to the Founder, and at such time, the Founder shall deliver to the Participating Preferred Holders the certificates representing the Preferred Stock to be purchased by the Participating Preferred Holders, each certificate to be properly endorsed for transfer. 5. Exempt Transfers. 5.1 Securities Act. Notwithstanding the foregoing, the provisions of Sections 2 and 3 shall not apply to the sale of any stock to the public pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"). 5.2 Bylaws. This Agreement is subject to, and shall in no manner limit the right which the Company may have to repurchase securities from Musci and Williams pursuant to (i) a stock restriction agreement or other agreement between the Company and Musci and Williams and (ii) any right of first refusal set forth in the Bylaws of the Company. 6. Legend. 6.1 Certificate. Each certificate representing shares of Common Stock now or hereafter owned by a Founder or issued to any person in connection with a transfer pursuant to Section 2.2 hereof shall be endorsed with the following legend: "THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN CO-SALE AGREEMENT BY AND BETWEEN THE SHAREHOLDER, THE COMPANY AND CERTAIN HOLDERS OF STOCK OF THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY." 6.2 Instructions. The Preferred Holders agree that the Company may instruct its transfer agent to impose transfer restrictions on the shares represented by certificates bearing the legend referred to in Section 6.1 above to enforce the provisions of this Agreement and the Company agrees to promptly do so. The legend shall be removed upon termination of this Agreement. 6 7 7. Prior Agreement. The Co-Sale and Right of First Refusal Agreement entered into by the Company and the persons and entities listed therein dated December 28, 2000 is hereby terminated. 7 8 8. Miscellaneous. 8.1 Conditions to Exercise of Rights. Exercise of the Preferred Holders' rights under this Agreement shall be subject to and conditioned upon, and the Company shall use their best efforts to assist each party in, compliance with applicable laws. 8.2 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 8.3 Amendment. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only by the written consent of (i) the Company, (ii) each of the Founders and (iii) a majority in interest of the Preferred Holders. Any amendment or waiver effected in accordance with this Section 8.3 shall be binding upon each Preferred Holder, the Company, Musci, Williams and their successors and assigns. 8.4 Assignment of Rights. This Agreement constitutes the entire agreement between the parties relative to the specific subject matter hereof. Any previous agreement among the parties relative to the specific subject matter hereof is superseded by this Agreement. This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives. 8.5 Term. This Agreement shall continue in full force and effect from the date hereof through the earliest of the following dates, on which date it shall terminate in its entirety: (a) on the date of and immediately prior to the closing of a firmly underwritten public offering of the Common Stock pursuant to a registration statement filed with the Securities and Exchange Commission, and declared effective under the Securities Act, that results in the conversion of the Company's preferred stock. (b) on the date of and immediately prior to the closing of a sale, lease, or other disposition of all or substantially all of the Company's assets or the Company's merger into or consolidation with any other corporation or other entity, or any other corporate reorganization, in which the holders of the Company's outstanding voting stock immediately prior to such transaction own, immediately after such transaction, securities representing less than a majority of the voting power of the corporation or other entity surviving such transaction, provided that this Section 8.5(b) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Company. 8.6 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt, or (iv) three (3) days after deposit in first class U.S. mail, return receipt requested. All communications shall be sent to the party to be notified at the address as set forth on the 8 9 signature page hereof or at such other address as such party may designate by ten (10) days advance written notice to the other parties hereto. 8.7 Severability. In the event one or more of the provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 8.8 Entire Agreement. This Agreement and the Exhibits hereto, along with the Purchase Agreement and each of the Exhibits and Schedules thereto, constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 8.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 9 10 The foregoing Co-Sale Agreement is hereby executed as of the date first above written. COMPANY: BAM! ENTERTAINMENT, INC. By: /s/ RAYMOND C. MUSCI ---------------------------------------- Raymond C. Musci, President By: /s/ GEORGE M. SUNDHEIM, III ---------------------------------------- George M. Sundheim, III, Secretary PURCHASERS: PAR CAPITAL MANAGEMENT, INC. By: /s/ DAVID E. TOBIN ---------------------------------------- Name: David E. Tobin Title: Vice President MORGAN KEEGAN EARLY STAGE FUND, L.P. By: MERCHANT BANKERS, INC. as the general partner of Morgan Keegan Early Stage Fund, L.P. By: /s/ MINOR PERKINS ------------------------------------ Name: Minor Perkins Title: Vice President /s/ RAYMOND C. MUSCI -------------------------------------------- Raymond C. Musci /s/ ANTHONY R. WILLIAMS -------------------------------------------- Anthony R. Williams /s/ ROBERT HOLMES, JR. -------------------------------------------- Robert Holmes, Jr. /s/ STEPHEN AMBLER ---------------------------------------- Stephen Ambler /s/ JOSEPH MORICI ---------------------------------------- Joseph Morici /s/ MARK DYNE ---------------------------------------- Mark Dyne /s/ KEVIN BERMEISTER ---------------------------------------- Kevin Bermeister FIMAS, a Partnership By: /s/ GEORGE M. SUNDHEIM, III ----------------------------------- Name: George M. Sundheim, III Its: General Partner /s/ PAMELA COLBURN ---------------------------------------- Pamela Colburn /s/ ANTHONY NEUMANN ---------------------------------------- Anthony Neumann /s/ TERRY PHILLIPS ---------------------------------------- Terry Phillips /s/ STEVEN J. MASSARSKY ---------------------------------------- Steven J. Massarsky /s/ DAVID P. CLARK ---------------------------------------- David P. Clark K&L 2000 LLC By: /s/ PAUL W. SWEENEY, JR. --------------------------------- Name: Paul W. Sweeney, Jr. Title: Admin. Partner -- LA OTHER PREFERRED HOLDERS: /s/ ELIE SAMAHA ---------------------------------------- Elie Samaha FIMAS, L.P. By: /s/ GEORGE M. SUNDHEIM, III ----------------------------------- Name: George M. Sundheim, III Its: General Partner 10 11 Exhibit A Series C Stock Purchasers
Name Number of Shares ---- ---------------- PAR Capital Management, Inc. 88,680 Raymond C. Musci 13,302 Anthony R. Williams 13,302 Morgan Keegan Early Stage Fund, L.P. 88,680 Robert Holmes 6,651 Stephen Ambler 1,109 Joseph Morici 887 Mark Dyne 4,434 Kevin Bermeister 4,434 K&L 2000 LLC 1,109 Pam Colburn 1,109 Anthony Neumann 1,109 Terry Phillips 13,302 Steve Massarasky 2,217 David Clark 4,434 FIMAS, L.P., a Partnership 900
i 12 Exhibit B Form of Joinder Agreement The undersigned hereby agrees, effective as of the date hereof, to become a party to that certain Co-Sale and Right of First Refusal Agreement (the "Agreement") dated as of _________, 2001, by and among BAM! Entertainment, Inc. (the "Company") and the parties named therein and, for all purposes of the Agreement, the undersigned shall be included within the term "Founder" as defined in the Agreement. The undersigned further confirms that the representations and warranties contained in Section 2.1 of the Agreement are true and correct as to the undersigned as of the date hereof. The address and facsimile number to which notices may be sent to the undersigned is as follows: Facsimile No.: ---------------------------- Address: ------------------------------------------------------------------------ ------------------------------------ [NAME] ii EX-10.17 27 v72115orex10-17.txt EXHIBIT 10.17 1 EXHIBIT 10.17 MASTER PURCHASE ORDER ASSIGNMENT AGREEMENT ------------------------------------------ THIS AGREEMENT is made on the 25 day of February, 2000, by and between TRANSCAP TRADE FINANCE, an Illinois general partnership (the "CONTRACTOR") and BAY AREA MULTIMEDIA, INC., a California corporation (the "MANUFACTURER"), as follows: BACKGROUND OF AGREEMENT: A. The parties have signed an agreement in principle to enter into a purchase order assignment program under which the Manufacturer will assign customer purchase orders to the Contractor and request the Contractor to purchase the required materials to fulfill such purchase orders; the Contractor will retain the Manufacturer to manufacture, process and ship ordered goods; and fees will be paid to the Manufacturer for its services upon payment to the Contractor for the goods. B. The parties desire to enter into a formal agreement to set forth the terms and provisions of the purchase order assignment program. THEREFORE, in consideration of the services to be performed, the payments to be made, and the obligations to be assumed as set forth in this Agreement, the parties agree as follows: 1. DEFINITIONS. In this Agreement, the following frequently used terms are defined as set forth in this paragraph 1: (a) The "CERTIFICATE" means the Purchase Order Package Certificate attached hereto as Exhibit "A" required to be delivered with each request for assignment of a purchase order. The form of Certificate is attached to this Agreement as Exhibit "A" and made a part hereof. (b) With respect to each purchase order submitted for assignment hereunder, the Certificate will define the "PRODUCT" (the end product to be delivered to the customer), the "CUSTOMER" (the business entity which issues the purchase order), the "MATERIALS" (the materials required to produce the Product), the "PREMISES" (Manufacturer's facility or such other facility identified in the Certificate where the Materials will be delivered and Products will be produced), the "P.O. PRICE" (the purchase price to be paid by the Customer for the Products), the "P.O. DELIVERY DATE" (the date on which Products are to be delivered to the Customer as set forth in the Certificate), and the "MATERIALS DELIVERY DATE" (the date on which the Materials are to be delivered to the Manufacturer as set forth in the Certificate). The Manufacturer is not engaged in the manufacturing business but is engaged in the development, sale, and distribution of Products; and Materials and Products shall refer to the same goods. (c) A purchase order delivered to the Manufacturer in the ordinary course of its business is referred to as a "P.O." A P.O. which meets all of the requirements of paragraph 3 below is deemed to be unconditionally accepted by Contractor and is referred to as an "ACCEPTED P.O." The date on which the Contractor delivers notice of acceptance of the assignment of the P.O. is referred to as the "ACCEPTANCE DATE". When an Accepted P.O. is made null and void pursuant to this 2 Agreement, it is referred to as a "CANCELED P.O." Under certain circumstances, when a P.O. is not assignable to the Contractor, the Contractor will accept an assignment of the proceeds of the P.O. In such cases, the terms P.O. and Accepted P.O. will mean the proceeds of such P.O. or Accepted P.O. as the case may be. (d) A financial institution engaged in the practice of lending sums to the Manufacturer secured at least in part by Manufacturer's accounts receivable is referred to as the "ACCOUNTS RECEIVABLE LENDER". The Accounts Receivable Lender involved in this transaction (if any) is identified on Addendum I attached hereto. A "SENIOR LENDER" is any financial institution (including the Accounts Receivable Lender) which is engaged in lending sums to the Manufacturer secured by liens on some or all of the Manufacturer's assets. Each Senior Lender involved in this transaction (if any) is also identified on Addendum I. (e) The inventory of Products produced for satisfaction of a P.O. is referred to as the "P.O. INVENTORY"; the invoice rendered upon delivery of Products pursuant to a P.O. is referred to as the "P.O. INVOICE"; and payments received on account of P.O. Invoices (whether paid by the Customer, the Accounts Receivable Lender, the Manufacturer, or any other patty) are referred to as the "P.O. PROCEEDS". (f) The Manufacturer may repurchase an Accepted P.O. pursuant to paragraph 8(b) below. In the absence of such repurchase, an Accepted P.O. becomes a "DELINQUENT P.O." if the P.O. Price is not paid to the Contractor by the earliest of (i) the due date for payment of the P.O. Invoice, (ii) one hundred and five (105) days following the Funding Date if Contractor issues its letter of credit or purchase order, (iii) thirty (30) days following the Funding Date if Contractor advances funds by other than issuing its letter of credit or purchase order, or (iv) the date on which the Accepted P.O. is canceled. (g) If a lock box collection procedure is established pursuant to this Agreement, the term "LOCK BOX" refers to the Contractor's lock box account; and the term "LOCK BOX BANK" means the bank at which the Contractor establishes the Lock Box and so notifies Manufacturer in writing. The Lock Box and Lock Box Bank involved in this transaction (if any) are identified on Addendum II attached hereto. (h) The "FUNDING DATE" is the date on which the Contractor makes its first Materials purchase in connection with an Accepted P.O. or issues its letter of credit or purchase order or otherwise advances funds to or for the benefit of or on account of an Accepted P.O., whichever is earlier. The "CLEARANCE DATE" is the date on which the Contractor (or the Lock Box Bank) has received full payment of the P.O. Price in connection with an Accepted P.O. in fully collected funds. (i) The Manufacturer will perform its obligations in accordance with the "MANUFACTURER'S SPECIFICATIONS" which are set forth on Exhibit "B" attached hereto and will be paid a "MANUFACTURER'S FEE" computed in accordance with the provisions of paragraph 7(c) below. The Manufacturer's obligations are secured by a "SECURITY AGREEMENT" described in paragraph 10 below. 2 3 (j) The Contractor will be paid "COMMITMENT FEE" (computed and paid pursuant to Paragraph 6 below), the "CONTRACTOR'S DEAL FEES" (computed and paid pursuant to Paragraph 7 below), and "CONTRACTOR'S EXPENSES" (computed and paid pursuant to Paragraph 9 below). For purposes of computing the waiver of portions of the Commitment Fee, the term "PRODUCT VOLUME" means the aggregate of (a) the face amounts of all letters of credit issued by Contractor plus (b) the aggregate amount of funds advanced by Contractor by other than issuing its letters of credit, in connection with an Accepted P.O. for which a P.O. Invoice is issued on or before the date on which payment of the Commitment Fee is due; and "MINIMUM VOLUME" means Product Volume which equals or exceeds $3,000,000. (k) If the Manufacturer is required to make a "SECURITY DEPOSIT" (as defined in Paragraph 3(b)(i), the Security Deposit will be maintained in accordance with Paragraph 10.1. 2. SUBMISSION OF P.O.'s FOR ASSIGNMENT. Subject to the terms of this Agreement, the Manufacturer may request that the Contractor accept an assignment of each P.O. submitted to and accepted by Manufacturer and make Material purchases to fulfill the P.O. Each such request shall be made pursuant to a completed and signed Certificate delivered to the Contractor. 3. ACCEPTANCE OF P.O. ASSIGNMENTS. (a) Subject to the conditions and requirements set forth in this Paragraph 3, Contractor agrees to accept or decline acceptance of the assignment of a P.O. submitted to Contractor pursuant to the provisions of Paragraph 2 above (in Contractor's absolute discretion) by delivery of written notice to Manufacturer. Contractor will use its best efforts to deliver such acceptance by 5:00 p.m. on or before the fourth full business day after Contractor receives the Certificate. (b) Notwithstanding the provisions of Paragraph 3(a) above, Contractor shall not accept the assignment of any P.O. which does not meet the following requirements: (i) Contractor's funding commitment with respect to the P.O. shall not exceed 60% of the P.O. Price, provided, however, that Contractor may exceed such limitation upon the deposit by the Manufacturer with the Contractor of a Security Deposit (the "Security Deposit") in an amount equal to the excess of the Contractor's funding commitment with respect to the P.O. over 60% of the P.O. Price; (ii) Manufacturer shall have on deposit with Contractor a Security Deposit as set forth in Paragraph 10.1 hereof; (iii) Upon the purchase of Materials required for the P.O., or upon any other advance of funds in connection with the P.O., the Contractor's aggregate outstanding funding pursuant to this Agreement shall not exceed the sum of $1,000,000; (iv) An original, signed copy of the Certificate shall have been delivered to the Contractor; 3 4 (v) All information contained on the Certificate shall be verified by Contractor to ensure (to Contractor's satisfaction) that the Materials Delivery Date and P.O. Delivery Date are reasonable and that the P.O. is bona fide (which verification may include, without limitation, direct confirmation from the Customer and any vendors); and (vi) The Manufacturer shall have delivered to the Contractor such additional information and documentation as the Contractor may have from time to time requested. (c) Notwithstanding the other provisions of this paragraph 3, the Contractor's acceptance of the assignment of a P.O. shall be made null and void and the P.O. shall be deemed a Canceled P.O. upon the occurrence of any one of the following: (i) The failure of the Contractor to obtain accepted orders for Materials at prices and on other terms and conditions acceptable to the Contractor within five (5) business days following the Acceptance Date, and Contractor's notice to the Manufacturer thereof. Upon delivery of such notice to Manufacturer, Contractor's rights and interests in and to the P.O. will be terminated absolutely and Contractor shall have no obligation whatsoever, to Manufacturer with respect to such P.O.; (ii) The failure of a vendor of Materials to deliver Materials which conform to Contractor's specifications to the Premises on or before the Material Delivery Date. Upon such failure of delivery, Contractor shall have the right to require Manufacturer to purchase the Materials from Contractor and shall assign to Manufacturer the right to receive those Materials which have not then arrived at the Premises; (iii) The cancellation of the P.O. prior to delivery of Products to the Customer. Upon such cancellation, Manufacturer shall pay Contractor such sums as are required pursuant to paragraph 8 below; and (iv) The failure of the Manufacturer to obtain (if so requested by Contractor) a waiver and release of Contractor by the Customer of any and all liability for breach of any and all express or implied warranties or product liability claims with respect to the Products or the use and distribution thereof. (d) A P.O. shall be deemed an Accepted P.O. only when (i) the P.O. is submitted for assignment by the Manufacturer pursuant to a Certificate or such other form of submission to which the Contractor may from time to time consent, (ii) the Contractor shall deliver notice of acceptance of assignment to the Manufacturer pursuant to subparagraph (a) or, in the absence of such notice of acceptance, the Contractor shall purchase Materials with respect to the P.O. or otherwise advance of funds in connection with the P.O., (iii) the P.O. shall meet each of the requirements of subparagraph (b) above unless otherwise waived by the Contractor, and (iv) none of the events described in subparagraph (c) above shall have occurred prior to delivery of the Products to the 4 5 Customer pursuant to the P.O. Until such time as each of the aforedescribed requirements and conditions is satisfied in full, Contractor's acceptance of an assigned P.O. shall be deemed conditional and subject to revocation at any time. 4. APPOINTMENT OF MANUFACTURER. (a) Subject to the other provisions of this Agreement, with respect to all Accepted P.O.'s (and only so long as such P.O. remains an Accepted P.O.) Contractor hereby appoints the Manufacturer as Contractor's exclusive source for acceptance of Materials at the Premises, performance of all manufacturing, processing and warehousing requirements with respect to the conversion of Materials into Products, and the delivery of Products to Customers, and the Manufacturer hereby accepts such appointment. Manufacturer agrees to perform all of its obligations pursuant to this paragraph 4 in a good and workmanlike manner, to utilize quality control procedures consistent with the standards of Manufacturer and the industry, and to otherwise comply with each of the Manufacturer's Specifications. (b) So long as any Materials or Products are located at the Premises or are scheduled for delivery to the Premises, Manufacturer agrees to warehouse all Materials and Products and, with respect to such warehousing obligations, Manufacturer agrees to perform in accordance with all of the Manufacturer's Specifications. (c) Manufacturer further agrees that with respect to Materials purchased by Contractor pursuant to (and in accordance with) a Certificate which are not (or cannot be) used in connection with the applicable Accepted P.O., upon Contractor's written notice: (i) Manufacturer shall purchase such Materials from Contractor within three (3) days following Contractor's notice for a purchase price equal to Contractor's costs for the Materials; or (ii) If Manufacturer fails to make such purchase of Materials, such Materials shall be sold by Contractor and the proceeds thereof applied first to Contractor's costs for the Materials, and the balance, if any, to Manufacturer. 5. PAYMENT AND RE-ASSIGNMENT. (a) Upon delivery of Products to the Customer pursuant to an Accepted P.O., Manufacturer shall issue a P.O. Invoice (and deliver any other related documents required by the applicable P.O. for issuance of an invoice on account of such P.O.) to the Customer for the full P.O. Price. Upon Contractor's direction, the P.O. Invoice so issued shall be in the name of the Contractor and shall direct the Customer to make payment to the Contractor (or the Lock Box, if applicable). Manufacturer shall immediately pay to the Contractor any sums from time to time received by the Manufacturer from the Customer or any other party other than the Contractor on account of a P.O. Invoice. Upon Contractor's demand, each P.O. Invoice shall be prepared on such invoice form as Contractor may designate. 5 6 (b) At such time as Contractor has received payment in full on account of a P.O. Invoice, the Contractor shall pay Manufacturer in accordance with paragraph 7 below, and shall re-assign the applicable Accepted P.O. and all rights with respect thereto to the Manufacturer and the Manufacturer shall accept such re-assignment. The re-assignment shall be evidenced by a Re-Assignment and Release of Purchase Order in the form of Exhibit "C" attached hereto. (c) Sums received by the Contractor on account of a P.O. Invoice shall be applied by the Contractor for the satisfaction of the expenses, fees and charges described in this Agreement pursuant to the priorities of payment set forth in paragraph 7 below. Provided, however, that Manufacturer shall pay all sums due Contractor upon a Delinquent P.O. in the manner and pursuant to the terms of paragraph 8 below. 6. COMMITMENT FEE. (a) Subject to the provisions of this paragraph 6, Manufacturer shall pay Contractor a Commitment Fee in consideration of Contractor's commitment to reserve and have available sufficient funds to purchase Materials or to otherwise advance funds in connection with a P.O. for Product Volume in amounts equal to or exceeding the Minimum Volume as contemplated by this Agreement. The Commitment Fee shall be in the sum of $150,000 and shall be paid by Manufacturer on the earlier of twelve (12) months following the date of this Agreement or the date of termination of this Agreement. The Commitment Fee for the term of this Agreement is deemed by the parties to have been earned by the Contractor upon the signing of this Agreement, as of which date the Contractor has reserved the requisite funds. (b) Notwithstanding the provisions of subparagraph (a) above, all or a portion of the Commitment Fee shall be waived in accordance with the provisions of this subparagraph (b). If Product Volume as of the due date for payment of the Commitment Fee equals or exceeds the Minimum Volume, the entire Commitment Fee shall automatically be deemed waived by the Contractor. If Product Volume as of the due date for payment of the Commitment Fee does not equal or exceed the Minimum Volume, Contractor shall waive that portion of the Commitment Fee equal to the Commitment Fee multiplied by a fraction, the numerator of which is the Product Volume as of the due date for payment of the Commitment Fee, and the denominator of which is the Minimum Volume. 7. COMPENSATION OF CONTRACTOR AND MANUFACTURER. (a) Payments received by the Contractor or into the Lock Box on account of Accepted P.O.'s will be applied in the following order of priority: (i) First, to pay Contractor's Expenses to the extent that such expenses are then due pursuant to the terms of paragraph 9; (ii) Second, to the payment of the Contractor's Deal Fees in connection with the Accepted P.O. and all other Accepted P.O.'s that became Accepted P.O.'s concurrently with such Accepted P.O.; 6 7 (iii) Third, to pay any shortage then existing in the Security Deposit as set forth in paragraph 10.1; (iv) Fourth, to reimburse the Contractor for the cost of Materials and for other advances made in connection with a P.O. (without regard to term or prompt payment discounts) purchased in connection with the Accepted P.O. and all other Accepted P.O.'s that became Accepted P.O.'s concurrently with such Accepted P.O.; and (v) Fifth, to the payment of the Manufacturer's Fee in connection with the Accepted P.O. (b) The Contractor's Deal Fees with respect to each Accepted P.O. shall be as follows: (i) A transaction initiation and set-up fee in a sum equal to 5.0% of the aggregate of (a) the face amounts of all letters of credit issued by Contractor (or other financial accommodations) plus (b) all funds advanced by Contractor by other than issuing its letters of credit; plus (ii) A daily maintenance fee in a sum equal to 0.067% of the aggregate of the face amounts of all letters of credit issued by Contractor (or other financial accommodations) and all funds advanced by Contractor by other than issuing its letters of credit which remain outstanding for more than seventy-five (75) days; plus (iii) A Materials advance fee in a sum equal to the Applicable Daily Rate (as hereinafter defined) multiplied by the aggregate amount outstanding on all letters of credit (or other financial accommodations) and all funds advanced by Contractor by other than issuing its letters of credit on account of purchases of Materials or other advances made in connection with a P.O. multiplied by the number of days from the earliest of (A) the date on which any such letter of credit or purchase order or financial accommodation is negotiated into cash by any person, or (B) the date funds are advanced by other than issuing a letter of credit or purchase order, to and including the Clearance Date. The "Applicable Daily Rate" shall mean the prime rate as in effect from time to time at the American National Bank, Chicago, Illinois, plus 4%, divided by 360. (iv) In the event of a Delinquent P.O., a late payment fee in a sum equal to 0.067% of the outstanding portion of the P.O. Price multiplied by the number of days from the date an Accepted P.O. becomes a Delinquent P.O. to and including the Clearance Date. Notwithstanding the foregoing, if the sum of the transaction initiation and set-up fee and the daily maintenance fee is not equal to or greater than $2,500 with respect to an Accepted P.O., the minimum aggregate amount payable by Manufacturer to Contractor for the transaction initiation and set-up fee and the daily maintenance fee with respect to such accepted P.O. shall be equal to $2,500. 7 8 (c) The Manufacturer's Fee with respect to each Accepted P.O. shall be equal to the collected P.O. Proceeds with respect to such Accepted P.O. less all sums payable pursuant to subparagraphs (a)(i), (ii), (iii) and (iv) above and less 100% of all term discounts or discounts for prompt payment. (d) Sums due on account of the expenses and fees described in subparagraphs (a)(i), (ii), (iii) and (iv) above shall be paid as and when proceeds are received with respect to the applicable Accepted P.O. The Manufacturer's Fee will be paid not later than the second business day after the Clearance Date and after satisfaction of all costs, fees and expenses having a higher priority then due and owing. 8. REPURCHASE; REASSIGNMENT. (a) Contractor shall have the right to require the Manufacturer to immediately purchase any Delinquent P.O. (and inventory of Materials and Products in the case of a Canceled P.O.) for an amount equal to the full amount outstanding under the P.O. Invoice (or the P.O. Price in the case of a canceled P.O.). Any such payment by the Manufacturer shall be deemed to be P.O. Proceeds and shall be applied in accordance with the priorities and terms set forth in paragraph 7 above. (b) In the event that Manufacturer makes all payments due on a Delinquent P.O. or Canceled P.O. pursuant to the provisions of subparagraph (a) above, Contractor shall thereupon immediately assign to Manufacturer all of Contractor's rights and interests in and to the P.O. Invoice and the P.O. Proceeds and any Materials or Products in the possession of Contractor or Manufacturer with respect to such Delinquent P.O. 9. CONTRACTOR'S EXPENSES. Immediately upon Contractor's demand, Manufacturer shall pay or reimburse Contractor for all Contractor's Expenses. Contractor's Expenses include all reasonable expenses, fees, and costs incurred by Contractor in connection with the creation of and performance of this Agreement and the transactions contemplated hereby, including without limitation, the expenses of Contractor's representative at the Premises, insurance and credit insurance premiums, audit costs, attorney's fees, Contractor's travel expenses, Lock Box Bank charges, and filing fees. Contractor's demand for payment of Contractor's Expenses will be made in writing and will include reasonable documentation of the expenses for which reimbursement is demanded. Contractor acknowledges receipt of the sum of $5,000 deposited by Manufacturer to be applied towards the payment of Contractor's Expenses. 10. SECURITY INTERESTS. As security for the performance by Manufacturer of each of its obligations under this Agreement, Manufacturer hereby grants the following security interests to the Contractor: (a) A security interest in all of Manufacturer's assets in accordance with the provisions of the Security Agreement in form satisfactory to Contractor. Provided, however, that such grant of security interest shall be subordinate to the lien of the Senior Lender (if any) in any common collateral. 8 9 (b) The right to set-off against any and all amounts due to the Manufacturer hereunder any sums which are due to the Contractor hereunder which have become past due and delinquent under this Agreement. (c) All of the Manufacturer's rights and interests in, and right of payment from, the Accounts Receivable Lender of all sums paid or payable by the Accounts Receivable Lender from time to time to the Manufacturer. Manufacturer agrees to direct the Accounts Receivable Lender to make such payments to Contractor pursuant to such written direction as Contractor may request from time to time. (d) All checks, notes, deposits, drafts, and other instruments of payment on account of or related to an Accepted P.O. Manufacturer hereby irrevocably designates and appoints the Contractor (and all persons designated by the Contractor) as the Manufacturer's true and lawful attorney-in-fact and agent-in-fact and Contractor (or Contractor's agent) may, without notice to Manufacturer: (i) At any time endorse by writing or stamping Manufacturer's name on any checks, notes, deposits, drafts or other instruments of payment on account of, relating to, or representing the proceeds of an Accepted P.O. or any other collateral described herein or in the Security Agreement (collectively the "Collateral") which come into the possession of the Contractor or are under Contractor's control and deposit the same to the account of the Contractor for application to all sums due from the Manufacturer to the Contractor hereunder; and (ii) At any time after the occurrence of a default by the Manufacturer hereunder or pursuant to the Security Agreement, in Manufacturer's or Contractor's name, demand payment of, enforce payment of, exercise all of Manufacturer's rights and remedies with respect to, settle, adjust, compromise, initiate and prosecute legal proceeding with respect to, and otherwise take all actions with respect to the Collateral which are, in the Contractor's sole discretion, necessary or desirable in order to fulfill Manufacturer's obligations under this Agreement and otherwise realize the full economic value of the Collateral. 10.1 SECURITY DEPOSIT. (a) The Security Deposit shall be held and applied by the Contractor as follows: (i) Contractor shall hold the Security Deposit in such depositaries as it determines and may commingle the same with other funds from time to time in Contractor's possession. No interest or other earnings shall be payable on account of sums held as a Security Deposit. (ii) Upon the occurrence of a default as set forth in paragraph 18(c) below, Contractor may, in its discretion and without prior notice, apply all or any portion of the Security Deposit to pay or otherwise satisfy Manufacturer's obligations hereunder. Contractor 9 10 shall, as soon as practicable following any such application, notify Manufacturer thereof and provide a full accounting of such application. (b) When funds are applied in the manner set forth in paragraph 10.1(a)(ii) above, a "shortage" is created in an amount equal to all sums so applied. Manufacturer shall, within five (5) business days following notification of any shortage, pay to the Contractor, as and for a portion of the Security Deposit, the sum of such shortage. (c) Upon termination of this Agreement and the payment of all sums then due the Contractor by the Manufacturer hereunder. Contractor shall promptly pay the Security Deposit to Manufacturer. 11. GUARANTY. It is a condition to the signing of this Agreement and the performance by the Contractor of any of its obligations hereunder that the persons and entities listed on Addendum III attached hereto execute and deliver to the Contractor a Guaranty in form and substance satisfactory to Contractor under which said guarantor(s) guaranty the Manufacturer's obligations to Contractor hereunder. 12. COVENANTS OF CONTRACTOR. Provided that Manufacturer performs each of its obligations in the manner set forth in this Agreement, the Contractor covenants and agrees as follows: (a) To use reasonable efforts to place orders for Materials identified on Certificates for Accepted P.O.s for purchase by Contractor and delivery to the Premises on terms consistent with the terms set forth in the Certificate. (b) Following timely delivery and acceptance of Materials at the Premises, to promptly pay for all such Materials in accordance with the terms of purchase. (c) To release Materials located at the Premises in such quantity and at such times as are necessary to permit Manufacturer to meet the terms of Accepted P.O.'s. (d) Upon termination of this Agreement and performance by Manufacturer of all of its obligations hereunder, to promptly execute, deliver and file (if Manufacturer so requests) any instruments and documents reasonably necessary to terminate and release any and all security interests granted to Contractor by Manufacturer pursuant to this Agreement. 13. WARRANTIES AND REPRESENTATIONS OF MANUFACTURER. Manufacturer hereby makes the following warranties and representations to Contractor, each of which is deemed a material inducement to the Contractor to enter into and perform in accordance with the provisions of this Agreement and each of which shall be deemed renewed and restated as of the Acceptance Date of each Accepted P.O.: (a) Manufacturer is a corporation duly organized, validly existing, and in good standing under the laws of the state of its incorporation, and is qualified or licensed as a foreign corporation 10 11 to do business in every location in which the laws require Manufacturer to be so qualified or licensed; (b) Manufacturer has the right and power and is duly authorized and empowered to enter into, execute, deliver, and perform this Agreement and all agreements and documents described herein; (c) The execution, delivery, and performance by Manufacturer of this Agreement and all agreements and documents described herein does not constitute a violation of any law, regulation, judgment, order, contract, charter, by-laws, or other instrument to which Manufacturer is a party or is otherwise bound or subject; (d) Manufacturer is not in default under any loan agreement, mortgage, lease, trust deed or similar agreement relating to the borrowing of money to which Manufacturer is a party or is otherwise bound; (e) Each P.O. submitted for assignment by the Manufacturer is a bona fide purchase order and conforms in all respects to the representations contained in the Certificate, which Certificate is true and correct in all respects; (f) The Manufacturer shall at all times maintain such types and amounts of insurance coverage (including without limitation credit insurance) with respect to Manufacturer's business operations, the Premises, the Materials and the Products located upon the Premises and any Accepted P.O. as Contractor may from time to time reasonably require, such insurance to name the Contractor as an insured in the manner and to the extent required by Contractor from time to time and, upon the failure to maintain such coverage, Contractor may purchase the same and the cost thereof shall be deemed a Contractor's Expense; (g) Except with respect to the lien of the Accounts Receivable Lender or as otherwise set forth on Exhibit "D" attached hereto, there are no liens, judgments or claims affecting or relating to the Manufacturer or any of its assets; (h) Except as set forth on Exhibit "E", there are no suits, administrative proceedings, arbitration proceedings or other adversarial proceedings or investigations pending or (to the best of Manufacturer's knowledge) threatened against Manufacturer or any of the guarantors; (i) All of the financial information (including projections) provided by the Manufacturer to the Contractor in connection with the Contractor's consideration of the transaction contemplated by this Agreement are true and accurate, contain no material misstatement of any facts, contain all material information concerning the Manufacturer's financial condition, and do not omit to state any facts which, if disclosed, would reflect adversely on the financial condition of the Manufacturer or any of its Customers; and (j) Manufacturer has duly filed all federal, state, county, local, and foreign income, excise, sales, customs, property, withholding, social security and other tax and information returns and 11 12 reports required to be filed by it to the date hereof, or in the alternative, has obtained extensions for filing pursuant to established procedures, and has paid or made provision for payment of all taxes (including interest and penalties) due and payable. Manufacturer has no material liability for any taxes of any nature whatsoever. 14. PRODUCT WARRANTIES. Manufacturer expressly assumes and agrees to make all product and service warranties (expressed or implied) to Customers with respect to Products and further agrees to defend, indemnify and hold the Contractor harmless from and against any claims, suits, obligations, costs, or expenses (including reasonable attorney's fees and legal expenses) with respect to all express or implied warranties in connection with the Products. 15. AUDIT RIGHTS. Manufacturer shall deliver to Contractor copies of all information and documents submitted from time to time by the Manufacturer to any Senior Lender simultaneously with the submission of such documents to such Senior Lender; and shall deliver to Contractor monthly financial statements, aged accounts receivable, aged accounts payable, and Manufacturer's and Contractor's inventory schedules within fifteen (15) days following the end of each month during the term hereof. In addition, Contractor shall have the right to inspect, audit and copy any financial books, computer programs, and other data containing financial information in connection with the Manufacturer at any time during regular business hours upon not less than 24 hours' prior written notice. Manufacturer agrees to prepare and maintain complete and accurate business records with respect to the transactions contemplated by this Agreement. 16. RELATIONSHIP OF THE PARTIES. The parties are independent contractors and are not (and shall not be deemed to be) the partners, joint venturers, agents or representatives of the other. Each party is exclusively responsible for the conduct of its own business and is not authorized to bind the other party in any manner whatsoever. Further in this regard: (a) Manufacturer acknowledges that it has no ownership interest in any P.O., Materials, work-in-process, or Products in connection with an Accepted P.O. except as otherwise provided in this Agreement; and (b) Contractor acknowledges that it has no ownership interest (other than the security interests granted hereunder) in Manufacturer or in any of Manufacturer's assets. 17. INDEMNIFICATION. Manufacturer agrees to indemnify, hold harmless and defend Contractor from and against any loss, costs, (including reasonable attorney's fees and costs), claims, suits or causes of action brought, threatened or incurred by or against Contractor by reason of any of the following: (a) As a consequence of any breach of this Agreement by Manufacturer, any breach of a warranty made by Manufacturer hereunder, or the failure of any representation made by Manufacturer hereunder to be true; (b) Any suit or threat of suit by any Customer, including, without limitation, all claims under or with respect to Product warranties, except with respect to any suit or claim arising or 12 13 threatened solely by reason of Contractor's acts or omissions to act which constitute a breach of Contractor's obligations hereunder; (c) Any suit or threat of suit by any of Manufacturer's employees, former employees, securities holders or lenders. except with respect to any suit or claim arising or threatened solely by reason of Contractor's acts or omissions to act which constitute a breach of Contractor's obligations hereunder; (d) Any product liability claims of any kind, including, without limitation, all claims under or with respect to Product warranties; and (e) Environmental liability, if any, as a result of this Agreement or any transaction contemplated by or engaged in pursuant to or on account of this Agreement. 18. TERM AND TERMINATION; DEFAULT. (a) Term of Agreement. This Agreement is for a term of twelve (12) months following the date hereof; provided, however, that Contractor may terminate this Agreement immediately upon Manufacturer's default. (b) Obligations Upon Termination. Except for termination in the event of Manufacturer's default, upon termination of this Agreement, each party shall remain liable to perform all matured obligations under this Agreement which remain unperformed as of the termination date as if this Agreement remained in full force and effect. Upon termination for any reason and upon completion of the foregoing obligations in the case of a termination upon Manufacturer's default, all obligations hereunder shall terminate except the continuing obligations of the parties under paragraphs 13, 14, 15 and 17 hereof. (c) Default. (i) Manufacturer shall be considered to be in default hereunder if it either (A) fails to make any payment due Contractor hereunder within three (3) business days of the due date thereof, or (B) fails in any respect to perform any of its other obligations hereunder and such failure continues unremedied for a period of three (3) business days following Contractor's notice thereof, or (C) has made a representation which proves to be false or breaches a warranty made hereunder, or (D) files (or has filed against it) a petition (or otherwise initiates proceedings) for bankruptcy, reorganization, receivership or other proceedings for the protection of debtors, or (E) fails to make any payment due to any third party on or before the due date therefor if the failure to make such payment gives rise to or creates (or if unremedied would give rise to or create) an encumbrance upon the Products or any of them or otherwise restricts Contractor's sale or disposition of the Products or any of them. (ii) Without waiving or limiting any of Contractor's other rights and remedies in the event of a default by Manufacturer, and in addition to Contractor's 13 14 right of set-off set forth in paragraph 10 above, upon the occurrence of any event of default, Manufacturer shall be liable for immediate payment to Contractor of all amounts due or to become due to Contractor hereunder, including, without limitation, Contractor's Expenses, Contractor's Deal Fees and the Commitment Fee. Contractor shall further be entitled to reimbursement for all of its costs of collection, whether or not suit has been filed or judgment entered, including, without limitation, reasonable attorneys' fees and legal expenses. All amounts owed to Contractor pursuant to this paragraph 18(c) shall carry interest at the rate of 2% per month from the effective date of termination, or, in the case of Contractor's costs of collection, from the date such costs are incurred. (iii) In the event of default by Manufacturer, and subject to any agreements between Contractor and any Senior Lender, Contractor shall further be entitled to exercise all the rights and remedies of a secured party under the Uniform Commercial Code or as otherwise provided under the Security Agreement. The proceeds of any amount recovered by Contractor shall be applied, first, to the payment of Contractor's reasonable costs and expenses in connection with the enforcement of Contractor's rights and remedies hereunder; second, toward the payment or satisfaction of all amounts owing Contractor hereunder, including interest thereon; and third, any surplus to be paid to Manufacturer or as a court of competent jurisdiction may direct. In the case of a deficiency, Manufacturer shall remain liable for such deficiency after such sale, with interest at the rate herein provided. 19. MISCELLANEOUS PROVISIONS. (a) CHOICE OF LAW, VENUE, JURISDICTION AND SERVICE. THIS AGREEMENT AND ALL AGREEMENTS REFERRED TO HEREIN BETWEEN THE CONTRACTOR AND THE MANUFACTURER (COLLECTIVELY THE "TRANSACTION DOCUMENTS") HAVE BEEN SUBMITTED TO THE CONTRACTOR AT THE CONTRACTOR'S PRINCIPAL PLACE OF BUSINESS IN THE STATE OF ILLINOIS, WILL BE PERFORMED BY THE PARTIES IN THE STATE OF ILLINOIS, AND SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF ILLINOIS. THE VALIDITY OF EACH OF THE TRANSACTION DOCUMENTS AND THE CONSTRUCTION, INTERPRETATION AND ENFORCEMENT THEREOF, AND THE RIGHTS OF THE PARTIES THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO THE CONFLICTS OF LAW RULES OF THE STATE IN WHICH SUIT IS INITIATED PERTAINING TO THIS AGREEMENT. FURTHER, THE CONTRACTOR AND THE MANUFACTURER AGREE THAT ANY SUIT, ACTION, OR PROCEEDING ARISING OUT OF OR RELATING TO THE TRANSACTION DOCUMENTS OR ANY TRANSACTION CONTEMPLATED THEREBY, SHALL BE INSTITUTED IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION, OR ANY COURT OF THE STATE OF ILLINOIS LOCATED IN COOK COUNTY, AND EACH PARTY IRREVOCABLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THOSE COURTS AND 14 15 WAIVES ANY AND ALL OBJECTIONS TO JURISDICTION OR VENUE THAT ANY SUCH PARTY MAY HAVE UNDER THE LAWS OF THE STATE OF ILLINOIS OR OTHERWISE IN THOSE COURTS IN ANY SUCH SUIT, ACTION, OR PROCEEDING. FURTHER, TO THE EXTENT PERMITTED BY LAW, SERVICE OF PROCESS SUFFICIENT FOR PERSONAL JURISDICTION IN ANY ACTION AGAINST THE MANUFACTURER MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO ITS ADDRESS FOR NOTICE AS PROVIDED IN THIS AGREEMENT. MANUFACTURER AGREES THAT ANY FINAL JUDGMENT RENDERED AGAINST IT IN ANY ACTION OR PROCEEDING SHALL BE CONCLUSIVE AS TO THE SUBJECT OF SUCH FINAL JUDGMENT AND MAY BE ENFORCED IN OTHER JURISDICTIONS IN ANY MANNER PROVIDED BY LAW. (b) WAIVER OF RIGHT TO JURY TRIAL. MANUFACTURER AND CONTRACTOR ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT, ANY OTHER AGREEMENT RELATED HERETO OR WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY WOULD BE BASED UPON DIFFICULT AND COMPLEX ISSUES, AND THEREFORE, THE PARTIES AGREE THAT ANY COURT PROCEEDING ARISING OUT OF ANY SUCH CONTROVERSY WILL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. (c) Notices. All notices required or permitted pursuant to this Agreement shall be in writing and either personally delivered, sent by facsimile transmission (provided evidence of transmission is maintained and the original of the transmittal notice is sent by U.S. mail), or Federal Express or similar overnight delivery service, addressed to the respective addresses or facsimile number of the parties set forth on the last page of this Agreement, or at such telephone numbers or other addresses as have from time to time been designated by like notice. Notices given in the manner prescribed herein shall be deemed given on the date sent or transmitted (as the case may be). (d) Severability. The paragraphs of this Agreement are severable, and in the event that any paragraph or portion of this Agreement is declared illegal or unenforceable, the remainder of this Agreement will be effective and binding upon the parties. (e) Opinion of Counsel. It is an express condition to the closing of the transactions contemplated by this Agreement that the Manufacturer cause to be delivered to the Contractor an opinion of Manufacturer's counsel which is satisfactory to Contractor. (f) Waiver; Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof, and supersedes all prior oral or written agreements, understandings, or arrangements. No waiver of or modifications to the provisions of this Agreement will be valid unless in writing and signed by all parties. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their successors, assigns and legal representatives. 15 16 (g) Assignment. Manufacturer may not transfer or assign its rights or obligations hereunder without the prior written consent of the Contractor, and any attempted transfer or assignment shall be null and void. (h) Performance. Time is of the essence under this Agreement. (i) Further Assurances. From and after the date hereof, each party will execute all documents and take such further actions as the other may from time to time reasonably request in order to carry out the transactions provided for herein and accomplish the purposes contemplated hereby. (i) Publication. Contractor shall have the right to publicize (by "tombstone" or comparable publication) the Purchase Order Assignment Program evidenced hereby (including the date and size of the facility but not the specific terms hereof). (j) Counterparts; Facsimile Delivery. This Agreement may be executed in one or more counterparts, each of which taken together shall constitute one and the same instrument, admissible into evidence. Delivery of an executed counterpart of this Agreement by facsimile shall be equally as effective as delivery of a manually executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by facsimile shall also deliver a manually executed counterpart of this Agreement, but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. * * * * * * * * * * * 16 17 This Agreement has been signed at Northbrook, Illinois on the day and year first above written. CONTRACTOR: MANUFACTURER: TRANSCAP TRADE BAY AREA MULTIMEDIA, INC. FINANCE By: /s/ MICHAEL SEAR By: /s/ RAY MUSCI ------------------------------ ----------------------------- Michael Sear, Executive Vice President Ray Musci, President Transcap Associates, Inc. general partner Address: 900 Skokie Blvd. #210 Address: 333 W. Santa Clara St. ----------------------- ---------------------- Northbrook, IL. 60062 Suite 930 ----------------------- ---------------------- Facsimile: 847-753-9090 San Jose, CA. 95115 ----------------------- ---------------------- Facsimile: 408-298-9600 ---------------------- 17 18 EXHIBIT A PURCHASE ORDER PACKAGE CERTIFICATE This Certificate is executed by ___________________________, who is the ______________________ of BAY AREA MULTIMEDIA, INC., a California corporation ("Manufacturer"), in connection with the Master Purchase Order Agreement dated ___________, 2000, (the "Agreement") with TRANSCAP TRADE FINANCE ("Contractor"). The undersigned certifies to Contractor that all of the information contained in this Certificate is true, complete and accurate and is furnished to Contractor to induce Contractor to purchase Materials in accordance with the Agreement: 1. Customer Information (a) Attached is a purchase order number _______ dated _______________, 2000 in the total amount of $________ (the "Purchase Order") from the following customer ("Customer"), or Manufacturer has received a bona fide indication of interest from the following Customer. Name: Address: Person in charge: Phone Number: (b) Attached is a true and complete credit history, payment history and credit report on the Customer; or, in lieu thereof, _____________approval or accepted letter of credit. (c) The Purchase Order is (check one): ______ Assignable to Contractor by Manufacturer without Customer's consent; or ______ Not assignable without Customer's consent, but attached is the consent of the Customer to assignment to Contractor; ______ Not assignable, but the proceeds of the Purchase Order are assignable; or ______ Manufacturer has received indication of interest only. A-1 19 2. Product Information (a) Original (or a true, accurate and complete copy of) Purchase Order - attached. (b) Identification of "Product(s)": ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- (c) Quantity of Product Ordered: ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- (d) Specifications of Product: ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- 3. Price and Delivery Information (a) Aggregate Purchase Order Price: --------------------------- (b) Price per Unit of Product: -------------------------------- (c) Delivery Date ("P.O. Delivery Date") ---------------------- (d) Terms as to liability for shipping cost, insurance, "process and hold", risk of loss, etc.: ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- 4. Materials Information Attached is an exhibit detailing: (a) the quantity and quality specifications for all Materials needed to complete the Purchase Order ("Materials"); (b) the name, address, contact person and phone number of each person from whom the Materials may be purchased; and (c) confirmed current pricing and delivery date(s) ("Material Delivery Date(s)") for all of the Material and a copy of the applicable Purchase Orders. A-2 20 5. Production Information (a) The manufacturing/distributing facility at which the Product will be manufactured/distributed (the "Premises"): --------------------------------------------- --------------------------------------------- --------------------------------------------- (b) Brief description of production processes and requirements: ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- (c) Cost of Production: -------------------------------------- (d) Units of Product per day: -------------------------------- (e) Duration of production run to manufacture Product for the Purchase Order: ----------------------------------- 6. Gross Margin Here is the computation of Projected Net Gross Margin before depreciation, including, without limitation, projections of the cost of Materials and Manufacturer's Direct Costs: 7. Assignment of Purchase Order Attached is an Assignment of the Purchase Order, duly executed by authorized officers of Manufacturer. A-3 21 8. Lender Consent (check one): ______ None of the Materials, work-in-process or inventory is subject to a security interest; or ______ If any of the Materials, work-in-process or inventory of Manufacturer are subject to a security interest, attached is the written consent and release of each holder of a security interest, in form previously approved by Contractor. Dated: ___________________, 2000 BAY AREA MULTIMEDIA, INC. By: /s/ RAY MUSCI ----------------------------- Title: PRESIDENT ----------------------------- A-4 22 EXHIBIT A (continued) ACCEPTANCE OF PURCHASE ORDER CERTIFICATE The foregoing Purchase Order Certificate, as prepared and delivered by Manufacturer, is hereby accepted and approved. TRANSCAP TRADE FINANCE By: ------------------------ Dated: ----------------------- A-5 23 EXHIBIT A (continued) ASSIGNMENT OF PURCHASE ORDER FOR VALUE RECEIVED, BAY AREA MULTIMEDIA, INC., a California corporation ("Assignor") hereby assigns, transfers and delivers to TRANSCAP TRADE FINANCE ("Assignee") all of Assignor's right, title and interest in, to and under that certain Purchase Order, identified as follows, for the purposes, and pursuant to the terms and conditions of that certain Master Purchase Order Purchase Agreement, dated _________, 2000, between Assignor and Assignee: Assignor's P.O. No.:_______________ Customer Name:_____________________ P.O. Date:_________________________ BAY AREA MULTIMEDIA, INC. By: /s/ RAY MUSCI -------------------------- Title: PRESIDENT -------------------------- A-6 24 EXHIBIT B MANUFACTURER'S SPECIFICATIONS The following are performance specifications, obligations, and covenants (collectively the "Manufacturer's Specifications") required of Manufacturer in connection with its obligations under the Purchase Order Assignment Agreement to which this Exhibit is attached: 1. To deliver to each Customer a Purchase Order Acknowledgement on such form as Contractor may accept directing that payment of each P.O. Invoice be made to Contractor or the Lock Box Bank (if any). 2. To cooperate with Contractor concerning Contractor's placement of orders for Materials. 3. To notify Contractor immediately upon the receipt of Materials at the Premises. Upon such delivery, to inspect the quality and quantity of Materials and to notify Contractor of any deficiencies. 4. To permit Contractor's representative access to the Premises at all times for the purpose of inspecting, safeguarding, and otherwise observing and overseeing the storage of Materials and Products and the processing of Materials into Products. 5. To take all actions necessary for the conversion of Materials into Products and the shipment thereof to Customers in accordance with Accepted P.O.'s, including without limitation, manufacturing, processing, packaging, shipping, warehousing, fabricating and insuring Materials and Products in accordance with the specifications set forth in the applicable Accepted P.O., and to deliver the same to the Customer on or before the P.O. Delivery Date. 6. To maintain and supply sufficient quantity and quality of equipment, materials, labor and facilities (other than Materials) in order to perform each of its obligations described in this Exhibit "B". 7. To maintain all inventories of Materials and Products in such segregated locations upon the Premises as the Contractor may approve; to properly identify such Materials and Products as being the property of the Contractor and further identify the same by the P.O. and the Customer for which such Materials or Products relate; and to implement such commercially reasonable security procedures and devices as Contractor may require for the preservation and segregation of Materials and Products, including without limitation, the construction and maintenance of secured cages and storage rooms for such Materials and Products. To not ship or otherwise release any Materials or Products except with the prior written consent of the Contractor. 8. To ship all P.O. Inventory by such date, by such means, and under such terms as required pursuant to the applicable P.O. and to deliver the P.O. Inventory on or before the P.O. B-1 25 Delivery Date. Manufacturer shall further provide Contractor with written notice of each shipment of P.O. Inventory immediately following shipment thereof. 9. To prepare and deliver to the Contractor each P.O. Invoice immediately following shipment of the P.O. Inventory. 10. To fully insure in the name of the Manufacturer and the Contractor all P.O. Inventory during shipment to Customers in amounts, with carriers and on terms and conditions acceptable to Contractor. 11. To direct all Customers to make payment with respect to a P.O. Invoice to the Contractor or the Lock Box (if any) and to take no actions and make no statements which direct (or have the effect of causing) any P.O. Customer to make any payment with respect to any P.O. Invoice to anyone other than the Contractor or the Lock Box. 12. To not accept any payment (including rebates, set-offs, and other Customer adjustments) with respect to any P.O. Invoice other than through the Contractor or the Lock Box. 13. To receive and hold in trust for the sole and exclusive benefit of Contractor all sums and instruments representing payment of any P.O. Invoice and all proceeds which for any reason come into the possession of Manufacturer, its agents, representatives or any other party acting on behalf of Manufacturer, and promptly to deliver or cause delivery of such sums to the Contractor. 14. To maintain in the name of Manufacturer and Contractor general comprehensive liability insurance, with extended coverage and coverage against theft and product liability and such other insurance and coverages as may be commercially reasonable with exclusions, with carriers, and on terms and conditions that may be acceptable to Contractor in its sole discretion. 15. To deliver to Contractor a list of unpaid accounts receivable relating to P.O. Invoices as of last day of the preceding calendar month, such list to be delivered by the 10th day of the next succeeding month and certified as complete and accurate by a duly authorized officer of Manufacturer. 16. To not pledge any of its assets or cause or permit any lien or security interest to be taken in any of its assets, except such liens as are described on Exhibit "D" of this Agreement or are otherwise approved by Contractor. 17. To provide Contractor with written notice immediately upon (i) the filing or threat of filing of a bankruptcy petition by or against Manufacturer, (ii) the initiation of foreclosure proceedings or other similar action against Manufacturer or any of its assets, (iii) a request or demand made upon Manufacturer to make, or for any reason Manufacturer makes, an assignment for the benefit of its creditors, or (iv) Manufacturer becomes unable to pay its bills in the ordinary course of business as they become due. B-2 26 18. To immediately notify Contractor of any pending or threatened litigation, administrative proceeding, arbitration, or governmental investigation concerning or relating to Manufacturer or any goods, services or assets that are the subject of an Accepted P.O. or are pledged as collateral pursuant to the Security Agreement. B-3 27 EXHIBIT C RE-ASSIGNMENT AND RELEASE OF PURCHASE ORDER UPON AND SUBJECT TO PAYMENT OF the sum of $_____ on or before _________, 19__("Payment Date"), TRANSCAP TRADE FINANCE ("Assignor") hereby assigns, transfers and delivers to BAY AREA MULTIMEDIA, INC. ("Assignee") all of Assignor's right, title and interest in, to and under that certain Purchase Order identified below, and hereby releases any claims in or with respect to such Purchase Order. If payment is made after the Payment Date, such assignment and release shall require payment of $________ for each day after the Payment Date during which payment is not received. The applicable Purchase Order is: P.O. Invoice No.: ___________ Customer Name: ___________ P.O. Invoice Date: ___________ This Assignment shall become effective immediately upon receipt of good funds in the amount described above. TRANSCAP TRADE FINANCE By: --------------------------- Dated: ------------------ ACCEPTANCE BAY AREA MULTIMEDIA, INC., a California corporation ("Assignee"), hereby accepts the foregoing assignment of Purchase Order, and covenants and agrees to fully perform all obligations with respect thereto and hereby releases Assignor from responsibility for the performance of any such obligations whether required before, on or after the date of this Acceptance. Assignee hereby authorizes [Account Receivable Lender] to transfer the amount set forth above to Assignor per Assignor's instructions. Dated:________ BAY AREA MULTIMEDIA, INC. By: /s/ RAY MUSCI ------------------------- Title: PRESIDENT ------------------------- D-1 28 EXHIBIT D EXCEPTIONS TO CONTRACTOR'S SENIOR LIEN None D-1 29 EXHIBIT E PENDING LITIGATION, ETC. E-1 30 ADDENDUM I The Accounts Receivable Lender is: None The Senior Lenders other than the Accounts Receivable Lender are: None 31 ADDENDUM II In this Agreement: (a) The "Lock Box Bank" is: AMERICAN NATIONAL BANK DEPT. 77-6132 CHICAGO, IL 60678-6132 (b) The "Lock Box" is maintained in LOCK BOX ACCOUNT NO. 77-6132 at the Lock Box Bank. 32 ADDENDUM III The Guarantors pursuant to this Agreement are: Ray Musci EX-10.18 28 v72115orex10-18.txt EXHIBIT 10.18 1 EXHIBIT 10.18 FINANCING STATEMENT -- FOLLOW INSTRUCTIONS CAREFULLY This Financing Statement is presented for filing pursuant to the Uniform Commercial Code and will remain effective, with certain exceptions, for 5 years from date of filing. - -------------------------------------------------------------- A. NAME & TEL. # OF CONTACT AT FILER (OPTIONAL) - -------------------------------------------------------------- B. FILING OFFICE ACCT.# (optional) - -------------------------------------------------------------- C. RETURN COPY TO: (Name and Mailing Address) - -------------------------------------------------------------- D. OPTIONAL DESIGNATION (If applicable): [ ] LESSOR/LESSEE [ ] CONSIGNOR/CONSIGNEE [ ] NON-UCC FILING - ------------------------------------------------------------------------------------------------------------------------------------ 1. DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (1a or 1b) -------------------------------------------------------------------------------------------------------------------------------- 1a. ENTITY'S NAME Bay Area Multimedia, Inc. OR -------------------------------------------------------------------------------------------------------------------------------- 1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 333 W. Santa Clara San Jose CA USA 95113 - ------------------------------------------------------------------------------------------------------------------------------------ 1d. S.S. OR TAX I.D.# OPTIONAL 1e. TYPE OF ENTITY 1f. ENTITY'S STATE 1g. ENTITY'S ORGANIZATIONAL I.D.#, if any ADD'NL. INFO RE OR COUNTRY OF ENTITY DEBTOR ORGANIZATION [ ] NONE ==================================================================================================================================== 2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (2a or 2b) -------------------------------------------------------------------------------------------------------------------------------- 2a. ENTITY'S NAME OR -------------------------------------------------------------------------------------------------------------------------------- 2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE - ------------------------------------------------------------------------------------------------------------------------------------ 2d. S.S. OR TAX I.D.# OPTIONAL 2e. TYPE OF ENTITY 2f. ENTITY'S STATE 2g. ENTITY'S ORGANIZATIONAL I.D.#, if any ADD'NL INFO RE OR COUNTRY OF ENTITY DEBTOR ORGANIZATION [ ] NONE ==================================================================================================================================== 3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME - insert only one secured party name (3a or 3b) -------------------------------------------------------------------------------------------------------------------------------- 3a. ENTITY'S NAME Transcap Trade Finance OR -------------------------------------------------------------------------------------------------------------------------------- 3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX - ------------------------------------------------------------------------------------------------------------------------------------ 3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE 900 Skokie Blvd. Northbrook IL USA 60062 ==================================================================================================================================== 4. This FINANCING STATEMENT covers the following types or items of property" See attached Exhibit "A". ==================================================================================================================================== 5. CHECK [ ] This FINANCING STATEMENT is signed by the Secured Party instead of the Debtor to perfect a security interest BOX (a) in collateral already subject to a security interest in another jurisdiction when it was brought into this (if applicable) state, or when the debtor's location was changed to this state, or (b) in accordance with other statutory provisions [additional data may be required] 6. REQUIRED SIGNATURE(S) Bay Area Multimedia, Inc. /s/ RAY MUSCI ==================================================================================================================================== 7. If filed in Florida (check one) Documentary Documentary stamp [ ] stamp tax paid [ ] tax not applicable ==================================================================================================================================== 8. [ ] This FINANCING STATEMENT is to be filed [for record] (or recorded) in the REAL ESTATE RECORDS Attach Addendum (if applicable) - ------------------------------------------------------------------------------------------------------------------------------------ 9. Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s) [ADDITIONAL FEE] (optional) [ ] ALL DEBTORS [ ] DEBTOR 1 [ ] DEBTOR 2 ====================================================================================================================================
2 EXHIBIT "A" TO FINANCING STATEMENT This Financing Statement covers (i) all merchandise, inventory and goods and all additions, substitutions and replacements thereof, wherever located, together with all goods, supplies, incidentals, packaging materials, labels, materials and any other items used or usable in manufacturing, processing, packaging or shipping same, in all stages of production, and all products and proceeds of whatever sort, including specifically all "inventory" as such term is defined in the Uniform Commercial Code, now or hereafter owned by Debtor; (ii) all machinery and equipment, now or hereafter owned by Debtor, including, but not limited to, all machinery, equipment, furnishings, movable trade fixtures and vehicles now or hereafter owned by Debtor and all additions, substitutions and replacements of any of the foregoing, wherever located, together with all attachments, components, spare and replacement parts, related computer software, maintenance and repair supplies and manuals, instructional manuals, warranties, and equipment and accessories installed thereon or affixed thereto; (iii) all accounts receivable, contract rights and other customer obligations for the payment of money arising out of the Debtor's sale of goods or rendering of services, now existing or hereafter arising; (iv) all trademarks, copyrights, patents, contract rights and all general intangible assets of Debtor now or hereafter existing; and (v) all proceeds and products of the foregoing. Debtor's facility at which the Collateral is located is: ______________________________ ______________________________ 3 SECURITY AGREEMENT AND FINANCING STATEMENT THIS SECURITY AGREEMENT AND FINANCING STATEMENT is made this 25 of February 2000, between TRANSCAP TRADE FINANCE, an Illinois general partnership (the "SECURED PARTY"), and BAY AREA MULTIMEDIA, INC., a California corporation (the "DEBTOR"), as follows: BACKGROUND: A. On this date, the Secured Party and Debtor entered into a Master Purchase Order Assignment Agreement (the "Assignment Agreement"). B. It is a condition to Secured Party's performance of its obligations under the Assignment Agreement that the Debtor execute and deliver this Agreement to secure performance and payment of the "Liabilities" (as hereinafter defined). THEREFORE, in consideration of the agreements described in this Agreement and the Assignment Agreement, the parties agree as follows: 1. DEFINITIONS. In this Agreement, the following frequently used terms are defined as set forth in this paragraph 1: (a) Each term used in this Agreement which is defined in the Assignment Agreement will have the same meaning herein as that ascribed to it in the Assignment Agreement. (b) The "LIABILITIES" are all payments and other obligations from time to time due or owing to the Secured Party by the Debtor under the Assignment Agreement, this Agreement and any agreement referred to in the Assignment Agreement or this Agreement. (c) The "PRIMARY COLLATERAL" means those assets of the Debtor set forth on Exhibit "A" attached to and made part of this Agreement, whether now or hereafter existing or acquired, together with all the proceeds thereof and Debtor's interests therein. (d) The "COMMON COLLATERAL" are those assets of Debtor set forth on Exhibit "B" attached to and made part of this Agreement, whether now or hereafter existing or acquired, together with all the proceeds thereof and Debtor's interests therein which from time to time are also pledged to a Senior Lender and as to which the Secured Party shall maintain a subordinated security interest. If no Senior Lender is involved in the subject transaction, Exhibit "B" shall be excluded from this Agreement and the Primary Collateral and Common Collateral shall refer to the same assets. (e) The "COLLATERAL" means the Primary Collateral and the Common Collateral and the Secured Party's security interest in the Collateral is referred to as the "LIEN". 4 (f) The "SENIOR LIEN" is the security interest in the Common Collateral maintained by a Senior Lender (if any). (g) The "LOCATIONS" are Debtor's facilities set forth at the end of this Agreement at which all or a portion of the Collateral will be located. 2. GRANT OF SECURITY INTEREST. As security for the performance and payment of the Liabilities, the Debtor hereby assigns, grants, conveys, mortgages, hypothecates, pledges, and sets over to the Secured Party a continuing first priority security interest for the use and benefit of the Secured Party in the Primary Collateral; and a security interest for the use and benefit of the Secured Party in the Common Collateral which is subordinate only to the Senior Lien, if any. 3. REPRESENTATIONS AND WARRANTIES. The Debtor represents, warrants, and agrees that: (i) except with respect to the Senior Lien, no financing statement or other lien notice covering any portion of the Collateral is on file in any public office; (ii) the Debtor is and at all times will be the lawful owner of all Collateral, free of all liens and claims whatsoever except the Senior Lien and the Lien; (iii) the Debtor has full power and authority to execute this Agreement and to perform the Debtor's obligations hereunder, and to subject the Collateral to the Lien; (iv) all information with respect to Collateral set forth in any schedule, certificate or other writing at any time heretofore, and all other written information heretofore or hereafter furnished by the Debtor to the Secured Party is and will be true and correct in all respects as of the date furnished; (v) the Locations include the address at which any portion of the Collateral is located and Debtor will immediately notify Secured Party of any other location at which any portion of the Collateral is hereafter located; and (vi) there is no litigation or regulatory complaint against the Debtor or affecting or relating to the Collateral or any portion thereof which is pending or threatened as of this date other than as set forth on Exhibit "E" of the Assignment Agreement. 4. CERTIFICATES, SCHEDULES AND REPORTS. The Debtor will from time to time, as the Secured Party may request, deliver to the Secured Party such schedules and such certificates and reports respecting the Collateral to such extent as the Secured Party may reasonably request. Any such schedule, certificate or report shall be executed by an authorized officer of the Debtor and shall be in such form and detail as the Secured Party may specify. The Debtor shall immediately notify the Secured Party of the occurrence of any event causing a material loss or depreciation in the value of any item of Collateral, and the amount of such loss or depreciation. 5. AGREEMENTS OF THE DEBTOR. The Debtor (i) will, upon request of the Secured Party, execute such financing statements and other documents (and pay the cost of filing or recording the same), and do such other acts and things as Secured Party may from time to time reasonably request to establish and maintain valid perfected security interests in the Collateral; (ii) will keep all items of Collateral at the Locations; (iii) will keep its records concerning all items of Collateral at the Locations, which records will be of such character as will enable Secured Party to determine at any time the status thereof; (iv) will furnish the Secured Party such information concerning the Debtor and the Collateral as the Secured Party may from time to time reasonably request; (v) will permit the Secured Party or its designees, at all times, to inspect the Collateral, and to inspect, audit and make copies of and extracts from all records and all other papers in the possession of the Debtor, and 2 5 will, upon request of the Secured Party, deliver to the Secured Party all of such records and papers that pertain to the Collateral; (vi) will, upon request of the Secured Party, stamp on its records concerning the Collateral (and/or enter in its computer records concerning the Collateral) a notation, in form reasonably satisfactory to the Secured Party, of the security interests of the Secured Party hereunder; (vii) except as consented to in writing by the Secured Party, will not sell, lease, assign or create or permit to exist any lien on or security interest in any item of Collateral to or in favor of anyone other than the Secured Party and the Senior Lender(s); (viii) will at all times keep all items of Collateral insured against loss, damage, theft and other risks, in such amounts, by such companies, under such policies and in such form as may be required pursuant to the Assignment Agreement, which policies shall contain a so-called lender's loss payable (or comparable) clause, whereby a denial of payment based on policy conditions will not prevent recovery by Secured Party, and such policies or certificates thereof shall be deposited with the Secured Party; (ix) furnish to the Secured Party no less than thirty (30) days prior to the occurrence of any change in the Locations or in Debtor's name, notice in writing of such change; and (x) will reimburse the Secured Party for all expenses, including reasonable attorneys' fees and legal expenses incurred by the Secured Party in seeking to collect or enforce any rights under this Agreement or the Assignment Agreement. 6. REMEDIES. Whenever Debtor shall fail to perform any obligation in the manner and at the time required by the Assignment Agreement or this Agreement, or whenever the Debtor or any of them shall breach or default on a covenant made by any Debtor pursuant to the Assignment Agreement or this Agreement (collectively an "event of default"), the Secured Party may exercise any rights and remedies available to it under the Assignment Agreement and applicable law. The Debtor and each of them agrees, upon the occurrence of an event of default and during the continuance thereof, if requested by the Secured Party, to assemble, at the Debtor's expense, all or any part of the Collateral at a place designated by the Secured Party. Without limiting the foregoing, upon an event of default the Secured Party may, to the fullest extent permitted by applicable law, without notice, advertisement, hearing or process of law of any kind, (i) enter upon any premises where any of the Collateral may be located and take possession of and remove such Collateral, (ii) sell any or all of the Collateral, free of all rights and claims of the Debtor therein and thereto, at any public or private sale, and (iii) bid for and purchase any or all of the Collateral at any such sale. The Debtor and each of them hereby expressly waives, to the fullest extent permitted by applicable law, any and all notices, advertisements, hearings or process of law in connection with the exercise by the Secured Party of any of its rights and remedies upon an event of default. Any notification of the intended disposition of any of the Collateral required by law shall be deemed reasonably and properly given if given. at least ten (10) days before such disposition. Any proceeds of any disposition by the Secured Party of any of the Collateral will be applied by the Secured Party. First, to the payment of the Secured Party's reasonable out-of-pocket expenses in connection with the Collateral or this Agreement and enforcement of the Secured Party's rights with respect thereto or hereunder, including reasonable attorney's fees and legal expenses; Second, toward the payment or satisfaction of the Liabilities in full; and Third, any surplus to be paid to the Debtor, its successors and assigns, or as a court of competent jurisdiction may direct. 3 6 7. RELATIONSHIP WITH SENIOR LENDER. If a Senior Lender is involved in the instant transaction, the Secured Party and each Senior Lender have entered into a Subordination Agreement of even date herewith which defines and sets forth the respective rights and interests of the Secured Party and each Senior Lender in connection with the Collateral. 8. MISCELLANEOUS. (a) The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral in its possession if it takes such action for that purpose as the Debtor requests in writing, but failure of the Secured Party to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no failure of the Secured Party to preserve or protect any rights with respect to such Collateral against prior parties, or to do any act with respect to the preservation of such Collateral not so requested by the Debtor, shall be deemed a failure to exercise reasonable care in the custody or preservation of such Collateral. (b) All notices required or permitted pursuant to this Agreement shall be in writing and either personally delivered, sent by facsimile transmission (provided evidence of transmission is maintained and the original of the transmittal notice is sent by U.S. mail), or Federal Express or similar overnight delivery service, to the Secured Party at its address set forth at the end of this Agreement and to the Debtor at any one of the Locations. Notices given in the manner prescribed herein shall be deemed given on the date sent or transmitted (as the case may be). Either party may change its notice address by notice to the other party in the manner prescribed herein. (c) No delay on the part of the Secured Party in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Secured Party of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. (d) No amendment to, modification or waiver of, or consent with respect to, any provision of this Agreement shall in any event be effective unless the same shall be in writing and signed and delivered by the Secured Party, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. (e) All obligations of the Debtor and all rights, powers and remedies of the Secured Party expressed herein are in addition to all other rights, powers and remedies possessed by Secured Party, including, without limitation, those provided by applicable law or in any other written instrument or agreement relating to any of the Liabilities or security therefor. (f) The Agreement shall in all respects be a continuing agreement and shall remain in full force and effect until final payment in full of all the Liabilities. (g) THIS AGREEMENT HAS BEEN DELIVERED AT CHICAGO, ILLINOIS, AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS, SUBJECT, HOWEVER, TO THE UNIFORM COMMERCIAL CODE OF ANY APPLICABLE JURISDICTION. WHENEVER POSSIBLE, EACH PROVISION OF THIS AGREEMENT SHALL BE INTERPRETED IN SUCH MANNER AS TO BE EFFECTIVE AND VALID UNDER APPLICABLE LAW, BUT 4 7 IF ANY PROVISION OF THIS AGREEMENT SHALL BE HELD INVALID, ILLEGAL OR UNENFORCEABLE UNDER APPLICABLE, LAW, SUCH PROVISION SHALL BE INEFFECTIVE TO THE EXTENT OF SUCH INVALIDITY, ILLEGALITY OR UNENFORCEABILITY, WITHOUT INVALIDATING THE REMAINDER OF SUCH PROVISION OR THE REMAINING PROVISIONS OF THIS AGREEMENT. (h) THE DEBTOR IRREVOCABLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION, OR ANY COURT OF THE STATE OF ILLINOIS LOCATED IN COOK COUNTY, AND WAIVES ANY AND ALL OBJECTIONS TO JURISDICTION OR VENUE THAT ANY SUCH PARTY MAY HAVE UNDER THE LAWS OF THE STATE OF ILLINOIS OR OTHERWISE IN THOSE COURTS IN ANY SUCH SUIT, ACTION, OR PROCEEDING. FURTHER, TO THE EXTENT PERMITTED BY LAW, SERVICE OF PROCESS SUFFICIENT FOR PERSONAL JURISDICTION IN ANY ACTION AGAINST THE DEBTOR MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO ITS ADDRESS FOR NOTICE AS PROVIDED IN THIS AGREEMENT. (i) DEBTOR AND SECURED PARTY ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT, ANY OTHER AGREEMENT RELATED HERETO OR WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY WOULD BE BASED UPON DIFFICULT AND COMPLEX ISSUES, AND THEREFORE, THE PARTIES AGREE THAT ANY COURT PROCEEDING ARISING OUT OF ANY SUCH CONTROVERSY WILL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. (j) This Agreement shall be binding upon, and shall inure to the benefit of, the Secured Party and the Debtor and their respective successors and assigns. (k) At the option of the Secured Party, this Agreement, or a carbon, photographic or other reproduction of this Agreement or of any Uniform Commercial Code financing statement covering the Collateral or any portion thereof, shall be sufficient as a Uniform Commercial Code financing statement and may be filed as such. (1) This Agreement is the Security Agreement referred to in the Assignment Agreement. (m) In the case of any irreconcilable conflict between the provisions of this Agreement and the Assignment Agreement, the provisions of the Assignment Agreement shall control. (n) If more than one person or entity is included as a Debtor hereunder, each of Debtor's obligations, covenants, warranties, and representations hereunder is joint, several and mutually binding on each such party. (o) This Agreement may be executed in one or more counterparts, each of which taken together shall constitute one and the same instrument, admissible into evidence. Delivery of an 5 8 executed counterpart of this Agreement by facsimile shall be equally as effective as delivery of a manually executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by facsimile shall also deliver a manually executed counterpart of this Agreement, but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. IN WITNESS WHEREOF, this Agreement has been duly signed at Northbrook, Illinois on the day and year first above written. SECURED PARTY: TRANSCAP TRADE FINANCE By: /s/ John Maselli ----------------------------- Senior Credit Manager Transcap Associates, Inc. G.P. Address: 900 N. Skokie Blvd. Northbrook, IL 60062 DEBTOR: BAY AREA MULTIMEDIA, INC. By: /s/ RAY MUSCI ----------------------------- Title: President LOCATIONS: ----------------------------- ----------------------------- ----------------------------- 6 9 EXHIBIT "A" PRIMARY COLLATERAL The "Collateral" with respect to which Secured Party's first priority security interest applies shall be (i) all merchandise, inventory and goods and all additions, substitutions and replacements thereof, wherever located, together with all goods, supplies, incidentals, packaging materials, labels, materials and any other items used or usable in manufacturing, processing, packaging or shipping "Materials" and "Products" pursuant to "Accepted Purchase Orders", as such terms are defined in a certain Master Purchase Order Purchase Agreement dated ________________, 2000 between Secured Party and Debtor, and all products and proceeds of whatever sort now or hereafter owned by Debtor and related thereto; (ii) all accounts receivable, contract rights and other customer obligations for the payment of money arising out of the sale of goods pursuant to "Accepted Purchase Orders" now or hereafter existing; and (iii) all proceeds and products of the foregoing. Debtor's facility at which the Collateral is located is: - ------------------------------ "A-1" 10 EXHIBIT "B" COMMON COLLATERAL The "Collateral" with respect to which Secured Party's subordinated lien applies shall be (i) all merchandise, inventory and goods and all additions, substitutions and replacements thereof, wherever located, together with all goods, supplies, incidentals, packaging materials, labels, materials and any other items used or usable in manufacturing, processing, packaging or shipping same, in all stages of production, and all products and proceeds of whatever sort, including specifically all "inventory" as such term is defined in the Code, now or hereafter owned by Debtor; (ii) all machinery and equipment, now or hereafter owned by Debtor, including, but not limited to, all machinery, equipment, furnishings, movable trade fixtures and vehicles now or hereafter owned by Debtor and all additions, substitutions and replacements of any of the foregoing, wherever located, together with all attachments, components, spare and replacement parts, related computer software, maintenance and repair supplies and manuals, instructional manuals, warranties, and equipment and accessories installed thereon or affixed thereto; (iii) all accounts receivable, contract rights and other customer obligations for the payment of money arising out of the Debtor's sale of goods or rendering of services, now existing or hereafter arising; (iv) all trademarks, copyrights, patents, contract rights and all general. intangible assets of Debtor now or hereafter existing; and (v) all proceeds and products of the foregoing, except such assets of the Debtor as are described on Exhibit "A". Debtor's facility at which the Collateral is located is: - ------------------------------ "B-1" EX-10.19 29 v72115orex10-19.txt EXHIBIT 10.19 1 EXHIBIT 10.19 SUBORDINATION AGREEMENT DATED: February 25, 2000 ------------------------ TO: Transcap Trade Finance 900 N. Skokie Blvd. Northbrook, IL 60062 Gentlemen: To induce you to grant financial assistance to BAY AREA MULTIMEDIA, INC., a California corporation ("Borrower"), under that certain Master Purchase Order Assignment Agreement of even date herewith, Borrower and Ray Musci (the "Creditor"), to whom Borrower is now indebted in the sum of One Million Dollars ($1,000,000), and who will be benefited by the granting of such financial assistance to Borrower, hereby agree with each other and with you as follows: 1. All existing indebtedness, as well as all future indebtedness, of Borrower to Creditor, including principal, interest accrued and to accrue thereon, costs and attorneys' fees recovered thereon in case Creditor shall be obligated at any time to bring suit thereon, or any part thereof, is and shall be subordinated to all existing, as well as all future indebtedness of Borrower to you, including principal, interest accrued and to accrue thereon, and costs and attorneys' fees recovered thereon, in case you are obligated at any time to bring suit thereon, all such indebtedness of Borrower to you to be at all times superior in right to all such indebtedness of Borrower to Creditor. 2. Borrower will not, at any time when such indebtedness is owing to you, make any payment upon any such indebtedness owing to Creditor, or make any distribution to Creditor in any form whatsoever, except upon your prior written consent. If any distribution is made to Creditor in any form whatsoever in violation of the terms of this agreement, Creditor shall receive the same in trust for your benefit and shall forthwith remit it to you in the form received together with such documents as may be necessary to effectively transfer the same to you. 3. At your request, Creditor shall exhibit to you any original promissory note or other original evidence of the indebtedness or any part thereof marked with a conspicuous legend which reads substantially as follows: "This instrument is subordinated to certain present or future obligations owing from the maker to Transcap Trade Finance and its assigns." 4. If Borrower shall make a general assignment for the benefit of creditors or if any proceeding or other action under any law relating to bankruptcy, insolvency, reorganization or relief of debtors or seeking appointment of a receiver, trustee, custodian or similar official for Borrower or any part of Borrower's assets shall be commenced by or against Borrower, this agreement shall remain in full force and effect and shall constitute an assignment by Creditor to you of any dividends 2 or other amounts payable to Creditor from assets of Borrower, provided, that any excess of such dividends or other amounts after payment in full of Borrower's indebtedness to you shall be paid to Creditor. 5. Nothing in this agreement shall be construed as requiring you to grant any financial assistance or as limiting or precluding you from the exercise of your own judgment and discretion as to amount and time of payment in extending accommodations to Borrower, and Creditor hereby consents to and waives notice of any extension or renewal by you of Borrower's obligations to you. 6. This agreement shall remain in full force and effect until all of Borrower's obligations to you have been fully satisfied. 7. This agreement shall extend to and bind the respective heirs, personal representatives, successors and assigns of the parties hereto, and the aforesaid covenants of Borrower and Creditor respecting subordination of the claim or claims of Creditor in your favor shall extend to, include and be enforceable by any transferee or endorsee to whom you may transfer any claim or claims to which this subordination agreement shall apply. 8. This agreement shall be governed by and construed in accordance with the laws of the State of Illinois. 9. This agreement may be signed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. BAY AREA MULTIMEDIA, INC. By: /s/ RAY MUSCI ------------------------------ Ray Musci, President /s/ RAY MUSCI ------------------------------ Ray Musci, individually Accepted and agreed to this 25 day of February, 2000. TRANSCAP TRADE FINANCE By: /s/ John A. Maselli ------------------------------ Name: John A. Maselli ------------------------------ TITLE: Senior Credit Manager Transcap Associates, Inc. G.P. ------------------------------ 2 EX-10.20 30 v72115orex10-20.txt EXHIBIT 10.20 1 EXHIBIT 10.20 GUARANTY AND PLEDGE AGREEMENT This Guaranty and Pledge Agreement (the "Agreement") is made on the 25 day of February, 2000, by RAY MUSCI (the "Guarantor") in favor of TRANSCAP TRADE FINANCE, an Illinois general partnership (the "Contractor"), as follows: BACKGROUND OF AGREEMENT: A. The Contractor and BAY AREA MULTIMEDIA, INC., a California corporation (the "Manufacturer"), have on this day entered into a Master Purchase Order Assignment Agreement (the "Assignment Agreement") under the terms of which the Manufacturer will assign customer purchase orders to the Contractor and request the Contractor to purchase the required materials to fulfill such purchase orders; the Contractor will retain the Manufacturer to manufacture, process and ship ordered goods; and fees will be paid to the Contractor and the Manufacturer for their services thereunder. B. The Guarantor has a substantial financial stake in the Manufacturer and will substantially benefit from the performance by Contractor of its obligations under the Assignment Agreement. C. The execution of this Agreement is an express condition to the consummation of the transactions contemplated by the Assignment Agreement and the Contractor is unwilling to enter into or perform in accordance with the Assignment Agreement in the absence of the execution of this Agreement. THEREFORE, in consideration of the services to be performed, the payments to be made, and the obligations to be assumed by the Contractor pursuant to the Assignment Agreement, and further as an inducement to the Contractor to enter into and perform in accordance with the Assignment Agreement, the Guarantor hereby agrees as follows: 1. DEFINITIONS. In this Agreement, the following frequently used terms are defined as set forth in this Paragraph 1: (a) Any terms used in this Agreement which are defined in the Assignment Agreement will have the same meaning herein as is ascribed to such term in the Assignment Agreement. (b) The "Contract Documents" are, collectively, the Assignment Agreement, the Security Agreement and Financing Statement between the Contractor and the Manufacturer dated this day, the Subordination Agreement between the Contractor, the Manufacturer, and the Senior Lender dated this day, and this Agreement. (c) The "Obligations" mean all of the obligations of the Manufacturer and the Guarantor pursuant to the Contract Documents. (d) The term "Guarantor" means Ray Musci. 2 (e) The "Securities" means the securities of the Manufacturer listed on Schedule I attached to this Agreement and made a part hereof; together with all other or additional securities to which the Guarantor (without additional consideration) now is, or hereafter may be, entitled by virtue of his ownership of any of the securities as a result of any corporate reorganization, merger or consolidation, stock split, stock dividend, or otherwise. (f) A "Default" means the occurrence of an event of default by the Manufacturer pursuant to or in accordance with the provisions of any of the Contract Documents or the failure of the Guarantor to perform any covenant or agreement contained in this Agreement or if any representation or warranty contained in this Agreement is found to have been untrue, incomplete or misleading in any material respect when furnished. (g) The "Collateral" means all assets, property, and interests in assets and property in which a security interest is granted and a pledge is made by the Guarantor pursuant to paragraph 3 below. 2. GUARANTY. The Guarantor unconditionally and irrevocably guaranties to Contractor the full and prompt payment and performance when due, whether at maturity or earlier (by reason of acceleration) and at all times thereafter, of all of the Obligations, and further agrees to pay all costs and expenses including, without limitation, all court costs and reasonable attorneys' fees and expenses paid or incurred in endeavoring to collect all or any part of the Obligations from, or in prosecuting any action against, Manufacturer or the Guarantor. 3. PLEDGE OF SECURITIES. In addition, to secure the payment and performance of the Obligations, the Guarantor hereby grants to Contractor a security interest in and hereby pledges and assigns to Contractor the Securities, with stock powers attached thereto all duly endorsed in blank, herewith delivered to Contractor, and any and all dividends, distributions and other proceeds thereof. 4. TERMS AND CONDITIONS. (a) Subject to the provisions of the Contract Documents, Contractor shall have the exclusive right to determine the application of payments and credits, if any, received by Contractor from the undersigned, the Manufacturer, the Senior Lender, and any Customer. (b) Contractor is authorized, without notice or demand, and without affecting the liability of the Guarantor, from time to time to (i) renew, extend, accelerate or otherwise change the time for payment or performance of; or other terms relating to, the Obligations or any of them, or otherwise modify, amend or change the terms of the Contract Documents or any of them, or any other agreement, document or instrument now or hereafter executed by the Manufacturer and delivered to Contractor; (ii) accept partial payments on or performance of the Obligations; (iii) take and hold security or collateral for the undersigned's Obligations under this Agreement, or any other guaranties of, or support or security agreement relating to, the Obligations and exchange, enforce, waive and release any such security or collateral; (iv) apply such security or collateral and direct the order or manner of sale as in its sole discretion it may determine; and (v) settle, release, compromise, collect or otherwise liquidate the Obligations and any security or collateral in any manner, without affecting or impairing the Obligations of the undersigned. 2 3 (c) At any time after a Default, Contractor may, at its discretion, upon notice to the Guarantor and regardless of the acceptance of any security or collateral for the payment, appropriate and apply toward the payment and satisfaction of the Obligations (i) any indebtedness due or to become due from Contractor to the Guarantor; and (ii) any monies, credits or other property belonging to the Guarantor, at any time held by Contractor on deposit or otherwise. (d) Contractor shall not be required to take any steps to preserve any rights against prior parties (if any) to or in any of the Collateral or Obligations. (e) Contractor may, but shall not be obligated to, and the undersigned designates Contractor as attorney-in-fact to, contest, pay and/or discharge all liens, encumbrances, taxes or assessments on, or claims, actions or demands against any of the Collateral upon notice to, but without the consent of, the undersigned and to take all actions and proceedings in their name or in the name of the Manufacturer or of any other appropriate person to remove or contest such liens, encumbrances, claims, actions, demands, taxes or assessments by litigation or otherwise. The undersigned agrees to pay on demand all costs, attorneys' fees, expenses, and all other sums advanced or paid by Contractor pursuant to this paragraph 4(e). (f) Contractor may, at its discretion, file one or more financing statements, and in that respect to serve as the attorney-in-fact for the undersigned for the purpose of executing such financing statements under the Uniform Commercial Code, naming the Guarantor as debtor and Contractor as secured party, and describing the types or items of Collateral. Contractor may further serve as the attorney-in-fact for the Guarantor for the purpose of executing any additional notices, affidavits or other documents as Contractor may deem necessary to protect its security interest. The Guarantor agrees to pay on demand the amount of any and all filing fees and expenses which Contractor deems necessary to incur to protect its interest in the Collateral. (g) Contractor shall exercise reasonable care in the custody and preservation of the Collateral to the extent required by applicable statute, and shall be deemed to have exercised reasonable care if it takes such action for that purpose as the undersigned shall reasonably request in writing; but under no circumstances shall any omission to comply with any such request of itself be deemed a failure to exercise reasonable care. The undersigned agrees to pay on demand any cost or expense, including without limitation, attorneys' fees and costs incurred by Contractor in the reasonable preservation of the Collateral. (h) The Guarantor consents and agrees that Contractor shall be under no obligation to marshal/ any assets against, or in payment of, any or all of the Obligations. Guarantor further agrees that to the extent that the Manufacturer makes a payment(s) to Contractor, which payment(s) are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such payment or repayment, the obligation intended to be satisfied shall be renewed and continued in full force and effect as if said payment had not been made, and the Guarantor shall, upon demand by Contractor, immediately satisfy such obligation in full in accordance with the terms of this Agreement. The Guarantor further agrees that any and all claims of the Guarantor against the Manufacturer or against its properties, arising by 3 4 reason of any loan, advance, investment or other payment by the undersigned to Contractor shall be subordinate and subject in right of payment to the prior payment, in full, of all sums due pursuant to the Obligations. (i) The Guarantor assumes responsibility for keeping himself, herself or itself informed of the financial condition of the Manufacturer and of all other circumstances bearing upon the risk of Default. Contractor shall have no duty to advise the Guarantor of information known to Contractor regarding such condition or circumstances. (j) No delay on the part of Contractor in the exercise of any right or remedy shall operate as a waiver or constitute a discharge any of the Guarantor's obligations under this Agreement, and no single or partial exercise by Contractor of any right or remedy shall preclude the further exercise to any extent; nor shall any modification or waiver of any of the provisions of this Agreement be binding upon Contractor except as expressly set forth in a writing duly signed and delivered by an authorized officer of Contractor. Contractor's failure at any time to require strict performance by the Manufacturer or any other party of any of the provisions, warranties, terms and conditions contained in the Contract Documents shall not discharge any of the Guarantor's obligations under this Agreement, nor shall it waive, affect or diminish any right of the Contractor at any time to demand strict performance and such right shall not be deemed to have been waived by any act or knowledge of Contractor unless such waiver is contained in an instrument in waiting, signed by an officer of Contractor specifying such waiver. No waiver by Contractor of any default shall operate as a waiver of either any other default or the same default on a future occasion, and no action or inaction by Contractor including, without limitation, Contractor's failure to take any steps to preserve its rights in the Collateral, shall in any way affect or impair Contractor's rights or the obligations of the Guarantor under this Agreement. The Guarantor agrees that his obligations under this Agreement will not be discharged except by complete performance of all of the Obligations. Any determination by a court of competent jurisdiction of the sums owing by the Manufacturer to Contractor shall be conclusive and binding on the Guarantor irrespective of whether the Guarantor was a party to the suit or action in which such determination was made. 5. WARRANTIES AND REPRESENTATIONS. The Guarantor hereby represents and warrants to the Contractor that: (a) The execution, delivery, and performance by the Guarantor of this Agreement will not violate any provision of law, any order of any court or other agency of government, or any agreement or other instrument to which the Guarantor is a party or by which the Guarantor is bound or be in conflict with, result in a breach of or constitute (with due notice or lapse of time, or both) a default under any such agreement or other instrument, or result in the creation or imposition of any lien, charge, or encumbrance of any nature whatsoever upon any of the property or assets of the Guarantor, except as contemplated by the provisions of this Agreement; (b) This Agreement constitutes the legal, valid and binding obligation of the Guarantor and is enforceable against the Guarantor in accordance with the terms hereof; 4 5 (c) As to such of the Collateral deposited with the Contractor on the date hereof (i) the Guarantor is the legal and beneficial owner of the Securities; (ii) the Securities are validly issued, fully paid and non-assessable, and represent the percent of issued and outstanding shares of stock of (or other interest in) the Manufacturer as set forth in Schedule I; (iii) the securities transfer forms attached to the Certificates representing such Collateral have been duly executed and delivered by the Guarantor to Contractor; and (iv) none of the Collateral is subject to any security interest, pledge, lien or other encumbrance or adverse claim of any nature whatsoever. 6. VOTING RIGHTS. Unless and until a Default hereunder shall have occurred, the Guarantor shall be entitled to exercise all voting powers pertaining to the Securities owned by the Guarantor for any purposes not inconsistent with, or in violation of, the provisions of this Agreement in all corporate matters. 7. DEFAULT. (a) Upon and during the continuance of any Default, Contractor may, at its sole election: (i) proceed directly and at once, without notice, against the Guarantor to collect and recover the full amount or any portion of the Obligations, without first proceeding against the Manufacturer or any collateral or any other party or any other person, firm or corporation; (ii) with or without notice, transfer to or register in the name of itself or its nominee any of the Securities, and whether or not so transferred or registered, receive the income and dividends, including stock dividends and rights to subscribe, and hold the same as a part of the Collateral to secure the performance and payment of the Obligations, and/or apply the same as provided in this Agreement; (iii) exchange any of the Securities for other property upon the reorganization, recapitalization, or other readjustment of the Manufacturer, and (iv) vote the Securities and exercise or cause its nominee to exercise all or any powers with the same force and effect as an absolute owner. All of the above rights and powers may be exercised by Contractor without liability, except the obligation to account for property actually received. (b) In addition to any other rights given by law and under this Agreement, Contractor shall have the rights and remedies with respect to the Collateral of a secured party under the Illinois Uniform Commercial Code (whether or not that Code is in effect in the jurisdiction where the rights and remedies are asserted) all of which remedies shall be cumulative, and none exclusive, to the extent permitted by law. Contractor may sell or cause to be sold, in one or more sales or parcels, at such price or prices as Contractor may deem best, and for cash or on credit or for future delivery, without assumption of any credit risk, all or any of the Collateral, at public or private sale, without demand of performance but with notice to the undersigned, and the purchaser of any or all of the Collateral so sold shall then hold the same absolutely, free from any claim or right of any kind including (but not limited to) any equity of redemption of the Guarantor. Any requirements of reasonable notice shall be met if such notice is mailed, postage prepaid, to the Guarantor at the address set forth below at least ten (10) days before the time of the sale or disposition. Any other requirement of notice, demand or advertisement for sale is waived. Contractor may, in its own name, or in the name of its designee, buy at any public or, if permitted by law, any private sale, and, in lieu of the actual payment of the purchase price, Contractor may set off the amount of such price against the Guarantor's obligations hereunder. The undersigned will pay to Contractor all expenses (including attorney's fees) of, or incident to, the enforcement of any of the provisions of this Agreement. 5 6 (c) Any right to set-off exercised by Contractor shall be deemed to have been exercised immediately on the occurrence of a Default, even though such set-off is made or entered on the books of Contractor at any subsequent time. (d) In view of the fact that federal and state securities laws may impose certain restrictions on the method by which a sale of the Securities may be effected, it is agreed that in the event of a Default, Contractor may from time to time attempt to sell all or any part of the Collateral by means of a private placement, restricting the bidders and prospective purchasers to those who will represent and agree that they are purchasing for investment only and not for distribution. The undersigned agrees that acceptance by Contractor of the highest offer after soliciting offers from two or more potential buyers would be commercially reasonable. (e) Contractor, at any time and at its option, may apply all or any net cash receipts from the sale of Collateral to the payment of the Obligations, applying or reapplying, or distributing or allocating the same as it shall elect, whether or not then due. In case of any sale by Contractor of any of the Collateral on credit or for future delivery, the property sold may be retained by Contractor until the selling price is paid by the purchaser, but Contractor shall incur no liability in case of failure of the purchaser to take and pay for the property so sold. In case of any such failure, the property so sold may be again similarly sold. 8. INDEMNIFICATION. The Guarantor will at all times, now and hereafter, indemnify and hold Contractor harmless from and against all loss or damage arising in connection with this Agreement and against all claims, liability, demands, actions or suits, and all liabilities, payments, costs, charges and expenses including, but not limited to, attorneys' fees and costs incurred by Contractor on account of or in connection with the Agreement or the transactions or assertions of rights contemplated or permitted hereunder. 9. MISCELLANEOUS. (a) This Agreement shall be binding upon the undersigned and upon the heirs, executors, successors and assigns of the undersigned and shall inure to the benefit of Contractor's successors and assigns; all references to the Manufacturer and to the undersigned shall be deemed to include their respective successors, assigns, participants, receivers or trustees (as the case may be). (b) This Agreement embodies the entire understanding of the parties pertaining to the subject matter hereof, and shall constitute a continuing agreement applicable to future as well as existing transactions between the Contractor and the Manufacturer. (c) THIS AGREEMENT HAS BEEN DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN CHICAGO, ILLINOIS, AND SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS, AND AS PART OF THE CONSIDERATION FOR CONTRACTOR'S PERFORMANCE PURSUANT TO THE CONTRACT DOCUMENTS, THE UNDERSIGNED CONSENTS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN THE STATE OF ILLINOIS, AND FURTHER CONSENT THAT ALL SUCH SERVICE OF PROCESS BE MADE BY CERTIFIED OR 6 7 REGISTERED MAIL DIRECTED TO THE UNDERSIGNED AT THE ADDRESS STATED HEREIN AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED TWO (2) DAYS AFTER THE SAME SHALL HAVE BEEN POSTED. THE UNDERSIGNED FURTHER CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE COURT. (d) The headings used in this Agreement are for the convenience of the reader only; such headings constitute no part whatsoever of the Agreement between the parties. (e) No invalidity, irregularity or unenforceability of the Obligations (or any of them) hereby secured shall affect, impair or be a defense to any provision contained in this Agreement. If any term, condition or provision of this Agreement is determined to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other term, condition or provision of this Agreement. (f) If this Agreement shall differ or conflict in terms with any of the Contract Documents, the Agreement which gives Contractor the greater right, as determined by Contractor, shall prevail. GUARANTOR: Ray Musci /s/ RAY MUSCI -------------------------------- Address: 333 W Santa Clara St. Suite 930 San Jose, CA 95113 7 8 SCHEDULE I SECURITIES OF THE MANUFACTURER EX-10.21 31 v72115orex10-21.txt EXHIBIT 10.21 1 EXHIBIT 10.21 [COMERICA LOGO] MASTER REVOLVING NOTE Variable Rate-Demand-Obligatory Advances (Business and Commercial Loans Only) - -------------------------------------------------------------------------------- AMOUNT NOTE DATE MATURITY DATE TAX IDENTIFICATION # $1,000,000.00 November 13, 2000 ON DEMAND 77-0524421 - -------------------------------------------------------------------------------- For Value Received, the undersigned promise(s) to pay ON DEMAND to the order of Comerica Bank-California ("Bank"), at any office of the Bank in the State of California, One Million and no/100 Dollars (U.S.) (or that portion of it advanced by the Bank and not repaid as later provided) with interest until demand or an Event of Default, as later defined, at a per annum rate equal to the Bank's base rate from time to time in effect plus 0.000% per annum and after that at a rate equal to the rate of interest otherwise prevailing under this Note plus 3% per annum (but in no event in excess of the maximum rate permitted by law). The Bank's "base rate" is that annual rate of interest so designated by the Bank and which is changed by the Bank from time to time. Interest rate changes will be effective for interest computation purposes as and when the Bank's base rate changes. Interest shall be calculated on the basis of a 360-day year for the actual number of days the principal is outstanding. Unless sooner demanded, accrued interest on this Note shall be payable on the 13th day of each month commencing December 13, 2000. If the frequency of interest payments is not otherwise specified, accrued interest on this Note shall be payable monthly on the first day of each month, unless sooner demanded. If any payment of principal or Interest under this Note shall be payable on a day other than a day on which the Bank is open for business, this payment shall be extended to the next succeeding business day and interest shall be payable at the rate specified in this Note during this extension. A late payment charge equal to 5% of each late payment may be charged on any payment not received by the Bank within 10 calendar days after the payment due date, but acceptance of payment of this charge shall not waive any Default under this Note. The principal amount payable under this Note shall be the sum of all advances made by the Bank to or at the request of the undersigned, less principal payments actually received in cash by the Bank. The books and records of the Bank shall be the best evidence of the principal amount and the unpaid interest amount owing at any time under this Note and shall be conclusive absent manifest error. No interest shall accrue under this Note until the date of the first advance made by the Bank; after that interest on all advances shall accrue and be computed on the principal balance outstanding from time to time under this Note until the same is paid in full. This note and any other indebtedness and liabilities of any kind of the undersigned (or any of them) to the Bank, and any and all modifications, renewals or extensions of it, whether joint or several, contingent or absolute, now existing or later arising, and however evidenced (collectively "Indebtedness") are secured by and the Bank is granted a security interest in all items deposited in any account of any of the undersigned with the Bank and by all proceeds of these items (cash or otherwise), all account balances of any of the undersigned from time to time with the Bank, by all property of any of the undersigned from time to time in the possession of the Bank and by any other collateral, rights and properties described in each and every deed of trust, mortgage, security agreement, pledge, assignment and other security or collateral agreement which has been, or will at any time(s) later be, executed by any (or all) of the undersigned to or for the benefit of the Bank (collectively "Collateral"). Notwithstanding the above, (i) to the extent that any portion of the indebtedness is a consumer loan, that portion shall not be secured by any deed of trust or mortgage on or other security interest in any of the undersigned's principal dwelling or any of the undersigned's real property which is not a purchase money security interest as to that portion, unless expressly provided to the contrary in another place, or (ii) if the undersigned (or any of them) has(have) given or give(s) Bank a deed of trust or mortgage covering real property, that deed of trust or mortgage shall not secure this Note or any other indebtedness of the undersigned (or any of them), unless expressly provided to the contrary in another place. If the undersigned (or any of them) or any guarantor under a guaranty of all or part of the indebtedness ("guarantor") (i) fail(s) to pay any of the Indebtedness when due, by maturity, acceleration or otherwise, or fail(s) to pay any Indebtedness owing on a demand basis upon demand; or (ii) fail(s) to comply with any of the terms or provisions of any agreement between the undersigned (or any of them) or any such guarantor and the Bank; or (iii) become(s) insolvent or the subject of a voluntary or involuntary proceeding in bankruptcy, or a reorganization, arrangement or creditor composition proceeding, (if a business entity) cease(s) doing business as a going concern, (if a natural person) die(s) or become(s) incompetent, (if a partnership) dissolve(s) or any general partner of it dies, becomes incompetent or becomes the subject of a bankruptcy proceeding or (if a corporation or a limited liability company) is the subject of a dissolution, merger or consolidation; or (a) if any warranty or representation made by any of the undersigned or any guarantor in connection with this Note or any of the Indebtedness shall be discovered to be untrue or incomplete; or (b) If there is any termination, notice of termination, or breach of any guaranty, pledge, collateral assignment or subordination agreement relating to all or any part of the Indebtedness; or (c) if there is any failure by any of the undersigned or any guarantor to pay when due any of its indebtedness (other than to the Bank) or in the observance or performance of any term, covenant or condition in any document evidencing, securing or relating to such Indebtedness; or (d) if the Bank deems itself insecure believing that the prospect of payment of this Note or any of the Indebtedness is impaired or shall fear deterioration, removal or waste of any of the Collateral; or (e) if there is filed or issued a levy or writ of attachment or garnishment or other like judicial process upon the undersigned (or any of them) or any guarantor or any of the Collateral, including without limit, any accounts of the undersigned (or any of them) or any guarantor with the Bank, then the Bank, upon the occurrence of any of these events (each a "Default"), may at its option and without prior notice to the undersigned (or any of them), declare any or all of the indebtedness to be immediately due and payable (notwithstanding any provisions contained in the evidence of it to the contrary), cease advancing money or extending credit to or for the benefit of the undersigned under this Note or any other agreement between the undersigned and Bank, terminate this Note as to any future liability or obligation of Bank, but without affecting Bank's rights and security interests in any Collateral and the indebtedness of the undersigned to Bank, sell or liquidate all or any portion of the Collateral, set off against the Indebtedness any amounts owing by the Bank to the undersigned (or any of them), charge interest at the default rate provided in the document evidencing the relevant indebtedness and exercise any one or more of the rights and remedies granted to the Bank by any agreement with the undersigned (or any of them) or given to it under applicable law. In addition, if this Note is secured by a deed of trust or mortgage covering real property, then the trustor or mortgagor shall not mortgage or pledge the mortgaged premises as security for any other indebtedness or obligations. This Note, together with all other indebtedness secured by said deed of trust or mortgage, shall become due and payable immediately, without notice, at the option of the Bank, (a) if said trustor or mortgagor shall mortgage or pledge the mortgaged premises for any other Indebtedness or obligations or shall convey, assign or transfer the mortgaged premises by deed, installment sale contract or other instrument, or (b) if the title to the mortgaged premises shall become vested in any other person or party in any manner whatsoever, or (c) if there is any disposition (through one or more transactions) of legal or beneficial title to a controlling interest of said trustor or mortgagor. The undersigned acknowledge(s) that this Note matures upon issuance, and that the Bank, at any time, without notice, and without reason, may demand that this Note be immediately paid in full. The demand nature of this Note shall not be deemed modified by reference to a Default in this Note or in any agreement to a default by the undersigned or to the occurrence of an event of default (collectively an "Event of Default"). For purposes of this Note, to the extent there is reference to an Event of Default this reference is for the purpose of permitting the Bank to accelerate Indebtedness not on a demand basis and to receive interest at the default rate provided in the document evidencing the relevant indebtedness. It is expressly agreed that the Bank may exercise its demand rights under this Note whether or not an Event of Default has occurred. The Bank, with or without reason and without notice, may from time to time make demand for partial payments under this Note and these demands shall not preclude the Bank from demanding at any time that this Note be immediately paid in full. All payments under this note shall be in immediately available United States funds, without setoff or counterclaim. If this note is signed by two or more parties (whether by all as makers or by one or more as an accommodation party or otherwise), the obligations and undertakings under this Note shall be that of all and any two or more jointly and also of each severally. This Note shall bind the undersigned, and the undersigned's respective heirs, personal representatives, successors and assigns. 2 The undersigned waive(s) presentment, demand, protest, notice of dishonor, notice of demand or intent to demand, notice of acceleration or intent to accelerate, and all other notices and agree(s) that no extension or indulgence to the undersigned (or any of them) or release, substitution or nonenforcement of any security, or release or substitution of any of the undersigned, any guarantor or any other party, whether with or without notice, shall affect the obligations of any of the undersigned. The undersigned waive(s) all defenses or right to discharge available under Section 3-605 of the California Uniform Commercial Code and waive(s) all other suretyship defenses or right to discharge. The undersigned agree(s) that the Bank has the right to sell, assign, or grant participations, or any interest, in any or all of the Indebtedness, and that, in connection with this right, but without limiting its ability to make other disclosures to the full extent allowable, the Bank may disclose all documents and information which the Bank now or later has relating to the undersigned or the Indebtedness. The undersigned agree(s) that the Bank may provide information relating to the Note or to the undersigned to the Bank's parent, affiliates, subsidiaries and service providers. The undersigned agree(s) to reimburse the holder or owner of this Note for any and all costs and expenses (including without limit, court costs, legal expenses and reasonable attorney fees, whether inside or outside counsel is used, whether or not suit is instituted and, if suit is instituted, whether at the trial court level, appellate level, in a bankruptcy, probate or administrative proceeding or otherwise, incurred in collecting or attempting to collect this Note or incurred in any other matter or proceeding relating to this Note. The undersigned acknowledge(s) and agree(s) that there are no contrary agreements, oral or written, establishing a term of this Note and agree(s) that the terms and conditions of this Note may not be amended, waived or modified except in a writing signed by an officer of the Bank expressly stating that the writing constitutes an amendment, waiver or modification of the terms of this Note. As used in this Note, the word "undersigned" means, individually and collectively, each maker, accommodation party, indorser and other party signing this Note in a similar capacity. If any provision of this Note is unenforceable in whole or part for any reason, the remaining provisions shall continue to be effective. THIS NOTE IS MADE IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. The maximum interest rate shall not exceed the highest applicable usury ceiling. THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS. Bay Area Multimedia, Inc. By: /s/ RAYMOND MUSCI Its: President --------------------------------- ------------------------------ SIGNATURE OF TITLE By: Its: --------------------------------- ------------------------------ SIGNATURE OF TITLE By: Its: --------------------------------- ------------------------------ SIGNATURE OF TITLE By: Its: --------------------------------- ------------------------------ SIGNATURE OF TITLE 333 W. Santa Clara St., Ste 930 San Jose CA USA 95113 - -------------------------------------------------------------------------------- STREET ADDRESS CITY STATE COUNTRY ZIP CODE - -------------------------------------------------------------------------------- FOR BANK USE ONLY CCAR # - -------------------------------------------------------------------------------- LOAN OFFICER INITIALS LOAN GROUP NAME OBLIGOR(S) NAME SM San Jose Metro Bay Area Multimedia, Inc. - -------------------------------------------------------------------------------- LOAN OFFICER I.D. NO. LOAN GROUP NO. OBLIGOR # NOTE # AMOUNT 48134 95760 $1,000,000.00 - -------------------------------------------------------------------------------- EX-10.22 32 v72115orex10-22.txt EXHIBIT 10.22 1 EXHIBIT 10.22 [COMERICA LOGO] SECURITY AGREEMENT ================================================================================ As of November 13, 2000, for value received, the undersigned ("Debtor") grants to Comerica Bank-California ("Bank"), a California banking corporation, a continuing security interest in the Collateral (as defined below) to secure payment when due, whether by stated maturity, demand acceleration or otherwise, of all existing and future indebtedness ("Indebtedness") to the Bank of Bay Area Multimedia, Inc. ("Borrower") and/or Debtor. Indebtedness includes without limit any and all obligations or liabilities of the Borrower and/or Debtor to the Bank, whether absolute or contingent, direct or indirect, voluntary or involuntary, liquidated or unliquidated, joint or several, known or unknown; any and all obligations or liabilities for which the Borrower and/or Debtor would otherwise be liable to the Bank were it not for the invalidity or unenforceability of them by reason of any bankruptcy, insolvency or other law, or for any other reason; any and all amendments, modifications, renewals and/or extensions of any of the above; all costs incurred by Bank in establishing, determining, continuing, or defending the validity or priority of its security interest, or in pursuing its rights and remedies under this Agreement or under any other agreement between Bank and Borrower and/or Debtor or in connection with any proceeding involving Bank as a result of any financial accommodation to Borrower and/or Debtor; and all other costs of collecting Indebtedness, including without limit attorney fees. Any reference in this Agreement to attorney fees shall be deemed a reference to reasonable fees, costs, and expenses of both in-house and outside counsel and paralegals, whether or not a suit or action is instituted and to court costs if a suit or action is instituted, and whether attorney fees or court costs are incurred at the trial court level, on appeal, in a bankruptcy, administrative or probate proceeding or otherwise. 1. Collateral shall mean all of the following property Debtor now or later owns or has an interest in, wherever located: - specific items listed below and/or on attached Schedule A, if any, is/are also included in Collateral: Money Market account #8000214836 dated October 17, 2000 in the current amount of $500,000.00 in the name of Anthony Ronald Williams and any and all subsequent renewals thereof. - all goods, instruments, documents, policies and certificates of insurance, deposits, money or other property (except real property which is not a fixture) which are now or later in possession of Bank, or as to which Bank now or later controls possession by documents or otherwise, and - all additions, attachments, accessions, parts, replacements, substitutions, renewals, interest, dividends, distributions, rights of any kind (including but not limited to stock splits, stock rights, voting and preferential rights), products, and proceeds of or pertaining to the above including, without limit, cash or other property which were proceeds and are recovered by a bankruptcy trustee or otherwise as a preferential transfer by Debtor. 2. Warranties, Covenants and Agreements. Debtor warrants, covenants and agrees as follows: 2.1 Debtor shall furnish to Bank, in form and at intervals as Bank may request, any information Bank may reasonably request and allow Bank to examine, inspect, and copy any of Debtor's books and records. Debtor shall, at the request of Bank, mark its records and the Collateral to clearly indicate the security interest of Bank under this Agreement. 2.2 At the time any Collateral becomes, or is represented to be, subject to a security interest in favor of Bank, Debtor shall be deemed to have warranted that (a) Debtor is the lawful owner of the Collateral and has the right and authority to subject it to a security interest granted to Bank; (b) none of the Collateral is subject to any security interest other than that in favor of Bank and there are no financing statements on file, other than in favor of Bank; and (c) Debtor acquired its rights in the Collateral in the ordinary course of its business. 2.3 Debtor will keep the Collateral free at all times from all claims, liens, security interests and encumbrances other than those in favor of Bank. Debtor will not, without the prior written consent of Bank, sell, transfer or lease, or permit to be sold, transferred or leased, any or all of the Collateral, except (where Inventory is pledged as Collateral) for Inventory in the ordinary course of its business and will not return any Inventory to its supplier. Bank or its representatives may at all reasonable times inspect the Collateral and may enter upon all premises where the Collateral is kept or might be located. 2.4 Debtor will do all acts and will execute or cause to be executed all writings requested by Bank to establish, maintain and continue a perfected and first security interest of Bank in the Collateral. Debtor agrees that Bank has no obligation to acquire or perfect any lien on or security interest in any asset(s), whether realty or personalty, to secure payment of the Indebtedness, and Debtor is not relying upon assets in which the Bank may have a lien or security interest for payment of the Indebtedness. 2.5 Debtor will pay within the time that they can be paid without interest or penalty all taxes, assessments and similar charges which at any time are or may become a lien, charge or encumbrance upon any Collateral, except to the extent contested in good faith and bonded in a manner satisfactory to Bank. If Debtor fails to pay any of these taxes, assessments, or other charges in the time provided above, Bank has the option (but not the obligation) to do so and Debtor agrees to repay all amounts so expended by Bank immediately upon demand, together with interest at the highest lawful default rate which could be charged by Bank on any Indebtedness. 2.6 Debtor will keep the Collateral in good condition and will protect it from loss, damage, or deterioration from any cause. Debtor has and will maintain at all times (a) with respect to the Collateral, insurance under an "all risk" policy against fire and other risks customarily insured against, and (b) public liability insurance and other insurance as may be required by law or reasonably required by Bank, all of which insurance shall be in amount, form and content, and written by companies as may be satisfactory to Bank, containing a lender's loss payable endorsement acceptable to Bank. Debtor will deliver to Bank immediately upon demand evidence satisfactory to Bank that the required insurance has been procured. If Debtor fails to maintain satisfactory insurance, Bank has the option (but not the obligation) to do so and Debtor agrees to repay all amounts so expended by Bank immediately upon demand, together with interest at the highest lawful default rate which could be charged by Bank on any Indebtedness. 2.7 If Accounts Receivable are pledged as Collateral under this Agreement, then on each occasion on which Debtor evidences to Bank the account balances on and the nature and extent of the Accounts Receivable, Debtor shall be deemed to have warranted that except as otherwise indicated (a) each of those Account Receivable is valid and enforceable without performance by Debtor of any act; (b) each of those account balances are in fact owing, (c) there are no setoffs, recoupments, credits, contra accounts, counterclaims or defenses against any of those Accounts Receivable, (d) as to any Accounts Receivable represented by a note, trade acceptance, draft or other instrument or by any chattel paper or document, the same have been endorsed and/or delivered by Debtor to Bank, (e) Debtor has not received with respect to any Account Receivable, any notice of the death of the related account debtor, nor of the distribution, liquidation, termination of existence, insolvency, business failure, appointment of a receiver for, assignment for the benefit of creditors by, or filing of a petition in bankruptcy by or against, the account debtor, and (f) as to each Account Receivable, the account debtor is not an affiliate of Debtor, the United States of America or any department, agency or instrumentality of it, or a citizen or resident of any jurisdiction outside of the United States. Debtor will do all acts and will execute all writings requested by Bank to perform, enforce performance of, and collect all Accounts Receivable. Debtor shall neither make nor permit any modification, compromise or substitution for any Account Receivable without the prior written consent of Bank. Debtor shall, at Bank's request, arrange for verification of Accounts Receivable directly with account debtors or by any other methods acceptable to Bank. 2.8 Debtor at all times shall be in strict compliance with all applicable laws, including without limit any laws, ordinances, directives, orders, statutes, or regulations an object of which is to regulate or improve health, safety, or the environment ("Environmental Laws"). 2 2.9 If marketable securities are pledged as Collateral under this Agreement and if at any time the outstanding principal balance of the Indebtedness exceeds N/A of the value of the Collateral, as such value is determined from time to time by Bank (herein called the "Margin Requirement"), Debtor shall immediately pay or cause to be paid to Bank an amount sufficient to reduce the Indebtedness such that the remaining principal outstanding thereunder is equal to or less than the Margin Requirement. Bank shall apply payments made under this paragraph in payment of the Indebtedness in such order and manner of application as Bank in its sole discretion elects. In the alternative, Debtor may provide or cause to be provided to Bank additional collateral in the form of cash or other property acceptable to Bank and with a value, as determined by Bank, that when added to the Collateral will constitute compliance with the Margin Requirement. 2.10 If Bank, acting in its sole discretion, redelivers Collateral to Debtor or Debtor's designee for the purpose of (a) the ultimate sale or exchange thereof; or (b) presentation, collection, renewal, or registration of transfer thereof; or (c) loading, unloading, storing, shipping, transshipping, manufacturing, processing or otherwise dealing with it preliminary to sale or exchange; such redelivery shall be in trust for the benefit of Bank and shall not constitute a release of Bank's security interest in it or in the proceeds or products of it unless Bank specifically so agrees in writing. If Debtor requests any such redelivery, Debtor will deliver with such request a duly executed financing statement in form and substance satisfactory to Bank. Any proceeds of Collateral coming into Debtor's possession as a result of any such redelivery shall be held in trust for Bank and immediately delivered to Bank for application on the Indebtedness. Bank may (in its sole discretion) delivery any or all of the Collateral to Debtor, and such delivery by Bank shall discharge Bank from all liability or responsibility for such Collateral. Bank, at its option, may require delivery of any Collateral to Bank at any time with such endorsements or assignments of the Collateral as Bank may request. 2.11 At any time and without notice, Bank may, as to Collateral other than Equipment, Fixtures or Inventory, (a) cause any or all of such Collateral to be transferred to its name or to the name of its nominees; (b) receive or collect by legal proceedings or otherwise all dividends, interest, principal payments and other sums and all other distributions at any time payable or receivable on account of such Collateral, and hold the same as Collateral, or apply the same to the Indebtedness, the manner and distribution of the application to be in the sole discretion of Bank; (c) enter into any extension, subordination, reorganization, deposit, merger or consolidation agreement or any other agreement relating to or affecting such Collateral, and deposit or surrender control of such Collateral, and accept other property in exchange for such Collateral and hold or apply the property or money so received pursuant to this Agreement. 2.12 Bank may assign any of the Indebtedness and deliver any or all of the Collateral to its assignee, who then shall have with respect to Collateral so delivered all the rights and powers of Bank under this Agreement, and after that Bank shall be fully discharged from all liability and responsibility with respect to Collateral so delivered. 2.13 Debtor delivers this Agreement based solely on Debtor's independent investigation of (or decision not to investigate) the financial condition of Borrower and is not relying on any information furnished by Bank. Debtor assumes full responsibility for obtaining any further information concerning the Borrower's financial condition, the status of the Indebtedness or any other matter which the undersigned may deem necessary or appropriate now or later. Debtor waives any duty on the part of Bank, and agrees that Debtor is not relying upon nor expecting Bank to disclose to Debtor any fact now or later known by Bank, whether relating to the operations or condition of Borrower, the existence, liabilities or financial condition of any guarantor of the Indebtedness, the occurrence of any default with respect to the Indebtedness, or otherwise, notwithstanding any effect such fact may have upon Debtor's risk or Debtor's rights against Borrower. Debtor knowingly accepts the full range of risk encompassed in this Agreement, which risk includes without limit the possibility that Borrower may incur Indebtedness to Bank after the financial condition of Borrower, or Borrower's ability to pay debts as they mature, has deteriorated. 2.14 Debtor shall defend, indemnify and hold harmless Bank, its employees, agents, shareholders, affiliates, officers, and directors from and against any and all claims, damages, fines, expenses, liabilities or causes of action of whatever kind, including without limit consultant fees, legal expenses, and attorney fees, suffered by any of them as a direct or indirect result of any actual or asserted violation of any law, including, without limit, Environmental Laws, or of any remediation relating to any property required by any law, including without limit Environmental Laws. 2.15 Debtor agrees that no security or guarantee now or later held by Bank for the payment of any Indebtedness, whether from Borrower, any guarantor, or otherwise, and whether in the nature of a security interest, pledge, lien, assignment, setoff, suretyship, guaranty, indemnity, insurance or otherwise, shall affect in any manner the unconditional pledge of Debtor under this Agreement, and Bank, at its sole discretion, without notice to the undersigned, may release, exchange, modify, enforce and otherwise deal with any security or guaranty without affecting in any manner the unconditional pledge of Debtor under this Agreement, Debtor acknowledges and agrees that Bank has no obligation to acquire or perfect any lien on or security interest in any assets, whether realty or personalty, or to obtain any guaranty to secure payment of the Indebtedness, and Debtor is not relying upon any guaranty which Bank has or may have or assets in which Bank has or may have a lien or security interest for payment of the Indebtedness. 2.16 Debtor may terminate their pledge under this Agreement as to future Indebtedness (except as provided below) by (and only by) delivering written notice of termination to an officer of Bank and receiving from an officer of Bank written acknowledgment of delivery; provided, the termination shall not be effective until the opening of business on the fifth (5th) day following written acknowledgement of delivery. Any termination shall not affect in any way Bank's rights under this Agreement as to any Indebtedness existing at the effective date of termination or any Indebtedness created after that pursuant to any commitment or agreement of Bank or pursuant to any Borrower loan with Bank existing at the effective date of termination (whether advances or readvances by Bank are optional or obligatory), or any modifications, extensions or renewals of any of this Indebtedness, whether in whole or in part, and as to all of this Indebtedness and modifications, extensions or renewals of it, this Agreement shall continue effective until the same shall have been fully paid. Debtor shall indemnify Bank against all claims, damages, costs and expenses, including without limit attorney fees, incurred by Bank in connection with any suit, claim or action against Bank arising out of any modification or termination of a Borrower loan or any refusal by Bank to extend additional credit in connection with the termination of this Agreement. 2.17 Debtor agrees to reimburse Bank upon demand for all costs and expenses (including, without limit, attorneys fees) incurred in enforcing any of the duties or obligations of Debtor under this Agreement or in establishing, determining, continuing or defending the validity or priority of Bank's security interest under this Agreement. 3. Collection of Proceeds. 3.1 Debtor agrees to collect and enforce payment of all Collateral until Bank shall direct Debtor to the contrary. Immediately upon notice to Debtor by Bank and at all times after that, Debtor agrees to fully and promptly cooperate and assist Bank in the collection and enforcement of all Collateral and to hold in trust for Bank all payments received in connection with Collateral and from the sale, lease or other disposition of any Collateral, all rights by way or suretyship or guaranty and all rights in the nature of a lien or security interest which Debtor now or later has regarding Collateral. Immediately upon and after such notice, Debtor agrees to (a) endorse to Bank and immediately deliver to Bank all payments received on Collateral or from the sale, lease or other disposition of any Collateral or arising from any other rights or interests of Debtor in the Collateral, in the form received by Debtor without commingling with any other funds, and (b) immediately deliver to Bank all property in Debtor's possession or later coming into Debtor's possession through enforcement of Debtor's rights or interests in the Collateral. Debtor irrevocably authorizes Bank or any Bank employee or agent to endorse the name of Debtor upon any checks or other items which are received in payment for any Collateral, and to do any and all things necessary in order to reduce these items to money. Bank shall have no duty as to the collection or protection of Collateral or the proceeds of it, nor as to the preservation of any related rights, beyond the use of reasonable care in the custody and preservation of Collateral in the possession of Bank. Debtor agrees to take all steps necessary to preserve rights against prior parties with respect to the Collateral. Nothing in this 3 Section 3.1 shall be deemed a consent by Bank to any sale, lease or other disposition of any Collateral. 3.2 If Accounts Receivable are pledged as Collateral, this Section 3.2 shall be applicable and Debtor agrees that immediately upon Bank's request (whether or not any Event of Default exists) the indebtedness shall be on a "remittance basis" as follows: Debtor shall at its sole expense establish and maintain (and Bank, at Bank's option, may establish and maintain at Debtor's expense); (a) a United States Post Office lock box (the "Lock Box"), to which Bank shall have exclusive access and control. Debtor expressly authorizes Bank, from time to time, to remove contents from the Lock Box, for disposition in accordance with this Agreement. Debtor agrees to notify all account debtors and other parties obligated to Debtor that all payments made to Debtor (other than payments by electronic funds transfer) shall be remitted, for the credit of Debtor, to the Lock Box, and Debtor shall include a like statement on all invoices; and (b) a non-interest bearing deposit account with Bank which shall be titled as designated by Bank (the "Cash Collateral Account") to which Bank shall have exclusive access and control. Debtor agrees to notify all account debtors and other parties obligated to Debtor that all payments made to Debtor by electronic funds transfer shall be remitted to the Cash Collateral Account, and Debtor, at Bank's request, shall include a like statement on all invoices. Debtor shall execute all documents and authorizations as required by Bank to establish and maintain the Lock Box and the Cash Collateral Account. 3.3 If Accounts Receivable are pledged as Collateral, this Section 3.3 shall be applicable, and all items or amounts which are remitted to the Lock Box, to the Cash Collateral Account, or otherwise delivered by or for the benefit of Debtor to Bank on account of partial or full payment of, or with respect to, any Collateral shall, at Bank's option, (i) be applied to the payment of the Indebtedness, whether then due or not, in such order or at such time of application as Bank may determine in its sole discretion, or, (ii) be deposited to the Cash Collateral Account. Debtor agrees that Bank shall not be liable for any loss or damage which Debtor may suffer as a result of Bank's processing of items or its exercise of any other rights or remedies under this Agreement, including without limitation indirect, special or consequential damages, loss of revenues or profits, or any claim, demand or action by any third party arising out of or in connection with the processing of items or the exercise of any other rights or remedies under this Agreement. Debtor agrees to indemnify and hold Bank harmless from and against all such third party claims, demands or actions, and all related expenses or liabilities, including, without limitation, attorney fees. 4. Defaults, Enforcement and Application of Proceeds 4.1 Upon the occurrence of any of the following events (each an "Event of Default"), Debtor shall be in default under this Agreement: (a) Any failure to pay the Indebtedness or any other indebtedness when due, or such portion of it as may be due, by acceleration or otherwise; or (b) Any failure or neglect to comply with, or breach of or default under, any term of this Agreement, or any other agreement or commitment between Borrower, Debtor, or any guarantor of any of the Indebtedness ("Guarantor") and Bank; or (c) Any warranty, representation, financial statement, or other information made, given or furnished to Bank by or on behalf of Borrower, Debtor, or any Guarantor shall be, or shall prove to have been, false or materially misleading when made, given, or furnished; or (d) Any loss, theft, substantial damage or destruction to or of any Collateral, or the issuance or filing of any attachment, levy, garnishment or the commencement of any proceeding in connection with any Collateral or of any other judicial process of, upon or in respect of Borrower, Debtor, any Guarantor, or any Collateral; or (e) Sale or other disposition by Borrower, Debtor, or any Guarantor of any substantial portion of its assets or property or voluntary suspension of the transaction of business by Borrower, Debtor, or any Guarantor, or death, dissolution, termination of existence, merger, consolidation, insolvency, business failure, or assignment for the benefit of creditors of or by Borrower, Debtor, or any Guarantor; or commencement of any proceedings under any state or federal bankruptcy or insolvency laws or laws for the relief of debtors by or against Borrower, Debtor, or any Guarantor; or the appointment of a receiver, trustee, court appointee, sequestrator or otherwise, for all or any part of the property of Borrower, Debtor, or any Guarantor; or (f) Bank deems the margin of Collateral insufficient or itself insecure, in good faith believing that the prospect of payment of the Indebtedness or performance of this Agreement is impaired or shall fear deterioration, removal, or waste of Collateral. 4.2 Upon the occurrence of any Event of Default, Bank may at its discretion and without prior notice to Debtor declare any or all of the Indebtedness to be immediately due and payable, and shall have and may exercise any one or more of the following rights and remedies: (a) Exercise all the rights and remedies upon default, in foreclosure and otherwise, available to secured parties under the provisions of the Uniform Commercial Code and other applicable law; (b) Institute legal proceedings to foreclose upon the lien and security interest granted by this Agreement, to recover judgment for all amounts then due and owing as Indebtedness, and to collect the same out of any Collateral or the proceeds of any sale of it; (c) Institute legal proceedings for the sale, under the judgment or decree of any court of competent jurisdiction, of any or all Collateral; and/or (d) Personally or by agents, attorneys, or appointment of a receiver, enter upon any premises where Collateral may then be located, and take possession of all or any of it and/or render it unusable; and without being responsible for loss or damage to such Collateral, hold, operate, sell, lease, or dispose of all or any Collateral at one or more public or private sales, leasings, or other dispositions, at places and times and on terms and conditions as Bank may deem fit, without any previous demand or advertisement; and except as provided in this Agreement, all notice of sale, lease or other disposition, and advertisement, and other notice or demand, any right or equity of redemption, and any obligation of a prospective purchaser or lessee to inquire as to the power and authority of Bank to sell, lease, or otherwise dispose of the Collateral or as to the application by Bank of the proceeds of sale or otherwise, which would otherwise be required by, or available to Debtor under, applicable law are expressly waived by Debtor to the fullest extent permitted. At any sale pursuant to this Section 4.2, whether under the power of sale, by virtue of judicial proceedings or otherwise, it shall not be necessary for Bank or a public officer under order of a court to have present physical or constructive possession of Collateral to be sold. The recitals contained in any conveyances and receipts made and given by Bank or the public officer to any purchaser at any sale made pursuant to this Agreement shall, to the extent permitted by applicable law, conclusively establish the truth and accuracy of the matters stated (including, without limit, as to the amounts of the principal of and interest on the Indebtedness, the accrual and nonpayment of it and advertisement and conduct of the sale); and all prerequisites to the sale shall be presumed to have been satisfied and performed. Upon any sale of any Collateral, the receipt of the officer making the sale under judicial proceedings or of Bank shall be sufficient discharge to the purchaser for the purchase money, and the purchaser shall not be obligated to see to the application of the money. Any sale of any Collateral under this Agreement shall be a perpetual bar against Debtor with respect to that Collateral. 4.3 Debtor shall at the request of Bank, notify the account debtors or obligors of Bank's security interest in the Collateral and direct payment of it to Bank. Bank may, itself, upon the occurrence of any Event of Default so notify and direct any account debtor or obligor, 4 4.4 The proceeds of any sale or other disposition of Collateral authorized by this Agreement shall be applied by Bank first upon all expenses authorized by the Uniform Commercial Code and all reasonable attorney fees and legal expenses incurred by Bank; the balance of the proceeds of the sale or other disposition shall be applied in the payment of the Indebtedness, first to interest, then to principal, then to remaining Indebtedness and the surplus, if any, shall be paid over to Debtor or to such other person(s) as may be entitled to it under applicable law. 4.5 Nothing in this Agreement is intended, nor shall it be construed, to preclude Bank from pursuing any other remedy provided by law for the collection of the Indebtedness or for the recovery of any other sum to which Bank may be entitled for the breach of this Agreement by Debtor. Nothing in this Agreement shall reduce or release in any way any rights or security interests of Bank contained in any existing agreement between Borrower, Debtor, or any Guarantor and Bank. 4.6 No waiver of default or consent to any act by Debtor shall be effective unless in writing and signed by an authorized officer of Bank. No waiver of any default or forbearance on the part of Bank in enforcing any of its rights under this Agreement shall operate as a waiver of any other default or of the same default on a future occasion or of an rights. 4.7 Debtor irrevocably appoints Bank or any agent of Bank (which appointment is coupled with an interest) the true and lawful attorney of Debtor (with full power of substitution) in the name, place and stead of, and at the expense of, Debtor: (a) to demand, receive, sue for, and give receipts or acquittances for any moneys due or to become due on any Collateral and to endorse any item representing any payment on or proceeds of the Collateral; (b) to execute and file in the name of and on behalf of Debtor all financing statements or other filings deemed necessary or desirable by Bank to evidence, perfect, or continue the security interests granted in this Agreement; and (c) to do and perform any act on behalf of Debtor permitted or required under this Agreement. 4.8 Upon the occurrence of an Event of Default, Debtor also agrees, upon request of Bank, to assemble the Collateral and make it available to Bank at any place designated by Bank which is reasonably convenient to Bank and Debtor. 5. MISCELLANEOUS. 5.1 Until Bank is advised in writing by Debtor to the contrary, all notices, requests and demands required under this Agreement or by law shall be given to, or made upon, Debtor at the first address indicated in Section 5.15 below. 5.2 Debtor will give bank not less than 90 days prior written notice of all contemplated changes in Debtor's name, chief executive office location, and/or location of any Collateral, but the giving of this notice shall not cure any Event of Default caused by this change. 5.3 Bank assumes no duty of performance or other responsibility under any contracts contained within the Collateral. 5.4 Bank has the right to sell, assign, transfer, negotiate or grant participations or any interest in, any or all of the Indebtedness and any related obligations, including without limit this Agreement. In connection with the above, but without limiting its ability to make other disclosures to the full extent allowable, Bank may disclose all documents and information which Bank now or later has relating to Debtor, the Indebtedness or this Agreement, however obtained. Debtor further agrees that Bank may provide information relating to this Agreement or relating to Debtor to the Bank's parent, affiliates, subsidiaries, and service providers. 5.5 "Intentionally Deleted." 5.6 Debtor waives any right to require the Bank to: (a) proceed against any person or property; (b) give notice of the terms, time and place of any public or private sale of personal property security held from Borrower or any other person, or otherwise comply with the provisions of Section 9-504 of the Uniform Commercial Code; or (c) pursue any other remedy in the Bank's power. Debtor waives notice of acceptance of this Agreement and presentment, demand, protest, notice of protest, dishonor, notice of dishonor, notice of default, notice of intent to accelerate or demand payment of any Indebtedness, any and all other notices to which the undersigned might otherwise be entitled, and diligence in collecting any Indebtedness, and agree(s) that the Bank may, once or any number of times, modify the terms of any Indebtedness, compromise, extend, increase, accelerate, renew or forbear to enforce payment of any or all Indebtedness, or permit Borrower to incur additional Indebtedness, all without notice to Debtor and without affecting in any manner the unconditional obligation of Debtor under this Agreement. Debtor unconditionally and irrevocably waives each and every defense and setoff of any nature which, under principles of guaranty or otherwise, would operate to impair or diminish in any way the obligation of Debtor under this Agreement, and acknowledges that such waiver is by this reference incorporated into each security agreement, collateral assignment, pledge and/or other document from Debtor now or later securing the Indebtedness, and acknowledges that as of the date of this Agreement no such defense or setoff exists. 5.7 Debtor waives any and all rights (whether by subrogation, indemnity, reimbursement, or otherwise) to recover from Borrower any amounts paid or the value of any Collateral given by Debtor pursuant to this Agreement. 5.8 In the event that applicable law shall obligate Bank to give prior notice to Debtor of any action to be taken under this Agreement, Debtor agrees that a written notice given to Debtor at least five days before the date of the act shall be reasonable notice of the act and, specifically, reasonable notification of the time and place of any public sale or of the time after which any private sale, lease, or other disposition is to be made, unless a shorter notice period is reasonable under the circumstances. A notice shall be deemed to be given under this Agreement when delivered to Debtor or when placed in an envelope addressed to Debtor and deposited, with postage prepaid, in a post office or official depository under the exclusive care and custody of the United States Postal Service or delivered to an overnight courier. The mailing shall be by overnight courier, certified, or first class mail. 5.9 Notwithstanding any prior revocation, termination, surrender, or discharge of this Agreement in whole or in part, the effectiveness of this Agreement shall automatically continue or be reinstated in the event that any payment received or credit given by Bank in respect of the Indebtedness is returned, disgorged, or rescinded under any applicable law, including, without limitation, bankruptcy or insolvency laws, in which case this Agreement, shall be enforceable against Debtor as if the returned, disgorged, or rescinded payment or credit had not been received or given by Bank, and whether or not Bank relied upon this payment or credit or changed its position as a consequence of it, in the event of continuation or reinstatement of this Agreement, Debtor agrees upon demand by Bank to execute and deliver to Bank those documents which Bank determines are appropriate to further evidence (in the public records and otherwise) this continuation or reinstatement, although the failure of Debtor to do so shall not affect in any way the reinstatement or continuation. 5.10 This Agreement and all the rights and remedies of Bank under this Agreement shall inure to the benefit of Bank's successors and assigns and to any other holder who derives from Bank title to or an interest in the Indebtedness or any portion of it, and shall bind Debtor and the heirs, legal representatives, successors, and assigns of Debtor. Nothing in this Section 5.10 is deemed a consent by Bank to any assignment by Debtor. 5.11 If there is more than one Debtor, all undertakings, warranties and covenants made by Debtor and all rights, powers and authorities given to of conferred upon Bank are made or given jointly and severally. 5.12 Except as otherwise provided in this Agreement, all terms in this Agreement have the meanings assigned to them in Division 9 (or, absent definition in Division 9, in any other Division) of the Uniform Commercial Code, as of the date of this Agreement. "Uniform Commercial Code" means the California Uniform Commercial Code; as amended. 5 5.13 No single or partial exercise, or delay in the exercise, of any right or power under this Agreement, shall preclude other or further exercise of the rights and powers under this Agreement. The unenforceability of any provision of this Agreement shall not affect the enforceability of the remainder of this Agreement. This Agreement constitutes the entire agreement of Debtor and Bank with respect to the subject matter of this Agreement. No amendment or modification of this Agreement shall be effective unless the same shall be in writing and signed by Debtor and an authorized officer of Bank. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without regard to conflict of laws principles. 5.14 To the extent that any of the Indebtedness is payable upon demand, nothing contained in this Agreement shall modify the terms and conditions of that Indebtedness nor shall anything contained in this Agreement preclude that from making deemed, without notice and with or without reason, for immediate payment of any or all of that Indebtedness at any time(s), whether or not an Event of Default has occurred. 5.15 Debtor's chief executive office is located and shall be maintained at 333 W. Santa Clara St., Ste 930 ------------------------------- STREET ADDRESS San Jose CA 95113 --------------------------------------------------------------------- CITY STATE ZIP CODE COUNTY If Collateral is located at other than the chief executive office, such Collateral is located and shall be maintained at --------------------------------------------------------------------- STREET ADDRESS --------------------------------------------------------------------- CITY STATE ZIP CODE COUNTY Collateral shall be maintained only at the locations identified in this Section 3.75. 5.16 A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement under the Uniform Commercial Code and may be filed by Bank in any filing office. 5.17 This Agreement shall be terminated only by the filing of a termination statement in accordance with the applicable provisions of the Uniform Commercial Code, but the obligations contained in Section 2.14 of this Agreement shall survive termination. 4. DEBTOR AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEABILITY OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE INDEBTEDNESS. 7. Special Provisions Applicable to this Agreement. (none, if left blank) DEBTOR: ANTHONY RONALD WILLIAMS ------------------------------------ DEBTOR NAME TITLE/PRINTED By: /s/ ANTHONY RONALD WILLIAMS ------------------------------------ SIGNATURE OF Anthony Ronald Williams Its: --------------------------------- TITLE (if applicable) By: ------------------------------------ SIGNATURE OF Its: --------------------------------- TITLE (if applicable) By: ------------------------------------ SIGNATURE OF Its: --------------------------------- TITLE (if applicable) By: ------------------------------------ SIGNATURE OF Its: --------------------------------- TITLE (if applicable) Borrower(s): Bay Area Media, Inc. EX-10.23 33 v72115orex10-23.txt EXHIBIT 10.23 1 EXHIBIT 10.23 [COMERICA BANK LOGO] November 13,2000 Bay Area Multimedia, Inc. 333 W. Santa Clara Street, Ste. 930 San Jose, CA 95113 This Letter Agreement is entered into by and between Comerica Bank-California ("Bank") and Bay Area Multimedia, Inc., a Corporation ("Borrower") as of this 13th day of November, 2000, at Bank's headquarters office at 333 West Santa Clara Street, San Jose, California 95113. Bank and Borrower agree that any loans which Bank in its sole discretion has made or may now or hereafter make to Borrower (sometimes hereinafter collectively referred to as the "Loan") shall be subject to the terms and conditions of this Letter Agreement unless otherwise agreed to in writing by Bank and Borrower. In the event there are contradictions between the provisions of this Letter Agreement and any other written agreement with the Bank, this Letter Agreement shall prevail. Loan shall be subject to the terms and conditions of this Letter Agreement, promissory note(s) executed in connection herewith and/or previously or subsequently executed, and all amendments, renewals and extensions thereof (singularly or collectively, the "Note"), and all those certain security agreements and/or such other security or other documents as Bank has required or may now or hereafter require in connection with the Loan (collectively, the "Loan Documents"). 1. Borrower shall provide to Bank the following reports: a. Quarterly company prepared financial statements within forty-five (45) days of quarter end. b. Copies of federal income tax returns of Guarantor within fifteen (15) days of filing each year. c. Personal financial statement of any Guarantor in a form satisfactory to Bank on an annual basis. d. Accounts Receivable Agings within 45 days of quarter end. e. Accounts Payable Agings within 45 days of quarter end. Please acknowledge your understanding and acceptance of these terms and conditions by signing below and returning this Letter Agreement to me. A copy has been provided for your records. Comerica Bank-California By: /s/ STEPHEN MOORE ------------------------------- Stephen Moore, Corporate Banking Officer Acknowledged and Accepted this 29 day of Nov, 2000. By: /s/ RAYMOND MUSCI ------------------------------- Bay Area Multimedia, Inc. 1 2 THE UNDERSIGNED AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS GUARANTY OR THE INDEBTEDNESS. IN WITNESS WHEREOF, the undersigned has (have) signed this Guaranty on November 13, 2000. GUARANTOR(S) ANTHONY RONALD WILLIAMS ----------------------- By: /s/ ANTHONY WILLIAMS -------------------------------- Signature of Anthony Williams WITNESS: Its: N/A --------------------------- (If Applicable) By: - ------------------------------- -------------------------------- Signature of Signature of Its: --------------------------- (If Applicable) GUARANTOR'S ADDRESS 333 West Santa Clara St., Suite 930 ------------------------------------ Street Address San Jose CA 95113 ------------------------------------ City State Zip Code BORROWER(S): Bay Area Multimedia, Inc. 4 EX-10.24 34 v72115orex10-24.txt EXHIBIT 10.24 1 EXHIBIT 10.24 [COMERICA LOGO] GUARANTY ================================================================================ The undersigned, for value received, unconditionally and absolutely guarantee(s) to Comerica Bank-California ("Bank") a California banking corporation, and to the Bank's successors and assigns, payment when due, whether by stated maturity, demand, acceleration or otherwise, of all existing and future indebtedness to the Bank of Bay Area Multimedia, Inc. ("Borrower") or any successor in interest, including without limit any debtor-in-possession or trustee in bankruptcy which succeeds to the interest of this party or person (jointly and severally the "Borrower"), however this Indebtedness has been or may be incurred or evidenced, whether absolute or contingent direct or indirect, voluntary or involuntary, liquidated or unliquidated, joint or several, and whether or not known to the undersigned at the time of this Guaranty or at the time any future Indebtedness is incurred (the "Indebtedness"). The Indebtedness guaranteed includes without limit: (a) any and all direct indebtedness of the Borrower to the Bank, including indebtedness evidenced by any and all promissory notes; (b) any and all obligations or liabilities of the Borrower to the Bank arising under any guaranty where the Borrower has guaranteed the payment of Indebtedness owing to the Bank from a third party; (c) any and all obligations or liabilities of the Borrower to the Bank arising from applications or agreements for the issuance of letters of credit; (d) any and all obligations or liabilities of the Borrower to the Bank arising out of any other agreement by the Borrower including without limit any agreement to indemnify the Bank for environmental liability or to clean up hazardous waste; (e) any and all indebtedness, obligations or liabilities for which the Borrower would otherwise be liable to the Bank were it not for the invalidity, irregularity or unenforceability of them by reason of any bankruptcy, insolvency or other law or order of any kind, or for any other reason, including without limit liability for interest and attorneys' fees on or in connection with, any of the Indebtedness from and after the filing by or against the Borrower of a bankruptcy petition whether an involuntary or voluntary bankruptcy case, including, without limitation, all attorneys' fees and costs incurred in connection with motions for relief from stay, cash collateral motions, nondischargeability motions, preference liability motions, fraudulent conveyance liability motions, fraudulent transfer liability motions and all other motions brought by Borrower, Guarantor, Bank or third parties in any way relating to Bank's rights with respect to such Borrower, Guarantor, or third party and/or affecting any collateral securing any obligation owed to Bank by Borrower, Guarantor, or any third party, probate proceedings, on appeal or otherwise; (f) any and all amendments, modifications, renewals and/or extensions of any of the above, including without limit amendments, modifications, renewals and/or extensions which are evidenced by new or additional instruments, documents or agreements; and (g) all costs of collecting Indebtedness, including without limit reasonable attorneys' fees and costs. The undersigned waive(s) notice of acceptance of this Guaranty and presentment, demand, protest, notice of protest, dishonor, notice of dishonor, notice of default, notice of intent to accelerate or demand payment of any Indebtedness, and diligence in collecting any Indebtedness, and agree(s) that the Bank may modify the terms of any Indebtedness, compromise, extend, increase, accelerate, renew or forbear to enforce payment of any or all Indebtedness, or permit the Borrower to incur additional Indebtedness, all without notice to the undersigned and without affecting in any manner the unconditional obligation of the undersigned under this Guaranty. The undersigned further waive(s) any and all other notices to which the undersigned might otherwise be entitled. The undersigned acknowledge(s) and agree(s) that the liabilities created by this Guaranty are direct and are not conditioned upon pursuit by the Bank of any remedy the Bank may have against the Borrower or any other person or any security. No invalidity, irregularity or unenforceability of any part or all of the Indebtedness or any documents evidencing the same, by reason of any bankruptcy, insolvency or other law or order of any kind or for any other reason, and no defense or setoff available at any time to the Borrower, shall impair, affect or be a defense or setoff to the obligations of the undersigned under this Guaranty. The undersigned deliver(s) this Guaranty based solely on the undersigned's Independent Investigation of the financial condition of the Borrower and is (are) not relying on any information furnished by the Bank. The undersigned assume(s) full responsibility for obtaining any further information concerning the Borrower's financial condition, the status of the Indebtedness or any other matter which the undersigned may deem necessary or appropriate from time to time. The undersigned waive(s) any duty on the part of the Bank, and agree(s) that it is not relying upon nor expecting the Bank to disclose to the undersigned any fact now or later known by the Bank, whether relating to the operations or condition of the Borrower, the existence, liabilities or financial condition of any co-guarantor of the Indebtedness, the occurrence of any default with respect to the Indebtedness, or otherwise, notwithstanding any effect these facts may have upon the undersigned's risk under this Guaranty or the undersigned's rights against the Borrower. The undersigned knowingly accept(s) the full range of risk encompassed in this Guaranty, which risk includes without limit the possibility that the Borrower may incur Indebtedness to the Bank after the financial condition of the Borrower, or its ability to pay its debts as they mature, has deteriorated. The undersigned represent(s) and warrant(s) that: (a) the Bank has made no representation to the undersigned as to the creditworthiness of the Borrower; and (b) the undersigned has (have) established adequate means of obtaining from the Borrower on a continuing basis financial and other information pertaining to the Borrower's financial condition. The undersigned agree(s) to keep adequately informed of any facts, events or circumstances which might in any way affect the risks of the undersigned under this Guaranty. The undersigned grant(s) to the Bank a security interest in and the right of setoff as to any and all property of the undersigned now or later in the possession of the Bank. The undersigned subordinate(s) any claim of any nature that the undersigned now or later has (have) against the Borrower to and in favor of all Indebtedness and agree(s) not to accept payment or satisfaction of any claim that the undersigned now or later may have against the Borrower without the prior written consent of the Bank. Should any payment, distribution, security, or proceeds, be received by the undersigned upon or with respect to any claim that the undersigned now or may later have against the Borrower, the undersigned shall immediately deliver the same to the Bank in the form received (except for endorsement or assignment by the undersigned where required by the Bank) for application on the Indebtedness, whether matured or unmatured, and until delivered the same shall be held in trust by the undersigned as the property of the Bank. The undersigned further assign(s) to the Bank as collateral for the obligations of the undersigned under this Guaranty all claims of any nature that the undersigned now or later has (have) against the Borrower (other than any claim under a deed of trust or mortgage covering real property) with full right on the part of the Bank, in its own name or in the name of the undersigned, to collect and enforce these claims. The undersigned agree(s) that no security now or later held by the Bank for the payment of any Indebtedness, whether from the Borrower, any guarantor, or otherwise, and whether in the nature of a security interest, pledge, lien, assignment, setoff, suretyship, guaranty, indemnity, insurance or otherwise, shall affect in any manner the unconditional obligation of the undersigned under this Guaranty, and the Bank, in its sole discretion, without notice to the undersigned, may release, exchange, enforce and otherwise deal with any security without affecting in any manner the unconditional obligation of the undersigned under this Guaranty. The undersigned acknowledge(s) and agree(s) that the Bank has no obligation to acquire or perfect any lien on or security interest in any asset(s), whether realty personalty, to secure payment of the Indebtedness, and the undersigned is (are) not relying upon any asset(s) in which the Bank has or may have a lien or security interest for payment of the Indebtedness. The undersigned acknowledge(s) that the effectiveness of this Guaranty is not conditioned on any or all of the Indebtedness being guaranteed by anyone else. Until the Indebtedness is irrevocably paid in full, the undersigned waive(s) any and all rights to be subrogated to the position of the Bank or to have the benefit of any lien, security interest or other guaranty now or later held by the Bank for the Indebtedness or to enforce any remedy which the Bank now or later has against the Borrower or any other person. Until the Indebtedness is irrevocably paid in full, the undersigned shall have no right of reimbursement, Indemnity, contribution or other right of recourse to or with respect to the Borrower or any other person. The undersigned agree(s) to indemnify and hold harmless the Bank from and against any and all claims, actions, damages, costs and expenses, including without limit reasonable attorneys' fees, incurred by the Bank in connection with the 1. 2 undersigned's exercise of any right or subrogation, contribution, indemnification or recourse with respect to this Guaranty. The Bank has no duty to enforce or protect any rights which the undersigned may have against the Borrower or any other person and the undersigned assume(s) full responsibility for enforcing and protecting these rights. Notwithstanding any provision of the preceding paragraph or anything else in this Guaranty to the contrary, if any of the undersigned is or becomes an "insider" or "affiliate" (as defined in Section 101 of the Federal Bankruptcy Code, as it may be amended) with respect to the Borrower, then that undersigned irrevocably and absolutely waives any and all rights of subrogation, contribution, indemnification, recourse, reimbursement and any similar rights against the Borrower (or any other guarantor) with respect to this Guaranty, whether such rights arise under an express or implied contract or by operation of law. It is the intention of the parties that the undersigned shall not be (or be deemed to be) a "creditor" (as defined in Section 101 of the Federal Bankruptcy Code, as it may be amended) of the Borrower (or any other guarantor) by reason of the existence of this Guaranty in the event that the Borrower becomes a debtor in any proceeding under the Federal Bankruptcy Code. This waiver is given to induce the Bank to enter into certain written contracts with the Borrower included in the Indebtedness. The undersigned warrant(s) and agree(s) that none of Bank's rights, remedies or interests shall be directly or indirectly impaired because of any of the undersigned's status as an "insider" or "affiliate" of the Borrower, and undersigned shall take any action, and shall execute any document, which the Bank may request in order to effectuate this warranty to the Bank. If any indebtedness is guaranteed by two or more guarantors, the obligation of the undersigned shall be several and also joint, each with all and also each with any one or more of the others, and may be enforced at the option of the Bank against each severally, any two or more jointly, or some severally and some jointly. The Bank, in its sole discretion, may release any one or more of the guarantors for any consideration which it deems adequate, and may fail or elect not to prove a claim against the estate of any bankrupt, insolvent, incompetent or deceased guarantor; and after that, without notice to any other guarantor, the Bank may extend or renew any or all indebtedness and may permit the Borrower to incur additional Indebtedness, without affecting in any manner the unconditional obligation of the remaining guarantor(s). This action by the Bank shall not, however, be deemed to affect any right to contribution which may exist among the guarantors. Any of the undersigned may terminate their obligation under this Guaranty as to future Indebtedness (except as provided below) by (and only by) delivering written notice of termination to an officer of the Bank and receiving from an officer of the Bank written acknowledgement of delivery; provided, the termination shall not be effective until the opening of business on the fifth (5th) day following written acknowledgement of delivery. Any termination shall not affect in any way the unconditional obligations of the remaining guarantor(s), whether or not the termination is known to the remaining guarantor(s). Any termination shall not affect in any way the unconditional obligations of the terminating guarantor(s) as to any Indebtedness existing at the effective date of termination or any Indebtedness created after that pursuant to any commitment or agreement of the Bank or any Borrower loan with the Bank existing at the effective date of termination (whether advances or readvances by the Bank are optional or obligatory), or any modifications, extensions or renewals of any of this Indebtedness, whether in whole or in part, and as to all of this Indebtedness and modifications, extensions or renewals of it, this Guaranty shall continue effective until the same shall have been fully paid. The Bank has no duty to give notice of termination by any guarantor(s) to any remaining guarantor(s). The undersigned shall indemnify the Bank against all claims, damages, costs and expenses, including without limit reasonable attorneys' fees and costs, incurred by the Bank in connection with any suit, claim or action against the Bank arising out of any modification or termination of a Borrower loan or any refusal by the Bank to extend additional credit in connection with the termination of this Guaranty. Notwithstanding any prior revocation, termination, surrender or discharge of this Guaranty (or for any lien, pledge or security interest securing this Guaranty) in whole or part, the effectiveness of this Guaranty, and of all liens, pledges and security interests securing this Guaranty, shall automatically continue or be reinstated, as the case may be, in the event that (a) any payment received or credit given by the Bank in respect to the Indebtedness is returned, disgorged or rescinded as a preference, impermissible setoff, fraudulent conveyance, division of trust funds, or otherwise under any applicable state or federal law, including, without limitation, laws pertaining to bankruptcy or insolvency, in which case this Guaranty, and all liens, pledges and security interests securing this Guaranty, shall be enforceable against the undersigned as if the returned, disgorged or rescinded payment or credit had not been received or given by the Bank, and whether or not the Bank relied upon this payment or credit or changed its position as a consequence of it; or (b) any liability is imposed, or sought to be imposed, against the Bank relating to the environmental condition of, or the presence of hazardous or toxic substances on, in or about, any property given as collateral to the Bank by the Borrower, whether this condition is known or unknown, now exists or subsequently arises (excluding only conditions which arise after any acquisition by the Bank of any such property, by foreclosure, in lieu of foreclosure or otherwise, to the extent due to the wrongful act or omission of the Bank), in which case this Guaranty, and all liens, pledges and security interests securing this Guaranty, shall be enforceable against the undersigned to the extent of all liability, costs and expenses (including without limit reasonable attorneys' fees and costs) incurred by the Bank as the direct or indirect result of any environmental condition or hazardous or toxic substances. In the event of continuation or reinstatement of this Guaranty and the liens, pledges and security interests securing it, the undersigned agree(s) upon demand by the Bank to execute and deliver to the Bank those documents which the Bank determines are appropriate to further evidence (in the public records or otherwise) this continuation or reinstatement, although the failure of the undersigned to do so shall not affect in any way the reinstatement or continuation. If the undersigned do(es) not execute and deliver to the Bank upon demand such documents, the Bank and each Bank officer is irrevocably appointed (which appointment is coupled with an interest) the true and lawful attorney of the undersigned (with full power of substitution) to execute and deliver such documents in the name and on behalf of the undersigned. For purposes of this Guaranty, "environmental condition" includes, without limitation, conditions existing with respect to the surface or ground water, drinking water supply, land surface or subsurface and the air; and "hazardous or toxic substances" shall include any and all substances now or subsequently determined by any federal, state or local authority to be hazardous or toxic, or otherwise regulated by any of these authorities. Although the intent of the undersigned and the Bank is that California law shall apply to this Guaranty, regardless of whether California law applies, the undersigned further agree(s) as follows: With respect to the limitation, if any, stated in the Additional Provisions below on the amount of principal guaranteed under this Guaranty, the undersigned agree(s) that (a) this limitation shall not be a limitation on the amount of Borrower's Indebtedness to the Bank; (b) any payments by the undersigned shall not reduce the maximum liability of the undersigned under this Guaranty unless written notice to that effect is actually received by the Bank at or prior to the time of the payment; and (c) the liability of the undersigned to the Bank shall at all times be deemed to be the aggregate liability of the undersigned under this Guaranty and any other guaranties previously or subsequently given to the Bank by the undersigned and not expressly revoked, modified or invalidated in writing. The undersigned waive(s) any right to require the Bank to: (a) proceed against any person, including without limit the Borrower; (b) proceed against or exhaust any security held from the Borrower or any other person; (c) give notice of the terms, time and place of any public or private sale of personal property security held from the Borrower or any other person, or otherwise comply with the provisions of Section 9-504 of the California or other applicable Uniform Commercial Code; (d) pursue any other remedy in the Bank's power; or (e) make any presentments or demands for performance, or give any notices of nonperformance, protests, notices of protest, or notices of dishonor in connection with any obligations or evidences of Indebtedness held by the Bank as security. In connection with any other obligations or evidences of Indebtedness which constitute in whole or in part indebtedness, or in connection with the creation of new or additional Indebtedness. The undersigned authorize(s) the Bank, either before or after termination of this Guaranty, without notice to or demand on the undersigned and without affecting the undersigned's liability under this Guaranty, from time to time to: (a) apply any security and direct the order or manner of sale of it, including without limit, a nonjudicial sale permitted by the terms of the controlling security agreement, mortgage or deed of trust, as the Bank in its discretion may determine; (b) release or substitute any one or more of the endorsers or any other guarantors of the Indebtedness; and (c) apply payments received by the Bank from the Borrower to any Indebtedness of the Borrower to the Bank, in such order as the Bank shall determine in its sole discretion, whether or not this Indebtedness is covered by this Guaranty, and the undersigned waive(s) any provision of law regarding application of payments which specifies otherwise. The Bank may without notice assign this Guaranty in whole or in part. Upon the Bank's request, the undersigned agree(s) to provide to the Bank copies of the undersigned's financial statements. 2 3 The undersigned waive(s) any defense based upon or arising by reason of (a) any disability or other defense of the Borrower or any other person; (b) the cessation or limitation from any cause whatsoever, other than final and irrevocable payment in full, of the Indebtedness; (c) any lack of authority of any officer, director, partner, agent or any other person acting or purporting to act on behalf of the Borrower which is a corporation, partnership or other type of entity, or any defect in the formation of the Borrower; (d) the application by the Borrower of the proceeds of any Indebtedness for purposes other than the purposes represented by the Borrower to the Bank or intended or understood by the Bank or the undersigned; (e) any act or omission by the Bank which directly or indirectly results in or aids the discharge of the Borrower or any Indebtedness by operation of law or otherwise; or (f) any modification of the Indebtedness, in any form whatsoever including without limit any modification made after effective termination, and including without limit, the renewal, extension, acceleration or other change in time for payment of the Indebtedness, or other change in the terms of any Indebtedness, including without limit increase or decrease of the interest rate. The undersigned understands that, absent this waiver, Bank's election of remedies, including but not limited to its decision to proceed to nonjudicial foreclosure on any real property securing the Indebtedness, could preclude Bank from obtaining a deficiency judgment against Borrower and the undersigned pursuant to California Code of Civil Procedure sections 580a, 580b, 580d or 726 and could also destroy any subrogation rights which the undersigned has against Borrower. The undersigned further understands that, absent this waiver, California law, including without limitation, California Code of Civil Procedure sections 580a, 580b, 580d or 726, could afford the undersigned one or more affirmative defenses to any action maintained by Bank against the undersigned on this Guaranty. The undersigned waives any and all rights and provisions of California Code of Civil Procedure sections 580a, 580b, 580d and 726, including, but not limited to any provision thereof that: (i) may limit the time period for Bank to commence a lawsuit against Borrower or the undersigned to collect any Indebtedness owing by Borrower or the undersigned to Bank; (ii) may entitle Borrower or the undersigned to a judicial or nonjudicial determination of any deficiency owed by Borrower or the undersigned to Bank, or to otherwise limit Bank's right to collect a deficiency based on the fair market value of such real property security; (iii) may limit Bank's right to collect a deficiency judgment after a sale of any real property securing the Indebtedness; (iv) may require Bank to take only one action to collect the Indebtedness or that may otherwise limit the remedies available to Bank to collect the Indebtedness. The undersigned waives all rights and defenses arising out of an election of remedies by Bank even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed the undersigned's rights of subrogation and reimbursement against Borrower by the operation of Section 580d of the Code of Civil Procedure or otherwise. The undersigned acknowledges and agrees that this is a knowing and informed waiver of the undersigned's rights as discussed above and that Bank is relying on this waiver in extending credit to Borrower. The undersigned acknowledge(s) that the Bank has the right to sell, assign, transfer, negotiate, or grant participations in all or any part of the Indebtedness and any related obligations, including without limit this Guaranty. In connection with that right, the Bank may disclose any documents and information which the Bank now or later acquires relating to the undersigned and this Guaranty, whether furnished by the Borrower, the undersigned or otherwise. The undersigned further agree(s) that the Bank may disclose these documents and information to the Borrower. The undersigned agree(s) that the Bank may provide information relating to this Guaranty or to the undersigned to the Bank's parent, affiliates, subsidiaries and service providers. The total obligations under this Guaranty shall be UNLIMITED unless specifically limited in the Additional Provisions of this Guaranty, and this obligation (whether unlimited or limited to the extent indicated in the Additional Provisions) shall include, IN ADDITION TO any limited amount of principal guaranteed, any and all interest on all Indebtedness and any and all costs and expenses of any kind, including without limit reasonable attorneys' fees and costs, incurred by the Bank at any time(s) for any reason in enforcing any of the duties and obligations of the undersigned under this Guaranty or otherwise incurred by the Bank in any way connected with this Guaranty, the Indebtedness or any other guaranty of the Indebtedness (including without limit reasonable attorneys' fees and other expenses incurred in any suit involving the conduct of the Bank, the Borrower or the undersigned). All of these costs and expenses shall be payable immediately by the undersigned when incurred by the Bank, without demand, and until paid shall bear interest at the highest per annum rate applicable to any of the Indebtedness, but not in excess of the maximum rate permitted by law. Any reference in this Guaranty to attorneys' fees shall be deemed a reference to fees, charges, costs and expenses of both in-house and outside counsel and paralegals, whether or not a suit or action is instituted, and to court costs if a suit or action is instituted, and whether attorneys' fees or court costs are incurred at the trial court level, on appeal, in a bankruptcy, administrative or probate proceeding or otherwise. Any reference in the Additional Provisions or elsewhere (a) to this Guaranty being secured by certain collateral shall NOT be deemed to limit the total obligation of the undersigned under this Guaranty or (b) to this Guaranty being limited in any respect shall NOT be deemed to limit the total obligation of the undersigned under any prior or subsequent guaranty given by the undersigned to the Bank. The undersigned unconditionally and irrevocably waive(s) each and every defense and setoff of any nature which, under principles of guaranty or otherwise, would operate to impair or diminish in any way the obligation of the undersigned under this Guaranty, and acknowledge(s) that each such waiver is by this reference incorporated into each security agreement, collateral assignment, pledge and/or other document from the undersigned now or later securing this Guaranty and/or the Indebtedness, and acknowledge(s) that as of the date of this Guaranty no such defense or setoff exists. The undersigned acknowledge(s) that the effectiveness of this Guaranty is subject to no conditions of any kind. This Guaranty shall remain effective with respect to successive transactions which shall either continue the Indebtedness, increase or decrease it, or from time to time create new Indebtedness after all or any prior Indebtedness has been satisfied, until this Guaranty is terminated in the manner and to the extent provided above. The undersigned warrant(s) and agree(s) that each of the waivers set forth above are made with the undersigned's full knowledge of their significance and consequences, and that under the circumstances, the waivers are reasonable and not contrary to public policy or law if any of these waivers are determined to be contrary to any applicable law or public policy, these waivers shall be effective only to the extent permitted by law. This Guaranty constitutes the entire agreement of the undersigned and the Bank with respect to the subject matter of this Guaranty. No waiver, consent, modification or change of the terms of this Guaranty shall bind any of the undersigned or the Bank unless in writing and signed by the waiving party or an authorized officer of the waiving party, and then this waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given. This Guaranty shall inure to the benefit of the Bank and its successors and assigns. This Guaranty shall be binding on the undersigned and the undersigned's heirs, legal representatives, successors and assigns including, without limit, any debtor in possession or trustee in bankruptcy for any of the undersigned. The undersigned has (have) knowingly and voluntarily entered into this Guaranty in good faith for the purpose of inducing the Bank to extend credit or make other financial accommodations to the Borrower, and the undersigned acknowledge(s) that the terms of this Guaranty are reasonable. If any provision of this Guaranty is unenforceable in whole or in part for any reason, the remaining provisions shall continue to be effective. THIS GUARANTY SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. Additional Provisions (if any): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3. 4 STATEMENT DATE: November 13, 2000 ----------------- Bay Area Multimedia, Inc. Comerica Bank-California 333 W Santa Clara St., Ste 930 P.O. Box 49032 San Jose, CA 95113 San Jose, CA 95161-9032 RE: Fee on $1,000,000.00 Note, dated November 13, 2000, and maturing Demand Officer 48134 Loan Fee $1,000.00 Total Due: $1,000.00 [ ] Customer Check Attached [X] Charge DDA No. 1891-220855 Acknowledged by: /s/ RAYMOND MUSCI --------------------- 5 [COMERICA LOGO] Guaranty - -------------------------------------------------------------------------------- The undersigned, for value received, unconditionally and absolutely guarantee(s) to Comerica Bank-California ("Bank") a California banking corporation, and to the Bank's successors and assigns, payment when due, whether by stated maturity, demand, acceleration or otherwise, of all existing and future indebtedness to the Bank of Bay Area Multimedia, Inc. ("Borrower) or any successor in interest, including without limit any debtor-in-possession or trustee in bankruptcy which succeeds to the interest of this party or person (jointly and severally the "Borrower"), however this indebtedness has been or may be incurred or evidenced, whether absolute or contingent direct or indirect, voluntary or involuntary, liquidated or unliquidated, joint or several, and whether or not known to the undersigned at the time of this Guaranty or at the time any future indebtedness is incurred (the "Indebtedness"). The Indebtedness guaranteed includes without limit: (a) any and all direct Indebtedness of the Borrower to the Bank, including Indebtedness evidenced by any and all promissory notes; (b) any and all obligations or liabilities of the Borrower to the Bank arising under any guaranty where the Borrower has guaranteed the payment of indebtedness owing to the Bank from a third party; (c) any and all obligations or liabilities of the Borrower to the Bank arising from applications or agreements for the issuance of letters of credit; (d) any and all obligations or liabilities of the Borrower to the Bank arising out of any other agreement by the Borrower including without limit any agreement to indemnify the Bank for environmental liability or to clean up hazardous waste; (e) any and all Indebtedness, obligations or liabilities for which the Borrower would otherwise be liable to the Bank were it not for the invalidity, irregularity or unenforceability of them by reason of any bankruptcy, insolvency or other law or order of any kind, or for any other reason, including without limit liability for interest and attorneys' fees on, or in connection with, any of the Indebtedness from and after the filing by or against the Borrower of a bankruptcy petition whether an involuntary or voluntary bankruptcy case, including, without limitation, all attorneys' fees and costs incurred in connection with motions for relief from stay, cash collateral motions, nondischargeability motions, preference liability motions, fraudulent conveyance liability motions, fraudulent transfer liability motions and all other motions brought by Borrower, Guarantor, Bank or third parties in any way relating to Bank's rights with respect to such Borrower, Guarantor, or third party and/or affecting any collateral securing any obligation owed to Bank by Borrower, Guarantor, or any third party, probate proceedings, on appeal or otherwise; (f) any and all amendments, modifications, renewals and/or extensions of any of the above, including without limit amendments, modifications, renewals and/or extensions which are evidenced by new or additional instruments, documents or agreements; and (g) all costs of collecting Indebtedness, including without limit reasonable attorneys' fees and costs. The undersigned waive(s) notice of acceptance of this Guaranty and presentment, demand, protest, notice of protest, dishonor, notice of dishonor, notice of default, notice of intent to accelerate or demand payment of any Indebtedness, and diligence in collecting any Indebtedness, and agree(s) that the Bank may modify the terms of any Indebtedness, compromise, extend, increase, accelerate, renew of forbear to enforce payment of any of all Indebtedness, or permit the Borrower to incur additional Indebtedness, all without notice to the undersigned and without affecting in any manner the unconditional obligation of the undersigned under this Guaranty. The undersigned further waive(s) any and all other notices to which the undersigned might otherwise be entitled. The undersigned acknowledge(s) and agree(s) that the liabilities created by this Guaranty are direct and are not conditioned upon pursuit by the Bank of any remedy the Bank may have against the Borrower or any other person or any security. No invalidity, irregularity or unenforceability of any part or all of the Indebtedness or any documents evidencing the same, by reason of any bankruptcy, insolvency or other law or order of any kind or for any other reason, and no defense or setoff available at any time to the Borrower, shall impair, affect or be a defense or setoff to the obligation of the undersigned under this Guaranty. The undersigned deliver(s) this Guaranty based solely on the undersigned's Independent Investigation of the financial condition of the Borrower and is (are) not relying on any information furnished by the Bank. The undersigned assume(s) full responsibility for obtaining any further information concerning the Borrower's financial condition, the status of the Indebtedness or any other matter which the undersigned may deem necessary or appropriate from time to time. The undersigned waive(s) any duty on the part of the Bank, and agree(s) that it is not relying upon nor expecting the Bank to disclose to the undersigned any fact now or later known by the Bank, whether relating to the operations or condition of the Borrower, the existence, liabilities or financial condition of any co-guarantor of the Indebtedness, the occurrence of any default with respect to the Indebtedness, or otherwise, notwithstanding any effect these facts may have upon the undersigned's risk under this Guaranty or the undersigned's rights against the Borrower. The undersigned knowingly accept(s) the full range of risk encompassed in this Guaranty, which risk includes without limit the possibility that the Borrower may incur Indebtedness to the Bank after the financial condition of the Borrower, or its ability to pay its debts as they mature, has deteriorated. The undersigned represent(s) and warrant(s) that: (a) the Bank has made no representation to the undersigned as to the creditworthiness of the Borrower and (b) the undersigned has (have) established adequate means of obtaining from the Borrower on a continuing basis financial and other information pertaining to the Borrower's financial condition. The undersigned agree(s) to keep adequately informed of any facts, events or circumstances which might in any way affect the risks of the undersigned under this Guaranty. The undersigned grant(s) to the Bank a security interest in and the right of setoff as to any and all property of the undersigned now or later in the possession of the Bank. The undersigned subordinate(s) any claim of any nature that the undersigned now or later has (have) against the Borrower to and in favor of all Indebtedness and agree(s) not to accept payment or satisfaction of any claim that the undersigned now or later may have against the Borrower without the prior written consent of the Bank. Should any payment, distribution, security, or proceeds, be received by the undersigned upon or with respect to any claim that the undersigned now or may later have against the Borrower, the undersigned shall immediately deliver the same to the Bank in the form received (except for endorsement or assignment by the undersigned where required by the Bank) for application on the Indebtedness, whether matured or unmatured, and until delivered the same shall be held in trust by the undersigned as the property of the Bank. The undersigned further assign(s) to the Bank as collateral for the obligations of the undersigned under this Guaranty all claims of any nature that the undersigned now or later has (have) against the Borrower (other than any claim under a deed of trust or mortgage covering real property) with full right on the part of the Bank, in its own name or in the name of the undersigned, to collect and enforce these claims. The undersigned agree(s) that no security now or later held by the Bank for the payment of any Indebtedness, whether from the Borrower, any guarantor, or otherwise, and whether in the nature of a security interest, pledge, lien, assignment, setoff, suretyship, guaranty, Indemnity, insurance or otherwise, shall affect in any manner the unconditional obligation of the undersigned under this Guaranty, and the Bank, in its sole discretion, without notice to the undersigned, may release, exchange, enforce and otherwise deal with any security without affecting in any manner the unconditional obligation of the undersigned under this Guaranty. The undersigned acknowledge(s) and agree(s) that the Bank has no obligation to acquire or perfect any lien on or security interest in any asset(s) whether realty or personalty, to secure payment of the Indebtedness, and the undersigned is (are) not relying upon any asset(s) in which the Bank has or may have a lien or security interest for payment of the Indebtedness. The undersigned acknowledge(s) that the effectiveness of this Guaranty is not conditioned on any or all of the Indebtedness being guaranteed by anyone else. Until the Indebtedness is irrevocably paid in full, the undersigned waive(s) any and all rights to be subrogated to the position of the Bank or to have the benefit of any lien, security interest or other guaranty now or later held by the Bank for the Indebtedness or to enforce any remedy which the Bank now or later has against the Borrower or any other person. Until the Indebtedness is irrevocably paid in full, the undersigned shall have no right of reimbursement, indemnity, contribution or other right of recourse to or with respect to the Borrower or any other person. The undersigned agree(s) to indemnify and hold harmless the Bank from and against any and all claims, actions, damages, costs and expenses, including without limit reasonable attorneys' fees, incurred by the Bank in connection with the 1. 6 undersigned's exercise of any right of subrogation, contribution, indemnification or recourse with respect to this Guaranty. The Bank has no duty to enforce or protect any rights which the undersigned may have against the Borrower or any other person and the undersigned assume(s) full responsibility for enforcing and protecting these rights. Notwithstanding any provision of the preceding paragraph or anything else in this Guaranty to the contrary, if any of the undersigned is or becomes an "insider" or "affiliate" (as defined in Section 101 of the Federal Bankruptcy Code, as it may be amended) with respect to the Borrower, then that undersigned irrevocably and absolutely waives any and all rights of subrogation, contribution, indemnification, recourse, reimbursement and any similar rights against the Borrower (or any other guarantor) with respect to this Guaranty, whether such rights arise under an express or implied contract or by operation of law. It is the intention of the parties that the undersigned shall not be (or be deemed to be) a "creditor" (as defined in Section 101 of the Federal Bankruptcy Code, as it may be amended) of the Borrower (or any other guarantor) by reason of the existence of this Guaranty in the event that the Borrower becomes a debtor in any proceeding under the Federal Bankruptcy Code. This waiver is given to induce the Bank to enter into certain written contracts with the Borrower included in the Indebtedness. The undersigned warrant(s) and agree(s) that none of the Bank's rights, remedies or interests shall be directly or indirectly impaired because of any of the undersigned's status as an "insider" or "affiliate" of the Borrower, and undersigned shall take any action, and shall execute any document, which the Bank may request in order to effectuate this warranty to the Bank. If any indebtedness is guaranteed by two or more guarantors, the obligation of the undersigned shall be several and also joint, each with all and also each with any one or more of the others, and may be enforced at the option of the Bank against each severally, any two or more jointly, or some severally and some jointly. The Bank, in its sole discretion, may release any one or more of the guarantors for any consideration which it deems adequate, and may fail or elect not to prove a claim against the estate of any bankrupt, insolvent, incompetent or deceased guarantor; and after that, without notice to any other guarantor, the Bank may extend or renew any or all Indebtedness and may permit the Borrower to incur additional Indebtedness, without affecting in any manner the unconditional obligation of the remaining guarantor(s). This action by the Bank shall not, however, be deemed to affect any right to contribution which may exist among the guarantors. Any of the undersigned may terminate their obligation under this Guaranty as to future Indebtedness (except as provided below) by (and only by) delivering written notice of termination to an officer of the Bank and receiving from an officer of the Bank written acknowledgement of delivery; provided, the termination shall not be effective until the opening of business on the fifth (5th) day following written acknowledgement of delivery. Any termination shall not affect in any way the unconditional obligations of the remaining guarantor(s), whether or not the termination is known to the remaining guarantor(s). Any termination shall not affect in any way the unconditional obligations of the terminating guarantor(s) as to any Indebtedness existing at the effective date of termination or any Indebtedness created after that pursuant to any commitment or agreement of the Bank or any Borrower loan with the Bank existing at the effective date of termination (whether advances or readvances by the Bank are optional or obligatory), or any modifications, extensions or renewals of any of this Indebtedness, whether in whole or in part, and as to all of this Indebtedness and modifications, extensions or renewals of it, this Guaranty shall continue effective until the same shall have been fully paid. The Bank has no duty to give notice of termination by any guarantor(s) to any remaining guarantor(s). The undersigned shall indemnify the Bank against all claims, damages, costs and expenses, including without limit reasonable attorneys' fees and costs, incurred by the Bank in connection with any suit, claim or action against the Bank arising out of any modification or termination of a Borrower loan or any refusal by the Bank to extend additional credit in connection with the termination of this Guaranty. Notwithstanding any prior revocation, termination, surrender or discharge of this Guaranty (or of any lien, pledge or security interest securing this Guaranty) in whole or part, the effectiveness of this Guaranty, and of all liens, pledges and security interests securing this Guaranty, shall automatically continue or be reinstated, as the case may be, in the event that (a) any payment received or credit give by the Bank in respect of the Indebtedness is returned, disgorged or rescinded as a preference, impermissible setoff, fraudulent conveyance, diversion of trust funds, or otherwise under any applicable state or federal law, including, without limitation, laws pertaining to bankruptcy or insolvency, in which case this Guaranty, and all liens, pledges and security interests securing this Guaranty, shall be enforceable against the undersigned as if the returned, disgorged or rescinded payment or credit had not been received or given by the Bank, and whether or not the Bank relied upon this payment or credit or changed its position as a consequence of it; or (b) any liability is imposed, or sought to be imposed, against the Bank relating to the environmental condition of, or the presence of hazardous or toxic substances on, in or about, any property given as collateral to the Bank by the Borrower, whether this condition is known or unknown, now exists or subsequently arises (excluding only conditions which arise after any acquisition by the Bank of any such property, by foreclosure, in lieu of foreclosure or otherwise, to the extent due to the wrongful act or omission of the Bank), in which case this Guaranty, and all liens, pledges and security interests securing this Guaranty, shall be enforceable against the undersigned to the extent of all liability, costs and expenses (including without limit reasonable attorneys' fees and costs) incurred by the Bank as the direct or indirect result of any environmental condition or hazardous or toxic substances. In the event of continuation or reinstatement of this Guaranty and the liens, pledges and security interests securing it, the undersigned agree(s) upon demand by the Bank to execute and deliver to the Bank those documents which the Bank determines are appropriate to further evidence (in the public records or otherwise) this continuation or reinstatement, although the failure of the undersigned to do so shall not affect in any way the reinstatement or continuation. If the undersigned do(es) not execute and deliver to the Bank upon demand such documents, the Bank and each Bank officer is irrevocably appointed (which appointment is coupled with an interest) the true and lawful attorney of the undersigned (with full power of substitution) to execute and deliver such documents in the name and on behalf of the undersigned. For purposes of this Guaranty, "environmental condition" incudes, without limitation, conditions existing with respect to the surface or ground water, drinking water supply, land surface or subsurface and the air; and "hazardous or toxic substances" shall include any and all substances now or subsequently determined by any federal, state or local authority to be hazardous or toxic, or otherwise regulated by any of these authorities. Although the intent of the undersigned and the Bank is that California law shall apply to this Guaranty, regardless of whether California law applies, the undersigned further agree(s) as follows: With respect to the limitation, if any, stated in the Additional Provisions below on the amount of principal guaranteed under this Guaranty, the undersigned agree(s) that (a) this limitation shall not be a limitation on the amount of Borrower's Indebtedness to the Bank; (b) any payments by the undersigned shall not reduce the maximum liability of the undersigned under this Guaranty unless written notice to that effect is actually received by the Bank at or prior to the time of the payment; and (c) the liability of the undersigned to the Bank shall at all times be deemed to be the aggregate liability of the undersigned under this Guaranty and any other guaranties previously or subsequently given to the Bank by the undersigned and not expressly revoked, modified or invalidated in writing. The undersigned waive(s) any right to require the Bank to: (a) proceed against any person, including without limit the Borrower; (b) proceed against or exhaust any security held from the Borrower or any other person; (c) give notice of the terms, time and place of any public or private sale of personal property security held from the Borrower or any other person, or otherwise comply with the provisions of Section 9-504 of the California or other applicable Uniform Commercial Code; (d) pursue any other remedy in the Bank's power; or (e) make any presentments or demands for performance, or give any notices of nonperformance, protests, notices of protest, or notices of dishonor in connection with any obligations or evidence of Indebtedness held by the Bank as security, in connection with any other obligations or evidences of Indebtedness which constitute in whole or in part Indebtedness, or in connection with the creation of new or additional Indebtedness. The undersigned authorize(s) the Bank, either before or after termination of this Guaranty, without notice to or demand on the undersigned and without affecting the undersigned's liability under this Guaranty, from time to time to: (a) apply any security and direct the order or manner of sale of it, including without limit, a nonjudicial sale permitted by the terms of the controlling security agreement, mortgage or deed of trust, as the Bank in its discretion may determine; (b) release or substitute any one or more of the endorsers or any other guarantors of the Indebtedness; and (c) apply payments received by the Bank from the Borrower to any Indebtedness of the Borrower to the Bank, in such order as the Bank shall determine in its sole discretion, whether or not this indebtedness is covered by this Guaranty, and the undersigned waive(s) any provision of law regarding application of payments which specifies otherwise. The Bank may without notice assign this Guaranty in whole or in part. Upon the Bank's request, the undersigned agree(s) to provide to the Bank copies of the undersigned's financial statements. 2. 7 The undersigned waive(s) any defense based upon or arising by reason of (a) any disability or other defense of the Borrower or any other person; (b) the cessation or limitation from any cause whatsoever, other than final and irrevocable payment in full, of the Indebtedness; (c) any lack of authority of any officer, director, partner, agent or any other person acting or purporting to act on behalf of the Borrower which is a corporation, partnership or other type of entity, or any defect in the formation of the Borrower; (d) the application by the Borrower of the proceeds of any Indebtedness for purposes other than the purposes represented by the Borrower to the Bank or intended or understood by the Bank or the undersigned; (e) any act or omission by the Bank which directly or indirectly results in or aids the discharge of the Borrower or any Indebtedness by operation of law or otherwise; or (f) any modification of the Indebtedness, in any form whatsoever including without limit any modification made after effective termination, and including without limit, the renewal, extension, acceleration or other change in time for payment of the Indebtedness, or other change in the terms of any Indebtedness, including without limit increase or decrease of the interest rate. The undersigned understands that, absent this waiver, Bank's election of remedies, including but not limited to its decision to proceed to nonjudicial foreclosure on any real property securing the Indebtedness, could preclude Bank from obtaining a deficiency judgment against Borrower and the undersigned pursuant to California Code of Civil Procedure sections 580a, 580b, 580d or 726 and could also destroy any subrogation rights which the undersigned has against Borrower. The undersigned further understands that, absent this waiver, California law, including without limitation, California Code of Civil Procedure sections 580a, 580b, 580d or 726, could afford the undersigned one or more affirmative defenses to any action maintained by Bank against the undersigned on this Guaranty. The undersigned waives any and all rights and provisions of California Code of Civil Procedure sections 580a, 580b, 580d or 726, including, but not limited to any provision thereof that: (i) may limit the time period for Bank to commence a lawsuit against Borrower or the undersigned to collect any Indebtedness owing by Borrower or the undersigned to Bank; (ii) may entitle Borrower or the undersigned to a judicial or nonjudicial determination of any deficiency owed by Borrower or the undersigned to Bank, or to otherwise limit Bank's right to collect a deficiency based on the fair market value of such real property security; (iii) may limit Bank's right to collect a deficiency judgment after a sale of any real property securing the Indebtedness; (iv) may require Bank to take only one action to collect the Indebtedness or that may otherwise limit the remedies available to Bank to collect the Indebtedness. The undersigned waives all rights and defenses arising out of an election of remedies by Bank even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed the undersigned's rights of subrogation and reimbursement against Borrower by the operation of Section 580d of the Code of Civil Procedure or otherwise. The undersigned acknowledges and agrees that this is a knowing and informed waiver of the undersigned's rights as discussed above and that Bank is relying on this waiver in extending credit to Borrower. The undersigned acknowledge(s) that the Bank has the right to sell, assign, transfer, negotiate, or grant participations in all or any part of the Indebtedness and any related obligations, including without limit this Guaranty. In connection with that right, the Bank may disclose any documents and information which the Bank now or later acquires relating to the undersigned and this Guaranty, whether furnished by the Borrower, the undersigned or otherwise. The undersigned further agree(s) that the Bank may disclose these documents and information to the Borrower. The undersigned agree(s) that the Bank may provide information relating to this Guaranty or to the undersigned to the Bank's parent, affiliates, subsidiaries and service providers. The total obligation under this Guaranty shall be UNLIMITED unless specifically limited in the Additional Provisions to this Guaranty, and this obligation (whether unlimited or limited to the extent indicated in the Additional Provisions) shall include, IN ADDITION TO any limited amount of principal guaranteed, any and all interest on all Indebtedness and any and all costs and expenses of any kind, including without limit reasonable attorneys' fees and costs, incurred by the Bank at any time(s) for any reason in enforcing any of the duties and obligations of the undersigned under this Guaranty or otherwise incurred by the Bank in any way connected with this Guaranty, the Indebtedness or any other guaranty of the Indebtedness (including without limit reasonable attorneys' fees and other expenses incurred in any suit involving the conduct of the Bank, the Borrower or the undersigned). All of these costs and expenses shall be payable immediately by the undersigned when incurred by the Bank, without demand, and until paid shall bear interest at the highest per annum rate applicable to any of the Indebtedness, but not in excess of the maximum rate permitted by law. Any reference in this Guaranty to attorneys' fees shall be deemed a reference to fees, charges, costs and expenses of both in-house and outside counsel and paralegals, whether or not a suit or action is instituted, and to court costs if a suit or action is instituted, and whether attorneys' fees or court costs are incurred at the trial court level, on appeal, in a bankruptcy, administrative or probate proceeding or otherwise. Any reference in the Additional Provisions or elsewhere (a) to this Guaranty being secured by certain collateral shall NOT be deemed to limit the total obligation of the undersigned under this Guaranty or (b) to this Guaranty being limited in any respect shall NOT be deemed to limit the total obligation of the undersigned under any prior or subsequent guaranty given by the undersigned to the Bank. The undersigned unconditionally and irrevocably waive(s) each and every defense and setoff of any nature which, under principles of guaranty or otherwise, would operate to impair or diminish in any way the obligation of the undersigned under this Guaranty, and acknowledge(s) that each such waiver is by this reference incorporated into each security agreement, collateral assignment, pledge and/or other document from the undersigned now or later securing this Guaranty and/or the Indebtedness, and acknowledge(s) that as of the date of this Guaranty no such defense or setoff exists. The undersigned acknowledge(s) that the effectiveness of this Guaranty is subject to no conditions of any kind. This Guaranty shall remain effective with respect to successive transactions which shall either continue the Indebtedness, increase or decrease it, or from time to time create new Indebtedness after all or any prior Indebtedness has been satisfied, until this Guaranty is terminated in the manner and to the extent provided above. The undersigned warrant(s) and agree(s) that each of the waivers set forth above are made with the undersigned's full knowledge of their significance and consequences, and that under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any of these waivers are determined to be contrary to any applicable law or public policy, these waivers shall be effective only to the extent permitted by law. This Guaranty constitutes the entire agreement of the undersigned and the Bank with respect to the subject matter of this Guaranty. No waiver, consent, modification or change of the terms of this Guaranty shall bind any of the undersigned or the Bank unless in writing and signed by the waiving party or an authorized officer of the waiving party, and then this waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given. This Guaranty shall inure to the benefit of the Bank and its successors and assigns. This Guaranty shall be binding on the undersigned and the undersigned's heirs, legal representatives, successors and assigns including, without limit, any debtor in possession or trustee in bankruptcy for any of the undersigned. The undersigned has (have) knowingly and voluntarily entered into this Guaranty in good faith for the purpose of inducing the Bank to extend credit or make other financial accommodations to the Borrower, and the undersigned acknowledge(s) that the terms of this Guaranty are reasonable. If any provision of this Guaranty is unenforceable in whole or in part for any reason, the remaining provisions shall continue to be effective. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. Additional Provisions (if any): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3. 8 THE UNDERSIGNED AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED, EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS GUARANTY OR THE INDEBTEDNESS. IN WITNESS WHEREOF, THE UNDERSIGNED HAS (HAVE) SIGNED THIS GUARANTY ON November 13, 2000. GUARANTOR(S) ------------------------- BY: /s/ RAYMOND MUSCI ---------------------------------- Signature of Raymond Musci Its: N/A --------------------------- WITNESS: (If Applicable) - ------------------------------------- BY: Signature of ---------------------------------- Signature of Its: --------------------------- (If Applicable) GUARANTOR'S ADDRESS 20760 Monte Sunset Drive ------------------------------------- Street Address San Jose CA 95120 ------------------------------------- City State Zip Code BORROWER(S): Bay Area Multimedia, Inc. 4. 9 [COMERICA LOGO] AUTOMATIC LOAN PAYMENT AUTHORIZATION Date: November 13, 2000 Obligor Name (Typed or Printed): Bay Area Multimedia, Inc. Obligor Number: Lender's Cost Carrier #: 95760 -------------------------- Address: 333 W Santa Clara St., Ste 930 San Jose CA USA 95113 - ------------------------------------------------------------------------------- STREET ADDRESS CITY STATE COUNTRY ZIP CODE The undersigned hereby authorizes Comerica Bank-California ("Bank") to charge the account designated below for the payments due on the loan(s) as designated below and all renewals, extensions, modifications and/or substitutions thereof. This authorization will remain in effect unless the undersigned requests a modification that is agreed to by the Bank in writing. The undersigned remains fully responsible for all amounts outstanding to Bank if the designated account is insufficient for repayment. [X] Automatic Payment Authorization for all payments on all current and future borrowings, as and when such payments come due (which payments include, without limitation, principal, interest, fees, costs, and expenses). - ------------------------------------------------------------------------------- [ ] Automatic Payment Authorization for all payments on only the specific borrowing identified below, as and when such payments come due (which payments include, without limitation, principal, interest, fees, costs, and expenses). Specific Obligation Number: -------------------------------------------- - ------------------------------------------------------------------------------- [ ] Automatic Payment Authorization for less than all payments on only the specific borrowing identified below, as and when such payments come due. Specific Obligation Number: -------------------------------------------- [ ] Principal and interest payments only [ ] Principal payments only [ ] Interest payments only [ ] SPECIAL INSTRUCTIONS/IRREGULAR PAYMENT INSTRUCTIONS - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Payment Due Date: Loan payments will be charged to the account designated below on the dates such payments become due unless that day is a Saturday, Sunday, or Bank holiday in which case such payments will be charged on the following business day, with interest to accrue during this extension as provided under the loan documents. Account to be Changed: [X] Checking Comerica Account No. 1891220855 ----------------------- [ ] Savings Comerica Account No. ----------------------- ---------- Number of lead days to issue billing ------------ (Charge to account are withdrawals pursuant to account resolution) Bay Area Multimedia, Inc. By: /s/ RAYMOND MUSCI Its: President ----------------------------- -------------------------- SIGNATURE OF TITLE By: Its: ----------------------------- -------------------------- SIGNATURE OF TITLE By: Its: ----------------------------- -------------------------- SIGNATURE OF TITLE By: Its: ----------------------------- -------------------------- SIGNATURE OF TITLE Bank Copy 10 [COMERICA LOGO] BORROWER'S AUTHORIZATION - -------------------------------------------------------------------------------- Date: November 13, 2000 I (we) hereby authorize and direct Comerica Bank-California ("Bank") to pay to Comerica DDA # 1891220855 $600,000.00 ----------------------------------------------------- ------------------- to Comerica DDA # 1891220848 $ 20,000.00 ----------------------------------------------------- ------------------- to $ ----------------------------------------------------- ------------------- to $ ----------------------------------------------------- ------------------- of the proceeds of my (our) loan from the Bank evidenced by a note in the original principal amount of: $1,000,000.00 , dated November 13, 2000 . ----------------------------------------- ------------------------ Borrower(s): Bay Area Multimedia, Inc. By: /s/ RAYMOND MUSCI Its: President ------------------------------------------------------------------- SIGNATURE OF TITLE By: Its: ------------------------------------------------------------------- SIGNATURE OF TITLE By: Its: ------------------------------------------------------------------- SIGNATURE OF TITLE By: Its: ------------------------------------------------------------------- SIGNATURE OF TITLE EX-10.25 35 v72115orex10-25.txt EXHIBIT 10.25 1 EXHIBIT 10.25 BAYAREA MULTIMEDIA, INC. 333 West Santa Clara Street, Suite 930 San Jose, California 95113 December 26, 2000 COMERICA BANK-CALIFORNIA 333 West Santa Clara Street San Jose, CA 95113 Attn: Stephen Moore Re: Money Market Account No. 1891392944 Gentlemen: In connection with certain financing transactions between BayArea Multimedia, Inc., a California corporation, ("Borrower") and Comerica Bank-California ("Bank") a deposit in the amount of One Million and 00/100 Dollars ($1,000,000.00) will be maintained with Bank in money market account no. 1891392944 (the "Money Market Account") at Bank's San Jose office. Borrower hereby irrevocably assigns, pledges and grants a lien on and security interest to Bank in the Money Market Account, all funds deposited from time to time in the Money Market Account, all interest earned on the Money Market Account, and all proceeds thereof. The Money Market Account shall remain under Bank's sole dominion and control. Borrower further agrees that no funds shall be returned to Borrower until all of Borrower's obligations to Bank, set forth in the Loan & Security Agreement (Accounts and Inventory) dated November 13, 2000 by and between Bank and Borrower (the "Loan Agreement"), have been satisfied in full. In order to ensure the right and authority of Bank to sign on behalf of Borrower or take any action in the name of Borrower, Borrower hereby irrevocably appoints Bank Borrower's attorney-in-fact, with full authority in the place and stead of Borrower and in the name of Borrower, or any of them, from time to time in Bank's discretion, to take any action and execute any instrument, document, receipt or other agreement which Bank may deed necessary or advisable to accomplish the purposes of this letter agreement including the exercise of any withdrawal or control of the Money Market Account. This power of attorney is coupled with an interest and is irrevocable. By signing this Agreement, Bank and Borrower agree: 1. That the Money Market Account shall be maintained solely for the benefit of Bank and shall be subject to written instructions only from an officer of Bank; and 2. That the Money Market Account is to be a blocked account and that no withdrawals (other than the exercise of Bank's rights) may be made from the Money Market Account without the prior written consent of Bank. Borrower represents and warrants that Borrower owns the Money Market Account, free and clear of any other lien, security interest, or encumbrances whatsoever. 2 COMERICA BANK-CALIFORNIA Attn: Stephen Moore December 27, 2000 Page 2 This Agreement shall be governed by and construed in accordance with the laws of the State of California. In the event any action is commenced in connection with the enforcement of the terms of this letter agreement, the prevailing party shall be entitled to costs and expenses, including reasonable attorneys' fees. Borrower agrees that on occurrence of any of the events specified in Section 7 of the Loan Agreement, Bank may collect and realize upon all funds in the Money Market Account, without demand or prior notice to Borrower. The parties hereto further agree that none of the terms and provisions contained herein may be waived, altered, modified, or amended except by an agreement in writing executed by each of the parties hereto. BAYAREA MULTIMEDIA, INC. By: /s/ RAY MUSCI -------------------------- Its: President -------------------------- COMERICA BANK-CALIFORNIA By: /s/ DAVID JACKSON -------------------------- Its: Vice President -------------------------- EX-10.26 36 v72115orex10-26.txt EXHIBIT 10.26 1 Exhibit 10.26 (Confidential Portions Omitted) LICENSED PUBLISHER AGREEMENT LICENSED PUBLISHER AGREEMENT, entered into as of the 2nd day of February 2000 (the "Agreement" or "LPA"), by and between SONY COMPUTER ENTERTAINMENT AMERICA, a division of Sony Computer Entertainment America Inc., with offices at 919 E. Hillsdale Boulevard, Foster City, CA 94404 (hereinafter "SCEA"), and BAM!, with offices at 333 West Santa Clara Street, Suite 930 San Jose, CA 95113 (hereinafter "Publisher"). WHEREAS, SCEA and/or affiliated companies have developed a CD-based interactive console for playing video games and for other entertainment purposes known as the PlayStation(R) game console (hereinafter referred to as the "Player") and also own or have the right to grant licenses to certain intellectual property rights used in connection with the Player. WHEREAS, Publisher desires to be granted a non-exclusive license to publish, have manufactured, market, distribute and sell Licensed Products (as defined below) pursuant to the terms and conditions set forth in this Agreement. WHEREAS, SCEA is willing, on the terms and subject to the conditions of this Agreement, to grant Publisher the desired non-exclusive license to publish, have manufactured, market, distribute and sell Licensed Products in accordance with the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the representations, warranties and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Publisher and SCEA hereby agree as follows: 1. DEFINITION OF TERMS. 1.1 "Advertising Materials" means any advertising, marketing, merchandising, promotional, public relations (including press releases) and display materials relating to or concerning the Licensed Products, or any other advertising, merchandising, promotional, public relations (including press releases) and display materials depicting any of the Licensed Trademarks. 1.2 "Affiliate of SCEA" means, as applicable, either Sony Computer Entertainment Inc. in Japan, Sony Computer Entertainment Europe in the United Kingdom or such other Sony Computer Entertainment entity as may be established by Sony Computer Entertainment Inc. from time to time. 1.3 "CD Magazine" means a magazine in PlayStation Disc format to be produced by SCEA, which incorporates first and third party Product Information, in addition to hints and tips, interviews and other SCEA and Player-related information, and which will be sold to subscribers and other consumers or used for other promotional purposes of SCEA. 1.4 "Consumer Promotional Disc Program" shall have the meaning set forth in Section 1.36 hereto. 1.5 "Designated Manufacturing Facility" means a manufacturing facility which is designated by SCEA in its sole discretion to manufacture Licensed Products and/or component parts for the Player, which may include manufacturing facilities owned and operated by affiliated companies of SCEA. 1.6 "Development Tools" means the development tools leased and licensed by SCEA to a Licensed Developer pursuant to a Licensed Developer Agreement for use in the development of Executable Software. 1.7 "Executable Software" means Publisher's object code software which include Licensed Developer Software and any software (whether in object code or source code form) provided directly or indirectly by SCEA or an Affiliate of SCEA which is intended to be combined with Licensed Developer Software for execution on the Player and has the ability to communicate with the software resident in the Player. 1.8 "Generic Line" shall have the meaning set forth in Section 8.3 hereto. 1.9 "Guidelines" shall mean SCEA's Guidelines with respect to its Intellectual Property Rights, which may be set forth in the SourceBook or in other documentation provided by SCEA to Publisher. 1.10 "Hit Title Rebate" shall have the meaning set forth in Exhibit A, Section C hereto. 1.11 "Intellectual Property Rights" means, by way of example but not by way of limitation, all current and future worldwide patents and other patent rights, copyrights, trademarks, service marks, trade names, trade dress, mask work rights, trade secret rights, technical information, know-how, and the equivalents of the foregoing under the laws of any jurisdiction, and all other proprietary or intellectual property rights throughout the universe, including without limitation all applications and registrations with respect thereto, and all renewals and extensions thereof. 1.12 "Legal Copy" means any legal or contractual information required to be used in connection with a Licensed Product or Product Information, including but not limited to copyright and trademark attributions, contractual credits and developer or distribution credits. -1- 2 1.13 "Licensed Developer" means any developer which is licensed by SCEA or an Affiliate of SCEA to develop Licensed Products pursuant to a valid and then current Licensed Development Agreement. 1.14 "Licensed Developer Agreement" or "LDA" means a valid and current agreement or renewal thereof between a Licensed Developer and SCEA, or an equivalent such agreement between a Licensed Developer and an Affiliate of SCEA (e.g., the LDA with SCEE). 1.15 "Licensed Developer Software" means Licensed Developer's application source code and data (including audio and video material) developed by a Licensed Developer in accordance with its LDA, which, either by itself or combined with other Licensed Developer Software, when integrated with any software (whether in object code or source code form) provided by SCEA or an Affiliate of SCEA, creates Executable Software. 1.16 "Licensed Products" means the Executable Software (which may be combined with Executable Software of two or more Licensed Developers) which has been approved by SCEA in accordance with the terms and conditions of this Agreement, and which is embodied on CD-ROM media in the form of PlayStation Discs. 1.17 "Licensed Publisher" means any publisher which is licensed by SCEA to publish, have manufactured, market, distribute and sell Licensed Products pursuant to a valid and then current Licensed Publisher Agreement. 1.18 "Licensed Publisher Agreement" or "LPA" means a valid and current agreement or renewal thereof between a Licensed Publisher and SCEA. 1.19 "Licensed Territory" means the United States (including its possessions and territories), Canada and Mexico, as may be modified and/or supplemented by SCEA from time to time pursuant to Section 4.4 below. 1.20 "Licensed Trademarks" means the trademarks, service marks, trade dress and logos designated by SCEA in the SourceBook or other documentation provided by SCEA to Publisher as being licensed to Publisher. Nothing contained in this Agreement shall in any way grant Publisher the right to use the trademark "Sony" in any manner as a trademark, trade name, service mark or logo. SCEA may amend such Licensed Trademarks from time to time in the SourceBook or other documentation provided by SCEA to Publisher or upon written notice to Publisher. 1.21 "Manufacturing Specifications" means specifications setting forth terms relating to the manufacturing and assembly of Licensed Products, Packaging, Printed Materials and their component parts, which shall be set forth in the SourceBook or other documentation provided by SCEA to Publisher. 1.22 "Master Disc" means a gold CD-ROM disc in the form requested by SCEA containing the final pre-production Executable Software for a Licensed Product, which has been approved by SCEA pursuant to Section 5.4 and meets the Manufacturing Specifications. 1.23 "Official Magazine Demo" means a demo disc in PlayStation Disc format, to be produced by SCEA, containing first and third party Product Information, which will be "packed-in" to any official PlayStation magazine of SCEA or used for other promotional purposes of SCEA. 1.24 "Packaging" means, with respect to each Licensed Product, the carton, containers, packaging, edge labels and other proprietary labels, trade dress and wrapping materials, including any jewel case (or other container) or parts thereof (including any portion of the jewel case containing Licensed Trademarks), but excluding Printed Materials and PlayStation Discs. 1.25 "Pack-in Sampler Disc" means a demo disc in PlayStation Disc format to be produced by SCEA, containing first and third party Product Information, which shall be "packed-in" to the Player hardware box or used for other promotional purposes of SCEA. 1.26 "PlayStation Discs" means the distinctive black PlayStation interactive software CD-ROM discs compatible with the Player which are manufactured on behalf of Publisher which contain the Licensed Product or SCEA Demo Discs. 1.27 "Printed Materials" means all artwork and mechanicals set forth on the CD label of the PlayStation Disc relating to the Licensed Product and on or inside the jewel case (or other container) and/or if applicable, on or inside the box (or other) Packaging for the Licensed Product, and all instructional manuals, liners, inserts, trade dress and other user information and/or materials to be inserted into the jewel case and/or other Packaging. 1.28 "Product Information" means either (i) object code of a Licensed Product representing a playable portion of such Licensed Product ("Demo"); or (ii) a representative video sample of the Licensed Product; (iii) other Licensed Product related information, including but not limited to hints and tips, artwork, depictions of Licensed Product cover art, videotaped interviews, etc. With respect to Product Information provided in Demo form, the Demo delivered shall not consist of a complete game and shall be, at a minimum, an amount sufficient to demonstrate the game's core features and value, without providing too much game play so as to give the consumer a disincentive to purchase the complete Licensed Product, and such Demo shall also include any required Legal Copy on the title screen. 1.29 "Purchase Order" means a written purchase order processed in accordance with SCEA's instructions provided in this Agreement or provided separately by SCEA to Publisher. - 2 - 3 1.30 "Retail Sampler Disc" means a demo disc in PlayStation Disc format to be produced by SCEA, which contains first and third party Product Information, which will be sold at retail or used for other promotional purposes of SCEA. 1.31. "SCEA Demo Disc" means the SCEA developed and marketed demo discs, including the CD Magazine, Official Magazine Demo, Pack-in Sampler Disc, Retail Sampler Disc, and any other first party demo disc created by SCEA subsequent to the date of this Agreement in which SCEA invites Licensed Publishers to participate. Unless otherwise agreed in a separate agreement with Publisher, SCEA shall not charge any fees or royalties to Publisher for inclusion in SCEA Demo Discs. 1.32 "SCEA Established Third Party Demo Disc Programs" shall have the meaning set forth in Section 1.36 hereto. 1.33 "SCEA Product Code" shall mean the product identification number assigned to each Licensed Product, which shall consist of separate product identification numbers for multiple disc sets (i.e., SLUS-xxxxx). This SCEA Product Code is used on the Packaging and PlayStation Disc relating to each Licensed Product, as well as on most communications between SCEA and Publisher as a mode of identifying the Licensed Product other than by title. 1.34 "Sony Materials" means any hardware, data, object code, source code, documentation (or any part(s) of any of the foregoing), including without limitation any portion or portions of the Development Tools, which are provided or supplied by SCEA or an Affiliate of SCEA to Publisher or any Licensed Developer and/or other Licensed Publisher. 1.35 "SourceBook" means the SourceBook (or any other reference guide containing information similar to the SourceBook but designated with a different name) prepared by SCEA, which is provided separately to Publisher. The SourceBook is designed to serve as the first point of reference by Publisher in every phase of the development, approval, manufacture and marketing of Licensed Products. 1.36 "Third Party Demo Disc" means any demo disc in PlayStation Disc format which contains Product Information and which SCEA has granted Publisher permission to produce or which complies with the terms of an SCEA Established Third Party Demo Disc Program. For purposes of this Agreement, "SCEA Established Third Party Demo Disc Programs" shall include (i) the Consumer Promotional Disc Program, whereby Publisher produces a sample disc, for promotional use only and not for resale, to promote Licensed Products to consumers by creating a sampler containing Product Information from multiple Licensed Products or Product Information from a single Licensed Product; (ii) the Trade Promotional Disc Program, whereby Publisher produces a sample disc incorporating a beta version of Publisher's Licensed Products which have been concept approved by SCEA, for promotional use only and not for resale, to promote its Licensed Products to retailers, journalists and/or trade partners prior to release of such Licensed Products and (iii) any other third party demo disc program established by SCEA for Licensed Publishers in the future. 1.37 "Trade Promotional Disc Program" shall have the meaning set forth in Section 1.36 hereto. 1.38 "Unit" means a copy of each individual Licensed Product game title regardless of the number of PlayStation Discs constituting such Licensed Product game title. 2. LICENSE GRANT. SCEA hereby grants to Publisher, and Publisher hereby accepts, for the term of this Agreement, within the Licensed Territory, under Intellectual Property Rights owned or licensed by SCEA, a non-exclusive, non-transferable license, without the right to sublicense (except as specifically provided herein), to publish Licensed Products, which right to publish shall be limited to the following rights and other rights set forth in this LPA: (i) to enter into agreements with Licensed Developers and other third parties pursuant to Sections 3 and 17.5 hereto to develop Licensed Products which have been approved by SCEA in accordance with the terms of this LPA; (ii) to have such Licensed Products manufactured in accordance with the terms of this LPA; (iii) to market, distribute and sell such Licensed Products and to authorize others to do so in accordance with the terms of this LPA; (iv) to use the Licensed Trademarks strictly and only in connection with the marketing, packaging, advertising and promotion of the Licensed Products, and subject to SCEA's right of approval as provided herein; (v) to sublicense to end users the right to use the Licensed Products for noncommercial purposes only and not for public performance; and (vi) from time to time to participate by invitation of SCEA in the "Third Party Greatest Hits" program on terms and conditions to be determined and published by SCEA and separately agreed with Publisher. 3. DEVELOPMENT OF LICENSED PRODUCTS. This LPA grants Publisher the right to publish, have manufactured, market, distribute and sell Licensed Products, and does not authorize Publisher to develop Licensed Products or to lease or license Development Tools from SCEA to assist in such development. In order for Publisher to have Licensed Products developed for the Player or to lease or license Development Tools from SCEA to assist in such development, it must either (i) enter into a Licensed Developer Agreement directly with SCEA or with an Affiliate of SCEA; or (ii) enter into an agreement with a Licensed Developer for the development of Licensed Products. Publisher may also publish, have manufactured, market, distribute and/or sell Licensed Products for a Licensed Developer or another Licensed Publisher pursuant to the terms of this Agreement. -3- 4 Publisher shall notify SCEA in writing of the identity of any third party or Licensed Developer with whom it has contracted to develop, publish, have manufactured, market, distribute and/or sell Licensed Products within thirty (30) days of entering into an agreement or other arrangement with the third party. Publisher shall have the responsibility for determining that any developers or other third parties meet the criteria set forth herein. It shall be considered a material breach of this LPA for Publisher to provide Development Tools or other Sony Materials to an unlicensed developer or other third party. 4. LIMITATIONS ON LICENSES; RESERVATION OF RIGHTS. 4.1 REVERSE ENGINEERING PROHIBITED. Publisher hereby agrees not to directly or indirectly disassemble, decrypt, electronically scan, peel semiconductor components, decompile, or otherwise reverse engineer in any manner or attempt to reverse engineer or derive source code from, all or any portion of the Sony Materials (whether or not all or any portion of the Sony Materials are integrated with Licensed Developer Software), or permit or encourage any third party to do so. Publisher shall not use, modify, reproduce, sublicense, distribute, create derivative works from, or otherwise provide to third parties, the Sony Materials, in whole or in part, other than as expressly permitted by this Agreement. Publisher shall be required in all cases to pay royalties in accordance with Section 9 hereto to SCEA on any of Publisher's products utilizing Sony Materials. The burden of proof under this Section shall be on Publisher, and SCEA reserves the right to require Publisher to furnish evidence satisfactory to SCEA that this Section has been complied with. 4.2 RESERVATION OF SCEA'S RIGHTS. The licenses granted in this Agreement from SCEA to Publisher extend only to publishing, manufacturing, marketing, distribution and sale of Licensed Products for use on the Player, in such format as may be designated by SCEA. Without limiting the generality of the foregoing and except as otherwise provided herein, Publisher shall not have the right to distribute or transmit the Executable Software or the Licensed Products (to the extent each includes Sony Materials) via electronic means or any other means now known or hereafter devised, including without limitation, via wireless, cable, fiber optic means, telephone lines, microwave and/or radio waves, or over a network of interconnected computers or other devices. This Agreement does not grant any right or license, under any Intellectual Property Rights of SCEA or otherwise, except as expressly provided herein, and no other right or license is to be implied by or inferred from any provision of this Agreement or the conduct of the parties hereunder. Publisher shall not make use of any of the Sony Materials and/or any Intellectual Property Rights or Licensed Trademarks related to the Sony Materials and/or Player (or any portion thereof) except as authorized by and in compliance with the provisions of this Agreement or as may be otherwise expressly authorized in writing by SCEA. No right, license or privilege has been granted to Publisher hereunder concerning the development of any collateral product or other use or purpose of any kind whatsoever which displays or depicts any of the Licensed Trademarks. The rights set forth in Section 2(v) hereto are limited to the right to sublicense such rights to end users for non-commercial use; any public performance relating to the Licensed Product or the Player is prohibited unless expressly authorized in writing by SCEA. 4.3 RESERVATION OF PUBLISHER'S RIGHTS. Separate and apart from Sony Materials licensed to Publisher hereunder, Publisher (or a Licensed Developer, as determined between Publisher and such Licensed Developer) retains all rights, title and interest in and to the Licensed Developer Software, including without limitation, Publisher's (or Licensed Developer's) Intellectual Property Rights therein, as well as all of Publisher's (or Licensed Developer's) rights in any source code and other underlying material such as artwork and music related thereto, created by Publisher (or Licensed Developer) and contained therein, and nothing in this Agreement shall be construed to restrict the right of Publisher to develop, distribute or transmit products incorporating the Licensed Developer Software and such underlying material (separate and apart from the Sony Materials) for any hardware platform or service other than the Player or from using the Printed Materials or any Advertising Materials approved by SCEA as provided herein (provided that such Printed Materials and/or Advertising Materials do not contain any Licensed Trademarks) as Publisher determines for such other platforms. 4.4 ADDITIONS TO AND DELETIONS FROM LICENSED TERRITORY. SCEA may, from time to time, add one or more countries to the Licensed Territory by providing written notice of such addition to Publisher. SCEA shall also have the right to delete, and intends to delete any country or countries from the Licensed Territory if, in SCEA's reasonable judgment, the laws or enforcement of such laws in such country or countries do not protect SCEA's Intellectual Property Rights. In the event a country is deleted from the Licensed Territory, SCEA shall deliver to Publisher a notice stating the number of days within which Publisher shall cease exercising such licenses in the deleted country or countries. Publisher agrees to cease exercising such licenses, directly or through subcontractors, in such deleted country or countries, by the end of the period stated in such notice. 5. QUALITY STANDARDS FOR THE LICENSED PRODUCTS. 5.1 QUALITY ASSURANCE GENERALLY. The Licensed Products, including, without limitation, the contents and title of each of the Licensed Products, and/or Publisher's use of any of the Licensed Trademarks, shall be subject to SCEA's prior written approval, which shall not be unreasonably withheld or delayed and which shall be within SCEA's sole discretion as to acceptable standards of quality. SCEA shall have the right at any stage of the development of the Licensed Product to review such Licensed Product to ensure that it meets SCEA's quality assurance standards. Publisher agrees that all Licensed Products will be designed (if an original title for the Player) -4- 5 or modified (if a pre-existing title) to substantially utilize the particular capabilities of the Sony Materials and the Player, including but not limited to utilizing the software libraries and graphics capabilities of the Player. 5.2 PRODUCT PROPOSALS. 5.2.1 SUBMISSION OF PRODUCT PROPOSAL. Before Publisher contracts with a Licensed Developer for the creation of Licensed Developer Software (or, if Publisher is also a Licensed Developer, before Publisher commences programming of the Licensed Developer Software) for each of the Licensed Products, Publisher shall submit to SCEA, for SCEA's written approval or disapproval (which shall not be unreasonably withheld or delayed), a written proposal (the "Product Proposal") in accordance with the procedures specified in the SourceBook. Such Product Proposal must consist of a complete description of the proposed Licensed Product and such other information specified in the SourceBook, including but not limited to the scheduled and/or anticipated delivery date of final Executable Software, as well as any additional information that SCEA may deem to be useful in evaluating the proposed licensed Product, which may include samples of past work. 5.2.2 APPROVAL OF PRODUCT PROPOSAL. After SCEA's review of Publisher's Product Proposal, Publisher will receive written notice of the following possible statuses: (i) Approved; (ii) Conditional Approval; (iii) Re-submission Requested; or (iv) Not Approved. Such statuses shall have the meaning ascribed to them in the SourceBook, and may be changed from time to time by SCEA in subsequent versions of the SourceBook. Any requested re-submissions shall be made at Publisher's cost. If a Product Proposal is "Not Approved", then Publisher cannot re-submit such Product Proposal without significant, substantive revisions. In addition, if a Product Proposal as submitted by any Licensed Publisher or Licensed Developer is "Not Approved" by SCEA, it cannot be re-submitted by another Licensed Publisher or Licensed Developer without significant, substantive revisions. Publisher shall notify SCEA promptly in writing in the event of any material proposed change in any portion of the Product Proposal. SCEA's approval of a Product Proposal shall not obligate Publisher to continue with development or production of the proposed Licensed Product, provided that Publisher must immediately notify SCEA in writing if it discontinues, cancels or otherwise delays past the original scheduled delivery date the development of any proposed Licensed Product. If Publisher licenses a Licensed Product from a Licensed Developer, it shall immediately notify SCEA of such license, and SCEA will inform Publisher as to the status of the Product Proposal and Review Process for such Licensed Product and this Agreement shall govern the approval process of such Licensed Product after any such notification. SCEA shall have no obligation to approve any Product Proposal submitted by Publisher, and any development conducted by or at the direction of Publisher shall be at Publisher's own risk. Nothing herein shall restrict SCEA from commercially exploiting any coincidentally similar concept(s) and/or product(s) which have been independently developed by SCEA, an Affiliate of SCEA or any third party without reference to or reliance upon Publisher's work. 5.3 REVIEW OF WORK-IN-PROGRESS. SCEA has the right pursuant to this Agreement to require Publisher to submit to SCEA work-in-progress on the Licensed Product at certain intervals throughout the development of such Licensed Product and, upon written notice to Publisher, at any time during the development process. Upon receipt by Publisher of "Approved" or "Conditional Approval" status of the Licensed Product, Publisher must, within the time frame indicated in the approval letter, communicate with SCEA and mutually agree on a framework for the review of such Licensed Product throughout the development process ("Review Process"). Once the Review Process has begun, Publisher shall be responsible for submitting work-in-progress to SCEA in accordance with such Review Process. FAILURE TO SUBMIT WORK-IN-PROGRESS IN ACCORDANCE WITH ANY STAGE OF THE REVIEW PROCESS MAY AT SCEA'S DISCRETION, RESULT IN REVOCATION OF APPROVAL OF SUCH LICENSED PRODUCT. SCEA shall have the right to approve, reject or require additional information with respect to each stage of the Review Process, which shall not be unreasonably withheld or delayed by SCEA. SCEA shall specify in writing the reasons for any such rejection or request for additional information and shall state what corrections and/or improvements are necessary. If any stage of the Review Process is not provided to SCEA or, after a reasonable cure period agreed to between SCEA and Publisher, is not successfully met, SCEA shall have the right to revoke the approval of Publisher's Product Proposal. No approval by SCEA of any particular stage of the Review Process shall be deemed an approval of any other stage, nor shall any such approval be deemed to constitute a waiver of any approval requirement with respect to any other stage or any of SCEA's rights under this Agreement. LICENSED PRODUCTS WHICH ARE CANCELED BY PUBLISHER OR ARE LATE IN MEETING THE FINAL EXECUTABLE SOFTWARE STAGE OF THE REVIEW PROCESS BY MORE THAN THREE (3) MONTHS (WITHOUT AGREEING WITH SCEA ON A MODIFIED FINAL EXECUTABLE SOFTWARE DELIVERY DATE) ARE SUBJECT TO RE-SUBMISSION OF PRODUCT PROPOSAL, IN WHICH EVENT SCEA MAY RE-APPROVE OR DISAPPROVE SUCH PRODUCT PROPOSAL. The "Approved" or "Conditional Approval" status of the Product Proposal shall not be construed by Publisher as full approval of all elements of such Licensed Product, or as a commitment by SCEA to grant final approval to the Licensed Product. Failure to make changes required by SCEA to the Licensed Product at any stage of the Review Process, or making material changes to the Licensed Product without SCEA's approval may, in addition to the provisions set forth in this Section, subject Publisher to the termination provisions set forth in Section 15.3 hereto. 5.4 APPROVAL OF EXECUTABLE SOFTWARE. Publisher shall, on or before the date specified in the Product Proposal or as determined by SCEA pursuant to the Review Process, deliver to SCEA for its inspection and evaluation, a final version of the Executable Software for the proposed Licensed Product. SCEA will evaluate such final version -5- 6 of the Executable Software and notify Publisher in writing of its approval or disapproval of such Executable Software, which shall not be unreasonably withheld or delayed. If such Executable Software is disapproved, SCEA shall specify in writing the reasons for such disapproval and state what corrections and/or improvements are necessary. After making the necessary corrections and/or improvements, Publisher may submit a new version of such Executable Software for approval or disapproval by SCEA. No approval by SCEA or any element of the Executable Software shall be deemed an approval of any other element of the Licensed Product, nor shall any such approval be deemed to constitute a waiver of any of SCEA's rights under this Agreement. SCEA shall have the right to disapprove Executable Software if it fails to comply with one or more conditions as set forth in the SourceBook with no obligation to review all elements of such version of Executable Software. All final versions of Executable Software shall be submitted in the format prescribed by SCEA and shall include such number of gold master copies as SCEA may require from time to time. Publisher warrants that all final versions of Executable Software are fully tested and shall use its best efforts to ensure that final versions of Executable Software are fully debugged prior to submission to SCEA. In addition, prior to manufacture of Executable Software, Publisher shall be required to sign an affidavit (in the form of attached Exhibit B) stating that the Executable Software complies or will comply with standards set forth in the SourceBook or other documentation provided by SCEA to Publisher, Publisher approves the release of such Executable Software for manufacture in its current form and Publisher shall be fully responsible for any problems related to such Executable Software. 5.5 PUBLISHER'S ADDITIONAL QUALITY ASSURANCE OBLIGATIONS. If at any time or times subsequent to the approval of the Executable Software pursuant to Section 5.4, SCEA identifies any material bugs (such materiality to be determined by SCEA in its sole discretion) with respect to the Licensed Product or any material bugs are brought to the attention of SCEA or in the event that SCEA identifies any improper use its Licensed Trademarks or other Sony Materials with respect to the Licensed Product or any such improper use is brought to the attention of SCEA, Publisher shall, at no cost to SCEA, promptly correct any such material bugs, or improper Licensed Trademark or Sony Material use, to SCEA's commercially reasonable satisfaction, which may include, if necessary in SCEA's judgment, the recall and re-release of such Licensed Product. In the event any Units of any of the Licensed Products create any reasonable risk of loss or damage to any property or injury to any person, Publisher shall immediately take effective steps, at Publisher's sole liability and expense, to recall and/or to remove such defective Licensed Product from any affected channels of distribution, provided, however, that if Publisher is not acting as the distributor and/or seller for the Licensed Products, its obligation hereunder shall be to use its best efforts to arrange removal of such Licensed Product from channels of distribution. Publisher shall provide all end-user support for the Licensed Products and SCEA expressly disclaims any obligation to provide end-user support on Publisher's Licensed Products. 5.6 APPROVAL OF PRINTED MATERIALS. For each proposed Licensed Product, Publisher shall be responsible, at Publisher's expense, for creating and developing all Printed Materials. All Printed Materials shall comply with the Guidelines, which may be amended from time to time, provided that Publisher shall, except as otherwise provided herein, only be required to implement any such amended Guidelines in subsequent orders of Printed Materials and shall not be required to recall or destroy previously manufactured Printed Materials unless such Printed Materials do not comply with the original requirements in the Guidelines or unless explicitly required in writing by SCEA pursuant to a legal requirement involving SCEA's Intellectual Property Rights. Failure to follow the Guidelines and/or to submit or resubmit Printed Materials to SCEA as set forth herein, and in Section 7.1.3.1 hereto shall be a material breach of this Agreement and the provisions of Section 15.3 shall apply. No later than the time final Executable Software for a proposed Licensed Product is submitted to SCEA for inspection and evaluation, Publisher shall also deliver to SCEA, for review and evaluation, the proposed final Printed Materials for such proposed Licensed Product and a form of limited warranty for the proposed Licensed Product. Publisher acknowledges that failure to meet any scheduled release dates for a Licensed Product are solely the risk and responsibility of Publisher, and SCEA assumes no responsibility for Publisher failing to meet such scheduled release dates due to disapproval of Printed Materials relating to such Licensed Product. Publisher agrees that the quality of such Printed Materials shall be of the same quality of that associated with other commercially available high quality consumer products. If any of the Printed Materials are disapproved, SCEA shall specify the reasons for such disapproval and state what corrections are necessary. SCEA shall have no liability to Publisher for costs incurred or irrevocably committed to by Publisher for production of Packaging or Printed Materials that is disapproved by SCEA. After making the necessary corrections to the disapproved Printed Materials, Publisher must submit new proposed Printed Materials for approval by SCEA. SCEA shall not unreasonably withhold or delay its review of the proposed Printed Materials. No approval by SCEA of any element of the Printed Materials shall be deemed an approval of any other element of the Licensed Product, nor shall any such approval by deemed to constitute a waiver of any of SCEA's rights under this Agreement. In addition, SCEA's approval of any element of Printed Materials shall not release Publisher from any of its representations and warranties in Section 10.2 hereunder. 5.7 APPROVAL OF ADVERTISING MATERIALS. Pre-production samples of all Advertising Materials relating to Licensed Products shall be submitted by Publisher to SCEA, free of cost, for SCEA's evaluation and approval, which shall not be unreasonably withheld or delayed, as to the quality, style, appearance and usage of any of the Licensed Trademarks, appropriate references of any -6- 7 required notices and compliance with the Guidelines, prior to any actual production, use or distribution of any such items by Publisher or on its behalf. No such proposed Advertising Materials shall be produced, used or distributed directly or indirectly by Publisher without first obtaining the written approval of SCEA. If any of the Advertising Materials are disapproved, SCEA shall specify the reasons for such disapproval and state what corrections are necessary. SCEA may require Publisher to immediately withdraw and reprint any Advertising Materials which have been published but have not received the written approval of SCEA. SCEA shall have no liability to Publisher for costs incurred or irrevocably committed to by Publisher for production of Advertising Materials that are disapproved by SCEA. For each Licensed Product, Publisher shall be required to deliver to SCEA an affidavit (in the form of attached Exhibit C) stating that all advertising and promotional materials for the Licensed Product complies or will comply with the Guidelines for use of the Licensed Trademarks. After making the necessary corrections to the disapproved Advertising Materials, Publisher must submit new proposed Advertising Materials for approval by SCEA. SCEA shall not unreasonably withhold or delay its review of the proposed Advertising Materials. Failure to follow the Guidelines and/or to submit or resubmit Advertising Materials to SCEA for review shall be a material breach of this Agreement. PUBLISHERS WHO FAIL TO SUBMIT ADVERTISING MATERIALS TO SCEA FOR REVIEW OR OTHERWISE BROADCAST OR PUBLISH ADVERTISING MATERIALS WITHOUT THE APPROVAL OF SCEA SHALL BE SUBJECT TO THE PROVISIONS OF THE "THREE STRIKES" PROGRAM AS OUTLINED IN THE SOURCEBOOK WHICH COULD RESULT IN TERMINATION OF THIS LPA; TERMINATION OF THE LICENSED PRODUCT; OR COULD SUBJECT PUBLISHER TO THE PROVISIONS OF SECTION 15.4 HERETO. Subject in each instance to the prior written approval of SCEA (not to be unreasonably withheld), Publisher may use such textual and/or pictorial advertising matter (if any) as may be created by SCEA or in its behalf pertaining to the Sony Materials and/or to the Licensed Trademarks on such promotional and advertising materials as may, in Publisher's judgment, promote the sale of the Licensed Products within the Licensed Territory. Publisher shall include, at Publisher's cost and expense, the required consumer advisory rating code(s) on any and all Advertising Materials used in connection with the Licensed Product, which shall be procured in accordance with the provisions of Section 6 below. Publisher acknowledges that failure to meet any scheduled release dates for Advertising Materials is solely the risk and responsibility of Publisher, and SCEA assumes no responsibility for Publisher failing to meet such scheduled release dates due to approval requirements as set forth in this Section. No approval by SCEA of any element of the Advertising Materials shall be deemed an approval of any other element of the Licensed Product, nor shall any such approval be deemed to constitute a waiver of any of SCEA's rights under this Agreement. In addition, SCEA's approval of any element of Advertising Materials shall not release Publisher from any of its representations and warranties in Section 10.2 hereunder. 6. LABELING REQUIREMENTS. All Printed Materials for each Unit of the Licensed Products shall have conspicuously, legibly and irremovably affixed thereto the notices specified in a template provided in the SourceBook or other documentation provided by SCEA to Publisher, which template may be amended from time to time by SCEA during the term of this Agreement, following which Publisher will incorporate such amendment into its next print run for the Licensed Products. Publisher agrees that, if required by SCEA or any governmental entity, it shall submit each Licensed Product to a consumer advisory ratings system designated by SCEA and/or such governmental entity for the purpose of obtaining rating code(s) for each Licensed Product. Any and all costs and expenses incurred in connection with obtaining such rating code(s) shall be borne solely by Publisher. Any required consumer advisory rating code(s) procured hereby shall be displayed on the Licensed Product and in the associated Printed Materials and Advertising Materials in accordance with the SourceBook or other documentation provided by SCEA to Publisher, at Publisher's cost and expense. 7. MANUFACTURE OF THE LICENSED PRODUCTS. 7.1 MANUFACTURE BY SCEA. 7.1.1 APPOINTMENT OF SCEA AS MANUFACTURER. Publisher hereby appoints SCEA, and SCEA hereby accepts such appointment, as the manufacturer of PlayStation Discs and, subject to Section 7.1.3 below, the manufacturer and assembler of such PlayStation Discs with Printed Materials and Packaging. Publisher acknowledges and agrees that it shall purchase from SCEA or a Designated Manufacturing Facility [*] of its requirements for PlayStation Discs, during the term of the Agreement. SCEA shall provide to Publisher written Manufacturing Specifications, which may be amended from time to time upon reasonable notice to Publisher. SCEA shall have the right, but no obligation, to contract or subcontract any phase of production or manufacture of any or all of the Licensed Products, the Packaging, the Printed Materials or any part thereof, subject to Section 14 below. Any Designated Manufacturing Facility shall be a third party beneficiary of this Agreement. 7.1.2 CREATION OF MASTER CD-ROM. Following approval by SCEA of each Licensed Product pursuant to Section 5.4, Publisher shall provide SCEA with the number of Master Discs specified in the SourceBook or in any other documentation separately provided by SCEA to Publisher. SCEA or a Designated Manufacturing Facility shall create from one of the Master Discs provided by Publisher the original master CD-ROM, from which all other copies of the Licensed Product are to be replicated. Publisher shall be responsible for the costs, as set forth in the Manufacturing Specifications, of creating such original master CD-ROM. In order to insure against loss or damage to the copies of the Executable Software furnished to SCEA, Publisher will retain duplicates of all such Master -7- * Confidential portion omitted and filed separately with the Commission. 8 Discs. Neither SCEA nor a Designated Manufacturing Facility shall be liable for loss of or damage to any copies of the Master Discs or Executable Software. 7.1.3 PRINTED MATERIALS, PACKING AND ASSEMBLY SERVICES. 7.1.3.1 PRINTED MATERIALS. If Publisher elects to obtain Printed Materials from SCEA, Publisher shall deliver the film for all SCEA approved Printed Materials to SCEA or, if appropriate, at SCEA's option, to a Designated Manufacturing Facility in accordance with the Manufacturing Specifications, at Publisher's sole risk and expense. Publisher may elect, subject to SCEA's approval as provided in Section 5.6 hereto and in this section, to be responsible for manufacturing its own Printed Materials. In the event that Publisher elects to be responsible for manufacturing the Printed Materials (other than any Artwork which may be placed directly upon the PlayStation Disc, which will be supplied to SCEA for placement on the PlayStation Disc), Publisher shall deliver one hundred and ten percent (110%) of the number of Units of such Printed Materials to SCEA or at SCEA's option to a Designated Manufacturing Facility, within the time frame specified in the Manufacturing Specifications, in the minimum order quantities set forth in Section 7.2.2 below, at Publisher's sole risk and expense. Publisher shall be required to supply SCEA with twenty-four (24) samples of any Printed Materials not produced or supplied by SCEA or a Designated Manufacturing Facility prior to production, at no charge to SCEA or such Designated Manufacturing Facility, for SCEA's approval with respect to the quality thereof. Twelve (12) copies of such sample Printed Materials shall be supplied to SCEA and twelve (12) copies shall be supplied to a Designated Manufacturing Facility. In the event that such Printed Materials for a Licensed Product are revised by Publisher prior to a reorder of Units of Licensed Products, then Publisher must submit an additional twenty-four (24) samples to SCEA and a Designated Manufacturing Facility for approval prior to production. Such Printed Materials shall be required to comply with any Manufacturing Specifications established by SCEA for Printed Materials for Licensed Products, and SCEA shall have the right to disapprove any Printed Materials that do not comply with such Manufacturing Specifications. Such Manufacturing Specifications for Printed Materials shall be comparable to the manufacturing specifications applied by SCEA to its own software products for the Player. If Publisher elects to supply its own Printed Materials, neither SCEA nor a Designated Manufacturing Facility shall bear any responsibility for any delays. 7.1.3.2 PACKAGING. Publisher may either obtain Packaging from SCEA or from an alternate source. If Publisher elects to be responsible for manufacturing its own Packaging (other than any edge labels or other proprietary labels and any portion of the jewel case containing Licensed Trademarks, which Publisher will be required to purchase from SCEA or a Designated Manufacturing Facility), Publisher shall assume all responsibility for the creation of such Packaging, at Publisher's sole risk and expense. Publisher shall be responsible for encoding and printing edge labels provided by SCEA or a Designated Manufacturing Facility with information reasonably specified by SCEA from time to time and will apply such labels to each Unit of the Licensed Product as reasonable specified by SCEA. Publisher shall be required to supply SCEA with twenty-four (24) samples of any Packaging not produced or supplied by SCEA or a Designated Manufacturing Facility, at no charge to SCEA or Designated Manufacturing Facility, prior to production for SCEA's approval with respect to the quality thereof. Twelve (12) copies of such sample Packaging shall be supplied to SCEA and twelve (12) copies shall be supplied to a Designated Manufacturing Facility. In the event that Packaging for any Licensed Product is changed in any way after SCEA and a Designated Manufacturing Facility have already approved such Packaging, then Publisher must resubmit an additional twenty-four (24) samples to SCEA and such Designated Manufacturing Facility for approval. Failure to submit or resubmit Packaging to SCEA and a Designated Manufacturing Facility shall constitute a material breach of this Agreement, and the provisions of Section 15.3 shall apply. Such Packaging shall be required to comply with any Manufacturing Specifications established by SCEA for Packaging for Licensed Products, and SCEA shall have the right to disapprove any Packaging that does not comply with such Manufacturing Specifications. Such Manufacturing Specifications for Packaging shall be comparable to the manufacturing specifications applied by SCEA to its own software products for the Player. If Publisher procures Packaging from an alternate source, then it must also procure assembly services from an alternate source; neither SCEA nor a Designated Manufacturing Facility shall be required to assemble such Licensed Product if Packaging is obtained from an alternate source. If Publisher elects to supply its own Packaging and assembly services, neither SCEA nor a Designated Manufacturing Facility shall bear any responsibility for any delays. 7.1.3.3 ASSEMBLY SERVICES. Publisher may either procure assembly services from SCEA or from an alternate source. If Publisher elects to be responsible for assembling the Licensed Products, then SCEA shall ship the component parts of the Licensed Product to a destination provided by Publisher, at Publisher's sole risk and expense. Assembly of Licensed Products shall be required to comply with any Manufacturing Specifications established by SCEA for such assembly services, and SCEA shall have the right to inspect any assembly facilities utilized by Publisher in order to determine if the component parts of the Licensed Products are being assembled in accordance with the Manufacturing Specifications. SCEA shall have the right to require that Publisher recall any Licensed Products that do not contain proprietary labels or other material component parts or that otherwise fail to comply with the Manufacturing Specifications. If Publisher elects to assemble its own Licensed Products, neither SCEA nor a Designated Manufacturing Facility shall bear any responsibility for any delays or missing component parts. Failure to comply with Manufacturing Specifications regarding assembly services shall constitute a material -8- 9 breach of this Agreement, and the provisions of Section 15.3 shall apply. 7.1.4 MANUFACTURE OF UNITS. Upon approval, pursuant to Section 5 and subject to Section 7.1.3, of such pre-production samples of the Executable Software and the associated Printed Materials, Packaging and assembly services, SCEA or a Designated Manufacturing Facility will, in accordance with the terms and conditions set forth in this Section 7, and at Publisher's expense (a) manufacture PlayStation Discs for Publisher; (b) manufacture Publisher's Packaging and/or Printed Materials; and/or (c) assemble the PlayStation Discs with the Printed Materials and the Packaging. 7.2 PRICE, PAYMENT AND TERMS. 7.2.1 PRICE. The applicable price for manufacture of any Units of the Licensed Products ordered hereunder shall be provided to Publisher in the Manufacturing Specifications prior to manufacture of the Licensed Products. Purchase price(s) shall be stated in United States dollars and are subject to change by SCEA at any time upon reasonable notice to Publisher; provided, however, that the applicable price shall not be changed with respect to any Units of Licensed Products which are the subject of an effective Purchase Order but which have not yet been delivered by SCEA to Publisher at the designated F.O.B. point. Prices for finished Units of Licensed Products are exclusive of any foreign or U.S. federal, state, or local sales or value-added tax, use, excise, customs duties or other similar taxes or duties, which SCEA may be required to collect or pay as a consequence of the sale or delivery of any Units of the Licensed Products to Publisher. Publisher shall be solely responsible for the payment or reimbursement of any such taxes, fees and other such charges or assessments applicable to the sale and/or purchase of any finished Units of any of the Licensed Products. 7.2.2 ORDERS. Publisher shall issue to SCEA written Purchase Order(s) in accordance with the Manufacturing Specifications. All Purchase Orders to SCEA shall reference this Agreement, give a Publisher authorization number, specify quantities by Licensed Products, state requested delivery date and all packaging information and be submitted on or with an order form to be provided in the Manufacturing Specifications. All Purchase Orders to SCEA shall be subject to acceptance by SCEA which shall not be unreasonably withheld or delayed. Purchase Orders issued by Publisher to SCEA for each of the Licensed Products approved by SCEA shall be non-cancelable and be for at least [*] Units of such Licensed Product. In the event that SCEA or a Designated Manufacturing Facility manufactures the Printed Materials for the Publisher pursuant to Section 7.1.3 above, Publisher may, at Publisher's option, allow SCEA or such Designated Manufacturing Facility to manufacture an additional 20% of such Printed Materials at Publisher's expense on anticipation of reorders. Publisher agrees that such Printed Materials will be stored by a Designated Manufacturing Facility for a period of no more than one hundred and eighty (180) days, after which time such Printed Materials will, at Publisher's option, either be returned to Publisher at Publisher's cost and expense or be destroyed. Such Designated Manufacturing Facility may also store a reasonably quantity of Printed Materials procured from an alternate source for up to one hundred and eighty (180) days, subject to a reasonable storage fee, after which time such Printed Materials will, at Publisher's option, either be returned to Publisher at Publisher's cost and expense or be destroyed. Publisher shall have no right to cancel or reschedule any Purchase Order (or any portion thereof) for any of the Licensed Products unless the parties shall first have determined the status of such Purchase Order in the manufacturing process and reached mutual agreement as to Publisher's financial liability with respect to any desired cancellation or rescheduling of any such Purchase Order (or any portion thereof). 7.2.3 PAYMENT TERMS. Purchase Orders will be invoiced on a pro forma basis (a pro forma invoice is issued in advance of the official invoice) as soon as reasonably practical after receipt of Purchase Order and will include both manufacturing price and royalties payable pursuant to Section 9 hereto for each Unit of Licensed Products ordered. Each invoice will be payable either on a cash-in-advance basis or pursuant to a letter of credit. If the cash in advance option is selected, then upon issuance of a pro forma invoice to Publisher by SCEA, Publisher shall immediately forward to a Designated Manufacturing Facility the invoice amount. Such amount shall be payable in United States dollars and remitted by wire transfer to such bank account as shall be designated by SCEA or a Designated Manufacturing Facility for such purpose. Upon receipt of such amount by a Designated Manufacturing Facility, SCEA shall release the Publisher's Purchase Order to a Designated Manufacturing Facility for production. If the letter of credit option is selected, then at the time a Purchase Order is placed with SCEA, Publisher shall provide to SCEA an irrevocable letter of credit in favor of SCEA and payable at sight. The letter of credit must either be issued by a bank acceptable to SCEA or confirmed, at Publisher's expense, if so requested by SCEA. The letter of credit shall be in United States dollars in an amount equal to the manufacturing price determined pursuant to Section 7.2.1 and the royalty determined pursuant to Section 9 for each Unit of the License Product ordered. All associated banking charges with respect to payments of manufacturing costs and royalties (including but not limited to the costs of obtaining a letter of credit) shall be borne solely by Publisher. If permitted by SCEA, SCEA may at its sole discretion extend credit terms and limits to Publisher. SCEA may also at any time revoke such credit terms and limits as extended. If Publisher qualifies for such credit terms, then orders will be invoiced upon shipment and each invoice will be paid within [*] days of the date of the invoice. All overdue sums owed nor otherwise payable to SCEA under this Section 7 and under Section 9 hereto shall bear interest at the rate of one and one-half (1-1/2%) percent per month, or such lower rate as may be the maximum rate permitted under applicable law, * Confidential portion omitted and filed separately with the Commission. -9- 10 from the date upon which payment of the same shall first become due up to and including the date of payment thereof whether before or after judgment. Publisher shall be additionally liable for all of SCEA's costs and expenses of collection, including, without limitation, reasonable fees for attorneys and court costs. No deduction may be made from remittances unless an approved credit memo has been issued by SCEA. No claim for credit due to shortage or breakage will be allowed unless it is made within seven (7) days after Publisher receives the Licensed Product, and SCEA assumes no responsibility for shortage or breakage if Packaging and assembly services are obtained from alternate sources. Each shipment of Licensed Products to Publisher shall constitute a separate sale to Publisher, whether said shipment be whole or partial fulfillment of any order. Notwithstanding the foregoing, nothing in this Section shall excuse or be construed as a waiver of Publisher's obligation to timely provide any and all payments owed to SCEA hereunder. 7.3 DELIVERY OF LICENSED PRODUCTS. Neither SCEA nor any Designated Manufacturing Facility shall have an obligation to store completed Units of Licensed Products. Delivery of Licensed Products shall be in accordance with the Manufacturing Specifications, provided that Publisher may either specify the carrier to be used or allow SCEA or a Designated Manufacturing Facility to use the best way of getting the Licensed Products delivered. Title, risk of loss or damage in transit to any and all Licensed Products or component parts thereof manufactured by SCEA pursuant to Publisher's Purchase Orders shall vest in Publisher immediately upon delivery to the carrier. 7.4 TECHNOLOGY EXCHANGE AND QUALITY ASSURANCE. There will be no technology exchange between SCEA or any Designated Manufacturing Facility and Publisher under this Agreement. Due to the proprietary nature of the mastering process, SCEA or a Designated Manufacturing Facility will not under any circumstances release any original master CD-ROM, Master Discs or other in-process materials to the Publisher. All such physical master discs, stampers, etc. shall be and remain the sole property of SCEA or a Designated Manufacturing Facility. SCEA recognizes that the Intellectual Property Rights contained in Licensed Developer Software (separate and apart from any Sony Materials licensed to Publisher by SCEA hereunder) which is contained in physical master discs, stampers and other in-process materials is, as between SCEA and Publisher, the sole and exclusive property of Publisher or its licensors. 8. MARKETING AND DISTRIBUTION. 8.1 MARKETING GENERALLY. In accordance with the provisions of this Agreement, at no expense to SCEA, Publisher shall, and shall direct its distributors to, diligently market, sell and distribute the Licensed Products, and shall use its commercially reasonable best efforts to stimulate demand for such Licensed Products in the Licensed Territory and to supply any resulting demand. Publisher shall use its reasonable best efforts to protect the Licensed Products from and against illegal reproduction and/or copying by end users or by any other persons or entities. Such methods of protection may include, without limitation, markings or insignia providing identification of authenticity and packaging seals. 8.2 SAMPLES. Subject to availability, Publisher shall sell to SCEA quantities of the Licensed Products at as low a price and on terms as favorable as Publisher sells similar quantities of the Licensed Products to the general trade. In addition, Publisher shall provide to SCEA at no additional cost, for SCEA's internal use and general marketing purposes, sample copies of each Licensed Product, which shall not exceed [*] Units of each Licensed Product. Publisher shall be obligated to pay the manufacturing costs to the Designated Manufacturing Facility in accordance with Section 7.2.1, but not the royalty charges in accordance with Section 9, in connection with such sample Units of Licensed Products. In the event that Publisher assembles any Licensed Product using an alternate source, Publisher shall be responsible for shipping such sample Units to SCEA at Publisher's cost and expense. SCEA shall not directly or indirectly resell any such sample Units of the Licensed Products without Publisher's prior written consent. 8.3 MARKETING PROGRAMS OF SCEA. From time to time, SCEA may invite Publisher to participate in promotional or advertising opportunities which may feature one or more Licensed Products from one or more Publishers. Participation shall be voluntary and subject to terms to be determined at the time of the opportunity. In the event Publisher elects to participate, all materials submitted by Publisher to SCEA shall be submitted subject to Section 11.2 hereunder and delivery to SCEA shall constitute acceptance by Publisher of the terms of the offer. Moreover, all materials, if featured with one or more software products of SCEA or Licensed Products of other Publishers, may be used by SCEA, unless otherwise agreed in writing, with the following generic Legal Copy line: "Game copyright and trademarks are the property of the respective publisher or their licensors" ("Generic Line"). 8.4 DEMONSTRATION DISC PROGRAMS. SCEA may, from time to time, provide opportunities for Publisher to participate in SCEA Demo Disc programs by providing Product Information to SCEA. In addition, SCEA may, from time to time, grant to Publisher the right to create Third Party Demo Discs pursuant to SCEA Established Third Party Demo Disc Programs. The specifications with respect to the approval, creation, manufacture, marketing, distribution and sale of any such demo disc programs shall be set forth in the SourceBook or in other documentation to be provided by SCEA to Publisher when published. Except as otherwise specifically set forth herein, in the SourceBook or in other documentation provided by SCEA to Publisher, Third Party Demo Discs shall be considered "Licensed Products" and shall be subject in all respects to the terms and conditions of this Agreement. In addition, the following procedures shall also apply to SCEA Demo Discs and Third Party Demo Discs: * Confidential portion omitted and filed separately with the Commission. -10- 11 8.4.1 SCEA DEMO DISCS. 8.4.1.1 LICENSE. If Publisher wishes to participate in an SCEA Demo Disc program and provides Product Information to SCEA in connection thereto, Publisher shall thereby grant to SCEA a royalty-free license during the term of this Agreement in the Licensed Territory to manufacture, use, sell, distribute, market, advertise and otherwise promote Publisher's Product Information as part of such SCEA Demo Disc program. In addition, Publisher shall grant SCEA the right to feature Publisher and Licensed Product names in advertisements and promotional materials (including but not limited to in-store displays) and to make, copy, and distribute in packaging, advertising and promotional materials, copies of screen displays generated by the code, representative video samples or other Product Information provided to SCEA for use in such SCEA Demo Disc. Publisher agrees that all decisions relating to the selection of first and third party Product Information, marketing, advertisement, promotion, distribution or sale of the SCEA Demo Discs as a whole, including but not limited to SCEA Demo Discs title, trade name, logo and/or other identification, sales presentation, or retail and wholesale prices, shall be in the sole discretion of SCEA. 8.4.1.2 SUBMISSION AND APPROVAL OF PRODUCT INFORMATION. Upon receipt of a letter or other correspondence, the form of which is attached hereto as Exhibit D, notifying Publisher that SCEA has tentatively chosen Publisher's Product Information for inclusion in an SCEA Demo Disc, Publisher shall deliver to SCEA such requested Product Information no later than the deadline set forth in such letter or other correspondence. A separate letter will be sent for each SCEA Demo Disc, and Publisher must sign each letter prior to inclusion in such SCEA Demo Disc. Any Product Information provided by Publisher shall include Legal Copy on the title screen or elsewhere in the Product Information submitted to SCEA. The only Legal Copy provided by SCEA shall be the Generic Line as provided in Section 8.3 above, which shall appear on the SCEA Demo Disc title screen and packaging. Publisher acknowledges that SCEA shall have no responsibility to provide any Legal Copy beyond the Generic Line. Such Product Information shall comply with technical specifications provided to Publisher by SCEA. SCEA reserves the right to review and test the Product Information provided and request revisions prior to inclusion on the SCEA Demo Disc. In the event that SCEA requests changes to the Product Information and Publisher elects to continue to participate in such Demo Disc, Publisher shall make such changes as soon as possible after receipt of written notice of such requested changes from SCEA, but not later than the deadline for receipt of Product Information. Failure to make such changes and provide the modified Product Information to SCEA in accordance with such deadline shall result in the Product Information being removed from consideration for the SCEA Demo Disc. Costs associated with preparation of Product Information for inclusion in the SCEA Demo Disc shall be borne by Publisher. Except as otherwise provided in this Section, SCEA shall not edit or modify Product Information provided to SCEA by Publisher without Publisher's consent, not to be unreasonably withheld. SCEA shall have the right to use subcontractors to assist in the creation or development of any SCEA Demo Disc. 8.4.1.3 NO OBLIGATION TO PUBLISH. Acceptance of Product Information for test and review shall not be deemed confirmation that SCEA shall include the Product Information on an SCEA Demo Disc. SCEA reserves the right to choose from products submitted from other Licensed Publishers and first party products to determine the products to be included in SCEA Demo Discs, and will not guarantee to Publisher Licensed Product prominence with regards to screen shots or title treatment on the packaging or in SCEA Demo Discs. Nothing herein shall be construed as creating an obligation of SCEA to publish Product Information submitted by Publisher in any SCEA Demo Disc, nor shall SCEA be obligated to publish, advertise or promote any SCEA Demo Disc. 8.4.1.4 RETAIL SAMPLER DISCS. Publisher is aware and acknowledges that the Retail Sampler Disc will be distributed and sold by SCEA in the retail market. If Publisher elects to participate in any Retail Sampler Disc program, Publisher acknowledges that it is aware of no limitations regarding any Licensed Product or any portion thereof provided to SCEA pursuant to the terms of this Agreement which would in any way restrict SCEA's ability to distribute or sell the Retail Sampler Disc at retail, nor does Publisher or its licensors have any anticipation of receiving any compensation from such retail sales. In the event that SCEA institutes a SCEA Demo Disc in which a fee and/or royalty is charged to Publisher, SCEA and Publisher will enter into a separate agreement for such SCEA Demo Disc. 8.4.2 THIRD PARTY DEMO DISCS. 8.4.2.1 LICENSE. If Publisher wishes to participate in a Third Party Demo Disc program by notifying SCEA of its intention thereto, SCEA shall grant to Publisher the right and license to use Licensed Products in Third Party Demo Discs and to use, distribute, market, advertise and otherwise promote (and, if permitted in accordance with the terms of any SCEA Established Third Party Program or otherwise permitted by SCEA, to sell) such Third Party Demo Discs in accordance with the specifications provided separately to Publisher by SCEA, which may be modified from time to time by SCEA. In addition, SCEA hereby consents to the use of the Licensed Trademarks in connection with Third party Demo Discs, provided that SCEA's approval must be obtained prior to any use in accordance with the Terms of Section 8.4.2.2 hereto. If any SCEA Established Third Party Demo Disc Program is specified by SCEA to be for promotional use only and not for resale, and such Third Party Demo Disc is subsequently discovered to be for sale, the right to produce Third Party Demo Discs under such SCEA Established Third Party Demo Disc Program shall thereupon be revoked, and SCEA shall have the right to terminate any -11- 12 related Third Party Demo Discs in accordance with the terms of Section 15.3 hereto. 8.4.2.2 SUBMISSION AND APPROVAL OF THIRD PARTY DEMO DISCS. Publisher shall deliver to SCEA, for SCEA's prior approval, a final version of each Third Party Demo Disc in a format prescribed by SCEA. Such Third Party Demo Disc shall comply with technical specifications and any other requirements provided to Publisher by SCEA in the SourceBook or otherwise. In addition, SCEA shall evaluate the Third Party Demo Disc in accordance with the approval provisions for Executable Software and Printed Materials set forth in Sections 5.4 and 5.6, respectively. Furthermore, Publisher shall obtain the approval of SCEA in connection with any Advertising Materials relating to the Third Party Demo Discs in accordance with the approval provisions set forth in Section 5.7. Costs associated with preparation of product code for inclusion on Third Party Demo Discs shall be borne by Publisher. With respect to the Trade Promotional Disc Program, Publisher acknowledges that Product Information provided in connection with such program is in beta form and is not final approved code, nor should Publisher assume that final approval for mass production has been given at the time of manufacture. Publisher agrees to use the generic packaging and printed materials pursuant to the Trade Promotional Disc Program and the Consumer Promotional Disc Program to clearly and conspicuously state that the Trade Promotional Disc Program and the Consumer Promotional Disc Program are for promotional purposes only and not for resale. 8.4.2.3 MANUFACTURE AND ROYALTY OF THIRD PARTY DEMO DISCS. Publisher shall comply with any Manufacturing Specifications provided separately by SCEA to Publisher with respect to the manufacture and payment for the costs of manufacture of Third Party Demo Discs, and Publisher shall also comply with all terms and conditions of Section 7 hereto. No costs incurred in the development, manufacture, licensing, production, marketing and/or distribution (and if permitted by SCEA, sale) of the Third Party Demo Disc shall be deducted from any amounts payable to SCEA hereunder. Royalties on Third Party Demo Discs shall be as provided in Exhibit A. 8.5 CONTESTS AND SWEEPSTAKES OF PUBLISHER. SCEA acknowledges that, from time to time, Publisher may conduct contests and sweepstakes to promote Licensed Products. SCEA agrees to permit Publisher to include contests and sweepstakes materials in Printed Materials and Advertising Materials, subject to compliance with the approval provisions of Section 5.6 and 5.7 hereunder, compliance with the provisions of Section 10.2 and 11.2 hereunder, and subject to the following additional terms and conditions: (i) Publisher represents that it has retained the services of a fulfillment house to administer the contest or sweepstakes and if it has not retained the services of a fulfillment house, Publisher represents and warrants that it has the expertise to conduct such contests or sweepstakes, and in any event, Publisher assumes full responsibility for such contest or sweepstakes; (ii) Publisher represents and warrants that it has obtained the consent of all holders of intellectual property rights required to be obtained in connection with the contest or sweepstakes including, but not limited to, the consent of any holder of copyrights or trademarks relating to any advertisement or any promotional materials publicizing the contest or sweepstakes, or the prizes being awarded to winners of the contest or sweepstakes; and (iii) Publisher shall make available to SCEA all contest and sweepstakes material prior to publication in accordance with the approval process set forth in Section 5.6 or 5.7. Approval by SCEA of contest or sweepstakes materials for use in the Printed Materials or Advertising Materials (or any use of the Player or Licensed Products as prizes in such contest or sweepstakes) shall not constitute an endorsement by SCEA of such contest or sweepstakes, nor shall such acceptance be construed as SCEA having reviewed and approved such materials for compliance with any federal or state law, statute, regulations, order or the like, which shall be Publisher's sole responsibility. 8.6 DISTRIBUTION CHANNELS. Publisher may use such distribution channels as Publisher deems appropriate, including the use of third party distributors, resellers, dealers and sales representatives. In the event that Publisher elects to have one of its Licensed Products distributed and sold by another Licensed Publisher, Publisher must provide SCEA with written notice of such election, the name of the Licensed Publisher and any additional information requested by SCEA regarding the nature of the distribution services provided by such Licensed Publisher prior to manufacture of any Units of such Licensed Product. 8.7 LIMITATIONS ON DISTRIBUTION. Notwithstanding any other provisions in this Agreement, Publisher shall not, directly or indirectly, solicit orders from and/or sell any Units of the Licensed Products to any person or entity outside of the Licensed Territory, and Publisher further agrees that it shall not directly or indirectly solicit orders for and/or sell any Units of the Licensed Products in any situation where Publisher knows or reasonably should know that such Licensed Products may be exported or resold outside of the Licensed Territory. 9. ROYALTIES. Publisher shall pay SCEA a per Unit royalty in United States dollars, as set forth on Exhibit A hereto, for each Unit of the Licensed Products manufactured. Payment of such royalties shall be made to SCEA in conjunction with the payment to SCEA's Designated Manufacturing Facility of the manufacturing costs for each Unit and pursuant to the payment terms of Section 7.2.3 hereto. No costs incurred in the development, manufacture, marketing, sale and/or distribution of the Licensed Products shall be deducted from any royalties payable to SCEA hereunder. Similarly, there shall be no deduction from the royalties otherwise owed to SCEA hereunder as a result of any uncollectible accounts owed to Publisher, or for any credits, discounts, allowances or returns which Publisher may credit or otherwise grant to any third party customer of any -12- 13 Units of the Licensed Products, or for any taxes, fees, assessments or expenses of any kind which may be incurred by Publisher in connection with its sale and/or distribution of any Units of the Licensed Products and/or arising with respect to the payment of royalties hereunder. In addition to the royalty payments provided to SCEA hereunder, Publisher shall be solely responsible for and bear any cost relating to any withholding taxes and/or other such assessments which may be imposed by any governmental authority with respect to the royalties paid to SCEA hereunder; provided, however, that SCEA shall not manufacture Licensed Products outside of the United States without the prior consent of Publisher. Publisher shall provide SCEA with official tax receipts or other such documentary evidence issued by the applicable tax authorities sufficient to substantiate that any such taxes and/or assessments have in fact been paid. 10. REPRESENTATIONS AND WARRANTIES. 10.1 REPRESENTATIONS AND WARRANTIES OF SCEA. SCEA represents and warrants solely for the benefit of Publisher that SCEA has the right, power and authority to enter into this Agreement and to fully perform its obligations hereunder. 10.2 REPRESENTATIONS AND WARRANTIES OF PUBLISHER. Publisher represents and warrants that: (i) There is no threatened or pending action, suit, claim or proceeding alleging that the use by Publisher of all or any part of the Licensed Developer Software, Product Proposals, Product Information, Printed Materials, Advertising Materials or any underlying work or content embodied therein, or any name, designation or trademark used in conjunction with the Licensed Products infringes or otherwise violates any Intellectual Property Right or other right or interest of any kind whatsoever of any third party, or otherwise contesting any right, title or interest of Publisher in or to the Licensed Developer Software or any underlying work or content embodied therein, or any name, designation or trademark used in conjunction with the Licensed Products; (ii) The Licensed Developer Software, Product Proposals, Product Information, Printed Materials and Advertising Materials and their contemplated use under this Agreement does not and shall not infringe any person's or entity's rights including without limitation, patents, copyrights including rights in a joint work, trademarks, trade dress, trade secret, rights of publicity, privacy, performance, moral rights, literary rights and any other third party right; (iii) Publisher has the right, power and authority to enter into this Agreement, to grant SCEA the rights granted hereunder and to fully perform its obligations hereunder; (iv) The making of this Agreement by Publisher does not violate any separate agreement, rights or obligations existing between Publisher and any other person or entity, and, throughout the term of this Agreement, Publisher shall not make any separate agreement with any person or entity that is inconsistent with any of the provisions of this Agreement; (v) Publisher has not sold, assigned, leased, licensed or in any other way disposed of or encumbered the rights granted to Publisher hereunder, and Publisher will not sell, assign, lease, license or in any other way dispose of or encumber any of such rights; (vi) Publisher has obtained the consent of all holders of intellectual property rights required to be obtained in connection with use of any Product Information by SCEA as licensed hereunder, and Product Information provided to SCEA may be published, marketed, distributed and sold by SCEA in accordance with the terms and conditions of this Agreement and without SCEA incurring any royalty, residual, union, guild or other fees; (vii) Publisher shall not make any representation or give any warranty to any person or entity expressly or implicitly on SCEA's behalf, or to the effect that the Licensed Products are connected in any way with SCEA (other than that the Licensed Products have been developed, marketed, sold and/or distributed under license from SCEA); (viii) The Executable Software shall be distributed by Publisher solely in object code form; (ix) The Executable Software and any Product Information delivered to SCEA shall be in a commercially acceptable form, free of significant bugs, defects, time bombs or viruses, such that use of the software or Player would be disrupted, delayed, destroyed or rendered less than fully useful, and shall be fully compatible with the Player and any peripherals listed on the Printed Materials as compatible with the Licensed Product; (x) Each of the Licensed Products, Executable Software, Printed Materials and Advertising Materials shall be developed, marketed, sold and distributed by or at the direction of Publisher in an ethical manner and in full compliance with all applicable federal, state, provincial, local and foreign laws and any regulations and standards promulgated thereunder (including but not limited to federal and state lottery laws as currently interpreted and enforced) and will not contain any obscene or defamatory matter; (xi) Publisher's policies and practices with respect to the marketing, sale, and/or distribution of the Licensed Products shall in no manner reflect adversely upon the name, reputation or goodwill of SCEA; and (xii) Publisher shall make no false, misleading or inconsistent representations or claims with respect to any Licensed Products, the Player or SCEA. 11. INDEMNITIES; LIMITED LIABILITY. -13- 14 11.1 INDEMNIFICATION BY SCEA. SCEA shall indemnify and hold Publisher harmless from and against any and all third party claims, losses, liabilities, damages, expenses and costs, including, without limitation, reasonable fees for attorneys, expert witnesses and litigation costs, and including costs incurred in the settlement or avoidance of any such claim which result from or are in connection with a breach of any of the representations or warranties provided by SCEA herein; provided, however, that Publisher shall give prompt written notice to SCEA of the assertion of any such claim, and provided, further, that SCEA shall have the right to select counsel and control the defense and/or settlement thereof, subject to the right of Publisher to participate in any such action or proceeding at its own expense with counsel of its own choosing. SCEA shall have the exclusive right, at its discretion, to commence and prosecute at its own expense any lawsuit or to take such other action with respect to such matters as shall be deemed appropriate by SCEA. Publisher agrees to provide SCEA, at no expense to Publisher, reasonable assistance and cooperation concerning any such matter; and Publisher shall not agree to the settlement of any such claim, action or proceeding without SCEA's prior written consent. 11.2 INDEMNIFICATION BY PUBLISHER. Publisher shall indemnify and hold SCEA harmless from and against any and all third party claims, losses, liabilities, damages, expenses and costs, including, without limitation, reasonable fees for attorneys, expert witnesses and litigation costs, and including costs incurred in the settlement or avoidance of any such claim, which result from or are in connection with (i) a breach of any of the representations or warranties provided by Publisher herein, including without limitation claims resulting from Publisher's failure to timely pay any withholding taxes or other assessments as set forth in Section 9 hereto, any breach of Publisher's confidentiality obligations as set forth in Section 14 hereto or any breach of any representations, warranties or covenants relating to contests or sweepstakes as set forth in Sections 8.5 and 10.2 hereto; or (ii) any claim of infringement or alleged infringement of any third party's Intellectual Property Rights with respect to the Licensed Developer Software or any Product Information of Publisher; or (iii) any claims of or in connection with any personal or bodily injury (including death) or property damage, by whomsoever such claim is made, arising out of, in whole or in part, the marketing, sale, distribution and/or use of any of the Licensed Products (including but not limited to any damages or personal injury resulting from the awarding or failure to award contest or sweepstakes prizes), unless due directly to the breach of SCEA in performing any of the specific duties and/or providing any of the specific services required of it hereunder; or (iv) any federal, state or foreign civil or criminal actions relating to the marketing, sale and/or distribution of Licensed Products; provided, however, that SCEA shall give prompt written notice to Publisher of the assertion of any such claim, and provided, further, that Publisher shall have the right to select counsel and control the defense and/or settlement thereof, subject to the right of SCEA to participate in any such action or proceeding at its own expense with counsel of its own choosing. Publisher shall have the exclusive right, at its discretion, to commence and/or prosecute at its own expense any lawsuit or to take such other action with respect to such matter as shall be deemed appropriate by Publisher. SCEA shall retain the right to approve any settlement. SCEA shall provide Publisher, at no expense to SCEA, reasonable assistance and cooperation concerning any such matter, and SCEA shall not agree to the settlement of any such claim, action or proceeding without Publisher's prior written consent. 11.3 LIMITATION OF LIABILITY. 11.3.1 LIMITATION OF SCEA'S LIABILITY. IN NO EVENT SHALL SCEA OR ITS AFFILIATES OR OTHER COMPANIES AFFILIATED WITH SCEA AND ITS AFFILIATES, SUPPLIERS, OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS BE LIABLE FOR PROSPECTIVE PROFITS, OR ANY SPECIAL, PUNITIVE, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT LIMITATION THE BREACH OF THIS AGREEMENT BY SCEA, THE MANUFACTURE OF THE LICENSED PRODUCTS AND THE USE OF THE LICENSED PRODUCTS, EXECUTABLE SOFTWARE AND/OR THE PLAYER BY PUBLISHER OR ANY END-USER, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), INDEMNITY, PRODUCT LIABILITY OR OTHERWISE. IT IS THE RESPONSIBILITY OF PUBLISHER TO REVIEW THE ACCURACY OF THE DATA ON THE UNITS MANUFACTURED BY SCEA FOR PUBLISHER. IN NO EVENT SHALL SCEA'S LIABILITY ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT LIMITATION ANY LIABILITY FOR DIRECT DAMAGES, AND INCLUDING WITHOUT LIMITATION ANY LIABILITY UNDER SECTION 11.1 AND ANY WARRANTY IN SECTION 11.4 HERETO, EXCEED THE TOTAL AMOUNT PAID BY PUBLISHER TO SCEA UNDER THIS AGREEMENT. EXCEPT AS EXPRESSLY SET FORTH HEREIN, NEITHER SCEA NOR ANY AFFILIATE, NOR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS, SHALL BEAR ANY RISK, OR HAVE ANY RESPONSIBILITY OR LIABILITY, OF ANY KIND TO PUBLISHER OR TO ANY THIRD PARTIES WITH RESPECT TO THE QUALITY, OPERATION AND/OR PERFORMANCE OF ANY PORTION OF THE SONY MATERIALS, THE PLAYER OR ANY LICENSED PRODUCT. 11.3.2 LIMITATION OF PUBLISHER'S LIABILITY. IN NO EVENT SHALL PUBLISHER OR COMPANIES AFFILIATED WITH PUBLISHER, SUPPLIERS, OFFICERS, DIRECTORS, EMPLOYEES -14- 15 OR AGENTS BE LIABLE to SCEA FOR ANY PROSPECTIVE PROFITS, OR SPECIAL, PUNITIVE, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH (i) THIS AGREEMENT OR (ii) THE USE OR DISTRIBUTION IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THIS AGREEMENT OR ANY CODE PROVIDED BY SCEA, IN WHOLE OR IN PART, OR ANY LICENSED DEVELOPER SOFTWARE BY PUBLISHER OR ANY THIRD PARTY, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), INDEMNITY, PRODUCT LIABILITY OR OTHERWISE, PROVIDED THAT PUBLISHER EXPRESSLY AGREES THAT SUCH LIMITATIONS SHALL NOT APPLY TO DAMAGES RESULTING FROM PUBLISHER'S BREACH OF SECTIONS 2, 4, 11.2, 12.2 OR 14 OF THIS AGREEMENT, AND PROVIDED FURTHER THAT SUCH LIMITATIONS SHALL NOT APPLY TO AMOUNTS WHICH PUBLISHER MAY BE REQUIRED TO PAY TO THIRD PARTIES UNDER SECTIONS 11.2 OR 17.9. 11.4 WARRANTIES; DISCLAIMER OF WARRANTIES. 11.4.1 MANUFACTURING WARRANTY. SCEA warrants that the Units or any component parts thereto that are manufactured by SCEA or a Designated Manufacturing Facility for Publisher shall, at time of delivery to Publisher, be [*]. The sole obligation of SCEA and a Designated Manufacturing Facility under this warranty shall be, for a period of [*] the date of shipment of Units of Licensed Products or component parts thereto to Publisher, at SCEA's election, either to replace the defective Units or component parts or to issue credit to Publisher for the purchase price and any royalties paid to SCEA and/or a Designated Manufacturing Facility for any such [*]. Such warranty is the only warranty applicable to the Licensed Product manufactured by a Designated Manufacturing Facility for Publisher pursuant to Section 7 of this Agreement. This warranty shall not apply to damage resulting from accident, alteration, negligence, normal wear and tear, willful damage, abnormal conditions of use, failure to follow directions for use (whether given in instruction manuals or otherwise) or misuse of the Licensed Products, or to damage to or defects in any materials provided by Publisher to SCEA or a Designated Manufacturing Facility. If, during the aforesaid period, a [*] is received by Publisher, Publisher shall notify SCEA within the warranty period set forth above and, upon request by SCEA, provide SCEA with the returned Unit(s) or component part(s) and a written description of the [*]. SCEA and any Designated Manufacturing Facility shall not accept the return of any Unit(s) or component part(s) except [*] (i.e., those Units or component parts that are [*], and all such returns must be authorized by SCEA in writing and in advance. All Units or component parts which are returned in accordance with this Section 11.4.1 will be sent to a place designated by SCEA at SCEA's expense. If the defect did not arise from causes placing liability on SCEA or a Designated Manufacturing Facility under the above warranty, Publisher shall reimburse SCEA and any Designated Manufacturing Facility for expenses incurred in shipping, processing and analyzing the Units or component parts. SCEA's and any Designated Manufacturing Facility's reasonable judgment as to the origin of the defect shall be final and binding. Notwithstanding the foregoing, nothing herein shall be construed by Publisher to extend or create any stated limited warranty to consumers beyond the terms of such warranty. NOTWITHSTANDING THE FOREGOING, ANY COMPONENT PARTS OF LICENSED PRODUCTS NOT MANUFACTURED BY SCEA OR A DESIGNATED MANUFACTURING FACILITY ARE NOT UNDER WARRANTY HEREUNDER. 11.4.2 DISCLAIMER OF WARRANTY. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH ABOVE, NEITHER SCEA NOR ANY DESIGNATED MANUFACTURING FACILITY NOR ITS AFFILIATES AND SUPPLIERS MAKE, NOR DOES PUBLISHER RECEIVE, ANY WARRANTIES, EXPRESS, IMPLIED OR STATUTORY REGARDING THE SONY MATERIALS, THE PLAYER, THE UNITS OF THE LICENSED PRODUCTS MANUFACTURED HEREUNDER AND/OR PUBLISHER'S PRODUCT INFORMATION INCLUDED ON SCEA DEMO DISCS. SCEA SHALL NOT BE LIABLE FOR ANY INJURY, LOSS OR DAMAGE, DIRECT OR CONSEQUENTIAL, ARISING OUT OF THE USE OR INABILITY TO USE THE UNITS AND/OR ANY SOFTWARE ERRORS AND/OR "BUGS" IN PUBLISHER'S PRODUCT INFORMATION WHICH MAY BE REPRODUCED ON SCEA DEMO DISCS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SCEA AND ITS AFFILIATES AND SUPPLIERS EXPRESSLY DISCLAIM THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND THEIR EQUIVALENTS UNDER THE LAWS OF ANY JURISDICTION REGARDING THE SONY MATERIALS, LICENSED PRODUCTS, SCEA DEMO DISCS AND THE PLAYER. ANY WARRANTY AGAINST INFRINGEMENT THAT MAY BE PROVIDED IN SECTION 2-312(3) OF THE UNIFORM COMMERCIAL CODE AND/OR IN ANY OTHER COMPARABLE STATUTE IS EXPRESSLY DISCLAIMED. 12. COPYRIGHT, TRADEMARK AND TRADE SECRET RIGHTS. 12.1 PUBLISHER RIGHTS. The Licensed Developer Software and all Product Information, Product Proposals, Printed Materials and Advertising Materials related thereto (exclusive of the rights licensed from SCEA hereunder) and the Intellectual Property Rights therein and any names or other designations used as titles for the Licensed Products and any other trademarks used by Publisher and/or its affiliates are and shall be exclusive property of Publisher or of any third party from which Publisher has * Confidential portions omitted and filed separately with the Commission. - 15 - 16 been granted, or to whom Publisher has granted, the license and related rights to develop and otherwise exploit any such Licensed Developer Software and related materials or any such names or other designations. SCEA shall not do or cause to be done any act or thing in any way impairing or tending to impair or dilute any of Publisher's rights, title and/or interests in or to Publisher's Intellectual Property Rights. 12.2 SCEA RIGHTS. 12.2.1 LICENSED TRADEMARKS. The Licensed Trademarks and the goodwill associated therewith are and shall be the exclusive property of SCEA or Affiliates of SCEA. Nothing herein shall give Publisher any right, title or interest in or to any of the Licensed Trademarks, other than the non-exclusive license and privilege during the term hereof to display and use the Licensed Trademarks solely in accordance with the provisions of this Agreement. Publisher shall not do or cause to be done any act or thing in any way impairing or tending to impair or dilute any of SCEA's rights, title and/or interests in or to any of the Licensed Trademarks, nor shall Publisher register any trademark in its own name or in the name of any other person or entity, or obtain rights to employ Internet domain names or addresses, which are similar to or are likely to be confused with any of the Licensed Trademarks. 12.2.2 LICENSE OF SONY MATERIALS AND PLAYER. All rights with respect to the Sony Materials and Player, including, without limitation, all of SCEA's Intellectual Property Rights therein, are and shall be the exclusive property of SCEA or Affiliates of SCEA. Nothing herein shall give Publisher any right, title or interest in or to the Sony Materials or the Player (or any portion thereof), other than the non-exclusive license during the term hereof to use the Sony Materials and Player for the manufacturing, marketing, distribution and sale of the Licensed Products solely in accordance with the provisions of this Agreement. Publisher shall not do or cause to be done any act or thing in any way impairing or tending to impair any of SCEA's rights, title and/or interests in or to the Sony Materials or the Player (or any portion thereof). 13. INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS BY THIRD PARTIES. In the event that either Publisher or SCEA discovers or otherwise becomes aware that any of the Intellectual Property Rights of the other have been or are being infringed upon by any third party, then the party with knowledge of such infringement or apparent infringement shall promptly notify the other party. SCEA shall have the sole right, in its discretion, to institute and prosecute lawsuits against Third Parties for such infringement of SCEA's Intellectual Property Rights. Publisher shall have the right, in its discretion, to institute and prosecute lawsuits against third persons for such infringement of Publisher's Intellectual Property Rights which are distinct from SCEA's Intellectual Property Rights. If Publisher does not institute an infringement suit within thirty (30) days after SCEA's written request that it do so, SCEA may institute and prosecute such lawsuit. Any lawsuit shall be prosecuted solely at the cost and expense of the party bringing suit and all sums recovered in any such lawsuits, whether by judgment, settlement or otherwise, in excess of the amount of reasonable attorneys' fees and other out of pocket expenses of such suit, shall belong solely to the party bringing the suit. Upon request of the party bringing the lawsuit, the other party shall execute all papers, testify on all matters and otherwise cooperate in every way necessary and desirable for the prosecution of any such lawsuit. The party bringing suit shall reimburse the other party for the reasonable expenses incurred as a result of such cooperation, but unless authorized by other provisions of this Agreement, not costs and expenses attributable to the conduct of a cross-claim or third party action. 14. CONFIDENTIALITY. 14.1 PRIOR NONDISCLOSURE AGREEMENT. Publisher hereby reaffirms and ratifies the Nondisclosure Agreement dated January 19, 2000 between SCEA and Publisher ("Nondisclosure Agreement") which, as amended by Section 14.2 below, will remain in full force and effect with respect to the Confidential Information of SCEA throughout the term of this Agreement. 14.2 ADDITIONAL REQUIREMENTS REGARDING CONFIDENTIAL INFORMATION OF SCEA. 14.2.1 CONFIDENTIAL INFORMATION OF SCEA. "Confidential Information" of SCEA (as defined in the Nondisclosure Agreement and amended hereby) shall also include (i) the Sony Materials and information regarding SCEA's finances, business, marketing and technical plans, (ii) all documentation and information relating to the foregoing (other than documentation and information expressly intended for use by and released to end users or the general public), (iii) any and all other information, of whatever type and in whatever medium (including without limitation all data, ideas, discoveries, developments, know-how, trade secrets, inventions, creations and improvements), that is disclosed in writing or in any other form by SCEA to Publisher, and (iv) this Agreement and the terms and conditions thereof. If at any time Publisher becomes aware of any unauthorized duplication, access, use, possession or knowledge of any Confidential Information of SCEA, it shall notify SCEA as soon as reasonably practicable, and shall promptly act to recover any such information and/or prevent further breach of the confidentiality obligations herein. Publisher shall take all reasonable steps requested by SCEA to prevent the recurrence of any unauthorized duplication, access, use, possession or knowledge of the Confidential Information of SCEA. 14.2.2 CONFIDENTIALITY OF AGREEMENT. As provided above, the terms and conditions of this Agreement shall be treated as Confidential Information of SCEA; -16- 17 provided that each party may disclose the terms and conditions of this Agreement: (i) to legal counsel; (ii) in confidence, to accountants, banks and financing sources and their advisors; and (iii) in confidence, in connection with the enforcement of this Agreement or rights under this Agreement; and (iv) if Publisher shall be required, in the opinion of counsel, to file publicly or otherwise disclose the terms of this Agreement under applicable federal and/or state securities laws, Publisher shall be required to promptly notify SCEA such that SCEA has a reasonable opportunity to contest or limit the scope of such required disclosure, and Publisher shall request, and shall use its best efforts to obtain, confidential treatment for such sections of this Agreement as SCEA may designate. Any failure to notify SCEA under clause (iv) of this Section 14.2.2 shall be deemed a material breach of this Agreement. Unless otherwise permitted by SCEA, both parties shall treat the fact that they have entered into this Agreement as Confidential Information of the other party until a public announcement regarding the execution of this Agreement is released by SCEA, at its sole discretion, announcing that Publisher has become a licensee of SCEA. 14.3 REQUIREMENTS REGARDING CONFIDENTIAL INFORMATION OF PUBLISHER. 14.3.1 CONFIDENTIAL INFORMATION OF PUBLISHER. "Confidential Information of Publisher" shall mean (i) the Licensed Developer Software as provided to SCEA pursuant to this Agreement and all documentation and information relating thereto, including Product Proposals, Printed Materials and Advertising Materials (other than documentation and information expressly intended for use by and release to end users, the general public or the trade), and (ii) information relating to Publishers' or its affiliates' or licensors' finances, business, marketing and technical plans, that is disclosed in writing or in any other form by Publisher to SCEA. 14.3.2 PRESERVATION OF CONFIDENTIAL INFORMATION OF PUBLISHER. SCEA shall hold all Confidential Information of Publisher in confidence, and shall take all reasonable steps necessary to preserve the confidentiality of the Confidential Information of Publisher, and to prevent it from falling into the public domain or into the possession of persons other than those persons to whom disclosure is authorized hereunder, including but not limited to those steps that SCEA takes to protect the confidentiality of its own most highly confidential information. Except as may be expressly authorized by Publisher in writing, SCEA shall not at any time, either before or after any termination of this Agreement, directly or indirectly: (i) disclose any Confidential Information to any person other than an SCEA employee or subcontractor who needs to know or have access to such Confidential Information for the purposes of this Agreement, and only to the extent necessary for such purposes; (ii) except as otherwise provided in this Agreement, duplicate the Confidential Information of Publisher for any purpose whatsoever, (iii) use the Confidential Information for any reason or purpose other than as expressly permitted in this Agreement; or (iv) except as otherwise provided in Section 8.3, remove any copyright notice, trademark notice and/or other proprietary legend set forth on or contained within any of the Confidential Information of Publisher. 14.3.3 OBLIGATIONS UPON UNAUTHORIZED DISCLOSURE. If at any time SCEA becomes aware of any unauthorized duplication, access, use, possession or knowledge of any Confidential Information of Publisher, it shall notify the Publisher as soon as is reasonably practicable. SCEA shall provide any and all reasonable assistance to Publisher to protect Publisher's proprietary rights in any Confidential Information of Publisher that it or its employees or permitted subcontractors may have directly or indirectly disclosed or made available and that may be duplicated, accessed, used, possessed or known in a manner or for a purpose not expressly authorized by this Agreement including but not limited to enforcement of confidentiality agreements, commencement and prosecution in good faith (alone or with the disclosing party) of legal action, and reimbursement for all reasonable attorneys' fees, costs and expenses incurred by Publisher to protect its proprietary rights in the Confidential Information of Publisher. SCEA shall take all reasonable steps requested by Publisher to prevent the recurrence of any unauthorized duplication, access, use, possession or knowledge of the Confidential Information of Publisher. 14.3.4 EXCEPTIONS. The foregoing restrictions will not apply to information that could be deemed to be Confidential Information of Publisher to the extent that such information: (i) was known to SCEA at the time of disclosure to it; (ii) becomes part of information in the public domain through no fault of SCEA; (iii) has been rightfully received from a third party authorized by Publisher to make such disclosure without restriction; (iv) has been approved for release by prior written authorization of Publisher; or (v) has been disclosed by court order or as otherwise required by law (including without limitation to the extent that disclosure may be required under Federal or state securities laws), provided that SCEA has notified the disclosing party immediately upon learning of the possibility of any such court order or legal requirement and has given Publisher a reasonable opportunity to contest or limit the scope of such required disclosure. 15. TERM AND TERMINATION. 15.1 EFFECTIVE DATE; TERM. This Agreement shall not be binding upon the parties until it has been signed by or on behalf of each party, in which event it shall be effective as of the date first written above (the "Effective Date"). Unless sooner terminated in accordance with the provisions hereof, the term of this Agreement shall be for four (4) years from the Effective Date. 15.2 TERMINATION BY SCEA. SCEA shall have the right to terminate this Agreement immediately, by providing written notice of such election to Publisher, upon the occurrence of any of the following events or circumstances: -17- 18 (i) If Publisher breaches (A) any of its material obligations provided for in this Agreement (including but not limited to Publisher's failure to pay any amounts due hereunder), which materiality shall be determined by SCEA in its sole discretion; (B) some of its obligations provided for in this Agreement, the combined effect of which has a material effect hereunder; or (C) any other agreement entered into between SCEA or Affiliates of SCEA and Publisher. In the event of each such breach, Publisher shall have an opportunity to correct or cure such breach within thirty (30) days after receipt of written notice of such breach by SCEA, provided that, if after such thirty (30) day period, such breach is not corrected or cured to SCEA's satisfaction, this Agreement shall be terminated. (ii) Publisher's statement that it is unable to pay any amount due hereunder, or is unable to pay its debts generally as they shall become due. (iii) Publisher's filing of an application for, or consenting to, or directing the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of all or substantially all of Publisher's property, whether tangible or intangible, wherever located. (iv) The making by Publisher of a general assignment for the benefit of creditors. (v) The commencing by Publisher or Publisher's intention to commence a voluntary case under any applicable bankruptcy laws (as now or hereafter may be in effect). (vi) Publisher is bankrupt or insolvent. (vii) The filing by Publisher or the intent to file by Publisher of a petition seeking to take advantage of any other law providing for the relief of debtors. (viii) Publisher's acquiescence to, intention to acquiesce to, or failure to have dismissed within ninety (90) days, any petition filed against it in any involuntary case under any such bankruptcy law. (ix) The liquidation or dissolution of Publisher, or a statement of intent by Publisher to no longer exercise any of the rights granted by SCEA to Publisher hereunder. (x) If during the term of this Agreement a controlling interest in Publisher or a controlling interest in an entity which has, directly or indirectly, a controlling interest in Publisher is transferred to a party that (A) is in breach of any agreement with SCEA or an Affiliate of SCEA, and such agreement has been terminated as a result of such breach; (B) directly or indirectly holds or acquires an interest in a third party which develops any interactive hardware device or product which is directly or indirectly competitive with the Player; (C) is in litigation with SCEA or Affiliates of SCEA concerning any proprietary technology, trade secrets or other Intellectual Property Rights or Confidential Information of SCEA. As used in this Section 15.2, "controlling interest" means, with respect to any form of entity, sufficient power, whether by holding shares of stock, management power, voting power or power conferred on such person by the Certificate of Incorporation, Bylaws, Partnership Agreement or other documents regulating the form and powers of such entity, to control the decisions of such entity. (xi) If during the term of this Agreement Publisher, or an entity that has, directly or indirectly, a controlling interest in Publisher, enters into a business relationship with a third party with whom Publisher materially contributes to develop core components to an interactive hardware device or product which is directly or indirectly competitive with the Player. Publisher shall be obligated to immediately notify SCEA in the event that any of the events of circumstances specified in subsections (ii) - (xi) occur, and any failure to so notify SCEA shall constitute a material breach with no opportunity to cure such breach. 15.3 PRODUCT-BY-PRODUCT TERMINATION BY SCEA. In addition to the events of termination described in Section 15.2, above, SCEA, at its option, shall be entitled to terminate, on a product-by-product basis, the licenses and related rights herein granted to Publisher in the event that (a) Publisher fails to notify SCEA promptly in writing of any material change to any materials previously approved by SCEA in accordance with Section 5 or Section 7.1.3 hereto, and such breach is not corrected or cured prior to the earlier of (i) thirty (30) days after receipt of written notice of such breach or (ii) commercial release of the product; or (b) any third party with whom Publisher has contracted for the development of Executable Software breaches any of its material obligations to SCEA pursuant to such third party's agreement with SCEA with respect to such Executable Software; or (c) Publisher cancels a Licensed Product or fails to provide SCEA in accordance with the provisions of Section 5.4 above, with the final version of the Executable Software for any Licensed Product within three (3) months of the scheduled release date according to the Product Proposal, or fails to provide work in progress to SCEA in accordance with the Review Process in Section 5.3. 15.4 OPTION OF SCEA IN LIEU OF TERMINATION. As an alternative to terminating this Agreement or a particular Licensed Product as set forth in Sections 15.2 and 15.3 above, SCEA may, at its option, require Publisher to pay liquidated damages of up to [*] per incident (as defined in the sole discretion of SCEA) for the following material breaches of Publisher; providing Sony Materials or Confidential Information of SCEA to an unlicensed developer or other third party; failure to follow the Guidelines of SCEA with respect to any Licensed Trademarks; and failure to provide SCEA with Advertising Materials, or broadcasting or publishing Advertising Materials without the approval of SCEA, as provided in Section 5.7. Such liquidated damages shall be required in SCEA's sole discretion depending on the [*] Confidential portion omitted and filed separately with the Commission. -18- 19 circumstances, including the extent and type of injury flowing from the breach, and SCEA's expectations for future performance of Publisher. In the event that SCEA selects this option, Publisher shall be entitled to terminate this Agreement upon notice to SCEA rather than paying the liquidated damages hereunder. Election of this option by SCEA shall not constitute a waiver of any of SCEA's rights under this Agreement with respect to any other incidents and SCEA shall have the right to terminate this Agreement with respect to any other material breach. 15.5 NO REFUNDS. In the event of the termination of this Agreement in accordance with any of the provisions of Sections 15.2 through 15.4 above, no portion of any payments of any kind whatsoever previously provided to SCEA hereunder shall be owed or be repayable to Publisher. 16. EFFECT OF EXPIRATION OR TERMINATION. 16.1 INVENTORY STATEMENT. Within thirty (30) days of the date of expiration or the effective date of termination with respect to any and/or all Licensed Products, Publisher shall provide SCEA with an itemized statement, certified to be accurate by an officer of Publisher, specifying the number of unsold Units of the Licensed Products as to which such termination applies, on a title-by-title basis, which remain in its inventory and/or under its control at the time of expiration or the effective date of termination. SCEA shall be entitled to conduct at its expense a physical inspection of Publisher's inventory and work in process upon reasonable written notice during normal business hours in order to ascertain or verify such inventory and/or statement. 16.2 REVERSION OF RIGHTS. Upon expiration or termination and subject to Section 16.3 below, the licenses and related rights herein granted to Publisher shall immediately revert to SCEA, and Publisher shall cease and desist from any further use of Confidential Information of SCEA, the Licensed Trademarks and the Sony Materials and any Intellectual Property Rights therein, and, subject to the provisions of Section 16.3 below, Publisher shall have no further right to continue the publication, manufacture, marketing, sale and/or distribution of any Units of the Licensed Products, nor to continue to use the Licensed Trademarks; provided, however, that for a period of one year after termination, and subject to all the terms of Section 14, and provided this Agreement is not terminated due to a breach or default of Publisher, Publisher may retain such portions of Sony Materials as SCEA in its sole discretion agrees are required to support end users of Licensed Products but must return these materials at the end of such one year period. 16.3 DISPOSAL OF UNSOLD UNITS. Provided that this Agreement is not terminated due to a breach or default of Publisher, Publisher may, upon expiration or termination of this Agreement, sell off existing inventories of Licensed Products, on a non-exclusive basis, for a period of ninety (90) days from the date of expiration or termination of this Agreement, and provided such inventories have not been manufactured solely or principally for sale during such period. Subsequent to the expiration of such ninety (90) day period, or in the event this Agreement is terminated as a result of any breach or default of Publisher, any and all Units of the Licensed Products remaining in Publisher's inventory shall be destroyed by Publisher within five (5) business days of such expiration or termination. Within five (5) business days after such destruction, Publisher shall provide SCEA with an itemized statement, certified to be accurate by an officer of Publisher, indicating the number of Units of the Licensed Products which have been destroyed (on a title-by-title basis), the location and date of such destruction and the disposition of the remains of such destroyed materials. 16.4 RETURN OF SONY MATERIALS AND CONFIDENTIAL INFORMATION. Upon the expiration or earlier termination of this Agreement, Publisher shall immediately deliver to SCEA, or if and to the extent requested by SCEA destroy, all Sony Materials and any and all copies thereof, and Publisher and SCEA shall immediately deliver to the other party, or if and to the extent requested by such party, destroy, all Confidential Information of the other party, including any and all copies thereof, which the other party previously furnished to it in furtherance of this Agreement, including, without limitation, any such information, knowledge or know-how of which either party, as the receiving party, was apprised and which was reduced to tangible or written form by such party or in its behalf at any time during the term of this Agreement. Within five (5) working days after any such destruction, Publisher shall provide SCEA with an itemized statement certified to be accurate by an officer of Publisher, indicating the number of copies and/or units of the Sony Materials and/or units of the Sony Materials and/or Confidential Information which have been destroyed, the location and date of such destruction and the disposition of the remains of such destroyed materials. 16.5 RENEWAL OR EXTENSION OF THIS AGREEMENT; TERMINATION WITHOUT PREJUDICE. SCEA shall be under no obligation to renew or extend this Agreement notwithstanding any actions taken by either of the parties prior to the expiration of this Agreement. Upon the expiration of this Agreement, neither party shall be liable to the other for any damages (whether direct, consequential or incidental, and including, without limitation, any expenditures, loss of profits or prospective profits) sustained or arising out of or alleged to have been sustained or to have arisen out of such expiration. However, the expiration of this Agreement shall not excuse either party from its previous breach of any of the provisions of this Agreement or from any obligations surviving the expiration of this Agreement, and full legal and equitable remedies shall remain available for any breach or threatened breach of this Agreement or any obligations arising therefrom. The expiration or termination of this Agreement shall be without prejudice to any rights or remedies which one party may otherwise have against the other party. 17. MISCELLANEOUS PROVISIONS. -19- 20 17.1 NOTICES. All notices or other communications required or desired to be sent to either of the parties shall be in writing and shall be sent by registered or certified mail, postage prepaid, return receipt requested, or sent by recognized international courier service (e.g., Federal Express, DHL, etc.), telex, telegram or facsimile, with charges prepaid. The address for all notices or other communications required to be sent to SCEA or Publisher, respectively, shall be the mailing address stated in the preamble hereof, or such other address as may be provided by written notice from one party to the other on at least ten (10) days' prior written notice. Any such notice shall be effective upon the date of receipt, as confirmed by the sending party. 17.2 FORCE MAJEURE. Neither SCEA nor Publisher shall be liable for any loss or damage or be deemed to be in breach of this Agreement if its failure to perform or failure to cure any of its obligations under this Agreement results from any event or circumstance beyond its reasonable control, including, without limitation, any natural disaster, fire, flood, earthquake or other Act of God; shortage of equipment, materials, supplies or transportation facilities; strike or other industrial dispute; war or rebellion; shutdown or delay in power, telephone or other essential service due to the failure of computer or communications equipment or otherwise; or compliance with any law, regulation or order (whether valid or invalid) of any governmental body, other than an order, requirement or instruction arising out of Publisher's violation of any applicable law or regulation; provided, however, that the party interfered with gives the other party written notice thereof promptly, and, in any event, within fifteen (15) business days of discovery of any such Force Majeure condition. If notice of the existence of any Force Majeure condition is provided within such period, the time for performance or cure shall be extended for a period equal to the duration of the Force Majeure event or circumstance described in such notice, except that any such cause shall not excuse the payment of any sums owed by SCEA prior to, during or after any such Force Majeure condition. In the event that the Force Majeure condition continues for more than one hundred and twenty (120) days, SCEA may terminate this Agreement for cause by providing written notice to Publisher to such effect. 17.3 NO PARTNERSHIP OR JOINT VENTURE. The relationship between SCEA and Publisher, respectively, is that of licensor and licensee. Both parties are independent contractors and are not the legal representative, agent, joint venturer, partner or employee of the other party for any purpose whatsoever. Neither party has any right or authority to assume or create any obligations of any kind or to make any representation or warranty on behalf of the other party, whether express or implied, or to bind the other party in any respect whatsoever. 17.4 ASSIGNMENT. SCEA has entered into this Agreement based upon the particular reputation, capabilities and experience of Publisher and its officers, directors and employees. Accordingly, Publisher may not assign this Agreement or any of its rights hereunder, nor delegate or otherwise transfer any of its obligations hereunder, to any third party unless the prior written consent of SCEA shall first be obtained. This Agreement shall not be assigned in contravention of Section 15.2(x). Any attempted or purported assignment, delegation or other such transfer, directly or indirectly, without the required consent of SCEA shall be void and a material breach of this Agreement. Subject to the foregoing, this Agreement shall inure to the benefit of the parties and their respective successors (other than under the conditions set forth in Section 5.2(x)) and permitted assigns. SCEA shall have the right to assign any and all of its rights and obligations hereunder to any affiliate(s), including, without limitation, its obligations under Section 7 hereof. 17.5 SUBCONTRACTORS. Publisher shall not sell, assign, delegate, subcontract, sublicense or otherwise transfer or encumber all or any portion of the licenses herein granted; provided, however, that Publisher may retain those subcontractor(s) to assist with the development of Licensed Products which: (i) have signed a Nondisclosure Agreement and a Developer Agreement with SCEA (the "PlayStation Agreements") in full force and effect throughout the term of such development; or (ii) have signed an SCEA-approved subcontractor agreement between Publisher and subcontractor, which subcontractor agreement shall contain substantially identical terms to the Nondisclosure Agreement and the confidentiality provisions of this Agreement ("Subcontractor Agreement"). If a subcontractor will use Development Tools provided by Publisher, it must also comply with the requirements set forth in Section 16.5 of an LDA with respect to usage of such Development Tools. Such Subcontractor Agreement shall provide that SCEA is a third party beneficiary of such Subcontractor Agreement, and has the full right to bring any actions against such subcontractors to comply in all respect with the terms and conditions of this Agreement. Publisher agrees to provide a copy of any such Subcontractor Agreement to SCEA prior to and following execution thereof. Publisher shall not disclose to any subcontractor any Confidential Information of SCEA (as defined herein and in the Nondisclosure Agreement), including, without limitation, any Sony Materials, unless and until either the PlayStation Agreements or a Subcontractor Agreement have been executed. Notwithstanding any consent which may be granted by SCEA for Publisher to employ any such permitted subcontractor(s), or any such separate agreement(s) that may be entered into by Publisher with any such permitted subcontractor, Publisher shall remain fully liable for its compliance with all of the provisions of this Agreement and for the compliance of any and all permitted subcontractors with the provisions of any agreements entered into by such subcontractors in accordance with this Section 17.5. Publisher shall use its best efforts to cause its subcontractors employed hereby to comply in all respects with the terms and conditions of this Agreement, and hereby unconditionally guarantees all obligations of its subcontractors. 17.6 COMPLIANCE WITH APPLICABLE LAWS. The parties shall at all times comply with all applicable -20- 21 regulations and orders of their respective countries and all conventions and treaties to which their countries are a party or relating to or in any way affecting this Agreement and the performance by the parties of this Agreement. Each party, at its own expense, shall negotiate and obtain any approval, license or permit required in the performance of its obligations, and shall declare, record or take such steps to render this Agreement binding, including, without limitation, the recording of this Agreement with any appropriate governmental authorities (if required). 17.7 GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement shall be governed by and integrated in accordance with the laws of the State of California, excluding that body of law related to choice of laws, and of the United States of America. Any action or proceeding brought to enforce the terms of this Agreement or to adjudicate any dispute arising hereunder shall be brought in the courts of the County of San Mateo, State of California (if under State law) or the Northern District of California (if under Federal law or pursuant to diversity jurisdiction). Each of the parties hereby submits itself to the exclusive jurisdiction and venue of such courts for purposes of any such action and agrees that any service of process may be effected by delivery of the summons in the manner provided in the delivery of notices set forth in Section 17.1 above. In addition, each party hereby waives the right to a jury trial in any action or proceeding brought to enforce the terms of this Agreement or to adjudicate any dispute arising hereunder. 17.8 LEGAL COSTS AND EXPENSES. In the event it is necessary for either party to retain the services of an attorney or attorneys to enforce the terms of this Agreement or to file or defend any action arising out of this Agreement, then the prevailing party in any such action shall be entitled, in addition to any other rights and remedies available to it at law or in equity to recover from the other party its reasonable fees for attorneys and expert witnesses, plus such court costs and expenses as may be fixed by any court of competent jurisdiction. The term "prevailing party" for the purposes of this Section shall include a defendant who has by motion, judgment, verdict or dismissal by the court, successfully defended against any claim that has been asserted against it. 17.9 REMEDIES. Unless expressly set forth to the contrary, either party's election of any remedies provided for in this Agreement shall not be exclusive of any other remedies available hereunder or otherwise at law or in equity, and all such remedies shall be deemed to be cumulative. Any breach of Sections 2, 3, 4, 5, 6, 7.1, 12 and 14 of this Agreement would cause irreparable harm to SCEA, the extent of which would be difficult to ascertain. Accordingly, Publisher agrees that, in addition to any other remedies to which SCEA may be entitled, in the event of a breach by Publisher or any of its employees or permitted subcontractors of any such Sections of this Agreement, SCEA shall be entitled to the immediate issuance without bond of ex parte injunctive relief enjoining any breach or threatened breach of any or all of such provisions. In addition, Publisher shall indemnify SCEA for all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and all reasonable related costs) which SCEA may sustain or incur as a result of such breach. 17.10 SEVERABILITY. In the event that any provision of this Agreement (or portion thereof) is determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, such provision (or part thereof) shall be enforced to the extent possible consistent with the stated intention of the parties, or, if incapable of such enforcement, shall be deemed to be deleted from this Agreement, while the remainder of this Agreement shall continue in full force and remain in effect according to its stated terms and conditions. 17.11 SECTIONS SURVIVING EXPIRATION OR TERMINATION. The following sections shall survive the expiration or earlier termination of this Agreement for any reason: 4, 5.5, 6, 7.2, 7.4, 9, 10, 11, 12, 14, 15.5, 16, 17.4, 17.5, 17.6, 17.7, 17.8, 17.9 and 17.10. 17.12 WAIVER. No failure or delay by either party in exercising any right, power or remedy under this Agreement shall operate as a waiver of any such right, power or remedy. No waiver of any provision of this Agreement shall be effective unless in writing and signed by the party against whom such waiver is sought to be enforced. Any waiver by either party of any provision of this Agreement shall not be construed as a waiver of any other provision of this Agreement, nor shall such waiver operate as or be construed as a waiver of such provision respecting any future event or circumstance. 17.13 MODIFICATION. No modification of any provision of this Agreement shall be effective unless in writing and signed by both of the parties. 17.14 HEADINGS. The section headings used in this Agreement are intended primarily for reference and shall not by themselves determine the construction or interpretation of this Agreement or any portion hereof. 17.15 INTEGRATION. This Agreement (together with the Exhibits attached hereto) constitutes the entire agreement between SCEA and Publisher and supersedes all prior or contemporaneous agreements, proposals, understandings and communications between SCEA and Publisher, whether oral or written, with respect to the subject matter hereof; provided, however, that notwithstanding anything to the contrary in the foregoing, the Nondisclosure Agreement referred to in Section 14 hereto shall remain in full force and effect. 17.16 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, and together shall constitute one and the same instrument. 17.17 CONSTRUCTION. This Agreement shall be fairly interpreted in accordance with its terms and without any - 21 - 22 strict construction in favor of or against either of the parties. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first written above. SONY COMPUTER ENTERTAINMENT AMERICA BAM! [ILLEGIBLE] By: /s/ PHIL HARRISON By: /s/ RAY MUSCI ----------------------------------- ---------------------------- Print Name: Phil Harrison Print Name: Ray Musci --------------------------- -------------------- Title: VP Third Party/R&D Title: President -------------------------------- ------------------------- Date: 2/11/00 Date: 2/10/00 --------------------------------- -------------------------- NOT AN AGREEMENT UNTIL EXECUTED BY BOTH PARTIES -22- CONFIDENTIAL 23 EXHIBIT A ROYALTIES A. LICENSED PRODUCT PER UNIT ROYALTY. The per Unit royalty due under Section 9 of the Agreement with respect to each Licensed Product shall be [*], unless otherwise set forth below. B. SCEA ESTABLISHED THIRD PARTY DEMO DISC PROGRAM ROYALTIES. Publisher shall pay SCEA a per Unit royalty in United States dollars of [*] for each Unit of the Consumer Promotional Disc Program and the Trade Promotional Disc Program manufactured. The quantity of Units ordered shall comply with the terms of such SCEA Established Third Party Demo Disc Program. Payment of such royalties shall be made to SCEA in conjunction with the payments to SCEA of the manufacturing costs for each Unit and pursuant to the terms and conditions set forth in Sections 7.2.3 and 9 hereto and in such SCEA Established Third Party Demo Disc Program. C. ADJUSTMENTS TO LICENSED PRODUCT ROYALTY - HIT TITLE REBATE 1. In the event that the total purchases by Publisher from SCEA with respect to any Licensed Product exceed the following numbers of Units during the first three (3) years after first commercial shipment of such Licensed Product, Publisher shall be entitled to a rebate with respect to royalties paid by Publisher to SCEA pursuant to Section 9 of the Agreement ("Hit Title Rebate") which shall be credited to Publisher's account as provided below, as follows:
VOLUME ROYALTY REBATE ------ -------------- a. Over [*] Units and up to [*] Units [*] of Royalty paid with respect to such Units b. Over [*] Units and up to [*] Units [*] of Royalty paid with respect to such Units c. Over [*] Units and up to [*] Units [*] of Royalty paid with respect to such Units d. Over [*] Units and up to [*] Units [*] of Royalty paid with respect to such Units e. Over [*] Units [*] of Royalty paid with respect to such Units.
2. SCEA shall credit Publisher's account for the Hit Title Rebates as follows: (i) if Publisher's initial order for a Licensed Product is less than the Hit Title Rebate threshold provided in C.1.a above, then SCEA shall credit Publisher's account sixty (60) days following the date that Publisher notifies SCEA that sales of a Licensed Product exceed the Hit Title Rebate threshold, subject to SCEA's right to confirm such information; (ii) if Publisher's initial order for a Licensed Product reaches or exceeds the Hit Title Rebate threshold provided in C.1.a above, then Publisher may credit the Hit Title Rebate amount set forth above as a separate line item on the Purchase Order with respect to such Licensed Product. It is Publisher's responsibility to inform SCEA when it reaches a Hit Title Rebate threshold, and Publisher shall not take a Hit Title Rebate as a separate line item on a Purchase Order without discussing first with SCEA. 3. The Hit Title Rebate may not be used in conjunction with any royalty reduction program of Sony in effect from time to time, including but not limited to any "Greatest Hits" program, nor shall a Hit Title Rebate be taken on a Third Party Demo Disc program or any promotional program of SCEA. 4. Each Licensed Product shall be considered independently for purposes of calculating the Hit Title Rebate and the rebates shall be [*]. By way of example: a. If Publisher's aggregate shipments for a single Licensed Product are less than [*] Units, [*]. * Confidential portions omitted and filed separately with the Commission. - 23 - CONFIDENTIAL 24 b. If Publisher's aggregate shipments for a single Licensed Product exceed [*] but are less than [*] Units, Publisher will be entitled to receive [*] of the Royalty paid as a rebate with respect to the first [*] Units, at the time Publisher is invoiced for such excess order, and shall thereafter be charged a per Unit royalty of $[*] less [*], until Units of the Licensed Product shipped exceed [*] Units. c. If Publisher's aggregate orders for a single Licensed Product exceed [*] Units, but are less than [*] Units, Publisher will receive [*] of the Royalty paid as a rebate with respect to the first [*] Units, at the time Publisher is invoiced for such excess order, and shall thereafter be charged a per Unit royalty of $[*] less [*], until Units of the Licensed Product shipped exceed [*] Units. Please note that in this case Publisher will only receive a [*] additional rebate with respect to the first [*] Units because it has already received a [*] rebate on such Units. * Confidential portions omitted and filed separately with the Commission. - 24 - 25 EXHIBIT B [PLAYSTATION LOGO] SCEA THIRD PARTY ACCOUNTABILITY REPORT Product Codes SLUS-FAKE
Title: Super Fake Bug Date: 7/8/98 Rev. No. 1.0 First Rev Date: 7/8/98 Lead Analyst Genre Action/Arcade No of Discs 1 Acct. Manager View 3/4 Overhead ESRB T Publisher F for Fake, L.T.D. Environment 3-D Total Revs 1 Developer Not Even Real Prod. No of Players Up to 2 Players Controllers Analog Pad Misc Periph Memory Card
SUPER FAKE BUG still contains problems. Some of these problems may have been waived by the Account Manager, [*] Third Party Quality Assurance highly recommends correcting all Class "A" bugs, and all "TRC" and "Guideline" issues. We also recommend that all remaining Class "B", "C" and "D" bugs be corrected where possible. The publisher, F FOR FAKE, L.T.D. assumes full responsibility for these problems. [1] A BUGS [1] B BUGS [1] C BUGS [1] D BUGS [1] GUIDELINE ISSUES [1] CONTENT ISSUES [1] TRC ISSUES Options used should be assumed to be default settings except where noted. Class= A BUG NO. [A1] DATE [7/8/98] CATEGORY [Crash] REV [1.0] REV FIXED [N/A] FREQUENCY [Always] STATUS [Open] EXPLANATION [Not Fixed] [100%] BUG DESCRIPTION In Fakeland, Act 2, if the user jumps onto the third lilypad from the left, the game freezes. At this point, the system had to be reset. Class= B BUG NO. [B1] DATE [7/8/98] CATEGORY [Collision] REV [1.0] REV FIXED [N/A] FREQUENCY [Always] STATUS [Open] EXPLANATION [Not Fixed] [100%] BUG DESCRIPTION In Space Odyssey, when Dr. Strangelove appears at the Overlook hotel and knocks on the door, if the user repeatedly pushes up on the D-Pad, Dr. Strangelove passes through the door. * Confidential portion omitted and filed separately with the Commission. 1 26 SCEA THIRD PARTY ACCOUNTABILITY REPORT FOR: SUPER FAKE BUG
- ------------------------------------------------------------------------------------------------ CLASS = C - ------------------------------------------------------------------------------------------------ Bug No. C1 Date 7/8/98 Category Graphics Rev. 1.0 Rev. Fixed N/A Frequency Always Status Open Explanation Not Fixed 100%
BUG DESCRIPTION During any instant replay, if the camera is rotating while the ball is in motion from a kick, the entire screen jitters (shakes). EXPECTED: The screen should not jitter or shake when using normal functions during replay mode.
- ------------------------------------------------------------------------------------------------ CLASS = D - ------------------------------------------------------------------------------------------------ Bug No. D1 Date 7/8/98 Category Comment Rev. 1.0 Rev. Fixed N/A Frequency Always Status Open Explanation Not Fixed 100%
BUG DESCRIPTION The hedge maze outside the Overlook hotel does not contain snow. To enhance gameplay appeal, snow and ice should be added to the hedge maze design.
- ----------------------------------------------------------------------------------------------- CLASS = TECHNICAL REQUIREMENT - ----------------------------------------------------------------------------------------------- Bug No. TRC 1 Date 7/8/98 Category TRC Rev. 1.0 Rev. Fixed N/A Frequency Always Status Open Explanation Not Fixed 100%
BUG DESCRIPTION No calibration mode is available for the Dual Analog controller. As outlined in the SONY Technical Requirements Checklist (Ver 1.2, Sec 11.2.1, Page 13) "There is a calibration mode [for Analog Joystick]."
- ---------------------------------------------------------------------------------------------------------- CLASS = GUIDELINE - ---------------------------------------------------------------------------------------------------------- Bug No. Guideline 1 Date 7/8/98 Category Guideline Rev. 1.0 Rev. Fixed N/A Frequency Always Status Open Explanation Not Fixed 100%
BUG DESCRIPTION The triangle button does not take the user back to the previous menu. As outlined in the SONY User Interface Guidelines (Ver 2.0, Sec 4.5, page A-3) "The triangle button should be used to take the user to the previous menu." 2 27 SCEA THIRD PARTY ACCOUNTABILITY REPORT FOR: SUPER FAKE BUG
- ----------------------------------------------------------------------------------------------------- CLASS = CONTENT - ----------------------------------------------------------------------------------------------------- Bug No. Content 1 Date 7/8/98 Category Content Rev. 1.0 Rev. Fixed N/A Frequency Always Status Open Explanation Not Fixed 100%
BUG DESCRIPTION In the Overlook hotel, the paintings on the wall contain images of naked women. - ----------------------------------------------------------------------------------------------------- 1 A BUGS 1 B BUGS 1 C BUGS 1 D BUGS 1 GUIDELINE ISSUES 1 CONTENT ISSUES 1 TRC ISSUES - -----------------------------------------------------------------------------------------------------
- --------------------------------- ---------------------------------- -VP Third Party -Quality Assurance Director - --------------------------------- ---------------------------------- -Account Manager -Publisher Representative SUPER FAKE BUG 3 28 EXHIBIT C [SONY LOGO] ADVERTISING/PRINTED MATERIAL ACCOUNTABILITY FORM PAGE 1 OF 1 BASIC INFORMATION PRODUCT NUMBER DATE - -------------------------------------------------------------------------------- TITLE VERSION - -------------------------------------------------------------------------------- SCEA ACCOUNT MANAGER E-MAIL ADDRESS - -------------------------------------------------------------------------------- PUBLISHER DEVELOPER - -------------------------------------------------------------------------------- SUBMISSIONS CONTACT PHONE FAX - -------------------------------------------------------------------------------- ADVERTISEMENT/PRINTED MATERIAL CHECKLIST TYPE OF MEDIA BEING SUBMITTED: - -------------------------------------------------------------------------------- INTENDED USE: - -------------------------------------------------------------------------------- RELEASE DATE OF ADVERTISEMENT/PRINTED MATERIAL: - -------------------------------------------------------------------------------- [ ] Advertising material will not be created for this title. NOTES: ---------------------------------------------------------------------- ---------------------------------------------------------------------- ADVERTISING/PRINTED MATERIAL: Pre-production samples of the advertising, merchandising, promotional, and display material of or concerning the Licensed Products (collectively referred to hereinafter as the "Advertising Materials") shall be submitted by Publisher to SCEA, free of cost, for SCEA's evaluation and approval as to quality, style, appearance, usage of any of the Licensed Trademarks, and appropriate reference of any required legal notices, prior to any actual production, use, or distribution of any such items by Publisher or in its behalf. No such proposed Advertising Material shall be produced, used or distributed directly or indirectly by Publisher without first obtaining the written approval of SCEA which approval will not be unreasonably withheld or delayed. SCEA may require Publisher to immediately withdraw and reprint any Advertising Materials for the Licensed Product which have been published but they have not received the written approval of SCEA. Failure to follow the SCEA guidelines for use of Licensed Trademarks and Advertising Materials shall be considered a material breach of Publisher's License Agreement with SCEA. PRODUCT MANAGEMENT: By signing this form, the Publisher confirms that all guidelines required by SCEA have been followed in the preparation of this product advertising. SIGNATURE TITLE DATE - -------------------------------------------------------------------------------- SUBMISSION INFORMATION SUBMISSION: After assembling the required materials, please forward them with a copy of this completed form to: Packaging/Advertising Coordinator SCEA 919 E. Hillsdale Blvd., Suite 200 Foster City, CA 94404 Phone: 650-655-5599 or 3549 29 EXHIBIT D [FORM OF LETTER REGARDING SCEA DEMO DISCS] VIA FAX [Date] [Name] [Third Party Name] [Address] Re: [Specify SCEA Demo Disc Program] Dear ________________: This letter confirms that Sony Computer Entertainment America ("SCEA") would like to include the Product Information (listed below) of your PlayStation game (listed below) in the following Demo Disc: Game Title: Type of Product Information Required: Demo Disc program: Deadline: Date of Licensed Publisher Agreement: Please return a signed copy of this letter to ________ by fax at _________ and submit the Product Information directly to SCEA's consultant, ________________, no later than the Deadline set forth above. Failure to provide this acknowledged letter and the code, by this date, will result in removal of your Product Information from the Demo Disc. The inclusion of your Product Information is subject to the terms and conditions of the Licensed Publisher Agreement between SCEA and you. Very truly yours, AGREED AND ACKNOWLEDGED BY: [PUBLISHER] By: _______________________________ Title: ____________________________ Date: _____________________________ cc: Legal Department -27- EX-10.27 37 v72115orex10-27.txt EXHIBIT 10.27 1 EXHIBIT 10.27 (Confidential Portions Omitted) AMENDMENT TO THE LICENSED PUBLISHER AGREEMENT AMENDMENT, dated as of April 1, 2000 ("Amendment") between Sony Computer Entertainment America Inc., located at 919 E. Hillsdale Boulevard, Foster City, CA 94404 ("SCEA") and Bay Area Multimedia, located at 333 West Santa Clara Street, Suite 930, San Jose, CA 95113 ("Publisher") to the Licensed Publisher Agreement dated as of February 2, 2000 between SCEA and Publisher (the "Agreement" or "LPA"). Capitalized terms used herein and not defined shall have the meanings attributed to them in the LPA. WHEREAS, SCEA has recently announced changes to the royalty structure for Licensed Products for the Player; WHEREAS, SCEA desires to amend the LPA to effectuate these royalty changes upon execution of the Amendment, in addition to making various other changes to SCEA's Third Party program; NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Publisher and SCEA hereby agree to amend the LPA as follows: 1. Effective upon execution hereof, the following Definition is hereby amended and restated in its entirety: 1.16 "Licensed Products" means the Executable Software (which may be combined with Executable Software of two or more Licensed Developers), which shall consist of one product developed for the Player per Unit, in final form developed exclusively for the Player. Publisher shall have no right to package or bundle more than one product developed for the Player in a single Unit unless separately agreed with SCEA. 2. Effective upon execution hereof, the following new Definition is hereby incorporated into the LPA: 1.39 "Wholesale Price" or "WSP" shall mean the greater of (i) the first published priced of the Licensed Product offered to retailers by Publisher as evidenced by a sell sheet or price list issued by Publisher, or (ii) the actual price paid by resellers upon the first commercial shipment of a Licensed Product without offsets, rebates or deductions from invoices of any kind. 3. Effective upon execution hereof, the following sentence is hereby added to the end of Section 4.3: Notwithstanding the foregoing, Publisher shall not distribute or transmit Product Software which is intended to be used with the Player via electronic means or any other means now known or hereafter devised, including without limitation, via wireless, cable, fiber optic means, telephone lines, microwaves and/or radio waves, or other network of computers or other devices, except as otherwise permitted in Section 4.2 herein. 4. Effective upon execution hereof, the following sentence is hereby added to the end of Section 7.1.4: SCEA reserves the right to insert, or to require Publisher to insert, certain Printed Materials relating to the Player or Licensed Trademarks into each Unit of Licensed Products. 5. Effective upon execution hereof, the following new Section 8.8 is hereby incorporated into the LPA: 8.8 PlayStation Website. All Licensed Publisher shall be required to provide Product Identification for a web page for each of its Licensed Products for display on the PlayStation promotional 1 2 website, or other website or websites as may be operated by SCEA from time to time in connection with the promotion of the PlayStation brand. Specifications for Product Information for such web pages shall be as provided in the SourceBook. Publisher shall provide SCEA with such Product Information for each Licensed Product upon submission of Printed Materials to SCEA for approval in accordance with Section A6 herein. Publisher shall also provide updates to such web page in a timely manner as required by SCEA in updates to the SourceBook. In addition, Publisher shall use its best efforts to provide Product Information for web pages for Publisher's Licensed Products released from the launch of the Player to the date of execution hereof within sixty (60) days of either execution of this Amendment or receipt of specifications provided separately by SCEA for the integration of such web page, whichever occurs later. In the event that Publisher is unable to provide Product Information for previously released Licensed Products within the time frame set forth above, then SCEA may create Product Information relating to such previously released Licensed Products and provide it to Publisher for approval. Failure of Publisher to approve such web pages within ten (10) days after receipt thereof will be deemed approval. 6. Effective upon execution hereof, Section 15.4 of the LPA is hereby amended and restated in the entirety to read as follows: 15.4 Options of SCEA in Lieu of Termination. As alternatives to terminating this Agreement or a particular Licensed Product as set forth in Sections 15.2 and 15.3 above, SCEA may, at its option and upon written notice to Publisher, take the following actions in lieu of terminating this Agreement. In the event that SCEA elects either of these options, Publisher may terminate this Agreement upon written notice to SCEA rather than allowing SCEA to exercise these options. Election of these options by SCEA shall not constitute a waiver of or compromise with respect to any of SCEA's rights under this Agreement and SCEA may elect to terminate this Agreement with respect to any breach. 15.4.1 Suspension of Agreement. SCEA may suspend this Agreement, entirely or with respect to a particular Licensed Product or program, for a set period of time which shall be specified in writing to Publisher upon the occurrence of any breach of this Agreement. 15.4.2 Liquidated Damages. Whereas a minor breach of any of the events set out below may not warrant termination of this Agreement, but will cause SCEA damages in amounts difficult to quantify, SCEA may require Publisher to pay liquidated damages of [*] per event, as follows: (i) Failure to submit Advertising Materials to SCEA for approval (including any required resubmissions); (ii) Broadcasting or publishing Advertising Materials without receiving the final approval or consent of SCEA; (iii) Failure to make SCEA's requested revisions to Advertising Materials; or (iv) Failure to comply with the SourceBook, Manufacturing Specifications or Guidelines which relates in any way to use of Licensed Trademarks. Liquidated damages shall be invoiced separately or on Publisher's next invoice for Licensed Products. SCEA reserves the right to terminate this Agreement for breach in lieu of seeking liquidated damages or in the event that liquidated damages are unpaid. 7. Effective upon execution hereof, Exhibit A, Section A of the Agreement is hereby amended and restated in its entirety to read as follows: A. Applicable Royalties on Licensed Products. * Confidential portion omitted and filed separately with the Commission. 2 3 1. Initial Orders. Publishing shall pay SCEA, either directly or through its designee, a per title royalty in United States dollars for each Unit of the Licensed Products initially released after execution of the Amendment based on the initial Wholesale Price of the Licensed Products, as follows: - -------------------------------------------------------------------------------- Wholesale Price Per Title Royalty - -------------------------------------------------------------------------------- [*] $[*] to $[*] $[*] - -------------------------------------------------------------------------------- [*] $[*] to $[*] $[*] - -------------------------------------------------------------------------------- [*] $[*] to $[*] $[*] - -------------------------------------------------------------------------------- [*] $[*] to $[*] $[*] - -------------------------------------------------------------------------------- [*] $[*] + [*] - -------------------------------------------------------------------------------- In the absence of satisfactory evidence to support the WSP, the royalty rate that shall apply will be [*] per Unit. For purposes of this Amendment, Units of Licensed Products shall be considered "released" when Units first begin to chip from a Designated Manufacturing Facility. 2. Reorders and Other Programs. Royalties on Licensed Products initially released prior to execution of this Amendment shall be [*] per Unit. Royalties on additional orders to manufacture a specific Licensed Product shall be the royalty determined by the initial Wholesale Price as reported by Publisher for the Licensed Product regardless of the wholesale price of the Licensed Product at the time of reorder, except in the event that the Wholesale Price increases for such Licensed Product, in which case the royalty shall be adjusted upwards to reflect the higher Wholesale Price. Licensed Products qualifying for SCEA's "Greatest Hits" programs or other programs offered by SCEA shall be subject to the royalties applicable for such programs. 3. Payment. At the time of placing an order to manufacture a Licensed Product, Publisher shall submit to SCEA an accurate accounting statement setting out the number of Units of Licensed Product to be manufactured, projected initial wholesale price, applicable royalty, and total amount due SCEA. In addition, Publisher shall submit to SCEA prior to placing the initial order for each Licensed Product a separate certification, in the form provided by SCEA in the SourceBook, signed by officers of Publisher that certifies that the Wholesale Price provided to SCEA is accurate and attaching such documentation supporting the WSP as requested by SCEA. The accounting statement due hereunder shall be subject to the audit and accounting provisions set forth below. 4. Audit Provisions. Publisher shall keep full, complete, and accurate books of accounts and records covering all transactions relating to this Agreement. Publisher shall preserve such books of account, records, documents, and material for a period of twenty-four (24) months after the expiration or earlier termination of this Agreement. Acceptance by SCEA of an accounting statement, purchase order, or payment hereunder will not preclude SCEA from challenging or questioning the accuracy thereof at a later time. In the event that SCEA reasonably believes that the Wholesale Price provided by Publisher with respect to any Licensed Product is not accurate, SCEA shall be entitled to request additional documentation from Publisher to support the listed Wholesale Price for such Licensed Product. In addition, during the Term and for a period of two (2) years thereafter upon the giving of reasonable written notice to Publisher, representatives of SCEA shall have access to, and the right to make copies and summaries of, such portions of all of Publisher's books and records as pertain to the Licensed Products and any payments due or credits received hereunder. In the event that such inspection reveals an under-reporting of any payment due to SCEA, Publisher shall immediately pay SCEA such amount. In the event that any audit conducted by SCEA reveals that Publisher has under-reported any payment due to SCEA hereunder by five percent (5%) or more for that audit period, then in addition to the payment of the appropriate amount due to SCEA * Confidential portion omitted and filed separately with the Commission. 3 4 Publisher shall reimburse SCEA for all reasonable audit costs for that audit and any and all collection costs to recover the unpaid amount. 8. Effective upon execution hereof, Exhibit A, Section C is hereby amended and restated in its entirety to read as follows: 3. The Hit Title Rebate may not be used in connection with any royalty reduction program of SCEA in effect from time to time, including but not limited to any "Greatest Hits" program, nor shall a Hit Title Rebate be taken on a Third Party Demo Disc program or any promotional program of SCEA or on Licensed Products that qualify for the [*]. 9. Except as specifically amended hereby, the LPA shall remain in full force and effect and is hereby ratified and confirmed in all respects. This Amendment shall be governed by and construed in accordance with the laws of the State of California. SONY COMPUTER ENTERTAINMENT BAY AREA MULTIMEDIA AMERICA INC. By: /s/ Phil Harrison By: /s/ Ray Musci ------------------------ --------------------- Phil Harrison Name: Ray Musci Vice President Title: President Third Party Relations and Date: 2-25-00 Research and Development July 28, 2000 NOT A VALID AGREEMENT UNTIL BOTH PARTIES EXECUTED BY BOTH PARTIES * Confidential portion omitted and filed separately with the Commission. 4 EX-10.28 38 v72115orex10-28.txt EXHIBIT 1O.28 1 EXHIBIT 10.28 (Confidential Portions Omitted) SONY COMPUTER ENTERTAINMENT AMERICA INC. [PLAYSTATION(R) LOGO] PLAYSTATION(R)2 CD-ROM/DVD-ROM LICENSED PUBLISHER AGREEMENT 2 TABLE OF CONTENTS
SECTION: PAGE: - -------- ----- 1. DEFINITION OF TERMS............................................... 1 2. LICENSE GRANT..................................................... 3 3. DEVELOPMENT OF LICENSED PRODUCTS.................................. 3 4. LIMITATIONS ON LICENSES; RESERVATION OF RIGHTS.................... 4 5. QUALITY STANDARDS FOR THE LICENSED PRODUCTS....................... 5 6. MANUFACTURE OF THE LICENSED PRODUCTS.............................. 7 7. MARKETING AND DISTRIBUTION........................................ 10 8. ROYALTIES......................................................... 12 9. REPRESENTATIONS AND WARRANTIES.................................... 15 10. INDEMNITIES; LIMITED LIABILITY.................................... 16 11. SCEA INTELLECTUAL PROPERTY RIGHTS................................. 17 12. INFRINGEMENT OF SCEA INTELLECTUAL PROPERTY RIGHTS BY THIRD PARTIES.................................................. 18 13. CONFIDENTIALITY................................................... 18 14. TERM AND TERMINATION.............................................. 20 15. EFFECT OF EXPIRATION OR TERMINATION............................... 22 16. MISCELLANEOUS PROVISIONS.......................................... 23
3 PLAYSTATION(R)2 CD-ROM/DVD-ROM LICENSED PUBLISHER AGREEMENT This LICENSED PUBLISHER AGREEMENT (the "Agreement" or "LPA"), entered into as of the 1st day of April, 2000 (the "Effective Date"), by and between SONY COMPUTER ENTERTAINMENT AMERICA INC., with offices at 919 E. Hillsdale Boulevard, Foster City, CA 94404 (hereinafter "SCEA"), and Bag Area Multimedia, with offices at 333 West Santa Clara St. Suite 930 San Jose, CA 95113 (hereinafter "Publisher"). WHEREAS, SCEA, its parent company, Sony Computer Entertainment Inc., and/or certain of their affiliates and companies within the group of companies of which any of them form a part (collectively referred to herein as "Sony") are designing and developing, and licensing core components of, a computer entertainment system known as the PlayStation(R)2 computer entertainment system (hereinafter referred to as the "System"). WHEREAS, SCEA has the right to grant licenses to certain SCEA Intellectual Property Rights (as defined below) in connection with the System. WHEREAS, Publisher desired to be granted a non-exclusive license to publish, develop, have manufactured, market, distribute and sell Licensed Products (as defined below) pursuant to the terms and conditions set forth in this Agreement; and SCEA is willing, on the terms and subject to the conditions of this Agreement, to grant Publisher such a license. NOW, THEREFORE, in consideration of the representations, warranties and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Publisher and SCEA hereby agree as follows: 1. DEFINITION OF TERMS. 1.1 "Advertising Materials" means any advertising, marketing, merchandising, promotional, public relations (including press releases) and display materials relating to or concerning Licensed Products or proposed Licensed Products, or any other advertising, merchandising, promotional, public relations (including press releases) and display materials depicting any of the Licensed Trademarks. For purposes of this Agreement, Advertising Materials include any advertisements in which the System is referred to or used in any way, including but not limited to giving the System away as prizes in contests or sweepstakes and the public display of the System in product placement opportunities. 1.2 "Affiliate of SCEA" means, as applicable, either Sony Computer Entertainment Inc. in Japan, Sony Computer Entertainment Europe Ltd. in the United Kingdom or such other Sony Computer Entertainment entity as may be established from time to time. 1.3 "Designated Manufacturing Facility" means a manufacturing facility or facilities which is designated by SCEA in its sole discretion to manufacture Licensed Products and/or their component parts, which may include manufacturing facilities owned and operated by affiliated companies of SCEA. 1.4 "Development System Agreement" means an agreement entered into between SCEA and a Licensed Publisher, Licensed Developer or other licensee for the sale or license of Development Tools. 1.5 "Development Tools" means the PlayStation 2 development tools sold or licensed by SCEA to a Licensed Publisher or Licensed Developer for use in the development of Executable Software for the System. 1.6 "Executable Software" means software which includes Product Software and any software provided directly or indirectly by SCEA or an Affiliate of SCEA designed for execution exclusively on the System and which has the ability to communicate with the software resident in the System. 1.7 "Fiscal Year" means a year measured from April 1 to March 31. 1.8 "Generic Line" means the generic legal attribution line used on SCEA marketing or other materials, which shall be or be substantially similar to the following: "Product copyright and trademarks are the property of the respective publisher or their licensors". 1.9 "Guidelines" shall mean any guidelines of SCEA or an Affiliate of SCEA with respect to SCEA Intellectual Property Rights, which may be set forth in the SourceBook 2 or in other documentation provided by SCEA or an Affiliate of SCEA to Publisher. 1.10 "Legal Copy" means any legal or contractual information required to be used in connection with a Licensed Product or Product Information, including but not limited to copyright and trademark attributions, contractual credits and developer or distribution credits. 1.11 "Level 1 Rebate" shall have the meaning set forth in Section 8.4 hereto. 1 4 1.12 "Level 2 Rebate" shall have the meaning set forth in Section 8.4 hereto. 1.13 "Licensed Developer" means any developer that has signed a valid and then current Licensed Developer Agreement. 1.14 "Licensed Developer Agreement" or "LDA" means a valid and current license agreement for the development of Licensed Products for the System, fully executed between a Licensed Developer and SCEA or an Affiliate of SCEA. 1.15 "Licensed Products" means the Executable Software (which may be combined with Executable Software of other Licensed Publishers or Licensed Developers), which shall consist of one product developed for the System or for the original PlayStation game console per Unit, in final form developed exclusively for the System. Publisher shall have no right to package or bundle more than one product developed for the System or for the original PlayStation game console in a single Unit unless separately agreed with SCEA. 1.16 "Licensed Publisher" means any publisher that has signed a valid and then current Licensed Publisher Agreement. 1.17 "Licensed Publisher Agreement" or "LPA" means a valid and current license agreement for the publication, development, manufacture, marketing, distribution and sale of Licensed Products for the System, fully executed between a Licensed Publisher and SCEA or an Affiliate of SCEA. 1.18 "Licensed Territory" means the United States (including its possessions and territories) and Canada. The Licensed Territory may be modified and/or supplemented by SCEA from time to time pursuant to Section 4.4 below. 1.19 "Licensed Trademarks" means the trademarks, service marks, trade dress, logos and other icons or indicia designed by SCEA in the SourceBook 2 or other Guidelines for use on or in connection with Licensed Products. Nothing contained in this Agreement shall in any way grant Publisher the right to use the trademark "Sony" in any manner. SCEA may amend such Licensed Trademarks from time to time in the SourceBook 2 or other Guidelines or upon written notice to Publisher. 1.20 "Manufacturing Specifications" means specifications setting forth terms relating to the manufacture and assembly of PlayStation 2 Format Discs, Packaging, Printed Materials and each of their component parts, which shall be set forth in the SourceBook 2 or other documentation provided by SCEA or a Designated Manufacturing Facility to Publisher and which may be amended from time to time upon reasonable notice to Publisher. 1.21 "Master Disc" means a recordable CD-ROM or DVD-ROM disc in the form requested by SCEA containing final pre-production Executable Software for a Licensed Product. 1.22 "Packaging" means, with respect to each Licensed Product, the carton, containers, packaging, edge labels and other proprietary labels, trade dress and wrapping materials, including any jewel case (or other CD-ROM or DVD-ROM container) or parts thereof, but excluding Printed Materials and PlayStation 2 Format Discs. 1.23 "PlayStation 2 Format Discs" means the uniquely marked or colored CD-ROM or DVD-ROM discs formatted for use with the System which, for purposes of this Agreement, are manufactured on behalf of Publisher and contain Licensed Products of SCEA Demo Discs. 1.24 "Printed Materials means all artwork and mechanicals set forth on the disc label of the PlayStation Disc relating to any of the Licensed Products and on or inside any Packaging for the Licensed Product, and all instructional manuals, liners, inserts, trade dress and other user information to be inserted into the Packaging. 1.25 "Product Information" means any information owned or licensed by Publisher relating in any way to Licensed Products, including but not limited to demos, videos, hints and tips, artwork, depictions of Licensed Product cover art and videotaped interviews. 1.26 "Product Proposal" shall have the meaning set forth in Section 5.2.1 hereto. 1.27 "Product Software" means any software including audio and video material developed by a Licensed Publisher or Licensed Developer, which, either by itself or combined with Product Software of other licensees, when integrated with software provided by SCEA or an Affiliate of SCEA, creates Executable Software. It is understood that Product Software contains no proprietary information of Sony or any other rights of SCEA. 1.28 "Publisher Intellectual Property Rights" means those intellectual property rights, including but not limited to patents and other patent rights, copyrights, trademarks, service marks, trade names, trade dress, mask work rights, utility model rights, trade secret rights, technical information, know-how, and the equivalents of the foregoing under the laws of any jurisdiction, and all other proprietary or intellectual property rights throughout the universe, which pertain to Product Software, Product Information, Printed Materials, Advertising Materials or other rights of Publisher required or necessary under this Agreement. 2 5 1.29 "Purchase Order" means a written purchase order processed in accordance with the terms of Section 6.2.2 hereto, the Manufacturing Specifications or other terms provided separately by SCEA or a Designated Manufacturing Facility to Publisher. 1.30 "SCEA Demo Disc" means any demonstration disc developed and distributed by SCEA. 1.31 "SCEA Established Third Party Demo Disc Programs" means (i) any consumer or trade demonstration disc program specified in the SourceBook 2, and (ii) any other third party demo disc program established by SCEA for Licensed Publishers. 1.32 "SCEA" Intellectual Property Rights" means those intellectual property rights, including but not limited to patents and other patent rights, copyrights, trademarks, service marks, trade names, trade dress, mask work rights, utility model rights, trade secret rights, technical information, know-how, and the equivalents of the foregoing under the laws of any jurisdiction, and all other proprietary or intellectual property rights throughout the universe, which are required to ensure compatibility with the System or which pertain to the Licensed Trademarks. 1.33 "SCEA Product Code" means the product identification number assigned to each Licensed Product, which shall consist of separate product identification numbers for multiple disc sets (i.e., SLUS-xxxxx). This SCEA Product Code is used on the Packaging and PlayStation Disc relating to each Licensed Product, as well as on most communications between SCEA and Publisher as a mode of identifying the Licensed Product other than by title. 1.34 "Sony Materials" means any data, object code, source code, firmware, documentation (or any part(s) of any of the foregoing), related to the System, selected in the sole judgment of SCEA, which are provided or supplied by SCEA or an Affiliate of SCEA to Publisher or any Licensed Developer and/or other Licensed Publisher. For purposes of this Agreement, Sony Materials shall not include any hardware portions of the Development Tools, but shall include firmware in such hardware. 1.35 "SourceBook 2" means the PlayStation 2 SourceBook (or any other reference guide containing information similar to the SourceBook 2 but designated with a different name) prepared by SCEA, which is provided separately to Publisher. The Source Book2 is designed to serve as the first point of reference by Publisher in every phase of the development, approval, manufacture and marketing of Licensed Products. 1.36 "Standard Rebate" shall mean the rebate offered by SCEA on titles of Licensed Products that achieve specified sales volumes as set forth in Section 8.4 of this Agreement. 1.37 "Third Party Demo Disc" means any demo disc developed and marketed by a Licensed Publisher, which complies with the terms of an SCEA Established Third Party Demo Disc Program. 1.38 "Unit" means an individual copy of a Licensed Product title regardless of the number of PlayStation2 Format Discs constituting such Licensed Product title. 1.39 "Wholesale Price" or "WSP" shall mean the greater of (i) the first published price of the Licensed Product offered to retailers by Publisher as evidenced by a sell sheet or price list issued by Publisher, or (ii) the actual price paid by retailers upon the first commercial shipment of a Licensed Product without offsets, rebates or deduction from invoices of any kind. 2. LICENSE. 2.1 LICENSE GRANT. SCEA grants to Publisher, and Publisher hereby accepts, for the term of this Agreement, within the Licensed Territory, under SCEA Intellectual Property Rights owned, controlled or licensed by SCEA, a non-exclusive, non-transferable license, without the right to sublicense (except as specifically provided herein), to publish Licensed Products using Sony Materials, which right shall be limited to the following rights and other rights set forth in, and in accordance with the terms of, this LPA: (i) to produce or develop Licensed Products and to enter into agreements with Licensed Developers and other third parties to develop Licensed Products; (ii) to have such Licensed Products manufactured; (iii) to market, distribute and sell such Licensed Products and to authorize others to do so; (iv) to use the Licensed Trademarks strictly and only in connection with the development, manufacturing, marketing, packaging, advertising and promotion of the Licensed Products, and subject to SCEA's right of approval as provided herein; and (v) to sublicense to end users the right to use the Licensed Products for noncommercial purposes in conjunction with the System only, and not with other devices or for public performance. 2.2 SEPARATE PLAYSTATION AGREEMENTS. Unless specifically set forth in this Agreement, all terms used herein are specific to the System and the third party licensing program related thereto and not to the original PlayStation game console or third party licensing program related thereto. Licenses relating to the original PlayStation game console are subject to separate agreements with SCEA, and any license of rights to Publisher under such separate agreements shall not confer on Publisher any rights under the System and vice versa. 3. DEVELOPMENT OF LICENSED PRODUCTS. 3.1 RIGHT TO DEVELOP. This LPA grants Publisher the right to develop Licensed Products. It also gives Publisher the right to purchase and/or license Development 3 6 Tools, as is appropriate, from SCEA or its designated agent, pursuant to a separate Development System Agreement with SCEA, to assist in such development. In developing Executable Software (or portions thereof), Publisher and its agents shall fully comply in all respects with any and all technical specifications which may from time to time be issued by SCEA. In the event that Publisher uses third party tools to develop Executable Software, Publisher shall be responsible for ensuring that it has obtained appropriate licenses for such use. 3.2 DEVELOPMENT BY THIRD PARTIES. Except as otherwise set forth herein, Publisher shall not provide Sony Materials or SCEA's Confidential Information to any third party. Publisher shall be responsible for determining that third parties meet the criteria set forth herein. Publisher may contract with a third party for development of Licensed Products, provided that such third party is: (i) a Licensed Publisher, (ii) a Licensed Developer, or (iii) an SCEA-authorized subcontractor in compliance with the provisions of Section 16.6. Publisher shall notify SCEA in writing of the identity of any such third party within thirty (30) days of entering into an agreement or other arrangement with the third party. 4. LIMITATIONS ON LICENSES; RESERVATION OF RIGHTS. 4.1 REVERSE ENGINEERING PROHIBITED. Other than as expressly permitted by SCEA in writing, Publisher shall not directly or indirectly disassemble, decrypt, electronically scan, peel semiconductor components, decompile, or otherwise reverse engineer in any manner or attempt to reverse engineer or derive source code from, all or any portion of the Sony Materials, or permit, assist or encourage any third party to do so. Other than as expressly permitted by SCEA in writing, Publisher shall not use, modify, reproduce, sublicense, distribute, create derivative works from, or otherwise provide to third parties, the Sony Materials, in whole or in part, other than as expressly permitted by SCEA. SCEA shall permit Publisher to study the performance, design and operation of the Development Tools solely for the limited purposes of developing and testing Publisher's software applications, or to build tools to assist Publisher with the development and testing of software applications for Licensed Products. Any tools developed or derived by Publisher resulting from the study of the performance, design or operation of the Development Tools shall be considered as derivative products of the Sony Materials for copyright purposes, but may be treated as trade secrets of Publisher. In no event shall Publisher patent any tools created, developed or derived from Sony Materials. Publisher shall not make available to any third party any tools developed or derived from the study of the Development Tools without the express written permission of SCEA. Use of such tools shall be strictly limited to the creation or testing of Licensed Products and any other use, direct or indirect of such tools is strictly prohibited. Publisher shall be required in all cases to pay royalties in accordance with Section 8 hereto to SCEA on any of Publisher's products utilizing any Sony Materials or derivative works made therefrom. Moreover, Publisher shall bear all risks arising from incompatibility of its Licensed Product and the System resulting from use of Publisher-created tools. The burden of proof under this Section shall be on Publisher, and SCEA reserves the right to require Publisher to furnish evidence satisfactory to SCEA that Publisher has complied with this Section. 4.2 RESERVATION OF SCEA'S RIGHTS. 4.2.1 LIMITATION OF RIGHTS TO LICENSES GRANTED. The licenses granted in this Agreement extend only to the publication, development, manufacture, marketing, distribution and sale of Licensed Products for use on the System, in such formats as may be designated by SCEA. Without limiting the generality of the foregoing and except as otherwise provided herein, Publisher shall not distribute or transmit the Executable Software or the Licensed Products via electronic means or any other means now known or hereafter devised, including without limitation, via wireless, cable, fiber optic means, telephone lines, microwave and/or radio waves, or over a network of computers or other devices. Notwithstanding this limitation, Publisher may electronically transmit Executable Software from site to site, or from machine to machine over a computer network, for the sole purpose of facilitating development; provided that no right of retransmission shall attach to any such transmission, and provided further that Publisher shall use reasonable security measures customary within the high technology industry to reduce the risk of unauthorized interception or retransmission of such transmissions. This Agreement does not grant any right or license, under any SCEA Intellectual Property Rights or otherwise, except as expressly provided herein, and no other right or license is to be implied by or inferred from any provision of this Agreement or the conduct of the parties hereunder. 4.2.2 OTHER USE OF SONY MATERIALS AND SCEA INTELLECTUAL PROPERTY RIGHTS. Publisher shall not make use of any Sony Materials or any SCEA Intellectual Property Rights (or any portion thereof) except as authorized by and in compliance with the provisions of this Agreement. Publisher shall not use the Executable Software, Sony Materials or SCEA's Confidential Information in connection with the development of any software for any emulator or other computer hardware or software system. No right, license or privilege has been granted to Publisher hereunder concerning the development of any collateral product or other use or purpose of any kind whatsoever which displays or depicts any of the Licensed Trademarks. The rights set forth in Section 2.1(v) hereto are limited to the right to sublicense such rights to end users for non-commercial use; any public performance relating to the Licensed Product or the System is prohibited unless expressly authorized in writing by SCEA. 4 7 4.3 RESERVATION OF PUBLISHER'S RIGHTS. Separate and apart from Sony Materials and other rights licensed to Publisher by SCEA hereunder, as between Publisher and SCEA, Publisher retains all rights, title and interest in and to the Product Software, and the Product Proposals and Product Information related thereto, including without limitation Publisher Intellectual Property Rights therein, as well as Publisher rights in any source code and other underlying material such as artwork and music related thereto and any names used as titles for Licensed Products and other trademarks used by Publisher. Nothing in this Agreement shall be construed to restrict the right of Publisher to develop, distribute or transmit products incorporating the Product Software and such underlying material (separate and apart from the Sony Materials) for any hardware platform or service other than the System, or to use Printed Materials or Advertising Materials approved by SCEA as provided herein (provided that such Printed Materials and/or Advertising Materials do not contain any Licensed Trademarks) as Publisher determines for such other platforms. SCEA shall not do or cause to be done any act or thing in any way impairing or tending to impair or dilute any of Publisher's rights, title or interests hereunder. Notwithstanding the foregoing, Publisher shall not distribute or transmit Product Software which is intended to be used with the System via electronic means or any other means now known or hereafter devised, including without limitation, via wireless, cable, fiber optic means, telephone lines, microwave and/or radio waves, or other a network of computers or other devices, except as otherwise permitted in Section 4.2.1 hereto. 4.4 ADDITIONS TO AND DELETIONS FROM LICENSED TERRITORY. SCEA may, from time to time, add one or more countries to the Licensed Territory by providing written notice of such addition to Publisher. SCEA shall also have the right to delete, and intends to delete any countries from the Licensed Territory if, in SCEA's reasonable judgment, the laws or enforcement of such laws in such countries do not protect SCEA Intellectual Property Rights. In the event a country is deleted from the Licensed Territory, SCEA shall deliver to Publisher a notice stating the number of days within which Publisher shall cease distributing Licensed Products, and retrieve any Development Tools located, in any such deleted country. Publisher shall cease distributing Licensed Products, and retrieve any Development Tools, directly or through subcontractors, by the end of the period stated in such notice. 4.5 SOURCEBOOK 2 REQUIREMENT. Publisher shall be required to comply with all the provisions of the SourceBook 2, including without limitation the Technical Requirements Checklist therein, when published, or within a commercially reasonable time following its publication to incorporate such provisions, as if such provisions were set forth in this Agreement. 5. QUALITY STANDARDS FOR THE LICENSED PRODUCTS. 5.1 QUALITY ASSURANCE GENERALLY. The Licensed Products (and all portions thereof) and Publisher's use of any Licensed Trademarks shall be subject to SCEA's prior written approval, which shall not be unreasonably withheld or delayed and which shall be within SCEA's sole discretion as to acceptable standards of quality. SCEA shall have the right at any stage of the development of a Licensed Product to review such Licensed Product to ensure that it meets SCEA's quality assurance standards. All Licensed Products will be developed to substantially utilize the particular capabilities of the System's proprietary hardware, software and graphics. No approval by SCEA of any element or stage of development of any Licensed Product shall be deemed an approval of any other element or stage of such Licensed Product, nor shall any such approval be deemed to constitute a waiver of any of SCEA's rights under this Agreement. In addition, SCEA's approval of any element or any stage of development of any Licensed Product shall not release Publisher from any of its representations and warranties in Section 9.2 hereunder. 5.2 PRODUCT PROPOSALS. 5.2.1 SUBMISSION OF PRODUCT PROPOSAL. Publisher shall submit to SCEA for SCEA's written approval or disapproval, which shall not be unreasonably withheld or delayed, a written proposal (the "Product Proposal"). Such Product Proposal must contain all information specified in the SourceBook 2, as well as any additional information that SCEA may deem to be useful in evaluating the proposed Licensed Product. 5.2.2 APPROVAL OF PRODUCT PROPOSAL. After SCEA's review of Publisher's Product Proposal, Publisher will receive written notice from SCEA of the status of the Product Proposal, which may range from "Approved" to "Not Approved." Such conditions shall have the meanings ascribed to them in the SourceBook 2, and may be changed from time to time by SCEA. If a Product Proposal is "Not Approved", then neither Publisher nor any other Licensed Developer or Licensed Publisher may re-submit such Product Proposal without significant, substantive revisions. SCEA shall have no obligation to approve any Product Proposal submitted by Publisher. Any development conducted by or at the direction of Publisher and any legal commitment relating to development work shall be at Publisher's own financial and commercial risk. Publisher shall not construe approval of a Product Proposal as a commitment by SCEA to grant final approval to such Licensed Product. Nothing herein shall restrict SCEA from commercially exploiting any coincidentally similar concept(s) and/or product(s), which have been independently developed by SCEA, an Affiliate of SCEA or any third party. 5.2.3 CHANGES TO PRODUCT PROPOSAL. Publisher shall notify SCEA promptly in writing in the event of any material proposed change in any portion of 5 8 the Product Proposal. SCEA's approval of a Product Proposal shall not obligate Publisher to continue with development or production of the proposed Licensed Product, provided that Publisher must immediately notify SCEA in writing if it discontinues, cancels or otherwise delays past the original scheduled delivery date the development of any proposed Licensed Product. In the event that Publisher licenses a proposed Licensed Product from another Licensed Publisher or a Licensed Developer, it shall immediately notify SCEA of such change and must re-submit such Licensed Product to SCEA for approval in accordance with the provisions of Section 5.2.1 above. 5.3 WORK-IN-PROGRESS. 5.3.1 SUBMISSION AND REVIEW OF WORK-IN-PROGRESS. SCEA shall require Publisher to submit to SCEA work-in-progress on Licensed Products at certain intervals throughout their development and, upon written notice to Publisher, at any time during the development process. Upon approval of the Product Proposal, Publisher must, within the time frame indicated in the approval letter, communicate with SCEA and mutually agree on a framework for the review of such Licensed Product throughout the development process ("Review Process"). Once the Review Process has begun, Publisher shall be responsible for submitting work-in-progress to SCEA in accordance with such Review Process. FAILURE TO SUBMIT WORK-IN-PROGRESS IN ACCORDANCE WITH ANY STAGE OF THE REVIEW PROCESS MAY, AT SCEA'S DISCRETION, RESULT IN REVOCATION OF APPROVAL OF SUCH PRODUCT PROPOSAL. 5.3.2 APPROVAL OF WORK IN PROGRESS. SCEA shall have the right to approve, reject or require additional information with respect to each stage of the Review Process. SCEA shall specify in writing the reasons for any such rejection or request for additional information and shall state what corrections and/or improvements are necessary. If any stage of the Review Process is not provided to SCEA or is not successfully met after a reasonable cure period agreed to between SCEA and Publisher, SCEA shall have the right to revoke the approval of Publisher's Product Proposal. 5.3.3 CANCELLATION OR DELAY; CONDITIONS OF APPROVAL. Licensed Products which are canceled by Publisher or are late in meeting the final Executable Software delivery date by more than three (3) months (without agreeing with SCEA on a modified final delivery date) shall be subject to the termination provisions set forth in Section 14.3 hereto. In addition, failure to make changes required by SCEA to the Licensed Product at any stage of the Review Process, or making material changes to the Licensed Product without SCEA's approval, may subject Publisher to the termination provisions set forth in Section 14.3 hereto. 5.4 APPROVAL OF EXECUTABLE SOFTWARE. On or before the date specified in the Product Proposal or as determined by SCEA pursuant to the Review Process, Publisher shall deliver to SCEA for its inspection and evaluation, a final version of the Executable Software for the proposed Licensed Product. SCEA will evaluate such Executable Software and notify Publisher in writing of its approval or disapproval, which shall not be unreasonably withheld or delayed. If such Executable Software is disapproved, SCEA shall specify in writing the reasons for such disapproval and state what corrections and improvements are necessary. After making the necessary corrections and improvements, Publisher shall submit a new version of such Executable Software for SCEA's approval. SCEA shall have the right to disapprove Executable Software if it fails to comply with SCEA's corrections or improvements or one or more conditions as set forth in the SourceBook 2 with no obligation to review all elements of any version of Executable Software. All final versions of Executable Software shall be submitted in the format prescribed by SCEA and shall include such number of Master Discs as SCEA may require from time to time. Publisher hereby (i) warrants that all final versions of Executable Software are fully tested; (ii) shall use its best efforts to ensure such Executable Software is fully debugged prior to submission to SCEA; and (iii) warrants that all versions of Executable Software comply or will comply with standards set forth in the SourceBook 2 or other documentation provided by SCEA to Publisher. In addition, prior to manufacture of Executable Software, Publisher must sign an accountability form stating that (x) Publisher approves the release of such Executable Software for manufacture in its current form and (y) Publisher shall be fully responsible for any problems related to such Executable Software. 5.5 PRINTED MATERIALS. 5.5.1 COMPLIANCE WITH GUIDELINES. For each proposed Licensed Product, Publisher shall be responsible, at Publisher's expense, for creating and developing Printed Materials. All Printed Materials shall comply with the Guidelines, which may be amended from time to time, provided that Publisher shall, except as otherwise provided herein, only be required to implement amended Guidelines in subsequent orders of Printed Materials and shall not be required to recall or destroy previously manufactured Printed Materials, unless such Printed Materials do not comply with the original requirements in the Guidelines or unless explicitly required to do so in writing by SCEA. 5.5.2 SUBMISSION AND APPROVAL OF PRINTED MATERIALS. No later than submission of final Executable Software for a proposed Licensed Product. Publisher shall also deliver to SCEA, for review and evaluation, the proposed final Printed Materials and a form of limited warranty for the proposed Licensed Product. Failure to meet any scheduled release dates for a Licensed Product is solely the risk and responsibility of Publisher, and SCEA assumes no responsibility for Publisher failing to meet such scheduled release dates due to this submission process. The 6 9 quality of such Printed Materials shall be of the same quality as that associated with other commercially available high quality software products. If any of the Printed Materials are disapproved, SCEA shall specify the reasons for such disapproval and state what corrections are necessary. SCEA shall have no liability to Publisher for costs incurred or irrevocably committed to by Publisher for production of Printed Materials that are disapproved by SCEA. After making the necessary corrections to any disapproved Printed Materials, Publisher must submit new Printed Materials for approval by SCEA. SCEA shall not unreasonably withhold or delay its review of Printed Materials. 5.6 ADVERTISING MATERIALS. 5.6.1 SUBMISSION AND APPROVAL OF ADVERTISING MATERIALS. Pre-production samples of all Advertising Materials shall be submitted by Publisher to SCEA, at Publisher's expense, prior to any actual production, use or distribution of any such items by Publisher or on its behalf. SCEA shall evaluate and approve such Advertising Materials, which approval shall not be unreasonably withheld or delayed, as to the following standards: (i) the content, quality, and style of the overall advertisement; (ii) the quality, style, appearance and usage of any of the Licensed Trademarks; (iii) appropriate references of any required notices; and (iv) compliance with the Guidelines. If any of the Advertising Materials are disapproved, SCEA shall specify the reasons for such disapproval and state what corrections are necessary. SCEA may require Publisher to immediately withdraw and reprint any Advertising Materials that have been published but have not received the written approval of SCEA. SCEA shall have no liability to Publisher for costs incurred or irrevocably committed to by Publisher for production of Advertising Materials that are disapproved by SCEA. For each Licensed Product, Publisher shall be required to deliver to SCEA an accountability form stating that all Advertising Materials for such Licensed Product comply or will comply with the Guidelines for use of the Licensed Trademarks. After making the necessary corrections to any disapproved Advertising Materials, Publisher must submit new proposed Advertising Materials for approval by SCEA. 5.6.2 FAILURE TO COMPLY; THREE STRIKES PROGRAM. PUBLISHERS WHO FAIL TO OBTAIN SCEA'S APPROVAL OF ADVERTISING MATERIALS PRIOR TO BROADCAST OR PUBLICATION SHALL BE SUBJECT TO THE PROVISIONS OF THE "THREE STRIKES" PROGRAM OUTLINED IN THE SOURCEBOOK 2. FAILURE TO OBTAIN SCEA'S APPROVAL OF ADVERTISING MATERIALS COULD RESULT IN TERMINATION OF THIS LPA OR TERMINATION OF APPROVAL OF THE LICENSED PRODUCT, OR COULD SUBJECT PUBLISHER TO THE PROVISIONS OF SECTION 14.4 HERETO. Failure to meet any scheduled release dates for Advertising Materials is solely the risk and responsibility of Publisher, and SCEA assumes no responsibility for Publisher failing to meet such scheduled release dates due to approval requirements as set forth in this Section. 5.6.3 SCEA MATERIALS. Subject in each instance to the prior written approval of SCEA, Publisher may use advertising materials owned by SCEA pertaining to the System or to the Licensed Trademarks on such Advertising Materials as may, in the Publisher's judgment, promote the sale of Licensed Products. 5.7 RATING REQUIREMENTS. If required by SCEA or any governmental entity, Publisher shall submit each Licensed Product to a consumer advisory ratings system designated by SCEA and/or such governmental entity for the purpose of obtaining rating code(s) for each Licensed Product. Any and all costs and expenses incurred in connection with obtaining such rating code(s) shall be borne solely by Publisher. Any required consumer advisory rating code(s) procured hereby shall be displayed on the Licensed Product and in the associated Printed Materials and Advertising Materials, at Publisher's cost and expense, in accordance with the SourceBook 2 or other documentation provided by SCEA to Publisher. 5.8 PUBLISHER'S ADDITIONAL QUALITY ASSURANCE OBLIGATIONS. If at any time or times subsequent to the approval of Executable Software and Printed Materials, SCEA identifies any material defects (such materiality to be determined by SCEA in its sole discretion) with respect to the Licensed Product, or in the event that SCEA identifies any improper use of its Licensed Trademarks or Sony Materials with respect to the Licensed Product, or any such material defects or improper use are brought to the attention of SCEA, Publisher shall, at no cost to SCEA, promptly correct any such material defects, or improper use of Licensed Trademarks or Sony Materials, to SCEA's commercially reasonable satisfaction, which may include, if necessary in SCEA's judgment, the recall and re-release of such Licensed Product. In the event any Units of Licensed Products create any risk of loss or damage to any property or injury to any person, Publisher shall immediately take effective steps, at Publisher's sole liability and expense, to recall and/or remove such defective Units from any affected channels of distribution, provided, however, that if Publisher is not acting as the distributor and/or seller for the Licensed Products, its obligation hereunder shall be to use its best efforts to arrange removal of such Licensed Product from channels of distribution. Publisher shall provide all end-user support for the Licensed Products and SCEA expressly disclaims any obligation to provide end-user support on Publisher's Licensed Products. 6. MANUFACTURE OF THE LICENSED PRODUCTS. 6.1 MANUFACTURE OF UNITS. Upon approval of Executable Software and associated Printed Materials pursuant to Section 5, and subject to Sections 6.1.2, 6.1.3 and 6.1.4 below, the Designated Manufacturing Facility 7 10 will, in accordance with the terms and conditions set forth in this Section 6, and at Publisher's expense (a) manufacture PlayStation 2 Format Discs for Publisher; (b) manufacture Publisher's Packaging and/or Printed Materials; and/or (c) assemble the PlayStation 2 Format Discs with the Printed Materials and the Packaging. Publisher shall comply with all Manufacturing Specifications related to the particular terms set forth herein. SCEA reserves the right to insert or require the Publisher to insert certain Printed Materials relating to the System or Licensed Trademarks into each Unit. 6.1.1 MANUFACTURE OF PLAYSTATION 2 FORMAT DISCS. 6.1.1.1 DESIGNATED MANUFACTURING FACILITIES. To insure compatibility of the PlayStation 2 Format Discs with the System, consistent quality of the Licensed Product and incorporation of anti-piracy security systems, SCEA shall designate and license a Designated Manufacturing Facility to reproduce PlayStation 2 Format Discs. Publisher shall purchase [*] of its requirements for PlayStation 2 Format Discs from such Designated Manufacturing Facility during the term of the Agreement. Any Designated Manufacturing Facility shall be a third party beneficiary of this Agreement. 6.1.1.2 CREATION OF MASTER CD-ROM OR DVD-ROM. Pursuant to Section 5.4 in connection with final testing of Executable Software, Publisher shall provide SCEA with the number of Master Discs specified in the SourceBook 2. A Designated Manufacturing Facility shall create from one of the fully approved Master Discs provided by Publisher the original master CD-ROM or DVD-ROM, from which all other copies of the Licensed Product are to be replicated. Publisher shall be responsible for the costs, as determined by the Designated Manufacturing Facility, of producing such original master. In order to insure against loss or damage to the copies of the Executable Software furnished to SCEA, Publisher will retain duplicates of all Master Discs, and neither SCEA nor any Designated Manufacturing Facility shall be liable for loss of or damage to any Master Discs or Executable Software. 6.1.2 MANUFACTURE OF PRINTED MATERIALS. 6.1.2.1 MANUFACTURE BY DESIGNATED MANUFACTURING FACILITY. If Publisher elects to obtain Printed Materials from a Designated Manufacturing Facility, Publisher shall deliver all SCEA-approved Printed Materials to that Designated Manufacturing Facility, at Publisher's sole risk and expense, and the Designated Manufacturing Facility will manufacture such Printed Materials in accordance with this Section 6. In order to insure against loss or damage to the copies of the Printed Materials furnished to SCEA, Publisher will retain duplicates of all Printed Materials, and neither SCEA nor any Designated Manufacturing Facility shall be liable for loss of or damage to any such Printed Materials. 6.1.2.2 MANUFACTURE BY ALTERNATE SOURCE. Subject to SCEA's approval as provided in Section 5.5.2 hereto and in this Section, Publisher may elect to be responsible for manufacturing its own Printed Materials (other than any Artwork which may be placed directly upon the PlayStation Disc, which Publisher will supply to the Designated Manufacturing Facility for placement), at Publisher's sole risk and expense. Prior to production of each order, Publisher shall be required to supply SCEA with samples of any Printed Materials not produced or supplied by a Designated Manufacturing Facility, at no charge to SCEA or Designated Manufacturing Facility, for SCEA's approval with respect to the quality thereof. SCEA shall have the right to disapprove any Printed Materials that do not comply with the Manufacturing Specifications. Manufacturing Specifications for Printed Materials shall be comparable to manufacturing specifications applied by SCEA to its own software products for the System. If Publisher elects to supply its own Printed Materials, neither SCEA nor any Designated Manufacturing Facility shall be responsible for any delays arising from use of Publisher's own Printed Materials. 6.1.3 MANUFACTURE OF PACKAGING. 6.1.3.1 MANUFACTURE BY DESIGNATED MANUFACTURING FACILITY. To ensure consistent quality of the Licensed Products, SCEA may designate and license a Designated Manufacturing Facility to reproduce proprietary Packaging for the System. If SCEA creates proprietary Packaging for the System, then Publisher shall purchase all of its requirements for such proprietary Packaging from a Designated Manufacturing Facility during the term of the Agreement, and the Designated Manufacturing Facility will manufacture such Packaging in accordance with this Section 6. 6.1.3.2 MANUFACTURE BY ALTERNATE SOURCE. If SCEA elects to use standard, non-proprietary Packaging for the System, then Publisher may elect to be responsible for manufacturing its own Packaging (other than any proprietary labels and any portion of a container containing Licensed Trademarks, which Publisher must purchase from a Designated Manufacturing Facility). Publisher shall assume all responsibility for the creation of such Packaging at Publisher's sole risk and expense. Publisher shall be responsible for encoding and printing proprietary edge labels provided by a Designated Manufacturing Facility with information reasonably specified by SCEA from time to time and will apply such labels to each Unit of the Licensed Product as reasonably specified by SCEA. Prior to production of each order, Publisher shall be required to supply SCEA with samples of any Packaging not produced or supplied by a Designated Manufacturing Facility, at no charge to SCEA or Designated Manufacturing Facility, for SCEA's approval with respect to the quality thereof. SCEA * Confidential portion omitted and filed separately with the Commission. 8 11 shall have the right to disapprove any Packaging that does not comply with the Manufacturing Specifications. Manufacturing Specifications for Packaging shall be comparable to manufacturing specifications applied by SCEA to its own software products for the System. If Publisher procures Packaging from an alternate source, then it must also procure assembly services from an alternate source. If Publisher elects to supply its own Packaging, neither SCEA nor any Designated Manufacturing Facility shall be responsible for any delays arising from use of Publisher's own Packaging. 6.1.4 ASSEMBLY SERVICES. Publisher may either procure assembly services from a Designated Manufacturing Facility or from an alternate source. If Publisher elects to be responsible for assembling the Licensed Products, then the Designated Manufacturing Facility shall ship the component parts of the Licensed Product to a destination provided by Publisher, at Publisher's sole risk and expense. SCEA shall have the right to inspect any assembly facilities utilized by Publisher in order to determine if the component parts of the Licensed Products are being assembled in accordance with SCEA's quality standards. SCEA may require that Publisher recall any Licensed Products that do not contain proprietary labels or other material component parts or that otherwise fail to comply with the Manufacturing Specifications. If Publisher elects to use alternate assembly facilities, neither SCEA nor any Designated Manufacturing Facility shall be responsible for any delays or missing component parts arising from use of alternate assembly facilities. 6.2 PRICE, PAYMENT AND TERMS. 6.2.1 PRICE. The applicable price for manufacture of any Units of Licensed Products ordered hereunder shall be provided to Publisher by the Designated Manufacturing Facility. Purchase shall be subject to the terms and conditions set out in any purchase order form supplied to Publisher by the Designated Manufacturing Facility. 6.2.2 ORDERS. Publisher shall issue to a Designated Manufacturing Facility a written Purchase Order(s) in the form set forth and containing the information required in the Manufacturing Specifications, with a copy to SCEA. All orders shall be subject to approval by SCEA, which shall not be unreasonably withheld or delayed. Purchase Orders issued by Publisher to a Designated Manufacturing Facility for each Licensed Product approved by SCEA shall be non-cancelable and be subject to the order requirements of the Designated Manufacturing Facility. 6.2.3 PAYMENT TERMS. Purchase Orders will be invoiced as soon as reasonably practical after receipt, and such invoice will include both manufacturing price and royalties payable pursuant to Section 8.1 or 8.2 hereto for each Unit of Licensed Products ordered. Each invoice will be payable either on a cash-in-advance basis or pursuant to a letter of credit, or, at SCEA's sole discretion, on credit terms. Terms for cash-in-advance and letter of credit payments shall be as set forth in the SourceBook 2. All amounts hereunder shall be payable in United States dollars. All associated banking charges with respect to payments of manufacturing costs and royalties shall be borne solely by Publisher. 6.2.3.1 CREDIT TERMS. SCEA may at its sole discretion extend credit terms and limits to Publisher. SCEA may also revoke such credit terms and limits at its sole discretion. If Publisher qualifies for credit terms, then orders will be invoiced upon shipment of Licensed Products and each invoice will be payable within thirty (30) days of the date of the invoice. Any overdue sums shall bear interest at the rate of one and one-half (1-1/2%) percent per month, or such lower rate as may be the maximum rate permitted under applicable law, from the date when payment first became due to and including the date of payment thereof. Publisher shall be additionally liable for all costs and expenses of collection, including without limitation, reasonable fees for attorneys and court costs. 6.2.3.2 GENERAL TERMS. No deduction may be made from remittances unless an approved credit memo has been issued by a Designated Manufacturing Facility. Neither SCEA nor a Designated Manufacturing Facility shall be responsible for shortage or breakage with respect to any order if component parts and/or assembly services are obtained from alternate sources. Each shipment to Publisher shall constitute a separate sale, whether said shipment be whole or partial fulfillment of any order. Nothing in this Agreement shall excuse or be construed as a waiver of Publisher's obligation to timely provide any and all payments owed to SCEA and Designated Manufacturing Facility. 6.3 DELIVERY OF LICENSED PRODUCTS. Neither SCEA nor any Designated Manufacturing Facility shall have an obligation to store completed Units of Licensed Products. Publisher may either specify a mode of delivery or allow Designated Manufacturing Facility to select a mode of delivery. 6.4 OWNERSHIP OF MASTER DISCS. Due to the proprietary nature of the mastering process, neither SCEA nor a Designated Manufacturing Facility shall under any circumstances release any original master CD-ROM, Master Discs or other in-process materials to Publisher. All such materials shall be and remain the sole property of SCEA or Designated Manufacturing Facility. Notwithstanding the foregoing, Publisher Intellectual Property Rights contained in Product Software that is contained in such in-process materials is, as between SCEA and Publisher, the sole and exclusive property of Publisher or its licensors (other than SCEA and/or it affiliates). 9 12 7. MARKETING AND DISTRIBUTION. 7.1 MARKETING GENERALLY. In accordance with the provisions of this Agreement and at no expense to SCEA, Publisher shall, and shall direct its distributors to, diligently market, sell and distribute the Licensed Products, and shall use commercially reasonable efforts to stimulate demand for such Licensed Products in the Licensed Territory and to supply any resulting demand. Publisher shall use its reasonable best efforts to protect the Licensed Products from and against illegal reproduction and/or copying by end users or by any other persons or entities. 7.2 SAMPLES. Publisher shall provide to SCEA, at no additional cost, for SCEA's internal use, [*] sample copies of each Licensed Product. Publisher shall pay any manufacturing costs to the Designated Manufacturing Facility in accordance with Section 6.2, but shall not be obligated to pay royalties, in connection with such sample Units. In the event that Publisher assembles any Licensed Product using an alternate source, Publisher shall be responsible for shipping such sample Units to SCEA at Publisher's cost and expense. SCEA shall not directly or indirectly resell any such sample copies of the Licensed Products without Publisher's prior written consent. SCEA may give sample copies to its employees, provided that it uses its reasonable efforts to ensure that such copies are not sold into the retail market. In addition, subject to availability, Publisher shall sell to SCEA additional quantities of Licensed Products at the Wholesale Price for such Licensed Product. Any changes to SCEA's policy regarding sample Units shall be set forth in the SourceBook 2. 7.3 MARKETING PROGRAMS OF SCEA. From time to time, SCEA may invite Publisher to participate in promotional or advertising opportunities that may feature one or more Licensed Products from one or more Licensed Publishers. Participation shall be voluntary and subject to terms to be determined at the time of the opportunity. In the event Publisher elects to participate, all materials submitted by Publisher to SCEA shall be submitted subject to Section 10.2 hereunder and delivery of such materials to SCEA shall constitute acceptance by Publisher of the terms of the offer. Moreover, SCEA may use the Generic Line on all multi-product marketing materials, unless otherwise agreed in writing. 7.4 DEMONSTRATION DISC PROGRAMS. SCEA may from time to time, provide opportunities for Publisher to participate in SCEA Demo Disc programs. In addition, SCEA may, from time to time, grant to Publisher the right to create Third Party Demo Discs pursuant to SCEA Established Third Party Demo Disc Programs. The specifications with respect to the approval, creation, manufacture, marketing, distribution and sale of any such demo disc programs shall be set forth in the SourceBook 2 or in other documentation to be provided by SCEA to Publisher. Except as otherwise specifically set forth herein, in the SourceBook 2 or in other documentation, Third Party Demo Discs shall be considered "Licensed Products" and shall be subject in all respects to the terms and conditions of this Agreement pertaining to Licensed Products. In addition, the following procedures shall also apply to SCEA Demo Discs and Third Party Demo Discs: 7.4.1 SCEA DEMO DISCS. 7.4.1.1 LICENSE. SCEA may, but shall not be obligated to, invite Licensed Publishers to participate in any SCEA Demo Disc program. Participation by Publisher in an SCEA Demo Disc program shall be optional. If Publisher elects to participate in an SCEA Demo Disc program and provides Product Information to SCEA in connection thereto, Publisher shall thereby grant to SCEA a royalty-free license during the term of this Agreement in the Licensed Territory to manufacture, use, sell, distribute, market, advertise and otherwise promote Publisher's Product Information as part of such SCEA Demo Disc program. In addition, Publisher shall grant SCEA the right to feature Publisher and Licensed Product names in SCEA Demo Disc Advertising Materials and to use copies of screen displays generated by the code, representative video samples or other Product Information in such SCEA Demo Disc Advertising Materials. All decisions relating to the selection of first and third party Product Information and all other aspects of SCEA Demo Discs shall be in the sole discretion of SCEA. 7.4.1.2 SUBMISSION AND APPROVAL OF PRODUCT INFORMATION. Upon receipt of written notice that SCEA has tentatively chosen Publisher's Product Information for inclusion in an SCEA Demo Disc, Publisher shall deliver to SCEA such requested Product Information by no later than the deadline set forth in such notice. Separate notice will be sent for each SCEA Demo Disc, and Publisher must sign each notice prior to inclusion in such SCEA Demo Disc. Publisher shall include its own Legal Copy on the title screen or elsewhere in the Product Information submitted to SCEA. SCEA shall only provide the Generic Line on the SCEA Demo Disc title screen and packaging. Publisher's Product Information shall comply with SCEA's technical specifications provided to Publisher. SCEA reserves the right to review and test the Product Information provided and request revisions prior to inclusion on the SCEA Demo Disc. If SCEA requests changes to the Product Information and Publisher elects to continue to participate in such Demo Disc, Publisher shall make such changes as soon as possible after receipt of written notice of such requested changes from SCEA, but not later than the deadline for receipt of Product Information. Failure to make such changes and provide the modified Product Information to SCEA by the deadline shall result in the Product Information to SCEA by the deadline shall result in the Product Information being removed from the SCEA Demo Disc. Costs associated with preparation of Product Information supplied to SCEA shall be borne solely by Publisher. Except as otherwise provided in this Section, SCEA shall not edit or modify Product * Confidential portion omitted and filed separately with the Commission. 10 13 Information provided to SCEA by Publisher without Publisher's consent, not to be unreasonably withheld. SCEA shall have the right to use subcontractors to assist in the development of any SCEA Demo Disc. With respect to Product Information provided by Publisher in demo form, the demo delivered to SCEA shall not constitute the complete Licensed Product and shall be, at a minimum, an amount sufficient to demonstrate the Licensed Product's core features and value, without providing too much information so as to give consumers a disincentive to purchase the complete Licensed Product. 7.4.1.3 NO OBLIGATION TO PUBLISH. Acceptance of Product Information for test and review shall not be deemed confirmation that SCEA shall include the Product Information on an SCEA Demo Disc, nor shall it constitute approval of any other element of the Licensed Product. SCEA reserves the right to choose from products submitted from other Licensed Publishers and first party products to determine the products to be included in SCEA Demo Discs, and Publisher's Licensed Products will not be guaranteed prominence or preferential treatment on any SCEA Demo Disc. Nothing herein shall be construed as creating an obligation of SCEA to publish Product Information submitted by Publisher in any SCEA Demo Disc, nor shall SCEA be obligated to publish, advertise or promote any SCEA Demo Disc. 7.4.1.4 SCEA DEMO DISCS SOLD AT RETAIL. Publisher is aware and acknowledges that certain SCEA Demo Discs may be distributed and sold by SCEA in the retail market. If Publisher elects to participate in any SCEA Demo Disc program which is sold in the retail market, as notified by SCEA to Publisher, Publisher acknowledges prior to participation in any such SCEA Demo Disc that it is aware of no limitations regarding Product Information provided to SCEA pursuant to the terms of this Agreement which would in any way restrict SCEA's ability to distribute or sell such SCEA Demo Disc at retail, nor does Publisher or it licensors (other than SCEA and/or its affiliates) have any participation of receiving any compensation from such retail sales. In the event that SCEA institutes a SCEA Demo Disc in which a fee and/or royalty is charged to Publisher, SCEA and Publisher will enter into a separate agreement regarding such SCEA Demo Disc. 7.4.2 THIRD PARTY DEMO DISCS. 7.4.2.1 LICENSE. Publisher may participate in any SCEA Established Third Party Demo Disc Program. Publisher shall notify SCEA of its intention to participate in any such program and upon receipt of such notice, SCEA shall grant to Publisher the right and license to use Licensed Products in Third Party Demo Discs and to use, distribute, market, advertise and otherwise promote (and, if permitted in accordance with the terms of any SCEA Established Third Party Program or otherwise permitted by SCEA, to sell) such Third Party Demo Discs in accordance with the SourceBook 2, which may be modified from time to time at the sole discretion of SCEA. Unless separately agreed in writing with SCEA. Third Party Demo Discs shall not be used, distributed, promoted, bundled or sold in conjunction with other products. In addition, SCEA hereby consents to the use of the Licensed Trademarks in connection with Third Party Demo Discs, subject to the approval procedures set forth in this Agreement. If any SCEA Established Third Party Demo Disc Program is specified by SCEA to be for promotional use only and not for resale, and such Third Party Demo Disc is subsequently discovered to be for sale, Publisher's right to produce Third Party Demo Discs shall thereupon be automatically revoked, and SCEA shall have the right to terminate any related Third Party Demo Discs in accordance with the terms of Section 14.3 or 14.4 hereto. 7.4.2.2 SUBMISSION AND APPROVAL OF THIRD PARTY DEMO DISCS. Publisher shall deliver to SCEA, fir SCEA's prior approval, a final version of each Third Party Demo Disc in a format prescribed by SCEA. Such Third Party Demo Disc shall comply with all requirements provided to Publisher by SCEA in the SourceBook 2 or otherwise. In addition, SCEA shall evaluate the Third Party Demo Disc in accordance with the approval provisions for Executable Software and Printed Materials set forth in Sections 5.4 and 5.5, respectively. Furthermore, Publisher shall obtain the approval of SCEA in connection with any Advertising Materials relating to the Third Party Demo Discs in accordance with the approval provisions set forth in Section 5.6. Costs associated with Third Party Demo Disc shall be borne solely by Publisher. No approval by SCEA of any element of any Third Party Demo Disc shall be deemed an approval of any other element thereto, nor does any such approval constitute final approval for the related Licensed Product. Unless otherwise permitted by SCEA, Publisher shall clearly and conspicuously state on all Third Party Demo Disc Packaging and Printed Materials that the Third Party Demo Disc is for promotional purposes only and not for resale. 7.4.2.3 MANUFACTURE AND ROYALTY OF THIRD PARTY DEMO DISCS. Publisher shall comply with all Manufacturing Specifications with respect to the manufacture and payment for manufacturing costs of Third Party Demo Discs, and Publisher shall also comply with all terms and conditions of Section 6 hereto. No costs incurred in the development, manufacture, licensing, production, marketing and/or distribution (and if permitted by SCEA, sale) of the Third Party Demo Disc shall be deducted from any amounts payable to SCEA hereunder. Royalties on Third Party Demo Disc shall be as provided in Section 8.2. 7.5 CONTESTS AND SWEEPSTAKES OF PUBLISHER. SCEA acknowledges that, from time to time, Publisher may conduct contests and sweepstakes to promote Licensed Products. SCEA shall permit Publisher to include contest or sweepstakes materials in Printed 11 14 Materials and Advertising Materials, subject to compliance with the approval provisions of Section 5.5 and 5.6 hereunder, compliance with the provisions of Section 9.2 and 10.2 hereunder, and subject to the following additional terms and conditions: (i) Publisher represents that it has retained the services of a fulfillment house to administer the contest or sweepstakes and if it has not retained the services of a fulfillment house, Publisher represents and warrants that it has the expertise to conduct such contests or sweepstakes, and in any event, Publisher shall assume full responsibility for all aspects of such contest or sweepstakes; (ii) Publisher warrants that each contest, sweepstakes, and promotion, comply with local, state and federal laws or regulations; (iii) Publisher represents and warrants that it has obtained the consent of all holders of intellectual property rights required to be obtained in connection with each contest or sweepstakes including, but not limited to, the consent of any holder of copyrights or trademarks relating to any Advertising Materials publicizing the contest or sweepstakes, or the prizes being awarded to winners of the contest or sweepstakes; and (iv) Publisher shall make available to SCEA all contest and sweepstakes material prior to publication in accordance with the approval process set forth in Section 5.5 or 5.6. Approval by SCEA of contest or sweepstakes materials for use in the Printed Materials or Advertising Materials (or any use of the System or Licensed Products as prizes in such contest or sweepstakes) shall not constitute an endorsement by SCEA of such contest or sweepstakes, nor shall such acceptance be construed as SCEA having reviewed and approved such materials for compliance with any federal or state law, statute, regulations, order or the like, which shall be Publisher's sole responsibility. 7.6 PLAYSTATION WEBSITE. All Licensed Publishers shall be required to provide Product Information for a web page for each of its Licensed Products for display on the PlayStation promotional website, or other website or websites as may be operated by SCEA from time to time in connection with the promotion of the PlayStation brand. Specifications for Product Information for such web pages shall be as provided in the SourceBook 2. Publisher shall provide SCEA with such Product Information for each Licensed Product upon submission of Printed Materials to SCEA for approval in accordance with Section 5.5.2 hereto. Publisher shall also provide updates to such web page in a timely manner as required by SCEA in updates to the SourceBook 2. 7.7 DISTRIBUTION. 7.7.1 DISTRIBUTION CHANNELS. Publisher may use such distribution channels as Publisher deems appropriate, including the use of third party distributors, resellers, dealers and sales representatives. In the event that Publisher elects to have one of its Licensed Products distributed and sold by another Licensed Publisher, Publisher must provide SCEA with advance written notice of such election, the name of the Licensed Publisher and any additional information requested by SCEA regarding the nature of the distribution services provided by such Licensed Publisher prior to manufacture of such Licensed Product. 7.7.2 LIMITATIONS ON DISTRIBUTION. Notwithstanding any other provisions in this Agreement, Publisher shall not, directly or indirectly, solicit orders from or sell any Units of the Licensed Products to any person or entity outside of the Licensed Territory. In addition, Publisher shall not directly or indirectly solicit orders for or sell any Units of the Licensed Products in any situation where Publisher knows or reasonably should know that such Licensed Products may be exported or resold outside of the Licensed Territory. 8. ROYALTIES. 8.1 APPLICABLE ROYALTIES ON LICENSED PRODUCTS. 8.1.1 INITIAL ORDERS. Publisher shall pay SCEA, either directly or through its designee, a per title royalty in United States dollars for each Unit of the Licensed Products manufactured based on the initial Wholesale Price of the Licensed Product, as follows:
Wholesale Price Per Title Royalty --------------- ----------------- [*] $[*] to $[*] $[*] [*] $[*] to $[*] $[*] [*] $[*] to $[*] $[*] [*] $[*] to $[*] $[*] [*] $[*] [*]
In the absence of satisfactory evidence to support the WSP, the royalty rate that shall apply will be [*] per Unit. 8.1.2 REORDERS AND OTHER PROGRAMS. Royalties on additional orders to manufacture a specific Licensed Product shall be the royalty determined by the initial Wholesale Price as reported by Publisher for that Licensed Product regardless of the wholesale price of the Licensed Product at the time of reorder, except in the event that the Wholesale Price increases for such Licensed Product, in which case the royalty shall be adjusted upwards to reflect the higher Wholesale Price. Licensed 12 * Confidential portions omitted and filed separately with the Commission. 15 Products qualifying for SCEA's "Greatest Hits" programs or other programs offered by SCEA shall be subject to the royalties applicable for such programs. Publisher acknowledges that as of the date of execution of this Agreement no "Greatest Hits" program exists for the PlayStation 2 Third Party licensing program. 8.2 THIRD PARTY DEMO DISC PROGRAM ROYALTIES: Publisher shall pay SCEA a per Unit royalty in United States dollars of [*] for each Third Party Demo Disc Unit manufactured. The quantity of Units ordered shall comply with the terms of such SCEA Established Third Party Demo Disc Program. 8.3 PAYMENT. Payment of royalties under Section 8.1 and 8.2 shall be made to SCEA through its Designated Manufacturing Facility concurrent with the placement of an order to manufacture Licensed Product and payment of manufacturing costs in accordance with the terms and conditions set forth in Section 6.2.3, unless otherwise agreed in writing with SCEA. At the time of placing an order to manufacture a Licensed Product, Publisher shall submit to SCEA an accurate accounting statement setting out the number of units of Licensed Product to be manufactured, projected initial wholesale price, applicable royalty, and total amount due SCEA. In addition, Publisher shall submit to SCEA prior to placing the initial order for each Licensed Product a separate certification, in the form provided by SCEA in the SourceBook 2, signed by officers of Publisher that certifies that the Wholesale Price provided to SCEA is accurate and attaching such documentation supporting the WSP as requested by SCEA. Payment shall be made prior to manufacture unless SCEA has agreed to extend credit terms to Publisher in writing pursuant to Section 6.2.3.3. Nothing herein shall be construed as requiring SCEA to extend credit terms to Publisher. The accounting statement due hereunder shall be subject to the audit and accounting provisions set forth in paragraph 16.2 below. No costs incurred in the development, manufacture, marketing, sale and/or distribution of the Licensed Products shall be deducted from any royalties payable to SCEA hereunder. Similarly, there shall be no deduction from the royalties otherwise owed to SCEA hereunder as a result of any uncollectible accounts owed to Publisher, or for any credits, discounts, allowances or returns which Publisher may credit or otherwise grant to any third party customer of any Units of the Licensed Products, or for any taxes, fees, assessments or expenses of any kind which may be incurred by Publisher in connection with its sale or distribution of any Units of the Licensed Products or arising with respect to the payment, of royalties hereunder. In addition to the royalty payments provided to SCEA hereunder, Publisher shall be solely responsible for and bear any cost relating to any withholding taxes or other such assessments which may be imposed by any governmental authority with respect to the royalties paid to SCEA hereunder; provided, however, that SCEA shall not manufacture Licensed Products outside of the United States without the prior consent of Publisher. Publisher shall provide SCEA with official tax receipts by other such documentary evidence issued by the applicable tax authorities sufficient to substantiate that any such taxes or assessments have in fact been paid. 8.4 REBATE PROGRAMS. Publisher shall be eligible to participate in one of three rebate programs offered by SCEA: the Standard Rebate program, the Level 1 Rebate program, or the Level 2 Rebate program. If Publisher qualifies for such rebates as set forth herein, rebates shall be credited to Publisher's account as provided below:
- ------------------------------------------------------------------------------- Units Ordered Standard Level 1 Level 2 - ------------------------------------------------------------------------------- [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] 3MM+ 20% 20% 20% - -------------------------------------------------------------------------------
8.4.1 STANDARD REBATE PROGRAM. All Publishers qualify for the Standard Rebate program. Rebates will be offered on an individual title basis. Rebates will be given to any individual Licensed Product that exceeds the above numbers of Units during the first year after first commercial shipment of such Licensed Product. The rebate in effect at the end of such year for the Licensed Product will remain in effect for as long as Publisher continues to sell such Licensed Product, but Publisher will not receive further rebates if sales of such Licensed Product hit additional thresholds as specified above after such year. The Standard Rebate may not be used in conjunction with a Third Party Demo Disc program or any promotional program of SCEA, with Licensed Products that qualify for any "Greatest Hits" program of SCEA or with Licensed Products that qualify for the [*] . 8.4.2 LEVEL 1 REBATE PROGRAM: To be eligible for the Level 1 Rebate program, Publisher must ship over [*] Units of certain Licensed Products in a single Fiscal Year. Level 1 Rebates shall be credited to Publisher on an individual title basis. Other terms of the Level 1 Rebate are as follows: (i) Only Publisher's titles (as determined below) that meet the following conditions shall count toward the [*] Unit threshold: Publisher must order at least [*] Units of the 13 * Confidential portion omitted and filed separately with the Commission. 16 Licensed Product both within the first year of commercial release of such Licensed Product and during the qualifying Fiscal Year. (ii) Any Licensed Products, including "Greatest Hits" titles and products for the original PlayStation game console, but excluding all demo discs, shall count toward the [*] Unit threshold (provided they meet the conditions set forth in Section 8.4.2(i) above). For purposes of determining Level 1 Rebate thresholds and the conditions set forth in Section 8.4.2(i), full priced Licensed Products and "Greatest Hits" Licensed Products shall be considered separate Licensed Products, with separate Unit minimums and release dates. (iii) Level 1 Rebates shall apply only to Licensed Products (not including "Greatest Hits" titles, Licensed Products qualifying for the [*] and products for the original PlayStation game console) ordered in the Fiscal Year following the Fiscal Year in which the [*] Unit threshold is met. Units of Licensed Products that qualified Publisher for inclusion in the Level 1 Rebate program in the previous Fiscal Year shall not be entitled to receive the Level 1 Rebate. (iv) Publisher must re-qualify for the Level 1 Rebate Program each Fiscal Year. If a Publisher fails to requalify for any Fiscal Year, then the Standard Rebate shall apply in such Fiscal Year. The first Fiscal Year for which a Publisher may qualify for the Level 1 Rebate shall be the Fiscal Year ending March 31, 2000, and if the Publisher qualifies for the Level 1 Rebate, it will apply to Licensed Products ordered in the Fiscal Year commencing April 1, 2000. (v) Licensed Products eligible for the Level 1 Rebate program shall not be eligible for Standard Rebates, and Level 1 Rebates shall supersede Standard Rebates with respect to any individual Licensed Product. If a Licensed Product qualifies for the Standard Rebate in one Fiscal Year, and Publisher qualifies for the Level 1 Rebate in the next Fiscal Year; Units of such Licensed Product ordered in the next Fiscal Year will receive the Level 1 Rebate commencing on April 1 of the next Fiscal Year going forward, but such Level 1 Rebate will not be credited retroactively to Units of the Licensed Product ordered in the previous Fiscal Year. For example, Publisher orders [*] Units of Product X in Fiscal Year 2001, receiving a Standard Rebate of [*]. Publisher qualifies for the Level 1 Rebate in Fiscal Year 2002. Publisher will receive the Level 1 Rebate of [*] commencing with Units ordered on April 1, 2001, but will not receive a retroactive credit for Units ordered prior to April 1, 2001. When Publisher reaches the [*] Unit threshold, it will receive a retroactive credit of [*] on all Level 1 Rebate Units ordered, as well as a retroactive credit of [*] on Standard Rebate Units ordered in the previous Fiscal Year, and Publisher will receive the Level 1 Rebate of [*] going forward. 8.4.3 LEVEL 2 REBATE PROGRAM: To be eligible for the Level 2 Rebate program, Publisher must ship over [*] Units of certain Licensed Products in any Fiscal Year. Level 2 Rebates shall be credited to Publisher on an individual title basis. Other terms of the Level 2 Rebate are as follows: (i) Only Publisher's titles (as determined below) that meet the following conditions shall count toward the [*] Unit threshold: Publisher must order at least [*] Units of the Licensed Product both within the first year of commercial release of such Licensed Product and during the qualifying Fiscal Year. (ii) Any Licensed Products, including "Greatest Hits" titles and products for the original PlayStation game console, but excluding all demo discs, shall count toward the [*] Unit threshold (provided they meet the conditions set forth in Section 8.4.3(i) above). For purposes of determining Level 2 Rebate thresholds and the conditions set forth in Section 8.4.2(i), full priced Licensed Products and "Greatest Hits" Licensed Products shall be considered separate Licensed Products, with separate Unit minimums and release dates. (iii) Level 2 Rebates shall apply only to Licensed Products (not including "Greatest Hits" titles, Licensed Products qualifying for the [*] and products for the original PlayStation game console) ordered in the Fiscal Year following the Fiscal Year in which the [*] Unit threshold is met. Units of Licensed Products that qualified Publisher for inclusion in the Level 2 Rebate program in the previous. Fiscal Year shall not be entitled to receive the Level 2 Rebate. (iv) Publisher must re-qualify for the Level 2 Rebate Program each Fiscal Year. If Publisher fails to requalify for any Fiscal Year then the Standard Rebate or Level 1 Rebate, as the case may be, shall apply in such Fiscal Year. The first Fiscal Year for which a Publisher may qualify for the Level 2 Rebate shall be the Fiscal Year ending March 31, 2000, and if the Publisher qualifies for the Level 2 Rebate, it will apply to Licensed Products ordered in the Fiscal Year commencing April 1, 2000. (v) Licensed Products eligible for the Level 2 Rebate program shall not be eligible for Standard Rebates or Level 1 Rebates, and Level 2 Rebates shall supersede Standard Rebates and Level 1 Rebates with respect to any individual Licensed Product. If a Licensed Product qualifies for the Standard Rebate or Level 1 Rebate in one Fiscal Year, and Publisher qualifies for the Level 2 Rebate in the next Fiscal Year, Units of such Licensed Product ordered in the next Fiscal Year will receive the Level 2 Rebate going forward, but such Level 2 Rebate will not be credited retroactively to Units of the Licensed Product ordered in the previous Fiscal Year. See Section 8.4.2(v) for an example. * Confidential portions omitted and filed separately with the Commission. 14 17 8.5 CALCULATION AND USE OF REBATES. Rebate percentages for all rebate programs shall be credited against royalties owed SCEA and shall have no other monetary value. All rebates, whether under the Standard Rebate, Level 1 Rebate or Level 2 Rebate Programs shall be issued by SCEA as a credit to Publisher for use against future royalty payments. It is Publisher's responsibility to inform SCEA when it reaches any rebate threshold. In no event shall Publisher take a deduction off royalties owed SCEA or deduction off an invoice payable to SCEA on current production unless and until SCEA issues a credit to Publisher in writing or unless otherwise agreed in writing. From time to time SCEA may allow Publisher to use credits in other manners on terms and conditions to be determined by SCEA. Publisher may use rebate credits to procure Development Tools. Units of Licensed Products shall be considered "ordered" when Units first begin to ship from a Designated Manufacturing Facility. 8.6 REBATE CREDITS. Subject to Sections 8.4.2(v) and 8.4.3(v), all rebate programs are [*], such that Publisher receives a credit for each rebate percentage against [*] Units when it reaches the Unit threshold for the next rebate percentage. SCEA shall credit Publisher's account with respect to [*] rebates as follows: (A) if Publisher's initial order for a Licensed Product is less than any rebate threshold provided above, then SCEA shall [*] credit Publisher's account sixty (60) days following the date that Publisher notifies SCEA that orders of a Licensed Product exceed any rebate threshold, subject to SCEA's right to confirm such information; and (B) if Publisher's initial order for a Licensed Product reaches or exceeds any rebate threshold provided above, then Publisher may credit the rebate amount set forth above as a separate line item on the Purchase Order with respect to such Licensed Product, subject to SCEA's confirmation right. 9. REPRESENTATIONS AND WARRANTIES. 9.1 REPRESENTATIONS AND WARRANTIES OF SCEA. SCEA represents and warrants solely for the benefit of Publisher that SCEA has the right, power and authority to enter into this Agreement and to fully perform its obligations hereunder. 9.2 REPRESENTATIONS AND WARRANTIES OF PUBLISHER. Publisher represents and warrants that: (i) There is no threatened or pending action, suit, claim or proceeding alleging that the use by Publisher of all or any part of the Product Software, Product Proposals, Product Information, Printed Materials, Advertising Materials or any underlying work or content embodied therein, or any name, designation or trademark used in conjunction with the Licensed Products infringes or otherwise violates any Intellectual Property Rights or other right or interest of any kind whatsoever of any third party, or otherwise contesting any right, title or interest of Publisher in or to the Product Software, Product Proposals, Product Information, Printed Materials, Advertising Materials or any underlying work or content embodied therein, or any name, designation or trademark used in conjunction with the Licensed Products; (ii) The Product Software, Product Proposals, Product Information, Printed Materials and Advertising Materials and their contemplated use under this Agreement do not and shall not infringe any person's or entity's rights including without limitation, patents, copyrights (including rights in a joint work), trademarks, trade dress, trade secret, rights of publicity, privacy, performance, moral rights, literary rights and any other third party right; (iii) Publisher has the right, power and authority to enter into this Agreement, to grant SCEA the rights granted hereunder and to fully perform its obligations hereunder; (iv) The making of this Agreement by Publisher does not violate any separate agreement, rights or obligations existing between Publisher and any other person or entity, and, throughout the term of this Agreement, Publisher shall not make any separate agreement with any person or entity that is inconsistent with any of the provisions of this Agreement; (v) Publisher has not sold, assigned, leased, licensed or in any other way disposed of or encumbered the rights granted to Publisher hereunder, and Publisher will not sell, assign, lease, license or in any other way dispose of or encumber any of such rights except as expressly permitted hereunder or as consented to by SCEA in writing; (vi) Publisher has obtained the consent of all holders of intellectual property rights required to be obtained in connection with use of any Product Information by SCEA as licensed hereunder, and Product Information when provided to SCEA in accordance with the terms of this Agreement may be published, marketed, distributed and sold by SCEA in accordance with the terms and conditions of this Agreement and without SCEA incurring any royalty, residual, union, guild or other fees; (vii) Publisher shall not make any representation or give any warranty to any person or entity expressly or implicitly on SCEA's behalf, or to the effect that the Licensed Products are connected in any way with SCEA (other than that the Executable Software and/or Licensed Products have been developed, marketed, sold and/or distributed under license from SCEA); (viii) In the event that Executable Software is delivered to other Licensed Publishers or Licensed Developers by Publisher in source code form, Publisher will take all precautions consistent with the protection of * Confidential portion omitted and filed separately with the Commission. 15 18 valuable trade secrets by companies in high technology industries to ensure the confidentiality of such source code; (ix) The Executable Software and any Product Information delivered to SCEA shall be in a commercially acceptable form, free of significant bugs, defects, time bombs or viruses which could disrupt, delay, destroy the Executable Software or System or render either of them less than fully useful, and shall be fully compatible with the System and any peripherals listed on the Printed Materials as compatible with the Licensed Product; (x) Each of the Licensed Products, Executable Software, Printed Materials and Advertising Materials shall be developed, marketed, sold and distributed by or at the direction of Publisher in an ethical manner and in full compliance with all applicable federal, state, provincial, local and foreign laws and any regulations and standards promulgated thereunder (including but not limited to federal and state lottery laws as currently interpreted and enforced) and will not contain any obscene or defamatory matter; (xi) Publisher's policies and practices with respect to the development, marketing, sale, and/or distribution of the Licensed Products shall in no manner reflect adversely upon the name, reputation or goodwill of SCEA; (xii) Publisher has, or will contract with a Licensed Developer for, the technical expertise and resources necessary to fulfill its obligations under this Agreement; and (xiii) Publisher shall make no false, misleading or inconsistent representations or claims with respect to any Licensed Products, the System or SCEA. 10. INDEMNITIES; LIMITED LIABILITY. 10.1 INDEMNIFICATION BY SCEA. SCEA shall indemnify and hold Publisher harmless from and against any and all third party claims, losses, liabilities, damages, expenses and costs, including, without limitation, reasonable fees for attorneys, expert witnesses and litigation costs, and including costs incurred in the settlement or avoidance of any such claim which result from or are in connection with a breach of any of the representations or warranties provided by SCEA herein; provided, however, that Publisher shall give prompt written notice to SCEA of the assertion of any such claim, and provided, further, that SCEA shall have the right to select counsel and control the defense and settlement thereof. SCEA shall have the exclusive right, at its discretion, to commence and prosecute at its own expense any lawsuit or to take such other action with respect to such matters as shall be deemed appropriate by SCEA. Publisher shall provide SCEA, at no expense to Publisher, reasonable assistance and cooperation concerning any such matter; and Publisher shall not agree to the settlement of any such claim, action or proceeding without SCEA's prior written consent. 10.2 INDEMNIFICATION BY PUBLISHER. Publisher shall indemnify and hold SCEA harmless from and against any and all claims, losses, liabilities, damages, expenses and costs, including, without limitation, reasonable fees for attorneys, expert witnesses and litigation costs, and including costs incurred in the settlement or avoidance of any such claim, which result from or are in connection with (i) a breach of any of the provisions of this Agreement; or (ii) infringement of a third party's intellectual property rights by Publisher; or (iii) any claims of or in connection with any personal or bodily injury (including death) or property damage, by whomever such claim is made, arising out of, in whole or in part, the development, marketing, sale, distribution and/or use of any of the Licensed Products (or portions thereof) unless due directly to the breach of SCEA in performing any of the specific duties and/or providing any of the specific services required of it hereunder; or (iv) any federal, state or foreign civil or criminal actions relating to the development, marketing, sale and/or distribution of Licensed Products. SCEA shall give prompt written notice to Publisher of the assertion of any such indemnified claim, and, with respect to third party claims, actions or proceedings against SCEA, SCEA shall have the right to select counsel for SCEA and reasonably control the defense and/or settlement thereof. Subject to the above, Publisher shall have the right, at its discretion, to select its own counsel, to commence and prosecute at its own expense any lawsuit, to reasonably control the defense and/or settlement thereof or to take such other action with respect to claims, actions or proceedings by or against Publisher. SCEA shall retain the right to approve any settlement. SCEA shall provide Publisher, at no expense to SCEA, reasonable assistance and cooperation concerning any such matter; and SCEA shall not agree to the settlement of any such claim, action or proceeding (other than third party claims, actions or proceedings against SCEA) without Publisher's prior written consent. 10.3 LIMITATION OF LIABILITY. 10.3.1 LIMITATION OF SCEA'S LIABILITY. IN NO EVENT SHALL SCEA OR OTHER SONY AFFILIATES AND THEIR SUPPLIERS, OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS BE LIABLE FOR LOSS OF PROFITS, OR ANY SPECIAL, PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF, RELATING TO OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT LIMITATION THE BREACH OF THIS AGREEMENT BY SCEA, THE MANUFACTURE OF THE LICENSED PRODUCTS AND THE USE OF THE LICENSED PRODUCTS, EXECUTABLE SOFTWARE AND/OR THE SYSTEM BY PUBLISHER OR ANY END-USER, WHETHER UNDER THEORY OF CONTRACT, TORT 16 19 (INCLUDING NEGLIGENCE), INDEMNITY, PRODUCT LIABILITY OR OTHERWISE. IN NO EVENT SHALL SCEA'S LIABILITY ARISING UNDER, RELATING TO OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT LIMITATION ANY LIABILITY FOR DIRECT OR INDIRECT DAMAGES, AND INCLUDING WITHOUT LIMITATION ANY LIABILITY UNDER SECTION 10.1 HERETO, EXCEED THE TOTAL AMOUNT PAID BY PUBLISHER TO SCEA UNDER THIS AGREEMENT. EXCEPT AS EXPRESSLY SET FORTH HEREIN, NEITHER SCEA NOR ANY SONY AFFILIATE, NOR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS, SHALL BEAR ANY RISK, OR HAVE ANY RESPONSIBILITY OR LIABILITY, OF ANY KIND TO PUBLISHER OR TO ANY THIRD PARTIES WITH RESPECT TO THE QUALITY, OPERATION AND/OR PERFORMANCE OF ANY PORTION OF THE SONY MATERIALS, THE SYSTEM OR ANY LICENSED PRODUCT. 10.3.2 LIMITATION OF PUBLISHER'S LIABILITY. IN NO EVENT SHALL PUBLISHER OR ITS AFFILIATED COMPANIES AND THEIR SUPPLIERS, OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS BE LIABLE TO SCEA FOR ANY LOSS OF PROFITS, OR ANY SPECIAL, PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF, RELATED TO OR IN CONNECTION WITH (i) THIS AGREEMENT OR (ii) THE USE OR DISTRIBUTION IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THIS AGREEMENT OF ANY CODE PROVIDED BY SCEA, IN WHOLE OR IN PART, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), INDEMNITY, PRODUCT LIABILITY OR OTHERWISE, PROVIDED THAT SUCH LIMITATIONS SHALL NOT APPLY TO DAMAGES RESULTING FROM PUBLISHER'S BREACH OF SECTIONS 4, 10.2, 11 OR 13 OF THIS AGREEMENT, AND PROVIDED FURTHER THAT SUCH LIMITATIONS SHALL NOT APPLY TO AMOUNTS WHICH PUBLISHER MAY BE REQUIRED TO PAY TO THIRD PARTIES UNDER SECTIONS 10.2 OR 16.10. 10.4 DISCLAIMER OF WARRANTY. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH HEREIN, NEITHER SCEA NOR ITS AFFILIATES AND SUPPLIERS MAKE, NOR DOES PUBLISHER RECEIVE, ANY REPRESENTATIONS OR WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, REGARDING THE SONY MATERIALS, SCEA'S CONFIDENTIAL INFORMATION THE SYSTEM, THE UNITS OF THE LICENSED PRODUCTS MANUFACTURED HEREUNDER AND/OR PUBLISHER'S PRODUCT INFORMATION INCLUDED ON SCEA DEMO DISCS. SCEA SHALL NOT BE LIABLE FOR ANY INJURY, LOSS OR DAMAGE, DIRECT, INDIRECT OR CONSEQUENTIAL, ARISING OUT OF THE USE OR INABILITY TO USE ANY UNITS AND/OR ANY SOFTWARE ERRORS AND/OR "BUGS" IN PUBLISHER'S PRODUCT INFORMATION WHICH MAY BE REPRODUCED ON SCEA DEMO DISCS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SCEA AND ITS AFFILIATES AND SUPPLIERS EXPRESSLY DISCLAIM THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND THEIR EQUIVALENTS UNDER THE LAWS OF ANY JURISDICTION, REGARDING THE SONY MATERIALS, SCEA'S CONFIDENTIAL INFORMATION, LICENSED PRODUCTS, SCEA DEMO DISCS AND THE SYSTEM. ANY WARRANTY AGAINST INFRINGEMENT THAT MAY BE PROVIDED IN SECTION 2-312(3) OF THE UNIFORM COMMERCIAL CODE AND/OR IN ANY OTHER COMPARABLE STATUTE IS EXPRESSLY DISCLAIMED. 11. SCEA INTELLECTUAL PROPERTY RIGHTS. 11.1 LICENSED TRADEMARKS. The Licensed Trademarks and the goodwill associated therewith are and shall be the exclusive property of SCEA or Affiliates of SCEA. Nothing herein shall give Publisher any right, title or interest in or to any of the Licensed Trademarks or any other trademarks of SCEA, other than the non-exclusive license provided herein. Publisher shall not do or cause to be done any act or thing in any way impairing or tending to impair or dilute any of SCEA's rights, title or interests in or to any of the Licensed Trademarks or any other trademarks of SCEA, nor shall Publisher register any trademark in its own name or in the name of any other person or entity, or obtain rights to employ Internet domain names or addresses, which are similar to or are likely to be confused with any of the Licensed Trademarks or any other trademarks of SCEA. 11.2 LICENSE OF SONY MATERIALS AND SYSTEM. All rights with respect to the Sony Materials and System, including, without limitation, all of SCEA Intellectual Property Rights therein, are and shall be the exclusive property of SCEA or Affiliates of SCEA. Nothing herein shall give Publisher any right, title or interest in or to the Sony Materials or the System (or any portion thereof), other than the non-exclusive license provided herein. Publisher shall not do or cause to be done any act or thing in any way impairing or tending to impair any of SCEA's rights, title or interests in or to the Sony Materials or the System (or any portion thereof). 17 20 12. INFRINGEMENT OF SCEA INTELLECTUAL PROPERTY RIGHTS BY THIRD PARTIES. In the event that Publisher discovers or otherwise becomes aware that any of the SCEA Intellectual Property Rights have been or are being infringed upon by any third party, then Publisher shall promptly notify SCEA. SCEA shall have the sole right, in its discretion, to institute and prosecute lawsuits against third parties for such infringement of SCEA Intellectual Property Rights. Any lawsuit shall be prosecuted solely at the cost and expense of SCEA and all sums recovered in any such lawsuits, whether by judgment, settlement or otherwise shall belong solely to SCEA. Upon request of SCEA, Publisher shall execute all papers, testify on all matters and otherwise cooperate in every way necessary and desirable for the prosecution of any such lawsuit. SCEA shall reimburse Publisher for the reasonable expenses incurred as a result of such cooperation, but unless authorized by other provisions of this Agreement, not costs and expenses attributable to the conduct of a cross-claim or third party action. 13. CONFIDENTIALITY. 13.1 SCEA'S CONFIDENTIAL INFORMATION. 13.1.1 DEFINITION OF SCEA's CONFIDENTIAL INFORMATION. "SCEA's Confidential Information" shall mean: (i) the System, Sony Materials and Development Tools; (ii) other documents and materials developed, owned, licensed or under the control of Sony, including all processes, data, hardware, software, inventions, trade secrets, ideas, creations, improvements, designs, discoveries, developments, research and know-how, including without limitation the SourceBook 2 and SCEA Intellectual Property Rights relating to the System, Sony Materials or Development Tools; and (iii) information and documents regarding SCEA's finances, business, marketing and technical plans, business methods and production plans. SCEA's Confidential Information may consist of information in any medium, whether oral, printed, in machine-readable form or otherwise, including information apprised to Publisher and reduced to tangible or written form at any time during the term of this Agreement. In addition, the existence of a relationship between Publisher and SCEA for the purposes set forth herein shall be deemed to be SCEA's Confidential Information unless otherwise agreed to in writing by the parties or until publicly announced by SCEA. 13.1.2 TERM OF PROTECTION OF SCEA's CONFIDENTIAL INFORMATION. The term for the protection of SCEA's Confidential Information shall commence on the Effective Date first above written and shall continue in full force and effect as long as any of SCEA's Confidential Information continues to be maintained as confidential and proprietary by SCEA and/or Sony. During such term, Publisher shall, pursuant to Section 13.1.3 below, safeguard and hold in trust and confidence and not disclose or use (except for the purposes herein specified) any and all of SCEA's Confidential Information. 13.1.3 PRESERVATION OF SCEA's CONFIDENTIAL INFORMATION. Publisher shall, with respect to SCEA's Confidential Information: (i) not disclose SCEA's Confidential Information to any person or entity, other than those employees or directors of the Publisher whose duties justify a "need-to-know" and who have executed a confidentiality agreement in which such employees or directors have agreed not to disclose and to hold confidential all confidential information and materials (inclusive of those of third parties) which may be disclosed to them or to which they may have access during the course of their duties. At SCEA's request, Publisher shall provide SCEA with a copy of such confidentiality agreement between Publisher and its employees or directors, and shall also provided SCEA with a list of employee and director signatories. Publisher shall not disclose any of SCEA's Confidential Information to third parties, including without limitation to consultants or agents. Any employees or directors who obtain access to SCEA's Confidential Information shall be advised by Publisher of the confidential nature of SCEA's Confidential Information, and Publisher shall be responsible for any breach of this Agreement by its employees or directors. (ii) take all measures necessary to safeguard SCEA's Confidential Information in order to avoid disclosure, publication, or dissemination, using as high a degree of care and scrutiny, but at least reasonable care, as is consistent with the protection of valuable trade secrets by companies in high technology industries. (iii) ensure that all written materials relating to or containing SCEA's Confidential Information be maintained in a restricted access area and plainly marked to indicate the secret and confidential nature thereof. (iv) at SCEA's request, return promptly to SCEA any and all portions of SCEA's Confidential Information, together with all copies thereof. (v) not use, modify, reproduce, sublicense, copy, distribute, create derivative works from, or otherwise provide to third parties, SCEA's Confidential Information, or any portion thereof, except as provided herein, nor shall Publisher remove any proprietary legend set forth on or contained within any of SCEA's Confidential Information. 18 21 13.1.4 EXCEPTIONS. The foregoing restrictions shall not apply to any portion of SCEA's Confidential Information which: (i) was previously known to Publisher without restriction on disclosure or use, as proven by written documentation of Publisher; or (ii) is or legitimately becomes part of the public domain through no fault of Publisher or its employees; or (iii) is independently developed by Publisher's employees who have not had access to SCEA's Confidential Information, as proven by written documentation of Publisher; or (iv) is required to be disclosed by administrative or judicial action; provided that Publisher must attempt to maintain the confidentiality of SCEA's Confidential Information by asserting in such action the restrictions set forth in this Agreement, and, immediately after receiving notice of such action or any notice of any threatened action, Publisher must notify SCEA to give SCEA the maximum opportunity to seek any other legal remedies to maintain such SCEA's Confidential Information in confidence as herein provided; or (v) is approved for release by written authorization of SCEA. 13.1.5 NO OBLIGATION TO LICENSE. Disclosure of SCEA's Confidential Information to Publisher shall not constitute any option, grant or license from SCEA to Publisher under any patent or other SCEA Intellectual Property Rights now or hereinafter held by SCEA. The disclosure by SCEA to Publisher of SCEA's Confidential Information hereunder shall not result in any obligation on the part of SCEA to approve any materials of Publisher hereunder or otherwise, nor shall such disclosure by SCEA give Publisher any right to, directly or indirectly, develop, manufacture or sell any product derived from or which uses any of SCEA's Confidential Information, other than as expressly set forth in this Agreement. 13.1.6 PUBLISHER'S OBLIGATIONS UPON UNAUTHORIZED DISCLOSURE. If at any time Publisher becomes aware of any unauthorized duplication, access, use, possession or knowledge of any SCEA's Confidential Information, it shall notify SCEA as soon as reasonably practicable, and shall promptly act to recover any such information and prevent further breach of the confidentiality obligations herein. Publisher shall provide any and all reasonable assistance to SCEA to protect SCEA's proprietary rights in any of SCEA's Confidential Information that it or its employees or permitted subcontractors may have directly or indirectly disclosed or made available, and that may be duplicated, accessed, used, possessed or known in a manner or for a purpose not expressly authorized by this Agreement, including but not limited to enforcement of confidentiality agreements, commencement and prosecution in good faith (alone or with the disclosing party) of legal action, and reimbursement for all reasonable attorneys' fees, costs and expenses incurred by SCEA to protect its proprietary rights in SCEA's Confidential Information. Publisher shall take all steps requested by SCEA to prevent the recurrence of any unauthorized duplication, access, use, possession or knowledge of SCEA's Confidential Information. In addition, SCEA shall have the right to pursue any actions at law or in equity, including without limitation the remedies set forth in Section 16.10 hereto. 13.2 PUBLISHER'S CONFIDENTIAL INFORMATION. 13.2.1 DEFINITION OF PUBLISHER'S CONFIDENTIAL INFORMATION. "Publisher's Confidential Information" shall mean: (i) any Product Software as provided to SCEA pursuant to this Agreement and all documentation and information relating thereto, including Product Proposals, Printed Materials and Advertising Materials (other than documentation and information intended for use by and release to end users, the general public or the trade); (ii) other documents and materials developed, owned, licensed or under the control of Publisher, including all processes, data, hardware, software, inventions, trade secrets, ideas, creations, improvements, designs, discoveries, developments, research and know-how; and (iii) information and documents regarding Publisher's finances, business, marketing and technical plans, business methods and production plans. Publisher's Confidential Information may consist of information in any medium, whether oral, printed, in machine-readable form or otherwise, including information apprised to SCEA and reduced to tangible or written form at any time during the term of this Agreement. 13.2.2 TERM OF PROTECTION OF PUBLISHER'S CONFIDENTIAL INFORMATION. The term for the protection of Publisher's Confidential Information shall commence on the Effective Date first above written and shall continue in full force and effect as long as any of Publisher's Confidential Information continues to be maintained as confidential and proprietary by Publisher. 13.2.3 PRESERVATION OF CONFIDENTIAL INFORMATION OF PUBLISHER. SCEA shall, with respect to Publisher's Confidential Information: (i) hold all Publisher's Confidential Information in confidence, and shall take all reasonable steps to preserve the confidentiality of Publisher's Confidential Information, and to prevent it from falling into the public domain or into 19 22 the possession of persons other than those persons to whom disclosure is authorized hereunder. (ii) not disclose Publisher's Confidential Information to any person other than an SCEA employee or subcontractor who needs to know or have access to such Confidential Information for the purposes of this Agreement, and only to the extent necessary for such purposes. (iii) ensure that all written materials relating to or containing Publisher's Confidential Information be maintained in a secure area and plainly marked to indicate the secret and confidential nature thereof. (iv) at Publisher's request, return promptly to Publisher any and all portions of Publisher's Confidential Information, together with all copies thereof. (v) not use Publisher's Confidential Information, or any portion thereof, except as provided herein, nor shall SCEA remove any proprietary legend set forth on or contained within any of Publisher's Confidential Information. 13.2.4 EXCEPTIONS. The foregoing restrictions will not apply to any portion of Publisher's Confidential Information which: (i) was previously known to SCEA without restriction on disclosure or use, as proven by written documentation of SCEA; or (ii) is or legitimately becomes part of information in the public domain through no fault of SCEA, its employees or its subcontractors; or (iii) is independently developed by SCEA's employees or affiliates who have not had access to Publisher's Confidential Information, as proven by written documentation of SCEA; or (iv) is required to be disclosed by administrative or judicial action; provided that SCEA attempted to maintain the confidentiality of Publisher's Confidential Information by asserting in such action the restrictions set forth in this Agreement, and immediately after receiving notice of such action, notified Publisher of such action to give Publisher the opportunity to seek any other legal remedies to maintain such Publisher's Confidential Information in confidence as herein provided; or (vi) is approved for release by written authorization of Publisher. 13.2.5 SCEA'S OBLIGATIONS UPON UNAUTHORIZED DISCLOSURE. If at any time SCEA becomes aware of any unauthorized duplication, access, use, possession or knowledge of any of Publisher's Confidential Information, it shall notify Publisher as soon as is reasonably practicable. SCEA shall provide any and all reasonable assistance to Publisher to protect Publisher's proprietary rights in any of Publisher's Confidential Information that it or its employees or permitted subcontractors may have directly or indirectly disclosed or made available and that may be duplicated, accessed, used, possessed or known in a manner or for a purpose not expressly authorized by this Agreement including but not limited to enforcement of confidentiality agreements, commencement and prosecution in good faith (alone or with the disclosing party) of legal action, and reimbursement for all reasonable attorneys' fees, costs and expenses incurred by Publisher to protect its proprietary rights in Publisher's Confidential Information. SCEA shall take all reasonable steps requested by Publisher to prevent the recurrence of any unauthorized duplication, access, use, possession or knowledge of Publisher's Confidential Information. 13.3 CONFIDENTIALITY OF AGREEMENT. The terms and conditions of this Agreement shall be treated as SCEA's Confidential Information and Publisher's Confidential Information; provided that each party may disclose the terms and conditions of this Agreement: (i) to legal counsel; (ii) in confidence, to accountants, banks and financing sources and their advisors; (iii) in confidence, in connection with the enforcement of this Agreement or rights arising under or relating to this Agreement; and (iv) if required, in the opinion of counsel, to file publicly or otherwise disclose the terms of this Agreement under applicable federal and/or state securities or other laws, the disclosing party shall be required to promptly notify the other party such that the other party has a reasonable opportunity to contest or limit the scope of such required disclosure, and the disclosing party shall request, and shall use its best efforts to obtain, confidential treatment for such sections of this Agreement as the other party may designate. 14. TERM AND TERMINATION. 14.1 EFFECTIVE DATE; TERM. This Agreement shall not be binding on the parties until it has been signed by each party, in which event it shall be effective from the Effective Date until March 31, 2003, unless earlier terminated pursuant to Section 14.2. The term shall be automatically extended for additional one-year terms thereafter, unless either party provides the other with written notice of its election not to so extend on or before January 31 of the applicable year. Notwithstanding the foregoing the term for the protection of SCEA's Confidential Information and Publisher's Confidential 20 23 Information shall be as set forth in Sections 13.2.3 and 13.2.2 respectively. 14.2 TERMINATION BY SCEA. SCEA shall have the right to terminate this Agreement immediately, by providing written notice of such election to Publisher, upon the occurrence of any of the following: (i) If Publisher breaches (A) any of its obligations hereunder; or (B) any other agreement entered into between SCEA or Affiliates of SCEA and Publisher. (ii) The liquidation or dissolution of Publisher or a statement of intent by Publisher to no longer exercise any of the rights granted by SCEA to Publisher hereunder. (iii) If during the term of this Agreement, a controlling interest in Publisher or in an entity which directly or indirectly has a controlling interest in Publisher is transferred to a party that (A) is in breach of any agreement with SCEA or an Affiliate of SCEA; (B) directly or indirectly holds or acquires a controlling interest in a third party which develops any interactive device or product which is directly or indirectly competitive with the System; or (C) is in litigation with SCEA or Affiliates of SCEA concerning any proprietary technology, trade secrets or other SCEA Intellectual Property Rights or SCEA's Confidential Information. As used in this Section 14.2, "controlling interest" means, with respect to any form of entity, sufficient power to control the decisions of such entity. (iv) If during the term of this Agreement, Publisher or an entity that directly or indirectly has a controlling interest in Publisher enters into a business relationship with a third party with whom Publisher materially contributes to develop core components to an interactive device or product which is directly or indirectly competitive with the System. Publisher shall immediately notify SCEA in writing in the event that any of the circumstances specified in this Section occur. 14.3 PRODUCT-BY-PRODUCT TERMINATION BY SCEA. In addition to the events of termination described in Section 14.2, above, SCEA, at its option, shall be entitled to terminate, on a product-by-product basis, the licenses and related rights herein granted to Publisher in the event that (a) Publisher fails to notify SCEA promptly in writing of any material change to any materials previously approved by SCEA in accordance with Section 5 or Section 6.1 hereto, and such breach is not corrected or cured within thirty (30) days after receipt of written notice of such breach; (b) Publisher uses a third party that fails to comply with the requirements of Section 3 in connection with the development of any Licensed Product; (c) any third party with whom Publisher has contracted for the development of Executable Software breaches any of its material obligations to SCEA pursuant to such third party's agreement with SCEA with respect to such Licensed Product; or (d) Publisher cancels a Licensed Product or fails to provide SCEA in accordance with the provisions of Section 5 above, with the final version of the Executable Software for any Licensed Product within three (3) months of the scheduled release date according to the Product Proposal (unless a modified final delivery date has been agreed to by the parties), or fails to provide work in progress to SCEA in strict accordance with the Review Process in Section 5.3. 14.4 OPTIONS OF SCEA IN LIEU OF TERMINATION. As alternatives to terminating this Agreement or a particular Licensed Product as set forth in Sections 14.2 and 14.3 above, SCEA may, at its option and upon written notice to Publisher, take the following actions in lieu of terminating this Agreement. In the event that SCEA elects either of these options, Publisher may terminate this Agreement upon written notice to SCEA rather than allowing SCEA to exercise these options. Election of these options by SCEA shall not constitute a waiver of or compromise with respect to any of SCEA's rights under this Agreement and SCEA may elect to terminate this Agreement with respect to any breach. 14.4.1 SUSPENSION OF AGREEMENT. SCEA may suspend this Agreement, entirely or with respect to a particular Licensed Product or program, for a set period of time which shall be specified in writing to Publisher upon the occurrence of any breach of this Agreement. 14.4.2 LIQUIDATED DAMAGES. Whereas a minor breach of any of the events set out below may not warrant termination of this Agreement, but will cause SCEA damages in amounts difficult to quantify, SCEA may require Publisher to pay liquidated damages of [*] per event as follows: (i) Failure to submit Advertising Materials to SCEA for approval (including any required resubmissions); (ii) Broadcasting or publishing Advertising Materials without receiving the final approval or consent of SCEA; (iii) Failure to make SCEA's requested revisions to Advertising Materials; or (iv) Failure to comply with the SourceBook 2, Manufacturing Specifications or Guidelines which relates in any way to use of Licensed Trademarks. Liquidated damages shall be invoiced separately or on Publisher's next invoice for Licensed Products. SCEA reserves the right to terminate this Agreement for breach in lieu of seeking liquidated damages or in the event that liquidated damages are unpaid. * Confidential portion omitted and filed separately with the Commission. 21 24 14.5 NO REFUNDS. In the event of the termination of this Agreement in accordance with any of the provisions of Sections 14.2 through 14.4 above, no portion of any payments of any kind whatsoever previously provided to SCEA hereunder shall be owed or be repayable to Publisher. 15. EFFECT OF EXPIRATION OR TERMINATION. 15.1 INVENTORY STATEMENT. Within thirty (30) days of the date of expiration or the effective date of termination with respect to any or all Licensed Products or this Agreement, Publisher shall provide SCEA with an itemized statement, certified to be accurate by an officer of Publisher, specifying the number of unsold Units of the Licensed Products as to which such termination applies, on a title-by-title basis, which remain in its inventory and/or under its control at the time of expiration or the effective date of termination. SCEA shall be entitled to conduct at its expense a physical inspection of Publisher's inventory and work in process upon reasonable written notice during normal business hours in order to ascertain or verify such inventory and inventory statement. 15.2 REVERSION OF RIGHTS. Upon expiration or termination and subject to Section 15.3 below, the licenses and related rights herein granted to Publisher shall immediately revert to SCEA, and Publisher shall cease from any further use of SCEA's Confidential Information, Licensed Trademarks and Sony Materials and any SCEA Intellectual Property Rights therein, and, subject to the provisions of Section 15.3 below, Publisher shall have no further right to continue the development, publication, manufacture, marketing, sale or distribution of any Units of the Licensed Products, or to continue to use any Licensed Trademarks; provided, however, that for a period of one year after termination, and subject to all the terms of Section 13, and provided this Agreement is not terminated due to a breach or default of Publisher, Publisher may retain such portions of Sony Materials and SCEA's Confidential Information as SCEA in its sole discretion agrees are required to support end users of Licensed Products but must return these materials at the end of such one year period. Upon expiration or termination, the licenses and related rights herein granted to SCEA by Publisher shall immediately revert to Publisher, and SCEA shall cease from any further use of Product Information and any Publisher Intellectual Property Rights therein; provided that SCEA may continue the manufacture, marketing, sale or distribution of any SCEA Demo Discs containing Publisher's Product Information which Publisher had approved prior to termination. 15.3 DISPOSAL OF UNSOLD UNITS. Provided that this Agreement is not terminated due to a breach or default of Publisher, Publisher may, upon expiration or termination of this Agreement, sell off existing inventories of Licensed Products, on a non-exclusive basis, for a period of ninety (90) days from the date of expiration or termination of this Agreement, and provided such inventories have not been manufactured solely or principally for sale during such period. Subsequent to the expiration of such ninety (90) day period, or in the event this Agreement is terminated as a result of any breach or default of Publisher, any and all Units of the Licensed Products remaining in Publisher's inventory shall be destroyed by Publisher within five (5) business days of such expiration or termination. Within five (5) business days after such destruction, Publisher shall provide SCEA with an itemized statement, certified to be accurate by an officer of Publisher, indicating the number of Units of the Licensed Products which have been destroyed (on a title-by-title basis), the location and date of such destruction and the disposition of the remains of such destroyed materials. 15.4 RETURN OF SONY MATERIALS AND CONFIDENTIAL INFORMATION. Upon the expiration or earlier termination of this Agreement, Publisher shall immediately deliver to SCEA, or if and to the extent requested by SCEA destroy, all Sony Materials and any and all copies thereof, and Publisher and SCEA shall, upon the request of the other party, immediately deliver to the other party, or if and to the extent requested by such party destroy, all Confidential Information of the other party, including any and all copies thereof, which the other party previously furnished to it in furtherance of this Agreement. Within five (5) working days after any such destruction, Publisher and/or SCEA, as appropriate, shall provide the other party with an affidavit of destruction and an itemized statement, each certified to be accurate by an officer of Publisher, indicating the numbers of copies and/or units of the Sony Materials and/or Confidential Information which have been destroyed, the location and date of such destruction and the disposition of the remains of such destroyed materials. In the event that Publisher fails to return the Sony Materials or Confidential Information and SCEA must resort to legal means (including without limitation any use of attorneys) to recover the Sony Materials or Confidential Information or the value thereof, all costs, including SCEA's reasonable attorney's fees, shall be borne by Publisher, and SCEA may, in addition to SCEA's other remedies, withhold such amounts from any payment otherwise due from SCEA to Publisher under any agreement between SCEA and Publisher. 15.5 EXTENSION OF THIS AGREEMENT; TERMINATION WITHOUT PREJUDICE. SCEA shall be under no obligation to extend this Agreement notwithstanding any actions taken by either of the parties prior to the expiration of this Agreement. Upon the expiration of this Agreement, neither party shall be liable to the other for any damages (whether direct, indirect, consequential or incidental, and including, without limitation, any expenditures, loss of profits or prospective profits) sustained or arising out of or alleged to have been sustained or to have arisen out of such expiration. The expiration or termination of this Agreement shall be without prejudice to any rights or remedies which one party may otherwise have against the 22 25 other party, and shall not excuse either party from any such expiration or termination. 16. MISCELLANEOUS PROVISIONS. 16.1 NOTICES. All notices or other communications required or desired to be sent to either of the parties shall be in writing and shall be sent by registered or certified mail, postage prepaid, or sent by recognized international courier service, telegram or facsimile, with charges prepaid. The address for all notices or other communications required to be sent to SCEA or Publisher, respectively, shall be the mailing address stated in the preamble hereof, or such other address as may be provided by written notice from one party to the other on at least ten (10) days' prior written notice. Any such notice shall be effective upon the date of actual or tendered delivery, as confirmed by the sending party. 16.2 AUDIT PROVISIONS. Publisher shall keep full, complete, and accurate books of account and records covering all transactions relating to this Agreement. Publisher shall preserve such books of account, records, documents, and material for a period of twenty-four (24) months after the expiration or earlier termination of this Agreement. Acceptance by SCEA of an accounting statement, purchase order, or payment hereunder will not preclude SCEA from challenging or questioning the accuracy thereof at a later time. In the event that SCEA reasonably believes that the Wholesale Price provided by Publisher with respect to any Licensed Product is not accurate, SCEA shall be entitled to request additional documentation from Publisher to support the listed Wholesale Price for such Licensed Product. In addition, during the Term and for a period of two (2) years thereafter and upon the giving of reasonable written notice to Publisher, representatives of SCEA shall have access to, and the right to make copies and summaries of, such portions of all of Publisher's books and records as pertain to the Licensed Products and any payments due or credits received hereunder. In the event that such inspection reveals an under-reporting of any payment due to SCEA, Publisher shall immediately pay SCEA such amount. In the event that any audit conducted by SCEA reveals that Publisher has under-reported any payment due to SCEA hereunder by [*] or more for that audit period, then in addition to the payment of the appropriate amount due to SCEA, Publisher shall reimburse SCEA for all reasonable audit costs for that audit and any and all collection costs to recover the unpaid amount. 16.3 FORM MAJEURE. Neither SCEA nor Publisher shall be liable for any loss or damage or be deemed to be in breach of this Agreement if its failure to perform or failure to cure any of its obligations under this Agreement results from any event or circumstance beyond its reasonable control, including, without limitation, any natural disaster, fire, flood, earthquake or other Act of God; shortage of equipment, materials, supplies or transportation facilities; strike or other industrial dispute; war or rebellion; shutdown or delay in power, telephone or other essential service due to the failure of computer or communications equipment or otherwise; provided, however, that the party interfered with gives the other party written notice thereof promptly, and, in any event, within fifteen (15) business days of discovery of any such Force Majeure condition. If notice of the existence of any Force Majeure condition is provided within such period, the time for performance or cure shall be extended for a period equal to the duration of the Force Majeure event or circumstance described in such notice, except that any such cause shall not excuse the payment of any sums owed to SCEA prior to, during or after any such Force Majeure condition. In the event that the Force Majeure condition continues for more than sixty (60) days, SCEA may terminate this Agreement for cause by providing written notice to Publisher to such effect. 16.4 NO AGENCY, PARTNERSHIP OR JOINT VENTURE. The relationship between SCEA and Publisher, respectively, is that of licensor and licensee. Both parties are independent contractors and are not the legal representative, agent, joint venturer, partner or employee of the other party for any purpose whatsoever. Neither party has any right or authority to assume or create any obligations of any kind or to make any representation or warranty on behalf of the other party, whether express or implied, or to bind the other party in any respect whatsoever. 16.5 ASSIGNMENT. SCEA has entered into this Agreement based upon the particular reputation, capabilities and experience of Publisher and its officers, directors and employees. Accordingly, Publisher may not assign this Agreement or any of its rights hereunder, nor delegate or otherwise transfer any of its obligations hereunder, to any third party unless the prior written consent of SCEA shall first be obtained. This Agreement shall not be assigned in contravention of Section 14.2(iii). Any attempted or purported assignment, delegation or other such transfer, directly or indirectly, without the required consent of SCEA shall be void. Subject to the foregoing, this Agreement shall inure to the benefit of the parties and their respective successors and permitted assigns (other than under the conditions set forth in Section 14.2(iii). SCEA shall have the right to assign any and all of its rights and obligations hereunder to any Sony affiliate(s). 16.6 SUBCONTRACTORS. Publisher shall not sell, assign, delegate, subcontract, sublicense or otherwise transfer or encumber all or any portion of the licenses herein granted without the prior written approval of SCEA, provided, however, that Publisher may retain those subcontractors who provide services which do not require access to Sony Materials or SCEA's Confidential Information without such prior approval. Publisher may retain those subcontractor(s) to assist with the development, publication and marketing of Licensed * Confidential portion omitted and filed separately with the Commission. 23 26 Products (or portions thereof) which have signed (i) an LPA or LDA with SCEA (the "PlayStation 2 Agreement") in full force and effect throughout the term of such development and marketing; or (ii) an SCEA-approved subcontractor agreement ("Subcontractor Agreement"); and SCEA has approved such subcontractor in writing, which approval shall be in SCEA's sole discretion. Such Subcontractor Agreement shall provide that SCEA is a third-party beneficiary of such Subcontractor Agreement and has the full right to bring any actions against such subcontractors to comply in all respects with the terms and conditions of this Agreement. Publisher shall provide a copy of any such Subcontractor Agreement to SCEA prior to and following execution thereof. Publisher shall not disclose to any subcontractor any of SCEA's Confidential Information, including, without limitation, any Sony Materials, unless and until either a PlayStation 2 Agreement or a Subcontractor Agreement has been executed and approved by SCEA. Notwithstanding any consent which may be granted by SCEA for Publisher to employ any such permitted subcontractor(s), or any such separate agreement(s) that may be entered into by Publisher with any such permitted subcontractor, Publisher shall remain fully liable for its compliance with all of the provisions of this Agreement and for the compliance of any and all permitted subcontractors with the provisions of any agreements entered into by such subcontractors in accordance with this Section. Publisher shall use its best efforts to cause its subcontractors retained in furtherance of this Agreement to comply in all respects with the terms and conditions of this Agreement, and hereby unconditionally guarantees all obligations of its subcontractors. SCEA may subcontract any of its rights or obligations hereunder. 16.7 COMPLIANCE WITH APPLICABLE LAWS. The parties shall at all times comply with all applicable regulations and orders of their respective countries and other controlling jurisdictions and all conventions and treaties to which their countries are a party or relating to or in any way affecting this Agreement and the performance by the parties of this Agreement. Each party, at its own expense, shall negotiate and obtain any approval, license or permit required in the performance of its obligations, and shall declare, record or take such steps to render this Agreement binding, including, without limitation, the recording of this Agreement with any appropriate governmental authorities (if required). 16.8 GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California, excluding that body of law related to choice of laws, and of the United States of America. Any action or proceeding brought to enforce the terms of this Agreement or to adjudicate any dispute arising hereunder shall be brought in the Superior Court of the County of San Mateo, State of California or the United States District Court for the Northern District of California. Each of the parties hereby submits itself to the exclusive jurisdiction and venue of such courts for purposes of any such action and agrees that any service of process may be effected by delivery of the summons in the manner provided in the delivery of notices set forth in Section 16.1 above. In addition, each party hereby waives the right to a jury trial in any action or proceeding related to this Agreement. 16.9 LEGAL COSTS AND EXPENSES. In the event it is necessary for either party to retain the services of an attorney or attorneys to enforce the terms of this Agreement or to file or defend any action arising out of this Agreement, then the prevailing party in any such action shall be entitled, in addition to any other rights and remedies available to it at law or in equity to recover from the other party its reasonable fees for attorneys and expert witnesses, plus such court costs and expenses as may be fixed by any court of competent jurisdiction. The term "prevailing party" for the purposes of this Section shall include a defendant who has by motion, judgment, verdict or dismissal by the court, successfully defended against any claim that has been asserted against it. 16.10 REMEDIES. Unless expressly set forth to the contrary, either party's election of any remedies provided for in this Agreement shall not be exclusive of any other remedies, and all such remedies shall be deemed to be cumulative. Any breach of Sections 3, 4, 5, 6.1, 11 and 13 of this Agreement would cause significant and irreparable harm to SCEA, the extent of which would be difficult to ascertain. Accordingly, in addition to any other remedies including without limitation equitable relief to which SCEA may be entitled, in the event of a breach by Publisher or any of its employees or permitted subcontractors of any such Sections of this Agreement, SCEA shall be entitled to the immediate issuance without bond of ex parte injunctive relief or, if a bond is required under applicable law, on the posting of a bond in an amount not to exceed [*], enjoining any breach or threatened breach of any or all of such provisions. In addition, if Publisher fails to comply with any of its obligations as set forth herein, SCEA shall be entitled to an accounting and repayment of all forms of compensation, commissions, remuneration or benefits which Publisher directly or indirectly realizes as a result of or arising in connection with any such failure to comply. Such remedy shall be in addition to and not in limitation of any injunctive relief or other remedies to which SCEA may be entitled under this Agreement or otherwise at law or in equity. In addition, Publisher shall indemnify SCEA for all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and all reasonable related costs) which SCEA may sustain or incur as a result of any breach under this Agreement. 16.11 SEVERABILITY. In the event that any provision of this Agreement (or portion thereof) is determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, such provision (or portion thereof) shall be enforced to the extent possible * Confidential portion omitted and filed separately with the Commission. 24 EX-10.29 39 v72115orex10-29.txt EXHIBIT 10.29 1 EXHIBIT 10.29 (Confidential Portions Omitted) PLAYSTATION(R)2 DEVELOPMENT SYSTEM AGREEMENT This PlayStation(R)2 Development System Agreement (the "Agreement")is entered into this 2nd day of August, 2000 (the "Effective Date") by and between Sony Computer Entertainment America Inc. ("SCEA") and Bay Area Multimedia ("Company") 1. DEFINITIONS. 1.1 "Developer Website" shall mean a passworded secure website that SCEA may establish to facilitate the dissemination of Software Tools and Documentation. 1.2 "Development Tool(s)" shall mean the Hardware Tools, the Software Tools and the Documentation. 1.3 "Documentation" shall mean all written materials that SCEA may provide to Company that are associated with and describe the function of the Development Tools. 1.4 "Firmware" shall mean all code embedded on any chip contained within any Hardware Tool, as may be upgraded or changed from time to time. 1.5 "Hardware Tool(s)" shall mean hardware development system(s), as may be updated or changed from time to time, that SCEA may sell to Company hereunder. 1.6 "Intellectual Property Rights" shall mean, by way of example but not by way of limitation, all current and future worldwide patents and other patent rights, copyrights, trademarks, service marks, trade names, mask work rights, trade secret rights, technical information, knowhow, and the equivalents of the foregoing under the laws of any jurisdiction, and all other proprietary or intellectual property rights throughout the universe, including without limitation all applications and registrations with respect thereto, and all renewals and extensions thereof. 1.7 "License Fee" shall mean the amount charged by SCEA for the license of one (1) copy of the Software Tools, Firmware and/or Documentation. 1.8 "Order Form(s)" shall mean, collectively, the attached order form, as it may be amended by SCEA from time to time. 1.9 "Software Tool(s)" shall mean the code and libraries, as may be updated or changed from time to time, that SCEA may license to Company hereunder, but shall not include that code that is subject to the GNU General Public License. 1.10 "Term" shall mean the period beginning on the Effective Date and ending on March 31,2003 to be automatically extended for additional one year terms thereafter, unless either party provides the other with written notice on or before January 31 of the applicable year of its election not to so extend. 1.11 "Territory" shall mean the United States of America and Canada. 2. PURCHASE AND SALE OF HARDWARE TOOLS. 2.1 From time to time, Company may buy, and SCEA may sell, the Hardware Tools that are listed in the Order Form. 2.2 The purchase price of each Hardware Tool is set forth in the Order Form; Company shall pay any applicable sales, use or other taxes in connection therewith. SCEA may change the price of any Hardware Tool at its discretion by either providing Company with prior written notice of the price change or by publicizing the new price(s) on SCEA's Company website. Unless otherwise agreed, Company shall pay for the Hardware Tool(s) in full prior to delivery, and title to all Hardware Tools shall remain with SCEA until SCEA has received full payment. 2.3 If SCEA extends credit terms to Company or facilitates third party financing for Company, until Company makes payment in full for all items so financed, Company (i) grants to SCEA or SCEA's designee a first position purchase money security interest in each 2 Hardware Tool and in the proceeds of disposition of any Hardware Tool and (ii) shall not sell, hypothecate or otherwise encumber any such Hardware Tool. Company shall execute and deliver to SCEA or SCEA's designee such financing statements as may be required to perfect the security interest, and SCEA or SCEA's designee may file such financing statements in its discretion. 2.4 SCEA shall be free to accept or reject, in its discretion, any order of Hardware Tools. SCEA does not warrant that Hardware Tools shall be available when ordered. SCEA shall pay applicable shipping charges for all Hardware Tools shipped; however, risk of loss to the Hardware Tools shall transfer to Company upon SCEA's delivery of the Hardware Tools to SCEA's common carrier of choice. 2.5 If Company issues a written purchase order or any other documentation purporting in any way to relate to this Agreement or the purchase of Hardware Tools hereunder, that document as issued by Company shall be considered to be for Company's internal use only, and the provisions of that document shall not amend or modify this Agreement except as may be expressly agreed to by SCEA in writing. 2.6 Prior to the Company shipping any Hardware Tool to SCEA, either pursuant to an announced upgrade "swap" program or pursuant to the warranty provisions set forth below, Company shall (i) securely delete any and all of Company's applications software from the hard drive and/or other storage media contained in the Hardware Tool and (ii) execute and provide to SCEA the written certification form attached hereto. 2.7 All purchases made hereunder are final. In no event shall SCEA be obligated to refund all or any portion of the purchase price of the Hardware Tools. 2.8 Company shall not remove any sticker or legend that SCEA places on the Hardware Tools. 2.9 Company acknowledges that the nontransferable license of the firmware within the Hardware Tools may act, as a practical matter, as a restriction or prohibition against the resale of the Hardware Tools. 3. LICENSE OF SOFTWARE TOOLS AND FIRMWARE. 3.1 SCEA grants to Company a nonexclusive, nontransferable, fully paid license to use the Software Tools, Documentation and Firmware, within the Territory and for the Term, solely: 3.1.1 For application developers and publishers, for the development of PlayStation2 compatible content subject to the terms and conditions of (i) sections 1, 2.1, 5.8, 6, 7 and 9 of an executed and existing Materials Loan Agreement and/or (ii) a subsequent written license agreement to be entered into by the parties hereto. 3.1.2 For tool and/or middleware developers, for the development of tools and/or middleware subject to the terms and conditions of an executed and existing "STANDARD TOOL AND MIDDLEWARE DEVELOPMENT AND LICENSE AGREEMENT FOR PlayStation2" between Company and Sony Computer Entertainment Inc. 3.2 The License Fee for the Software Tools, Documentation and Firmware is set forth in the Order Form, and may be subject to a sales tax charge notwithstanding the fact that such items are not "sold" hereunder. The Software Tools, Documentation and Firmware are, as a practical matter, "bundled" with the Hardware Tools; Company must, in addition to the Hardware Tool purchase price, pay one (1) License Fee for every Hardware Tool that it orders (but, pursuant to section 3.3 below, may make multiple copies of the Software Tool to install on those clients which are served by that Hardware Tool). Unless otherwise agreed, Company shall pay the License Fee in full prior to delivery or download. 3.3 Company is authorized to copy the libraries contained within the Software Tools solely to the extent necessary to integrate the 2 3 libraries into such content. For each License Fee paid and accepted by SCEA, (i) SCEA shall provide Company with one (1) copy of the Software Tools and Documentation and may, in the future, make such Software Tools and/or Documentation available on a Developer Website or through some other means of electronic distribution, and (ii) Company is authorized only to make and install copies of the Software Tools on multiple clients to be served by one (1) Hardware Tool. Company shall not copy the Software Tools except as is specified above; Company may, however, make and maintain one (1) copy per development site solely for archival and/or backup purposes. Company shall not copy the Documentation; additional copies of the Documentation may be ordered on the Order Form. 3.4 Other than as expressly permitted by SCEA in writing, Company shall not directly or indirectly (i) disassemble, decrypt, electronically scan, peel semiconductor components, decompile, or otherwise reverse engineer in any manner or attempt to reverse engineer or derive source code from, all or any portion of the Development Tools, or permit or encourage any third party to do so, (ii) use, modify, reproduce, sublicense, distribute, create derivative works from, or otherwise provide to third parties, the Development Tools, in whole or in part; and/or (iii) sell, lease, assign, lend, license, copy, encumber or otherwise transfer or dispose of any Software Tools or Documentation, or permit any mortgage, pledge, lien, claim, charge, security interest or other encumbrance with respect to the Software Tools or Documentation. The burden of proof under this section shall be on Company, and SCEA reserves the right to require Company to furnish evidence satisfactory to SCEA that Company has complied with this section. 3.5 Subject to the rights granted by SCEA herein, all rights with respect to the Software Tools, Documentation and Firmware, including, without limitation, all of SCEA's Intellectual Property Rights therein, are and shall be the exclusive property of SCEA and/or its affiliates. Nothing herein shall give Company any right, title or interest in or to the Software Tools, Documentation and/or Firmware (or any portion thereof), other than the non-exclusive license and privilege during the term hereof to use them solely in accordance with the provisions of this Agreement and other agreements to be entered into by the parties hereto. Company shall not do or cause to be done any act or thing contesting or in any way impairing or tending to impair any of SCEA's rights, title, and/or interests in or to the Software Tools, Documentation and/or Firmware (or any portion thereof). 3.6 During the Term and thereafter, Company shall not (i) apply for, seek to obtain or assert, or (ii) challenge or attack, any Intellectual Property Right in any part of the Software Tools, Documentation or Firmware. 3.7 Except as may be expressly granted herein, all other rights to the Software Tools, Documentation and Firmware (including, but not limited to, the right and license to market, promote, advertise and sell PlayStation 2 related content) are strictly reserved by SCEA. 4. CONFIDENTIALITY. The confidentiality provisions of all written PlayStation2 related agreements previously entered into by the parties or their affiliates are incorporated herein in full. 5. WARRANTIES AND LIMITATIONS OF LIABILITY. 5.1 SCEA warrants to Company that the Hardware Tools shall be free from [*] for a period of [*] from the date of receipt by Company (the "Warranty Period"). In the event of such a defect within the Warranty Period, SCEA shall - -- at its option -- repair or replace the applicable Hardware Tool at no charge to Company provided that (i) the request is made in writing during the Warranty Period, (ii) Company has properly installed and used the Hardware Tool, and (iii) Company has not modified the Hardware Tool. This warranty shall be personal to Company only and shall be nontransferable. 5.2 SCEA warrants to Company that the Software Tools and media shall be free from [*] for the Warranty Period. In the event of a [*] within the Warranty Period, SCEA shall replace the applicable * Confidential portion omitted and filed separately with the Commission. 3 4 Software Tool at no charge to Company. In the event of a [*] within the Software Tools themselves, SCEA will make reasonable efforts to remedy the defect and provide Company with an updated version of the applicable Software Tool. Following the Warranty Period, SCEA may (but shall not be obligated to) provide extended warranty service for an additional fee. 5.3 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH ABOVE, NEITHER SCEA NOR ITS AFFILIATES AND SUPPLIERS MAKE, NOR DOES COMPANY RECEIVE, ANY WARRANTIES, EXPRESS, IMPLIED OR STATUTORY REGARDING THE GOODS OR MATERIALS REFERENCED HEREIN. SCEA AND ITS AFFILIATES AND SUPPLIERS EXPRESSLY DISCLAIM THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND THEIR EQUIVALENTS UNDER THE LAWS OF ANY JURISDICTION, REGARDING THE HARDWARE TOOLS, SOFTWARE TOOLS, DOCUMENTATION AND/OR FIRMWARE. ANY WARRANTY AGAINST INFRINGEMENT THAT MAY BE PROVIDED IN SECTION 2-312(3) OF THE UNIFORM COMMERCIAL CODE AND/OR IN ANY OTHER COMPARABLE STATUTE IS EXPRESSLY DISCLAIMED. 5.4 IN NO EVENT SHALL SCEA OR ITS AFFILIATES, SUPPLIERS, OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS BE LIABLE FOR PROSPECTIVE PROFITS, OR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT LIMITATION THE BREACH OF THIS AGREEMENT BY SCEA, THE USE OF THE HARDWARE TOOLS, SOFTWARE TOOLS, DOCUMENTATION AND/OR FIRMWARE, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), INDEMNITY, PRODUCT LIABILITY OR OTHERWISE. IN NO EVENT SHALL SCEA'S LIABILITY ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT LIMITATION ANY LIABILITY FOR DIRECT DAMAGES, AND INCLUDING WITHOUT LIMITATION ANY LIABILITY UNDER ANY LIMITED WARRANTY PROVISION ABOVE, EXCEED THE TOTAL AMOUNT PAID BY COMPANY TO SCEA UNDER THIS AGREEMENT. EXCEPT AS EXPRESSLY SET FORTH HEREIN, NEITHER SCEA, NOR ANY AFFILIATE, NOR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS, SHALL BEAR ANY RISK, OR HAVE ANY RESPONSIBILITY OR LIABILITY, OF ANY KIND TO COMPANY OR TO ANY THIRD PARTIES WITH RESPECT TO THE QUALITY AND/OR PERFORMANCE OF ANY PORTION OF THE MATERIALS PROVIDED HEREUNDER OR THE CONTENT CREATED THROUGH THE USE THEREOF. 6. USE OF THE SOFTWARE TOOLS. 6.1 Company may use and store the Software Tools and Documentation solely at the development site listed on the Order Form or other location approved in writing by SCEA (the "Development Site") and ensure that they are accessible only to, and used only by, those employees and subcontractors entitled to use such materials. In the event that Company wishes to change the Development Site, it shall obtain SCEA's prior written approval thereto. Company must preserve any other proprietary rights notices placed on the Development Tools by SCEA and must place all such notices on any copies made as permitted by the terms hereof. 6.2 Company may provide the Software Tools and Documentation to any contractor that (i) is preapproved by SCEA in writing and (ii) has executed a written agreement with Company that contains substantially all of the terms and conditions of this Agreement and that makes SCEA an express intended third party beneficiary of Company's rights thereunder. Notwithstanding such a written subcontracting agreement, Company shall be jointly and severally responsible for all of the acts and omissions of its subcontractors. 6.3 The designee named on the applicable Order Form (the "Company Designee") shall act as the designated caretaker of the Development Tools. The Company Designee shall [*] Confidential portion omitted and filed separately with the Commission. 4 5 be responsible for receiving all materials hereunder, overseeing that the terms of this section 6 are fulfilled and shall act as the Company contact for matters related to the Development Tools. In the event that Company wishes to appoint a new Company Designee, it shall give SCEA written notice ten (10) days prior to the change. 6.4 SCEA may, upon reasonable notice to Company, inspect the Development Site in order to audit the use of the Software Tools and Documentation during Company's normal business hours in order to verify that Company is complying with its obligations hereunder. In addition, at SCEA's request, Company shall prepare and provide SCEA with an inventory report of Software Tools and Documentation in its possession within thirty (30) days of such request, detailing each by serial number and current physical location. 7. TERMINATION. 7.1 SCEA may terminate this Agreement immediately, upon written notice to Company: (i) upon a breach of any term of this Agreement or any other agreement between Company and SCEA; (ii) upon the liquidation or dissolution of Company, or a statement of intent by Company to no longer exercise any of the rights granted by SCEA to Company hereunder, or (iii) if, during the term of this Agreement, a controlling interest in Company or a controlling interest in an entity which has, directly or indirectly, a controlling interest in Company is transferred to a party that (A) is in breach of any agreement with SCEA or an affiliate of SCEA; (B) directly or indirectly holds or acquires a controlling interest in a third party which develops any interactive device or product which is directly or indirectly competitive with the PlayStation2 console; or (C) is in litigation with SCEA or affiliates of SCEA concerning any proprietary technology, trade secrets or other intellectual property rights or confidential information of SCEA. 7.2 Immediately upon termination or expiration of this Agreement, all rights granted hereunder shall revert to SCEA, Company shall no longer use the Development Tools or Documentation, and Company shall promptly deliver to SCEA - -- at Company's expense and without any right to refund or reimbursement--all Software Tools and Documentation in its possession, custody or control. 8. INDEMNIFICATION. 8.1 SCEA shall indemnify and hold Company harmless from and against any and all claims, losses, liabilities, damages, expenses and costs, including, without limitation, reasonable fees for attorneys, expert witnesses and litigation costs, and including costs incurred in the settlement or avoidance of any such claim which result from or are in connection with a breach of any of the representations or warranties provided by SCEA herein; provided, however, that Company shall give prompt written notice to SCEA of the assertion of any such claim, and provided, further, that SCEA shall have the right to select counsel and control the defense and settlement thereof. SCEA shall have the exclusive right, at its discretion, to commence and prosecute at its own expense any lawsuit or to take such other action with respect to such matters as shall be deemed appropriate by SCEA. Company shall provide SCEA, at no expense to Company, reasonable assistance and cooperation concerning any such matter; and Company shall not agree to the settlement of any such claim, action or proceeding without SCEA's prior written consent. 8.2 Company shall indemnify and hold SCEA harmless from and against any and all claims, losses, liabilities, damages, expenses and costs, including, without limitation, reasonable fees for attorneys, expert witnesses and litigation costs, and including costs incurred in the settlement or avoidance of any such claim, which result from or are in connection with (i) a breach of any of the provisions of this Agreement, or (ii) any claims of or in connection with any personal or bodily injury (including death) or property damage, by whomever such claim is made, arising out of, in whole or in part, the use of any of the Development Tools hereunder, unless due directly to the breach of SCEA in performing any of the specific duties and/or providing any of the specific 5 6 services required of it hereunder. SCEA shall give prompt written notice to Company of the assertion of any indemnified claim, and SCEA shall have the right to select counsel and reasonably control the defense and/or settlement thereof. 9. GENERAL PROVISIONS. 9.1 Notices. All notices or other communications required or desired to be sent to either of the parties shall be in writing to the address set forth on the attached order form, and shall be sent by registered or certified mail, postage prepaid, return receipt requested, or sent by recognized international courier service (e.g., Federal Express, DHL, etc.), telex, telegram or facsimile, with charges prepaid and subject to confirmation by letter sent via registered or certified mail, postage prepaid, return receipt requested. Any such notice shall be effective upon the date of receipt. 9.2 Force Majeure. Neither SCEA nor Company shall be liable for any loss or damage or be deemed to be in breach of this Agreement if its failure to perform or failure to cure any of its obligations under this Agreement results from any event or circumstance beyond its reasonable control, including, without limitation, any natural disaster, fire, flood, earthquake, or other Act of God; shortage of equipment, materials, supplies, or transportation facilities; strike or other industrial dispute; war or rebellion; or shutdown or delay in power, telephone or other essential service due to the failure of computer or communications equipment or otherwise; provided, however, that the party interfered with gives the other party written notice thereof promptly, and, in any event, within fifteen (15) business days of discovery of any such Force Majeure condition. If notice of the existence of any Force Majeure condition is provided within such period, the time for performance or cure shall be extended for a period equal to the duration of the Force Majeure event or circumstance described in such notice, except that any such cause shall not excuse the payment of any sums owed to SCEA prior to, during, or after any such Force Majeure condition. 9.3 No Partnership or Joint Venture. The relationship between SCEA and Company, respectively, is that of licensor and licensee. Company is an independent contractor and is not the legal representative, agent, joint venturer, partner, or employee of SCEA for any purpose whatsoever. Neither party has any right or authority to assume or create any obligations of any kind or to make any representation or warranty on behalf of the other party, whether express or implied, or to bind the other party in any respect whatsoever. 9.4 Assignment. SCEA has entered into this Agreement based upon the particular reputation, capabilities and experience of Company and its officers, directors and employees. Accordingly, Company may not assign this Agreement or any of its rights hereunder, nor delegate or otherwise transfer any of its obligations hereunder, to any third party unless the prior written consent of SCEA shall first be obtained. Any attempted or purported assignment, delegation or other such transfer without the required consent of SCEA shall be void. Subject to the foregoing, this Agreement shall inure to the benefit of the parties and their respective successors and permitted assigns. SCEA shall have the right to assign any and all of its rights and obligations hereunder to any affiliate(s). 9.5 Compliance With Applicable Laws. The parties shall at all times comply with all applicable regulations and orders of their respective countries and all conventions and treaties to which their countries are a party or relating to or in any way affecting this Agreement and the performance by the parties of this Agreement. Each party, at its own expense, shall negotiate and obtain any approval, license or permit required in the performance of its obligations, and shall declare, record or take such steps to render this Agreement binding, including, without limitation, the recording of this Agreement with any appropriate governmental authorities (if required). 9.6 Governing Law; Consent to Jurisdiction. This Agreement shall be governed 6 7 by and interpreted in accordance with the laws of the State of California, excluding that body of law related to choice of laws, and of the United States of America. Any action or proceeding brought to enforce the terms of this Agreement or to adjudicate any dispute arising hereunder shall be brought in the courts of San Mateo county, California or the Northern District of California. Each of the parties hereby submits itself to the exclusive jurisdiction and venue of such courts for purposes of any such action, waives forum non conveniens and similar defenses, and agrees that any service of process may be effected by delivery of the summons in the manner provided in the delivery of notices set forth in section 9.1 above. In addition, each party hereby waives the right to a jury trial in any action or proceeding related to this Agreement. 9.7 Legal Costs and Expenses. In the event it is necessary for either party to retain the services of an attorney or attorneys to enforce the terms of this Agreement or to file or defend any action arising out of this Agreement, then the prevailing party in any such action shall be entitled, in addition to any other rights and remedies available to it at law or in equity to recover from the other party its reasonable fees for attorneys and expert witnesses, plus such court costs and expenses as may be fixed by any court of competent jurisdiction. 9.8 Remedies. Unless expressly set forth to the contrary, either party's election of any remedies provided for in this Agreement shall not be exclusive of any other remedies available hereunder or otherwise at law or in equity, and all such remedies shall be deemed to be cumulative. Any breach of Sections 2, 3, 4 or 6 of this Agreement would cause irreparable harm to SCEA, the extent of which would be difficult to ascertain. Accordingly, Company agrees that, in addition to any other remedies to which SCEA may be entitled, in the event of a breach by Company or any of its employees or permitted subcontractors of any such sections of this Agreement, SCEA shall be entitled to the immediate ex parte issuance of injunctive relief--upon the posting of a bond not to exceed U.S. $[*], enjoining any breach or threatened breach of any or all of such provisions. In addition, Company shall indemnify SCEA for all losses, damages, liabilities, costs and expenses (including actual attorneys' fees and all related costs) which SCEA may sustain or incur as a result of such breach. 9.9 Severability. In the event that any provision of this Agreement (or portion thereof is determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, such provision (or part thereof) shall be enforced to the extent possible consistent with the stated intention of the parties, or, if incapable of such enforcement, shall be deemed to be deleted from this Agreement, while the remainder of this Agreement shall continue in full force and remain in effect according to its stated terms and conditions. 9.10 Sections Surviving Expiration or Termination. The following sections shall survive the expiration or earlier termination of this Agreement for any reason: 1, 3, 4, 5, 7, 8 and 9. 9.11 Waiver. No failure or delay by either party in exercising any right, power, or remedy under this Agreement shall operate as a waiver of any such right, power, or remedy. No waiver of any provision of this Agreement shall be effective unless in writing and signed by the party against whom such waiver is sought to be enforced. Any waiver by either party of any provision of this Agreement shall not be construed as a waiver of any other provision of this Agreement, nor shall such waiver operate as or be construed as a waiver of such provision respecting any future event or circumstance. 9.12 Modification. No modification of any provision of this Agreement shall be effective unless in writing and signed by both of the parties. 9.13 Headings. The section headings used in this Agreement are intended primarily for reference and shall not by themselves determine the construction or interpretation of this Agreement or any portion hereof. 9.14 Integration. This Agreement (together with Order Forms and the Nondisclosure * Confidential portion omitted and filed separately with the Commission. 7 8 Agreement) constitutes the entire agreement between SCEA and Company and supersedes all prior or contemporaneous agreements, proposals, understandings, and communications between SCEA and Company, whether oral or written, with respect to the subject matter hereof. 9.15 Counterparts. This Agreement maybe executed in two counterparts, by facsimile, each of which shall be deemed an original, and both of which together shall constitute one and the same instrument. 9.16 Construction. This Agreement shall be fairly interpreted in accordance with its terms and without any strict construction in favor of or against either of the parties. 9.17 Export. Company acknowledges that [all Hardware Tools, Software Tools and Documentation are subject to U.S. export control restrictions] and, additionally, may have been imported by SCEA under import documentation that indicates the destination country of use. Company certifies, therefore, that it shall not reexport, directly or indirectly, any Development Tool in violation of U.S. law and regulations. If for any reason Company does reexport any Development Tool, Company shall be exporter of record and shall be solely responsible for the obtaining of or compliance with any required export licenses. Prohibited sales and/or deliveries may subject Company to fines and imprisonment under applicable U.S. law. WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first written above. SONY COMPUTER ENTERTAINMENT BAY AREA MULTIMEDIA AMERICA INC. By: /s/ PHIL HARRISON By: /s/ RAYMOND C. MUSCI ------------------------------- --------------------------------- Phil Harrison VP 3rd Party Relations/Research & Name: Raymond C. Musci Development ------------------------------- Date: 08/24/2000 Title: President ------------------------------ Date: 08/16/00 ------------------------------- [Neither an offer nor an agreement until executed by both parties] 8 9 CERTIFICATION I, ___________________________ (name), on behalf of __________________________ (Company) hereby certify that l have deleted all application software from the hard drive and/or any other storage medium contained in the accompanying Hardware Tool, serial number ___________________ ---------------------------------- (Printed Name) 9 EX-10.30 40 v72115orex10-30.txt EXHIBIT 10.30 1 EXHIBIT 10.30 (Confidential Portions Omitted) CONFIDENTIAL LICENSE AGREEMENT FOR GAME BOY, GAME BOY COLOR AND GAME BOY POCKET HANDHELD VIDEO GAME SYSTEMS (Western Hemisphere) THIS AGREEMENT is entered into between NINTENDO OF AMERICA INC., a Washington corporation with an address for notice purposes of 4820 150th Avenue N.E., Redmond, WA 98052 (Fax: 425-882-3585) ("NINTENDO") and Bay Area Multimedia Inc., a California Corporation with an address for notice purposes of 333 West Santa Clara Street, Suite 930, San Jose, CA 95113 (Fax: 408-298-9600), Attention: President ("LICENSEE"). NINTENDO and LICENSEE acknowledge and agree as follows: 1. RECITALS 1.1 NINTENDO markets and sells high-quality video game systems, including without limitation hardware and software, marketed by NINTENDO under its trademarks "Game Boy(R)", "Game Boy(R) pocket" and "Game Boy(R) Color" for playing video games. 1.2 LICENSEE desires to gain access to and a license to use highly proprietary programming specifications, development tools, trademarks and other valuable intellectual property rights owned by NINTENDO, in order to develop video game software and to purchase such video game software from NINTENDO for play on the Game Boy Systems, which systems were developed by NCL (as defined below). 1.3 NINTENDO is willing to grant to LICENSEE a license to use such proprietary information and intellectual property rights and to sell video game software to LICENSEE upon the terms and conditions set forth in this Agreement. 2. DEFINITIONS 2.1 "Artwork" shall mean the final art and mechanical formats for the Licensed Product (as defined below) including the Game box, user instruction manual with consumer precautions and warranty, game cartridge label and inserts. 2.2 "Effective Date" shall mean the last date on which all parties shall have signed this Agreement. 2.3 "Finished Goods" shall mean the Game Cartridge, fully assembled with exterior labels, packaged in a plastic or polyethylene bag, placed in a high quality, custom packaging box, including all required Artwork. 2.4 "Game Boy Systems" shall mean individually, collectively or in any combination the 8-bit monochrome Game Boy and Game Boy pocket handheld video game systems and the 8-bit Game Boy Color handheld video game system. 2.5 "Game Cartridge(s)" shall mean interchangeable plastic cartridges adapted for use with the Game Boy System, housing the Game embodied in electronic memory devices or comparable medium authorized by NINTENDO for storing the Games. PAGE 1 2 2.6 "Game(s)" shall mean video game software compatible with the Game Boy Systems developed under this Agreement. 2.7 "Guidelines" shall mean the "Game Boy Systems Packaging Guidelines" and the "Game Boy Systems Development Manual" setting forth trademark, copyright and related artwork standards, as provided by NINTENDO. 2.8 "Independent Contractor" shall mean any third party agent, consultant, contractor or independent programmer, other than LICENSEE. 2.9 "Licensed Copyright(s)" shall mean various copyrights in printed materials, art or logo designs, computer software, electronic circuitry and rights in integrated circuit layout designs employed in the Game Boy Systems. 2.10 "Licensed Intellectual Properties" shall mean individually, collectively or in any combination, the Licensed Inventions, Licensed Proprietary Information, Licensed Copyrights and Licensed Trademarks. 2.11 "Licensed Invention(s)" shall mean improvements and inventions concerning the Game Boy Systems, including inventions that are or may become the subject matter of various patents or patent applications. 2.12 "Licensed Product(s)" shall mean Game Cartridges (or comparable medium authorized by NINTENDO) for employing the Licensed Intellectual Properties and having electronic memory devices storing the Games. 2.13 "Licensed Proprietary Information" shall mean any of the following information relating to the Game Boy Systems: (a) all current or future information, know-how, techniques, methods, information, tools, emulator hardware or software, software development specifications, and/or trade secrets, (b) any information or patent applications, (c) any business, marketing or sales data or information, and (d) any other information or data relating to development, design, operation, manufacturing, marketing or sales. "Licensed Proprietary Information" shall include information disclosed to LICENSEE by NINTENDO, NINTENDO's affiliated companies, and/or other third parties working with NINTENDO. Such Licensed Proprietary Information shall include all confidential information disclosed, whether in writing, orally, visually, or in the form of drawings, technical specifications, software, samples, pictures, models, recordings, or other tangible items which contain or manifest, in any form, the above listed information. Licensed Proprietary Information shall not include: (a) data and information which was in the public domain prior to LICENSEE's receipt of the same hereunder, or which subsequently becomes part of the public domain by publication or otherwise, except by LICENSEE's wrongful act or omission, (b) data and information which LICENSEE can demonstrate, through written records kept in the ordinary course of business, was in its possession without restriction on use or disclosure, prior to its receipt of the same hereunder and was not acquired directly or indirectly from NINTENDO under an obligation of confidentiality which is still in force, (c) data and information which LICENSEE can show was received by it from a third party who did not acquire the same directly or indirectly from NINTENDO and to whom LICENSEE has no obligation of confidentiality, and (d) data and information which is required to be disclosed by an authorized governmental or judicial entity, provided that LICENSEE shall notify NINTENDO at least thirty (30) days prior to such disclosure. 2.14 "Licensed Trademarks" shall mean registered and unregistered trademarks and trademark applications used in connection with the Game Boy Systems including, but not limited to, "Nintendo", "Game Boy", "Game Boy Color", Game Boy pocket, "Official Nintendo Seal of Quality" and trade dress in the Game Boy Systems. PAGE 2 3 2.15 "Marketing Materials" shall mean marketing, advertising or promotional materials which incorporate the Licensed Intellectual Properties and which are developed by or for LICENSEE to promote the sale of the Licensed Products. 2.16 "NCL" shall mean NINTENDO's parent company, Nintendo Co., Ltd. of Kyoto, Japan. 2.17 "Product Sample" shall mean a sample of the Game for Game Boy Color as defined in Section 5.2. 2.18 "Schedule 1" shall mean the "Nintendo of America Inc. Price Schedule for the Game Boy Licensed Game Paks" attached to this Agreement and incorporated by reference to this Agreement. 2.19 "Schedule 2" shall mean the "Nintendo of America Inc. Price Schedule for the Game Boy Color Licensed Game Paks" attached to this Agreement and incorporated by reference into this Agreement. 2.20 "Stripped Cartridge(s)" shall mean fully assembled Game Cartridges with exterior labels shipped in a plastic or polyethylene bag, excluding the required Artwork. 2.21 "Term" shall mean three (3) years from the Effective Date. 2.22 "Territory" shall mean all countries within the Western Hemisphere, including the United States, Canada, South America, Central America, Mexico and all applicable territories and possessions. 3. GRANT OF LICENSE; RESERVATION OF RIGHTS BY NINTENDO 3.1 Grant. For the Term and the Territory, NINTENDO hereby grants to LICENSEE, and LICENSEE hereby accepts under the terms and conditions set forth in this Agreement, a nonexclusive license to develop the Licensed Products. Except as may be permitted under a separate written authorization from NINTENDO or NCL, LICENSEE shall not use the Licensed Intellectual Properties for any other purpose. 3.2 Reservation of Rights in the Licensed Intellectual Properties. LICENSEE acknowledges NINTENDO's and NCL's right, title, and interest in and to the Licensed Intellectual Properties and the goodwill associated with the Licensed Trademarks. LICENSEE will not at any time do or cause to be done any act or thing which in any way impairs or is intended to impair any part of such right, title, interest or goodwill. LICENSEE shall not represent that it has any ownership in the Licensed Intellectual Properties. This agreement does not grant LICENSEE any ownership interest in the Licensed Intellectual Properties, and LICENSEE's use of the Licensed Intellectual Properties shall not create any right, title or interest therein in LICENSEE's favor beyond the license granted herein. 3.3 Reservation of Rights of Distribution Outside the Territory. LICENSEE shall market and sell the Licensed Products only in the Territory. LICENSEE shall not directly or indirectly export any Licensed Products from the Territory nor shall LICENSEE knowingly permit or assist any third party in doing so. 3.4 Reservation of Rights to Reverse Engineer. LICENSEE may utilize and study the design, performance and operation of the Game Boy Systems and the Licensed Proprietary Information solely for the purpose of developing software which is compatible with the Game Boy Systems for license under this Agreement. LICENSEE shall not, directly or indirectly, reverse engineer or aid or assist in the reverse engineering of all or any part of the Game Boy Systems, including the hardware, software and/or tools. For purposes of this Agreement, "reverse engineering" shall mean: (a) the x-ray electronic scanning and/or PAGE 3 4 physical or chemical stripping of semiconductor components; and/or (b) the disassembly, decompilation, decryption, or simulation of object code or executable code, specifically including, but not limited to, any NINTENDO supplied or developed libraries. The limitations set forth in this Section 3.4 shall not preclude LICENSEE from engaging in reverse engineering of any Game code which was developed solely by LICENSEE and related only to the Game and was not supplied by nor derived from any code supplied by NINTENDO. 3.5 Reservation of Rights of Electronic Transmission. LICENSEE shall not directly or indirectly duplicate, distribute or transmit Games via electronic means or any other means now known or hereafter devised, including without limitation, wireless, cable, fiber optic means, telephone lines, satellite transmission, microwave or radio waves or over a network of interconnected computers or other devices. Notwithstanding this limitation, LICENSEE shall not be prohibited from the electronic transmission of Games during the development processed for the sole purpose of facilitating development; provided, however, that no right of retransmission shall attach to any such transmission, and, provided, further, that LICENSEE shall use reasonable security measures, customary within the industry, to reduce the risk of unauthorized interception or retransmission of such transmission. 3.6 Notification Obligations. LICENSEE shall promptly notify NINTENDO of the loss or unauthorized use or disclosure of any Licensed Proprietary Information and shall promptly act to recover any such information and/or prevent further breach of the confidentiality obligations herein. 4. CONFIDENTIALITY 4.1 Disclosure of Proprietary Information. During the Term, NINTENDO may provide LICENSEE with highly proprietary development information, development tools, emulation systems, programming specifications and related resources and information constituting and incorporating the Licensed Proprietary Information to enable LICENSEE to develop video games for use with the Game Boy Systems. 4.2 Confidentiality of Licensed Proprietary Information. LICENSEE shall maintain all Licensed Proprietary Information as strictly confidential and will use such Licensed Proprietary Information only in accordance with this Agreement. LICENSEE shall limit access to the Licensed Proprietary Information to LICENSEE's employees having a strict need to know and shall advise such employees of their obligation of confidentiality as provided herein. LICENSEE shall require each such employee to retain in confidence the Licensed Proprietary Information pursuant to a written non-disclosure agreement between LICENSEE and such employee. LICENSEE shall use its best efforts to ensure that its employees working with or otherwise having access to Licensed Proprietary Information shall not disclose or make unauthorized use of the Licensed Proprietary Information. 4.3 Agent/Consultant Confidentiality. LICENSEE shall not disclose the Licensed Proprietary Information to any Independent Contractor without NINTENDO's prior written approval. Each approved Independent Contractor shall be required to enter into a written non-disclosure agreement with NINTENDO prior to receiving any access to or disclosure of the Licensed Proprietary Information. 5. DEVELOPMENT; QUALITY STANDARDS; ARTWORK; MANUFACTURING 5.1 Development and Sale of the Game Boy Systems Programs. During the Term and for the Territory, LICENSEE may develop Games and/or sell Licensed Products for the Game Boy Systems in accordance with this Agreement. 5.2 Submission of Product Sample (Game Boy Color Only). Prior to a Game Boy Color Game PAGE 4 5 reaching fifty percent (50%) completion, LICENSEE shall submit to NINTENDO for approval a Product Sample. Such Product Sample must include a demonstration of the manner in which such Game Boy Color dedicated or compatible Game will utilize and exploit the following color criteria: (a) differentiation from monochrome Game Boy software (each Game Boy Color Game must appear significantly more colorful than monochrome Game Boy software when "colorized" by the Game Boy Color hardware); (b) simultaneous colors; (c) appropriate use of color, (d) variety of colors, and (e) contrast and saturation. For the purpose of demonstrating these criteria, the Product Sample shall be either a programmed demo or various ROM images. In addition to these criteria, for Games which have been previously released for the Game Boy monochrome system, LICENSEE must provide a demonstration of the game-play enhancements which have been added to the Game which may include any of the following: (i) additional stages, levels or areas; (ii) new characters; and/or (iii) game-play based on color. Subsequent to acceptance and approval of a Product Sample, LICENSEE shall notify NINTENDO in writing of any material proposed changes in the Product Sample and/or the proposed Licensed Product. No submission samples are required for Games exclusively for play on Game Boy and Game Boy pocket systems. 5.3 Delivery of Completed Game. Upon completion of a Game, LICENSEE shall deliver to NINTENDO one (1) prototype of the Game in a format specified by NINTENDO, together with written user instructions and a complete screen text script. NINTENDO shall promptly evaluate the Game with regard to: (a) its technical compatibility with and error-free operation on the Game Boy Systems; (b) the suitability of the Game content, taking into account reasonable standards set forth in the Guidelines; and, if applicable, (c) whether the Game achieves the criteria as set forth in Section 5.2 at 50% completion and upon final completion. LICENSEE shall have satisfied the Game content suitability criteria by providing NINTENDO with proof that the Game has been provided with a certificate of a rating other than ADULTS ONLY (or its equivalent) from the Entertainment Software Ratings Board or comparable independent ratings body which reviews and certifies product for violent or sexual content, and that the Game meets the content criteria set forth in NINTENDO's content guidelines. 5.4 Approval of Completed Game. NINTENDO shall, within a reasonable period of time after receipt, approve or disapprove such Game. If such Game is disapproved, NINTENDO shall specify in writing the reasons for such disapproval and state what corrections and/or improvements are necessary. After making the necessary corrections and/or improvements, LICENSEE shall submit a revised Game for approval by NINTENDO. The approval of any Game by NINTENDO shall not relieve LICENSEE of its sole responsibility for the development, quality and operation of the Game or in any way create any warranty for a Licensed Product by NINTENDO. NINTENDO shall not unreasonably withhold or delay any approval provided for herein. 5.5 Development and Quality of Artwork. In connection with the submission of a proposed Licensed Product to NINTENDO, LICENSEE shall submit all Artwork to NINTENDO. All Artwork shall conform to the requirements set forth in the Guidelines. With fifteen (15) business days of receipt of the Artwork, NINTENDO shall approve or disapprove the Artwork based upon the Guidelines. If any of the Artwork is disapproved, NINTENDO shall specify in writing the reasons for such disapproval and state what corrections and/or improvements are necessary. After making the necessary corrections and/or improvements to the disapproved Artwork, LICENSEE shall resubmit new Artwork for approval by NINTENDO. NINTENDO shall not unreasonably withhold or delay its approval of any Artwork. 5.6 Appointment of NCL as Manufacturer of Licensed Product. LICENSEE hereby appoints NCL, and NINTENDO hereby confirms that NCL accepts such appointment, as manufacturer of the Licensed Products in the form of Finished Goods and/or Stripped Cartridges. NCL shall acquire and retain responsibility for all equipment, tooling, molds or masks used in connection with the manufacture of the Licensed Products. NCL shall have the sole responsibility for establishing and fulfilling all aspects of the manufacturing process PAGE 5 6 of the Licensed Products, including selecting the location of and specifications for any manufacturing facilities, appointing suppliers and subcontractors, and managing all work-in progress. 5.7 Manufacture of Licensed Products. Upon approval of a Game and upon receipt from LICENSEE of an order in accordance with Section 6 herein, NCL will manufacture the Licensed Products for LICENSEE. LICENSEE may, at its option, order Stripped Cartridges rather than Finished Goods and utilize an Independent Contractor to manufacture the Artwork and/or complete the final pack-out only, provided such Independent Contractor is approved in writing by NINTENDO. 5.8 Retention of Sample Licensed Products. NCL may, at its own expense, manufacture samples of the Licensed Products, only to the extent necessary, to be used by NINTENDO for archival purposes, legal proceedings against infringers of the Licensed Intellectual Properties, and for other lawful purposes. 6. PURCHASE PRICE; PAYMENT; DELIVERY OF COMPLETED LICENSED PRODUCT 6.1 Minimum Initial Orders. Upon placement of an initial order, LICENSEE shall order a minimum quantity of [*] units of a Licensed Product. 6.2 Subsequent Minimum Orders. LICENSEE may subsequently order additional Licensed Product in a minimum quantity of [*] units of a Licensed Product. 6.3 Purchase Price. The purchase price to be paid by LICENSEE to NINTENDO for the Licensed Products shall be in accordance with NINTENDO's pricing schedules currently set forth in the attached Schedules 1 & 2. The purchase price includes the cost of manufacturing, printing and packaging the Licensed Products and a royalty for the use of the Licensed Intellectual Properties. Schedule 1 and/or Schedule 2 are subject to change by NINTENDO at any time without notice. 6.4 Payment. At the time an order is placed, LICENSEE shall provide to NINTENDO an irrevocable letter of credit in favor of NINTENDO and payable at sight, issued by a bank acceptable to NINTENDO and confirmed, at LICENSEE's expense, if requested by NINTENDO. The letter of credit shall be in United States dollars in an amount equal to the purchase price of the Licensed Products ordered. All associated banking charges are for LICENSEE's account. 6.5 Shipment and Delivery. The Licensed Products shall be delivered F.O.B. Japan, with shipment at LICENSEE's direction and expense. Orders may be delivered by NINTENDO in partial shipments, each directed to no more than two (2) destinations designated by LICENSEE in the Territory. Title to the Licensed Products shall vest in accordance with the terms of the applicable letter of credit. 7. MARKETING, SALE AND RENTAL OF THE LICENSED PRODUCTS 7.1 Marketing Materials. LICENSEE agrees that any Marketing Materials shall be of high quality and shall comply with the Guidelines. 7.2 Submission of Proposed Marketing Materials. Prior to actual use or distribution, LICENSEE shall submit to NINTENDO for review and evaluation initial samples of all Marketing Materials. NINTENDO shall, within fifteen (15) business days of receipt of such samples, approve or disapprove of the quality of such samples. If any of the samples are disapproved as to quality, NINTENDO shall specify the reasons for such disapproval and state what corrections and/or improvements are necessary. After making the necessary corrections and/or improvements to the disapproved samples, LICENSEE may resubmit new samples for *Confidential portions omitted and filed separately with the Commission. PAGE 6 7 approval by NINTENDO as to quality. No Marketing Materials shall be distributed or utilized by LICENSEE without obtaining prior written approval as to quality by NINTENDO. NINTENDO shall not unreasonably withhold or delay its approval of the proposed Marketing Materials. NINTENDO reserves the right to disapprove Marketing Materials that include non-licensed accessories. 7.3 Warranty and Repair. With respect to the Licensed Product, LICENSEE shall provide to the original consumer a minimum ninety (90) day limited warranty, comparable to that offered by NINTENDO. LICENSEE shall also provide to the original consumer, either directly or indirectly through authorized service centers, reasonably accessible product service, including out-of-warranty service for a period of three (3) years following sale of the Licensed Product. In the event LICENSEE is unable to obtain sufficient quantities of repair parts for service obligations from defective and/or product returns, NINTENDO shall cooperate in providing reasonable quantities of repair parts to LICENSEE at its standard cost. 7.4 Business Facilities: Sales of Licensed Products. LICENSEE agrees to develop, maintain and utilize during the Term: (a) suitable office facilities within the Territory, adequately staffed to enable LICENSEE to fulfill all responsibilities under this Agreement; (b) necessary warehouse, distribution, marketing, sales, collection and credit operations to facilitate proper handling of the Licensed Product; and, (c) customer service and game counseling support, including telephone service, to adequately support the Licensed Product. 7.5 Defects; Recall. In the event of a material programming defect in the Licensed Product, which defect in the reasonable judgment of NINTENDO would significantly impair the ability of a consumer to play the Licensed Product, NINTENDO may require the LICENSEE to recall the Licensed Product and undertake suitable repairs or replacements prior to sale. 7.6 Rental. In the event LICENSEE elects to engage in the commercial rental of the Licensed Products within the Territory on such terms and conditions as LICENSEE shall determine, LICENSEE shall secure appropriate authorizations and/or assignments from the holder(s) of the copyrightable elements employed in the computer programs for the Licensed Product. LICENSEE shall clearly provide notice on the Artwork for each Licensed Product of any rental right or reservation thereof. 7.7 Nintendo Promotional Materials, Publications and Events. At its option, NINTENDO may: (a) insert in the packaging for the Licensed Product promotional materials concerning Nintendo Power magazine; (b) utilize screen shots, package art and related art and information regarding the Licensed Product in Nintendo Power, Nintendo Power Source (NINTENDO's on-line version of Nintendo Power) or other media or marketing programs which promote NINTENDO products; and (c) exercise public performance rights of the Licensed Product and use the related trademarks and art in NINTENDO sponsored contests, tours and events which generally promote NINTENDO products, provided that no other third party approvals are required. 8. LICENSEE'S COPYRIGHTS AND TRADEMARKS 8.1 Copyright and Trademark Warranties. LICENSEE represents and warrants that, throughout the Territory, LICENSEE is either: (a) the sole owner of all right, title and interest in and to the trademarks, copyrights, Artwork and other intellectual property rights used on or in association with the Licensed Products; or (b) the holder of sufficient rights to the trademarks, copyrights, Artwork and other intellectual property rights which have been licensed from a third party for use in the Licensed Product. 8.2 Licensee's Indemnification. LICENSEE shall indemnify and hold NINTENDO and NCL harmless from any claims, losses, liabilities, damages, expenses and costs, including, without limitation, PAGE 7 8 reasonable attorneys' fees and costs, which result from: (a) a breach of any of the representations or warranties provided by LICENSEE herein; (b) any claim of infringement of any third party's intellectual property rights with respect to the Licensed Product, (including, but not limited to, any claim relating to marketing, advertising and/or sale of the Licensed Product), excluding claims based solely upon NINTENDO's Licensed Intellectual Properties; or, (c) any claim of bodily injury (including death) or property damage arising out of, or in connection with, the development, sale and/or use of any of the Licensed Products. NINTENDO shall give LICENSEE prompt written notice of the assertion of any such claim and provided, further, that LICENSEE shall have the right to select counsel and control the defense and/or settlement of any such claim, subject to the right of NINTENDO to participate in any such action or proceeding at its own expense with counsel of its own choice. 8.3 Insurance. LICENSEE shall, at its own expense, obtain a policy of general liability insurance that includes product liability coverage by a recognized insurance company. Such policy of insurance shall be in an amount of not less than Three Million Dollars ($3,000,000 US) on a per occurrence basis and shall provide for adequate protection against any suits, claims, loss or damage or any alleged intellectual property infringements by the Licensed Products. Such policy shall name NINTENDO as an additional insured and may not be canceled without thirty (30) days' prior written notice to NINTENDO. A Certificate of Insurance shall be provided to NINTENDO's Licensing Department within thirty (30) days of the Effective Date. If LICENSEE fails to maintain such insurance during the Term, NINTENDO may secure and maintain such insurance at LICENSEE's expense. 9. LIMITATION OF LIABILITY 9.1 Disclaimer Regarding Licensed Intellectual Properties. NINTENDO makes no representations, guarantees or warranties concerning the scope or validity of the Licensed Intellectual Properties, and does not warrant that the sale of the Licensed Products by LICENSEE will not infringe upon the patent, trade secret, copyright, mask work or trademark rights of another in the Territory. LICENSEE HEREBY ASSUMES THE RISK OF INFRINGEMENT. 9.2 Warranty Disclaimer. NINTENDO DISCLAIMS ANY AND ALL WARRANTIES OF THE LICENSED PRODUCTS AS BETWEEN NINTENDO AND LICENSEE AND AS BETWEEN NINTENDO AND ANY THIRD PARTY PURCHASERS FROM LICENSEE. LICENSEE PURCHASES AND ACCEPTS ALL LICENSED PRODUCTS FROM NINTENDO ON AN "AS IS" AND "WHERE IS" BASIS AND WITHOUT ANY WARRANTIES, EXPRESS OR IMPLIED. WITH RESPECT TO THE LICENSED PRODUCTS, NINTENDO DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A GENERAL OR PARTICULAR PURPOSE AND SHALL IN NO EVENT BE LIABLE FOR ANY INCIDENTAL AND/OR CONSEQUENTIAL DAMAGES OF LICENSEE, ITS RETAILERS OR CUSTOMERS. LICENSEE SHALL BE SOLELY RESPONSIBLE FOR PROVIDING WARRANTY AND REPAIR/REPLACEMENT SERVICES FOR ANY DEFECTIVE LICENSED PRODUCTS. NOTWITHSTANDING THE CONDITIONS SET FORTH IN THIS PARAGRAPH, NINTENDO WILL USE ITS BEST EFFORTS TO RESOLVE ANY CATASTROPHIC DEFECT IN THE LICENSED PRODUCTS PURCHASED BY LICENSEE FROM NINTENDO. A "CATASTROPHIC DEFECT" IS DEFINED AS A MANUFACTURING DEFECT RATE OF FIVE PERCENT (5%) OR GREATER IN ANY SHIPMENT OF LICENSED PRODUCTS TO LICENSEE. PAGE 8 9 10. INFRINGEMENT OF LICENSED INTELLECTUAL PROPERTIES AND LICENSEE'S TRADEMARKS AND COPYRIGHTS 10.1 Reporting. In the event any claim is asserted against LICENSEE alleging that any of the Licensed Intellectual Properties constitute an infringement of another's rights or if a claim is asserted against NINTENDO alleging that the Licensed Products infringe the rights of a third party, then the party with such knowledge shall promptly notify the other party. 10.2 Licensed Intellectual Properties. NINTENDO shall have the sole right, at its expense, to commence and/or defend a legal action or negotiate a settlement relating to any alleged infringement by the Licensed Intellectual Properties. LICENSEE agrees to give reasonable assistance in any such legal action, but at no expense to it. NINTENDO shall be entitled to all of the recovery or damages collected as a result of such legal action or negotiated settlement. In the event of a legal action against LICENSEE alleging an infringement by the Licensed Intellectual Properties as incorporated into LICENSEE's Licensed Products which NINTENDO affirmatively elects in writing not to defend, LICENSEE may defend or settle such legal action, at its option and expense. NINTENDO agrees to provide reasonable assistance in defending any such legal action. LICENSEE agrees to keep NINTENDO fully informed with respect to developments in any such legal action and to provide NINTENDO reasonable notice of the terms of any proposed settlement and to consider any comments by NINTENDO before settlement is made. 10.3 Infringement of Licensed Products. LICENSEE shall take reasonable steps to abate any infringement of LICENSEE's copyrights and trademarks employed in the Licensed Products. LICENSEE shall also take all reasonable and necessary steps, including legal action, to defend against any alleged infringement caused by any of LICENSEE's content in a Licensed Product or any Artwork, title or designation used in conjunction with any of the Licensed Products. NINTENDO shall give to LICENSEE reasonable assistance and cooperation in any such legal action, but at no expense to NINTENDO. 11. TERM AND TERMINATION 11.1 Default or Breach. In the event that either party is in default or commits a breach of this Agreement which is not cured within thirty (30) days after written notice thereof, then this Agreement shall automatically terminate on the date specified in such notice. 11.2 Bankruptcy/Insolvency. At NINTENDO's option, and for its own convenience, this Agreement can be terminated immediately and without notice in the event that LICENSEE: (a) makes an assignment for the benefit of creditors; (b) becomes insolvent; (c) files a voluntary petition for bankruptcy; (d) acquiesces to any involuntary bankruptcy petition; (e) is adjudicated as a bankrupt; or (f) ceases to do business. 11.3 Termination Other Than by Breach. Upon the expiration of this Agreement or its termination other than by LICENSEE's breach, LICENSEE shall have a period of one hundred sixty (160) days to sell any unsold Licensed Products. All Licensed Products in LICENSEE's control following expiration of such sell-off period, shall be destroyed by LICENSEE within ten (10) days and proof of such destruction shall be delivered to NINTENDO certified by an officer of LICENSEE. 11.4 Termination by LICENSEE's Breach. If this Agreement is terminated by NINTENDO as a result of a breach of its terms and conditions by LICENSEE, LICENSEE shall immediately cease all distribution, promotion or sale of any Licensed Products. LICENSEE shall have a period of one hundred sixty (160) days to sell any unsold Licensed Products. All Licensed Products in LICENSEE's control following expiration of such sell-off period, shall be destroyed by LICENSEE within ten (10) days. PAGE 9 10 11.5 Licensed Intellectual Property Rights. Upon expiration and/or termination of this Agreement, LICENSEE will cease all use of the Licensed Intellectual Properties for any purpose, and Sections 4.2 and 4.3 of this Agreement, pertaining to LICENSEE's obligation to not disclose to third parties any Licensed Proprietary Information shall survive the termination of this Agreement. LICENSEE shall also return to NINTENDO all writings, drawings, models, data and other materials and things in LICENSEE's possession or in the possession of any past or present employee, agent or contractor receiving the information through LICENSEE, which constitute or relate to or disclose any Licensed Proprietary Information without making copies or otherwise retaining any such information. 11.6 Termination by Nintendo's Breach. If this Agreement is terminated by LICENSEE as a result of a breach of its terms or conditions by NINTENDO, LICENSEE may continue to sell the Licensed Products in the Territory until the expiration of the Term, at which time the provisions herein relating to termination other than by default of LICENSEE shall apply to any unsold Licensed Products. 12. GENERAL PROVISIONS 12.1 Nonassignability/Sublicensing. This Agreement is personal to Licensee and may not be sold, assigned, delegated, sublicensed or otherwise transferred or encumbered, in whole or in part, including without limitation, by operation of law, without the prior written consent of Nintendo, which consent may be withheld by Nintendo in its sole discretion. For purposes of determining whether an assignment of this agreement by Licensee (but not by Licensor) has occurred under this Section 12.1, a merger of Licensee into another business entity or a merger of another business entity into Licensee; the sale or transfer of more than twenty percent (20%) of the stock of Licensee, Licensee's assets, or ownership interest or control of Licensee; or, the granting of any security interest or other encumbrance in this Agreement or any rights arising under this Agreement, shall be deemed an assignment requiring notice to, and the prior written consent of, Nintendo, which consent may be withheld by Nintendo in its sole discretion. Upon any attempted sale, assignment, delegation, sublicense or other transfer or encumbrance in violation of the preceding sentences, this Agreement shall be deemed null and void, and of no effect, and in such event, notwithstanding anything in this Agreement to the contrary, Nintendo shall have the immediate, unqualified right to terminate this Agreement in addition to all other rights and remedies it may obtain due to Licensee's breach. This Agreement may be assigned by Licensor upon written notice to Licensee but without any consent, provided, however, that any such assignment shall not release the Licensor from its obligations to the Licensee under this Agreement. Subject to such restriction and to the restriction against assignment provided above, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. 12.2 Force Majeure. Neither party shall be liable for any breach of this Agreement occasioned by any cause beyond the reasonable control of such party, including governmental action, war, riot or civil commotion, fire, natural disaster, labor disputes, restraints affecting shipping or credit, delay of carriers, inadequate supply of suitable materials, or any other cause which could not with reasonable diligence be controlled or prevented by the parties. In the event of material shortages, including shortages of microcomputer chips necessary for production of the Licensed Products, NINTENDO reserves the right to allocate essential materials among itself and its licensees. 12.3 Waiver; Severability; Integration. The failure of any party to enforce any provision of this Agreement shall not be construed to be a waiver of such provision or of the right of such party to thereafter enforce such provision. In the event that any term, clause or provision of this Agreement shall be construed to be or adjudged invalid, void or unenforceable, such term, clause or provision shall be construed as severed from this Agreement, and the remaining terms, clauses and provisions shall remain in effect. This Agreement constitutes the entire agreement between the parties relating to the subject matter hereof. All prior PAGE 10 11 negotiations, representations, agreements and understandings are merged into, extinguished by and completely expressed by this Agreement. Any amendment to this Agreement shall be in writing, signed by both parties. 12.4 Governing Law: Venue. This Agreement shall be governed by, subject to and construed under the laws of the State of Washington. Any legal actions prosecuted or instituted by NINTENDO or by LICENSEE under this Agreement, with respect to any matters arising under or growing out of this Agreement, shall only be brought in a court of competent jurisdiction in King County, Washington and each party hereby consents to the jurisdiction and venue of such courts for such purposes. 12.5 Equitable Relief. LICENSEE acknowledges that in the event of its breach of this Agreement, no adequate remedy at law may be available to NINTENDO and that NINTENDO shall be entitled to seek injunctive or other equitable relief in addition to any relief available at law. 12.6 Attorneys' Fees. In the event it is necessary for either party of this Agreement to undertake legal action to enforce any of the terms, conditions or rights contained herein, or to defend any such action, then the prevailing party in any such action shall be entitled to recover from the other party all reasonable attorneys' fees, costs and expenses relating to such legal action or any appeal therefrom. 12.7 Notices. All notices required or permitted under this Agreement shall be sufficiently given when: (a) personally served or delivered; (b) deposited, postage prepaid, with a guaranteed air courier service, addressed as stated herein, or to such other person or address either party may designate in a notice; or, (c) by facsimile, with an original sent concurrently by first class U.S. mail. Notice shall be deemed effective upon the earlier of actual receipt or two (2) business days after transmittal. 12.8 Counterparts; Signature by Facsimile. This Agreement may be signed in counterparts, which shall together constitute a complete Agreement. A signature transmitted by facsimile shall be considered an original for purposes of this Agreement. 12.9 Time is of the Essence. Time is of the essence with regard to this Agreement and the performance of the parties' obligations hereunder. IN WITNESS WHEREOF, NINTENDO and LICENSEE have entered into this Agreement on the dates set forth below: NINTENDO: LICENSEE: NINTENDO OF AMERICA INC. BAY AREA MULTIMEDIA, INC. By: /s/ JOHN BAUER By: ------------------------------ ------------------------------ Its: Executive Vice President Administration Its: ----------------------------- Date: 2/18/00 Date: ---------------------------- PAGE 11 12 completely expressed by this Agreement. Any amendment to this Agreement shall be in writing, signed by both parties. 12.4 Governing Law; Venue. This Agreement shall be governed by, subject to and construed under the laws of the State of Washington. Any legal actions prosecuted or instituted by NINTENDO or by LICENSEE under this Agreement, with respect to any matters arising under or growing out of this Agreement, shall only be brought in a court of competent jurisdiction in King County, Washington and each party hereby consents to the jurisdiction and venue of such courts for such purposes. 12.5 Equitable Relief. LICENSEE acknowledges that in the event of its breach of this Agreement, no adequate remedy at law may be available to NINTENDO and that NINTENDO shall be entitled to seek injunctive or other equitable relief in addition to any relief available at law. 12.6 Attorneys' Fees. In the event it is necessary for either party of this Agreement to undertake legal action to enforce any of the terms, conditions or rights contained herein, or to defend any such action, then the prevailing party in any such action shall be entitled to recover from the other party all reasonable attorneys' fees, costs and expenses relating to such legal action or any appeal therefrom. 12.7 Notices. All notices required or permitted under this Agreement shall be sufficiently given when: (a) personally served or delivered; (b) deposited, postage prepaid, with a guaranteed air courier service, addressed as stated herein, or to such other person or address either party may designate in a notice; or, (c) by facsimile, with an original sent concurrently by first class U.S. mail. Notice shall be deemed effective upon the earlier of actual receipt or two (2) business days after transmittal. 12.8 Counterparts; Signature by Facsimile. This Agreement may be signed in counterparts, which shall together constitute a complete Agreement. A signature transmitted by facsimile shall be considered an original for purposes of this Agreement. 12.9 Time is of the Essence. Time is of the essence with regard to this Agreement and the performance of the parties' obligations hereunder. IN WITNESS WHEREOF, NINTENDO and LICENSEE have entered into this Agreement on the dates set forth below. NINTENDO: LICENSEE: NINTENDO OF AMERICA, INC. BAY AREA MULTIMEDIA, INC. By: By: /s/ RAYMOND C. MUSCI --------------------------------- ------------------------------------ Its: Executive Vice President, Its: President Administration ----------------------------------- Date: Date: 2/10/99 ------------------- -------------------- PAGE 11 13 SCHEDULE 1 NINTENDO OF AMERICA INC. PRICE SCHEDULE GAME BOY LICENSED GAME PAKS
- ---------------------------------------------------------------------------------------------------- MEMORY CAPACITY MBC BATTERY PREVIOUS NOA PREVIOUS "CLASSIC" PRICE NEW PRICE (SHIPPED BEFORE 12/31/94) PRICE - ---------------------------------------------------------------------------------------------------- 256K $ [*] $ [*] $ [*] 512K MBC-1 $ [*] $ [*] $ [*] 1 Megabit MBC-1 $ [*] $ [*] $ [*] 2 Megabit MBC-1 $ [*] $ [*] $ [*] 4 Megabit MBC-1 $ [*] $ [*] $ [*] 8 Megabit MBC-1 $ [*] 512K X 64K SRAM MBC-1 Battery $ [*] $ [*] $ [*] 1 Megabit X 64K SRAM MBC-1 Battery $ [*] $ [*] $ [*] 1 Megabit X 256K SRAM MBC-1 Battery $ [*] $ [*] $ [*] 2 Megabit X 16K SRAM MBC-1 $ [*] $ [*] $ [*] 2 Megabit X 64K SRAM MBC-1 Battery $ [*] $ [*] $ [*] 4 Megabit X 64K SRAM MBC-1 $ [*] $ [*] $ [*] 4 Megabit X 64K SRAM MBC-1 Battery $ [*] $ [*] $ [*] 512K MBC-2 Battery $ [*] $ [*] $ [*] 1 Megabit MBC-2 Battery $ [*] $ [*] $ [*] - ----------------------------------------------------------------------------------------------------
*Confidential Portions Omitted and Filed Separately with the Commission. PAGE 12 14 - -------------------------------------------------------------------------------- 2 Megabit MBC-2 Battery $[*] $[*] $[*] - --------------------------------------------------------------------------------
EXTRA PACKAGING (MUST BE ORDERED WITH PRODUCT ON A SEPARATE PO) Game Pak Box $[*] Instruction Manual [*] Game Pak Label [*] Game Pak Poster [*] Warranty Card [*] ALL PRICES ARE SUBJECT TO CHANGE WITHOUT NOTICE. REV. 4/1/97 *Confidential Portions Omitted and Filed Separately with the Commission. PAGE 13 15 SCHEDULE 2 NINTENDO OF AMERICA INC. PRICE SCHEDULE GAME BOY COLOR LICENSED GAME PAKS
- -------------------------------------------------------------------------------- MEMORY CAPACITY MBC BATTERY RUMBLE PAK PRICE - -------------------------------------------------------------------------------- 8 Megabit MBC-5 $[*] - -------------------------------------------------------------------------------- 8 Megabit MBC-5 Yes $[*] - -------------------------------------------------------------------------------- 8 Megabit X 64K SRAM MBC-5 Battery $[*] - -------------------------------------------------------------------------------- 8 Megabit X 64K SRAM MBC-5 Battery Yes $[*] - -------------------------------------------------------------------------------- 8 Megabit X 256K SRAM MBC-5 Battery $[*] - -------------------------------------------------------------------------------- 8 Megabit X 256K SRAM MBC-5 Battery Yes $[*] - -------------------------------------------------------------------------------- 16 Megabit MBC-5 $[*] - -------------------------------------------------------------------------------- 16 Megabit MBC-5 Yes $[*] - -------------------------------------------------------------------------------- 16 Megabit X 64K SRAM MBC-5 Battery $[*] - -------------------------------------------------------------------------------- 16 Megabit X 64K SRAM MBC-5 Battery Yes $[*] - -------------------------------------------------------------------------------- 16 Megabit X 256K SRAM MBC-5 Battery $[*] - -------------------------------------------------------------------------------- 16 Megabit x 256K SRAM MBC-5 Battery Yes $[*] - -------------------------------------------------------------------------------- 32 Megabit MBC-5 $[*] - -------------------------------------------------------------------------------- 32 Megabit MBC-5 Yes $[*] - -------------------------------------------------------------------------------- 32 Megabit X 64K SRAM MBC-5 Battery $[*] - -------------------------------------------------------------------------------- 32 Megabit X 64K SRAM MBC-5 Battery Yes $[*] - -------------------------------------------------------------------------------- 32 Megabit x 256K SRAM MBC-5 Battery $[*] - -------------------------------------------------------------------------------- 32 Megabit x 256K SRAM MBC-5 Battery Yes $[*] - --------------------------------------------------------------------------------
*Confidential Portions Omitted and Filed Separately with the Commission. PAGE 14 16
- -------------------------------------------------------------------------------- 8 Megabit X 64K SRAM MBC-3 Battery $[*] - --------------------------------------------------------------------------------
EXTRA PACKAGING (MUST BE ORDERED WITH PRODUCT ON A SEPARATE PO) Game Pak Box $[*] Instruction Manual [*] Game Pak Label [*] Game Pak Poster [*] Warranty Card [*] ALL PRICES ARE SUBJECT TO CHANGE WITHOUT NOTICE. REV. 2/1/99 *Confidential Portions Omitted and Filed Separately with the Commission. PAGE 15 EX-10.31 41 v72115orex10-31.txt EXHIBIT 10.31 1 EXHIBIT 10.31 (Confidential Portions Omitted) CONFIDENTIAL LICENSE AGREEMENT FOR NINTENDO 64 VIDEO GAME SYSTEM (Western Hemisphere) THIS AGREEMENT is entered into between NINTENDO OF AMERICA INC., a Washington corporation with an address for notice purposes of 4820 150th Avenue N.E., Redmond, WA 98052 (Fax: 425-882-3585) ("NINTENDO") and Bay Area Multimedia Inc., a California corporation with an address for notice purposes of 333 West Santa Clara Street, Suite 930, San Jose, CA 95113, (Fax: 408-298-9600), Attention: President ("LICENSEE"). NINTENDO and LICENSEE acknowledge and agree as follows: 1. RECITALS 1.1 NINTENDO markets and sells a high-quality video game system, including hardware, software and an input controller, marketed by NINTENDO under its trademarks "Nintendo 64" and "N64", for playing video games. 1.2 LICENSEE desires to gain access to and rights to utilize highly proprietary programming specifications, development tools, trademarks and other valuable intellectual property rights in order to develop video game software and to purchase and sell such video game software from NINTENDO for play on the Nintendo 64 system, which system was developed by NCL and Silicon Graphics, Inc. 1.3 NINTENDO is willing to grant a license to utilize such proprietary information and intellectual property rights and to sell video game software to LICENSEE upon the terms and conditions set forth in this Agreement. 2. DEFINITIONS 2.1 "Artwork" shall mean the final art and mechanical formats for the Licensed Product including the Game Cartridge box, user instruction manual with consumer precautions and warranty, Game Cartridge label and inserts. 2.2 "Competing Systems" shall mean hardware platforms, whether marketed now or in the future, designed to play interactive video games, including but without limitation: Apple/Bandai Pippin or Atmark, Atari Jaguar, Atari Lynx, Bandai WonderSwan, 3DO Real, Matsushita M2, Microsoft X-Box, Phillips CD-1 Interactive Player, Sega Master System, Sega Genesis, Sega CD, Sega Game Gear, Sega CD/X, Sega Nomad, Sega 32X, Sega Saturn, Sega Pico, Sega Dreamcast, Sony PSX/Playstation, Sony PSX II/Playstation II, SNK Neo Geo/Neo Geo Pocket, VM Labs Project X, and any successors or derivatives of any of the foregoing. 2.3 "Effective Date" shall mean the last date on which all parties shall have signed this Agreement. 2.4 "Exclusive Licensed Product" shall mean the audiovisual work in its current form and as hereafter developed, which is sold by LICENSEE as a Licensed Product under this Agreement. 2.5 "Finished Goods" shall mean the Game Cartridge, fully assembled with exterior labels, packaged in a plastic or polyethylene bag, placed in a high quality, custom packaging box, including all PAGE 1 2 required Artwork. 2.6 "Game Cartridge(s)" shall mean interchangeable plastic cartridges adapted for use with the N64 System, housing the Game embodied in electronic memory devices or comparable medium authorized by NINTENDO for storing and playing Games on the N64 System. 2.7 "Game(s)" shall mean video game software compatible with the N64 System developed under this Agreement. 2.8 "Guidelines" shall mean the "Nintendo 64 Packaging Guidelines" and the "Nintendo 64 Development Manual" setting forth trademark, copyright and related artwork standards, as published from time to time by NINTENDO. 2.9 "Independent Contractor" shall mean any third party agent, consultant, contractor or independent programmer, other than LICENSEE. 2.10 "Licensed Copyright(s)" shall mean various copyrights in printed materials, art or logo designs, trade dress, computer software, microcode, electronic circuitry and rights in integrated circuit layout designs employed in the N64 System. 2.11 "Licensed Intellectual Properties" shall mean individually, collectively or in any combination, the Licensed Inventions, Licensed Proprietary Information, Licensed Copyrights and Licensed Trademarks. 2.12 "Licensed Invention(s)" shall mean improvements and inventions concerning the N64 System, including inventions that are or may become the subject matter of various patents or patent applications. 2.13 "Licensed Product(s)" shall mean Game Cartridges (or comparable medium authorized by Nintendo) for employing the Licensed Intellectual Properties and having electronic memory devices storing the Games. 2.14 "Licensed Proprietary Information" shall mean any of the following information relating to the N64 System: (a) all current or future information, know-how, techniques, methods, information, tools, emulator boards, software development specifications, and/or trade secrets, (b) any patents or patent applications, (c) any business, marketing or sales data information, and (d) any other information or data relating to development, design, operation, manufacturing, marketing or sales. "Licensed Proprietary Information" shall include information disclosed to LICENSEE by NINTENDO, NINTENDO's affiliated companies, SGI, and/or other third parties working with NINTENDO. Such Licensed Proprietary Information shall include all confidential information disclosed, whether in writing, orally, visually, or in the form of drawings, technical specification, software, samples, pictures, models, recordings, or other tangible items which contain or manifest, in any form, the Licensed Proprietary Information. Licensed Proprietary Information shall not include: (a) data and information which was in the public domain prior to LICENSEE's receipt of the same hereunder, or which subsequently becomes part of the public domain by publication or otherwise, except by LICENSEE's wrongful act or omission, (b) data and information which LICENSEE can demonstrate, through written records kept in the ordinary course of business, was in its possession without restriction on use or disclosure, prior to its receipt of the same hereunder and was not acquired directly or indirectly from NINTENDO under an obligation of confidentiality which is still in force, (c) data and information which LICENSEE can show was received by it from a third party who did not acquire the same directly or indirectly from NINTENDO and to whom LICENSEE has no obligation of confidentiality, and (d) data and information which is required to be disclosed by an authorized governmental or judicial entity, provided that LICENSEE shall notify NINTENDO at least thirty (30) days prior to such disclosure. PAGE 2 3 2.15 "Licensed Trademarks" shall mean registered and unregistered trademarks and trademark applications used in connection with the N64 System, including "Nintendo", "Nintendo 64", "N64", "Official Nintendo Seal of Quality" and trade dress in the N64 System. 2.16 "Marketing Materials" shall mean marketing, advertising or promotional materials that incorporate the Licensed Intellectual Properties that are developed by or for LICENSEE to promote the sale of the Licensed Products. 2.17 "NCL" shall mean NINTENDO's parent company, Nintendo Co., Ltd. of Kyoto, Japan. 2.18 "Nintendo 64 System" and "N64 System" shall mean the 64-bit Nintendo 64 video game system, including the hardware, software and input controller marketed by NINTENDO and NCL. 2.19 "Product Proposal" shall mean a written proposal that provides a detailed explanation of the Game. 2.20 "Schedule 1" shall mean the "Nintendo of America Inc. Price Sheet N64 Licensed Game Paks" attached to this Agreement and incorporated by reference into this Agreement. 2.21 "SGI" shall mean Silicon Graphics, Inc. and/or MIPS Technologies, Inc. 2.22 "Stripped Cartridge(s)" shall mean fully assembled Game Cartridges with exterior labels shipped in a plastic or polyethylene bag, excluding the required Artwork. 2.23 "Term" shall mean three (3) years from the Effective Date. 2.24 "Territory" shall mean all countries within the Western Hemisphere, including the United States, Canada, South America, Central America, Mexico and all applicable territories and possessions. 3. GRANT OF LICENSE; RESERVATION OF RIGHTS BY NINTENDO 3.1 Grant. For the Term and in the Territory, NINTENDO hereby grants to LICENSEE, and LICENSEE hereby accepts under the terms and conditions set forth in this Agreement, a nonexclusive license to employ the Licensed Intellectual Properties solely to develop and sell video games incorporated into Game Cartridges for play on the N64 System. Except as may be permitted under a separate written authorization from NINTENDO or NCL, LICENSEE shall not use the Licensed Intellectual Properties for any other purpose. 3.2 Reservation of Rights in the Licensed Intellectual Properties. LICENSEE acknowledges NINTENDO and NCL's right, title, and interest in and to the Licensed Intellectual Properties and the goodwill associated with the Licensed Trademarks. LICENSEE will not at any time do or cause to be done any act or thing which in any way impairs or is intended to impair any part of such right, title, interest or goodwill. LICENSEE shall not represent that it has any ownership in the Licensed Intellectual Properties. Use of the Licensed Intellectual Properties shall not create any right, title or interest therein in LICENSEE's favor. 3.3 Reservation of Rights of Distribution Outside the Territory. LICENSEE shall market and sell the Licensed Products only in the Territory. LICENSEE shall not directly or indirectly export any Licensed Products from the Territory nor shall LICENSEE knowingly permit or assist any third party in doing so. PAGE 3 4 3.4 Reservation of Rights to Reverse Engineer. LICENSEE may utilize and study the design, performance and operation of the N64 System and the Licensed Proprietary Information solely for the purpose of developing software which is compatible with the N64 System for license under this Agreement. LICENSEE shall not, directly or indirectly, reverse engineer or aid or assist in the reverse engineering of all or any part of the N64 System, including the hardware, software, input controller and/or tools. For purposes of this Agreement, "reverse engineering" shall mean: (a) the x-ray electronic scanning and/or physical or chemical stripping of semiconductor components; (b) the disassembly, decompilation, decryption, simulation, debugging or code tracing of microcode; and/or (c) the disassembly, decompilation, decryption, simulation, debugging or code tracing of object code or executable code, specifically including, but not limited to, any NINTENDO supplied or developed libraries or microcode. The limitations set forth in this Section 3.4 shall not preclude LICENSEE from engaging in reverse engineering of any Game code which was developed solely by LICENSEE and related only to the Game and was not supplied by nor derived from any code supplied by NINTENDO. 3.5 Reservation of Rights of Electronic Transmission. LICENSEE shall not directly or indirectly duplicate, distribute or transmit Games via electronic means or any other means now known or hereafter devised, including within limitation, wireless, cable, fiber optic means, telephone lines, satellite transmission, microwave or radio waves or over a network of interconnected computers or other devices. Notwithstanding this limitation, LICENSEE shall not be prohibited from the electronic transmission of Games during the development process for the sole purpose of facilitating development; provided, however, that no right of retransmission shall attach to any such transmission, and, provided further, that LICENSEE shall use reasonable security measures, customary within the industry, to reduce the risk of unauthorized interception or retransmission of such transmissions. 3.6 Notification Obligations. LICENSEE shall promptly notify NINTENDO of the loss or unauthorized use or disclosure of any Licensed Proprietary Information and shall promptly act to recover any such information and/or prevent further breach of the confidentiality obligations herein. 4. CONFIDENTIALITY 4.1 Disclosure of Proprietary Information. NINTENDO has and shall during the Term provide LICENSEE with highly proprietary development information, development tools, emulation systems, programming specifications and related resources and information constituting and incorporating the Licensed Proprietary Information to enable LICENSEE to develop video games for use with the N64 System. 4.2 Confidentiality of Licensed Proprietary Information. LICENSEE shall maintain all Licensed Proprietary Information as strictly confidential and will use such Licensed Proprietary Information only in accordance with this Agreement. LICENSEE shall limit access to the Licensed Proprietary Information to LICENSEE's employees having a strict need to know and shall advise such employees of their obligation of confidentiality as provided herein. LICENSEE shall require each such employee to retain in confidence the Licensed Proprietary Information pursuant to a written non-disclosure agreement between LICENSEE and such employee. LICENSEE shall use its best efforts to ensure that its employees working with or otherwise having access to Licensed Proprietary Information shall not disclose or make unauthorized use of the Licensed Proprietary Information. 4.3 Agent/Consultant Confidentiality. LICENSEE shall not disclose the Licensed Proprietary Information to any Independent Contractor without NINTENDO's prior written approval. Each approved Independent Contractor shall be required to enter into a written non-disclosure agreement with NINTENDO prior to receiving any access to or disclosure of the Licensed Proprietary Information. PAGE 4 5 4.4 SGI as a Third-Party Beneficiary. LICENSEE hereby acknowledges and agrees that SGI shall be a third-party beneficiary of LICENSEE's confidentiality obligations as set forth in this Section 4. 5. DEVELOPMENT; QUALITY STANDARDS; ARTWORK; MANUFACTURING 5.1 Development and Sale of the N64 System Programs. During the Term, LICENSEE may develop Games and/or sell Licensed Products for the N64 System in accordance with this Agreement. 5.2 Exclusivity; Exclusive Licensed Product. For the Exclusive Licensed Product, LICENSEE agrees that, commencing on the Effective Date and continuing for a period of one (1) year from NINTENDO's first shipment of such Exclusive Licensed Product to LICENSEE, neither the Game incorporated into such Exclusive Licensed Product nor any adaptation, translation, derivative, sequel or substantially similar game which is sold by LICENSEE as a Licensed Product under this Agreement shall be sold anywhere in the Territory by LICENSEE or by any third party for play on any Competing System. Except as provided herein with regard to the Exclusive Licensed Product, or as may otherwise be limited by the legitimate intellectual property rights of NINTENDO or any third party, LICENSEE shall retain all rights with regard to the adaptation of Games for development and sale in any other format, including on any Competing System. 5.3 Submission of Game Concept. Before commencing development of a Game, LICENSEE shall submit to NINTENDO for approval, a Product Proposal. Such Product Proposal must include a detailed explanation of the manner in which the Game will utilize and exploit: (a) the unique 3-D capabilities and high quality graphics display of the N64 System; (b) the complex, high-capacity processing speed of the N64 System; and, (c) the dynamic interfaces and touch control features of the unique N64 System controller. For that purpose, the Product Proposal shall include: (a) a description of the proposed Game; (b) the development team profile, including information regarding any Independent Contractor which LICENSEE proposes to retain to work on the Game; (c) a description of any special hardware or software requirements; and, (d) the anticipated completion date of the proposed Licensed Product. Subsequent to acceptance and approval of a Product Proposal, LICENSEE shall notify NINTENDO in writing of any material proposed changes in the Product Proposal and/or the proposed Licensed Product. From time to time, at approximately quarterly intervals or such other reasonable times NINTENDO may establish for purposes of ensuring utilization and exploitation of the N64 System in the manner set forth above, LICENSEE shall submit work-in-progress on the Game to NINTENDO for further review in accordance with the criteria set forth herein. NINTENDO shall not unreasonably withhold or delay any approval provided for herein. 5.4 Delivery of Completed Game. Upon completion of a Game, LICENSEE shall deliver to NINTENDO one (1) prototype of the Game in a format specified by NINTENDO, together with written user instructions and a complete screen text script. NINTENDO shall promptly evaluate the Game with regard to: (a) its technical compatibility with and error-free operation on the N64 System; (b) the suitability of the Game content, taking into account reasonable standards set forth in the Guidelines; and, (c) whether the Game achieves the objectives set forth in LICENSEE's approved Product Proposal. LICENSEE shall have satisfied the Game content suitability criteria by providing NINTENDO with proof that the Game has been provided with a certificate of a rating other than ADULTS ONLY (or its equivalent) from the Entertainment Software Ratings Board or comparable independent ratings body which reviews and certifies product for violent or sexual content. 5.5 Approval of Completed Game. NINTENDO shall, within a reasonable period of time after receipt, approve or disapprove such Game. If such Game is disapproved, NINTENDO shall specify in writing the reasons for such disapproval and state what corrections and/or improvements are necessary. After making the necessary corrections and/or improvements, LICENSEE shall submit a revised Game for approval by NINTENDO. The approval of any Game by NINTENDO shall not relieve LICENSEE of its sole responsibility for the development, quality and operation of the Game or in any way create any warranty for PAGE 5 6 a Licensed Product by NINTENDO. NINTENDO shall not unreasonably withhold or delay any approval provided for herein. 5.6 Development and Quality of Artwork. In connection with the submission of a proposed Licensed Product to NINTENDO, LICENSEE shall submit all Artwork to NINTENDO. All Artwork shall conform to the requirements set forth in the Guidelines. Within fifteen (15) business days of receipt of the Artwork, NINTENDO shall approve or disapprove the Artwork based upon the Guidelines. If any of the Artwork is disapproved, NINTENDO shall specify in writing the reasons for such disapproval and state what corrections and/or improvements are necessary. After making the necessary corrections and/or improvements to the disapproved Artwork, LICENSEE shall resubmit new Artwork for approval by NINTENDO. NINTENDO shall not unreasonably withhold or delay its approval of any Artwork. 5.7 Appointment of NCL as Manufacturer of Licensed Product. LICENSEE hereby appoints NCL, and NINTENDO hereby confirms that NCL accepts such appointment, as manufacturer of the Licensed Products in the form of Finished Goods and/or Stripped Cartridges. NCL shall acquire and retain responsibility for all equipment, tooling, molds or masks used in connection with the manufacture of the Licensed Products. NCL shall have the sole responsibility for establishing and fulfilling all aspects of the manufacturing process of the Licensed Products, including selecting the location of the specifications of any manufacturing facilities, appointing suppliers and subcontractors, and managing all work-in progress. 5.8 Manufacture of Licensed Products. Upon approval of a Game and upon receipt from LICENSEE of an order in accordance with Section 6 herein, NCL will manufacture the Licensed Products for LICENSEE. LICENSEE may, at its option, order Stripped Cartridges rather than Finished Goods and utilize an Independent Contractor to manufacture the Artwork and/or complete the final pack-out only, provided such Independent Contractor is approved in writing by NINTENDO. 5.9 Retention of Sample Licensed Products. NCL may, at its own expense, manufacture samples of the Licensed Products, only to the extent necessary, to be used by NINTENDO for archival purposes, legal proceedings against infringers of the Licensed Intellectual Properties, and for other lawful purposes. 6. PURCHASE PRICE; PAYMENT; DELIVERY OF COMPLETED LICENSED PRODUCT 6.1 Minimum Initial Orders. Upon placement of an initial order, LICENSEE shall order a minimum quantity of [*] units of a Licensed Product. 6.2 Subsequent Minimum Orders. LICENSEE may subsequently order additional Licensed Product in a minimum quantity of [*] units per title. 6.3 Purchase Price. The purchase price to be paid by LICENSEE to NINTENDO for the Licensed Products shall be in accordance with NINTENDO's pricing schedule currently set forth in the attached Schedule 1. The purchase price includes the cost of manufacturing, printing and packaging the Licensed Products and a royalty for the use of the Licensed Intellectual Properties. Schedule 1 is subject to change by NINTENDO at any time without notice. 6.4 Payment. At the time an order is placed, LICENSEE shall provide to NINTENDO an irrevocable letter of credit in favor of NINTENDO and payable at sight, issued by a bank acceptable to NINTENDO and confirmed, at LICENSEE's expense, if requested by NINTENDO. The letter of credit shall be in United States dollars in an amount equal to the purchase price of the Licensed Products ordered. All associated banking charges are for LICENSEE's account. PAGE 6 * Confidential Portions Omitted and Filed Separately with the Commission. 7 6.5 Shipment and Delivery. The Licensed Products shall be delivered F.O.B. Japan, with shipment at LICENSEE's direction and expense. Orders may be delivered by NINTENDO in partial shipments, each directed to no more than two (2) destinations designated by LICENSEE in the Territory. Title to the Licensed Products shall vest in accordance with the terms of the applicable letter of credit. 7. MARKETING, SALE AND RENTAL OF THE LICENSED PRODUCTS 7.1 Marketing Materials. LICENSEE agrees that any Marketing Materials shall all be of high quality and shall comply with the Guidelines. 7.2 Submission of Proposed Marketing Materials. Prior to actual use or distribution, LICENSEE shall submit to NINTENDO for review and evaluation initial samples of all Marketing Materials. NINTENDO shall, within fifteen (15) business days of receipt of such samples, approve or disapprove of the quality of such samples. If any of the samples are disapproved as to quality, NINTENDO shall specify the reasons for such disapproval and state what corrections and/or improvements are necessary. After making the necessary corrections and/or improvements to the disapproved samples, LICENSEE may resubmit new samples for approval by NINTENDO as to quality. No Marketing Materials shall be distributed or utilized by LICENSEE without obtaining prior written approval as to quality by NINTENDO. NINTENDO shall not unreasonably withhold or delay its approval of the proposed Marketing Materials. NINTENDO reserves the right to disapprove Marketing Materials that include non-licensed accessories. 7.3 Warranty and Repair. With respect to the Licensed Product, LICENSEE shall provide to the original consumer a minimum ninety (90) day limited warranty, comparable to that offered by NINTENDO. LICENSEE shall also provide to the original consumer, either directly or indirectly through authorized service centers, reasonably accessible product service, including out-of-warranty service for a period of three (3) years following sale of the Licensed Product. In the event LICENSEE is unable to obtain sufficient quantities of repair parts for service obligations from defective and/or product returns, NINTENDO shall cooperate in providing reasonable quantities of repair parts to LICENSEE at its standard cost. 7.4 Business Facilities; Sales of Game Cartridges. LICENSEE agrees to develop, maintain and utilize during the Term: (a) suitable office facilities within the Territory, adequately staffed to enable LICENSEE to fulfill all responsibilities under this Agreement; (b) necessary warehouse, distribution, marketing, sales, collection and credit operations to facilitate proper handling of the Licensed Product; and, (c) customer service and game counseling support, including telephone service, to adequately support the Licensed Product. 7.5 Defects; Recall. In the event of a material programming defect in the Licensed Product, which defect in the reasonable judgment of NINTENDO would significantly impair the ability of a consumer to play the Licensed Product, NINTENDO may require the LICENSEE to recall the Licensed Product and undertake suitable repairs or replacements prior to sale. 7.6 Rental. In the event LICENSEE elects to engage in the commercial rental of the Licensed Products within the Territory on such terms and conditions as LICENSEE shall determine, LICENSEE shall secure appropriate authorizations and/or assignments from the author(s) of the copyrightable elements in the computer programs for the Licensed Product. LICENSEE shall clearly provide notice on the Artwork for each Licensed Product of any rental right or reservation thereof. 7.7 Nintendo Promotional Materials, Publications and Events. At its option, NINTENDO may: (a) insert in the packaging for the Licensed Product promotional materials concerning Nintendo Power magazine; (b) utilize screen shots, package art and related art and information regarding the Licensed Product in Nintendo Power, Nintendo Power Source (NINTENDO's on-line version of Nintendo Power) or other media PAGE 7 8 or marketing programs which promote NINTENDO products; and (c) exercise public performance rights of the Licensed Product, related trademarks and art in NINTENDO sponsored contests, tours and events which generally promote NINTENDO products, provided that no other third party approvals are required. 7.8 NINTENDO Gateway System. LICENSEE acknowledges that NINTENDO operates the Nintendo Gateway System in various non-coin activated commercial settings including, but not limited to, commercial airlines, cruise ships and hotels, whereby customers may be charged on a per use basis to play various Games on an adapted Nintendo 64 and/or Super Nintendo Entertainment System. The purpose of the Gateway System is to promote and increase demand for Nintendo 64 software in general. LICENSEE acknowledges that NINTENDO selects high quality Nintendo 64 software for possible participation in the program and may indentify one or more of LICENSEE's Games for possible adaptation and participation. Should NINTENDO identify one of LICENSEE's Games for possible participation, LICENSEE hereby agrees to conduct a good faith discussion with NINTENDO about the inclusion and adaptation of such Game for the Nintendo 64 Gateway System. 8. LICENSEE'S COPYRIGHTS AND TRADEMARKS 8.1 Copyright and Trademark Warranties. LICENSEE represents and warrants that, throughout the Territory, LICENSEE is either: (a) the sole owner of all right, title and interest in and to the trademarks, copyrights and Artwork used on or in association with the Licensed Products; or (b) the holder of sufficient rights to the trademarks, copyrights and Artwork which have been licensed from a third party for use in the Licensed Product. 8.2 Licensee's Indemnification. LICENSEE shall indemnify and hold NINTENDO and NCL harmless from any claims, losses, liabilities, damages, expenses and costs, including, without limitation, reasonable attorneys' fees and costs, which result from: (a) a breach of any of the representations or warranties provided by LICENSEE herein; (b) any claim of infringement of any third party's intellectual property rights with respect to the Licensed Product, excluding claims based solely upon NINTENDO's trademarks, copyrights and patents; or, (c) any claim of bodily injury (including death) or property damage arising out of, or in connection with, the development, sale and/or use of any of the Licensed Products. NINTENDO shall give LICENSEE prompt written notice of the assertion of any such claim and provided, further, that LICENSEE shall have the right to select counsel and control the defense and/or settlement of any such claim, subject to the right of NINTENDO to participate in any such action or proceeding at its own expense with counsel of its own choice. 8.3 Insurance. LICENSEE shall, at its own expense, obtain a policy of general liability insurance that includes product liability coverage by a recognized insurance company. Such policy of insurance shall be in an amount of not less than Three Million Dollars ($3,000,000 US) and shall provide for adequate protection against any suits, claims, loss or damage or any alleged intellectual property infringements by the Licensed Products. Such policy shall name NINTENDO as an additional insured and may not be canceled without thirty (30) days' prior written notice to NINTENDO. A Certificate of Insurance shall be provided to NINTENDO's Licensing Department within thirty (30) days of the Effective Date. If LICENSEE fails to maintain such insurance during the Term, NINTENDO may secure and maintain such insurance at LICENSEE's expense. 9. LIMITATION OF LIABILITY 9.1 Disclaimer of Licensed Intellectual Properties. NINTENDO makes no representations, guarantees or warranties concerning the scope or validity of the Licensed Intellectual Properties and does not warrant that the sale of the Licensed Products by LICENSEE will not infringe upon the patent, trade secret, copyright, mask work or trademark rights of another in the Territory. LICENSEE HEREBY ASSUMES THE PAGE 8 9 RISK OF INFRINGEMENT. 9.2 Warranty Disclaimer. NINTENDO DISCLAIMS ANY AND ALL WARRANTIES OF THE LICENSED PRODUCTS AS BETWEEN NINTENDO AND LICENSEE AND AS BETWEEN NINTENDO AND ANY THIRD PARTY PURCHASERS FROM LICENSEE. LICENSEE PURCHASES AND ACCEPTS ALL LICENSED PRODUCTS FROM NINTENDO ON AN "AS IS" AND "WHERE IS" BASIS AND WITHOUT ANY WARRANTIES, EXPRESS OR IMPLIED. WITH RESPECT TO THE LICENSED PRODUCTS, NINTENDO DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A GENERAL OR PARTICULAR PURPOSE AND SHALL IN NO EVENT BE LIABLE FOR ANY INCIDENTAL AND/OR CONSEQUENTIAL DAMAGES OF LICENSEE, ITS RETAILERS OR CUSTOMERS. LICENSEE SHALL BE SOLELY RESPONSIBLE FOR PROVIDING WARRANTY AND REPAIR/REPLACEMENT SERVICES FOR ANY DEFECTIVE LICENSED PRODUCTS. NOTWITHSTANDING THE CONDITIONS SET FORTH IN THIS PARAGRAPH, NINTENDO WILL USE ITS BEST EFFORTS TO RESOLVE ANY CATASTROPHIC DEFECT IN THE LICENSED PRODUCTS PURCHASED BY LICENSEE FROM NINTENDO. A "CATASTROPHIC DEFECT" IS DEFINED AS A MANUFACTURING DEFECT RATE OF FIVE PERCENT (5%) OR GREATER IN ANY SHIPMENT OF LICENSED PRODUCTS TO LICENSEE. 10. INFRINGEMENT OF LICENSED INTELLECTUAL PROPERTIES AND LICENSEE'S TRADEMARKS AND COPYRIGHTS 10.1 Reporting. In the event (a) any claim is asserted against either party alleging that any of the Licensed Intellectual Properties or a Licensed Product constitutes an infringement of another's rights; or, (b) either party discovers that any of the Licensed Intellectual Properties or LICENSEE's copyrights or trademarks used in connection with the Licensed Products have been infringed by a third party, then the party with such knowledge shall promptly notify the other party. 10.2 Licensed Intellectual Properties. NINTENDO shall have the sole right, at its expense, to commence and/or defend a legal action or negotiate a settlement relating to any alleged infringement by the Licensed Intellectual Properties. LICENSEE agrees to give reasonable assistance in any such legal action, but at no expense to it. NINTENDO shall be entitled to all of the recovery or damages collected as a result of such legal action or negotiated settlement. In the event of a legal action against LICENSEE alleging an infringement by the Licensed Intellectual Properties as incorporated into LICENSEE's Licensed Products which NINTENDO affirmatively elects in writing not to defend, LICENSEE may defend or settle such legal action, at its option and expense. NINTENDO agrees to provide reasonable assistance in defending any such legal action. LICENSEE agrees to keep NINTENDO fully informed with respect to developments in any such legal action and to provide NINTENDO reasonable notice of the terms of any proposed settlement and to consider any comments by NINTENDO before settlement is made. 10.3 Infringement of Licensed Products. LICENSEE shall take reasonable steps to abate any infringement of LICENSEE's copyrights and trademarks in the Licensed Products. LICENSEE shall also take all reasonable and necessary steps, including legal action, to defend against any alleged infringement caused by any of LICENSEE's software programs developed under this Agreement or any Artwork, title or designation used in conjunction with any of the Licensed Products. NINTENDO shall give to LICENSEE reasonable assistance and cooperation in any such legal action, but at no expense to NINTENDO. 11. TERM AND TERMINATION 11.1 Default or Breach. In the event that either party is in default or commits a breach of this Agreement which is not cured within thirty (30) days after written notice thereof, then this Agreement shall automatically terminate on the date specified in such notice. PAGE 9 10 11.2 Bankruptcy/Insolvency. At NINTENDO's option, this Agreement can be terminated immediately and without notice in the event that LICENSEE: (a) makes an assignment for the benefit of creditors; (b) becomes insolvent; (c) files a voluntary petition for bankruptcy; (d) acquiesces to any involuntary bankruptcy petition; (e) is adjudicated as a bankrupt; or (f) ceases to do business. 11.3 Termination Other Than by Breach. Upon the expiration of this Agreement or its termination other than by LICENSEE's breach, LICENSEE shall have a period of one hundred sixty (160) days to sell any unsold Licensed Products. LICENSEE shall destroy all Licensed Products in LICENSEE's control following expiration of such sell-off period, within ten (10) days. 11.4 Termination by LICENSEE's Breach. If this Agreement is terminated by NINTENDO as a result of a breach of its terms and conditions by LICENSEE, LICENSEE shall immediately cease all distribution, promotion or sale of any Licensed Products. LICENSEE shall have a period of one hundred sixty (160) days to sell any unsold Licensed Products. All Licensed Products in LICENSEE's control following expiration of such sell-off period shall be destroyed by LICENSEE within ten (10) days. 11.5 Licensed Intellectual Property Rights. Upon expiration and/or termination of this Agreement, LICENSEE will cease all use of the Licensed Intellectual Properties for any purpose, and will not disclose to third parties any Licensed Proprietary Information. LICENSEE shall also return to NINTENDO all writings, drawings, models, data and other materials and things in LICENSEE's possession or in the possession or any past or present employee, agent or contractor receiving the information through LICENSEE, which constitute or relate to or disclose any Licensed Proprietary Information without making copies or otherwise retaining any such information. 11.6 Termination by Nintendo's Breach. If this Agreement is terminated by LICENSEE as a result of a breach of its terms or conditions by NINTENDO, LICENSEE may continue to sell the Licensed Products in the Territory until the expiration of the Term, at which time the provisions herein relating to termination other than by default of LICENSEE shall apply to any unsold Licensed Products. 12. GENERAL PROVISIONS 12.1 Nonassignability/Sublicensing. This Agreement is personal to Licensee and may not be sold, assigned, delegated, sublicensed or otherwise transferred or encumbered, in whole or in part, including without limitation, by operation of law, without the prior written consent of Nintendo, which consent may be withheld by Nintendo in its sole discretion. For purposes of determining whether an assignment of this agreement by Licensee (but not by Licensor) has occurred under this Section 12.1, a merger of Licensee into another business entity or a merger of another business entity into Licensee; the sale or transfer of more than twenty percent (20%) of the stock of Licensee, Licensee's assets, or ownership interest or control of Licensee; or, the granting of any security interest or other encumbrance in this Agreement or any rights arising under this Agreement, shall be deemed an assignment requiring notice to, and the prior written consent of, Nintendo, which consent may be withheld by Nintendo in its sole discretion. Upon any attempted sale, assignment, delegation, sublicense or other transfer or encumbrance in violation of the preceding sentences, this Agreement shall be deemed null and void, and of no effect, and in such event, notwithstanding anything in this Agreement to the contrary, Nintendo shall have the immediate, unqualified right to terminate this Agreement in addition to all other rights and remedies it may obtain due to Licensee's breach. This Agreement may be assigned by Licensor upon written notice to Licensee but without any consent, provided, however, that any such assignment shall not release the Licensor from its obligations to the Licensee under this Agreement. Subject to such restriction and to the restriction against assignment provided above, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. 12.2 Force Majeure. Neither party shall be liable for any breach of this Agreement occasioned by any cause beyond the reasonable control of such party, including governmental action, war, riot or civil PAGE 10 11 commotion, fire, natural disaster, labor disputes, restraints affecting shipment or credit, delay of carriers, inadequate supply of suitable materials, or any other cause which could not with reasonable diligence be controlled or prevented by the parties. In the event of material shortages, including shortages of microcomputer chips necessary for production of the Licensed Products, NINTENDO reserves the right to allocate essential materials among itself and its licensees. 12.3 Waiver; Severability; Integration. The failure of any party to enforce any provision of this Agreement shall not be construed to be a waiver of such provision or of the right of such party to thereafter enforce such provision. In the event that any term, clause or provision of this Agreement shall be construed to be or adjudged invalid, void or unenforceable, such term, clause or provision shall be construed as severed from this Agreement, and the remaining terms, clauses and provisions shall remain in effect. This Agreement constitutes the entire agreement between the parties relating to the subject matter hereof, provided, however, that the Other Agreements shall remain in effect, except as may be modified by specific reference herein. All prior negotiations, representations, agreements and understandings are merged into, extinguished by and completely expressed by this Agreement. Any amendment to this Agreement shall be in writing, signed by both parties. 12.4 Governing Law; Venue. This Agreement shall be governed by, subject to and construed under the laws of the State of Washington. Any legal actions prosecuted or instituted by NINTENDO or by LICENSEE under this Agreement, with respect to any matters arising under or growing out of this Agreement, shall only be brought in a court of competent jurisdiction in King County, Washington and each party hereby consents to the jurisdiction and venue of such courts for such purposes. 12.5 Equitable Relief. LICENSEE acknowledges that in the event of its breach of this Agreement, no adequate remedy at law may be available to NINTENDO and that NINTENDO shall be entitled to seek injunctive or other equitable relief in addition to any relief available at law. 12.6 Attorneys' Fees. In the event it is necessary for either party of this Agreement to undertake legal action to enforce any of the terms, conditions or rights contained herein, or to defend any such action, then the prevailing party in any such action shall be entitled to recover from the other party all reasonable attorneys' fees, costs and expenses relating to such legal action. 12.7 Notices. All notices required or permitted under this Agreement shall be sufficiently given when: (a) personally served or delivered; (b) deposited, postage prepaid, with a guaranteed air courier service, addressed as stated herein, or to such other person or address either party may designate in a notice; or, (c) by facsimile, with an original sent concurrently by first class U.S. mail. Notice shall be deemed effective upon the earlier of actual receipt or two (2) business days after transmittal. 12.8 Counterparts; Signature by Facsimile. This Agreement may be signed in counterparts, which shall together constitute a complete Agreement. A signature transmitted by facsimile shall be considered an original for purpose of this Agreement. 12.9 Time is of the Essence. Time if of the essence with regard to this Agreement and the performance of the parties' obligations hereunder. PAGE 11 12 IN WITNESS WHEREOF, NINTENDO and LICENSEE have entered into this Agreement on the dates set forth below. NINTENDO: LICENSEE: NINTENDO OF AMERICA INC. BAY AREA MULTIMEDIA, INC. By: /s/ JOHN BAUER By: ------------------------------------------ ------------------------------ Its: Executive Vice President, Administration Its: ----------------------------- Date: 2/18/00 Date: ---------------------------------------- ---------------------------- PAGE 12 13 IN WITNESS WHEREOF, NINTENDO and LICENSEE have entered into this Agreement on the dates set forth below. NINTENDO: LICENSEE: NINTENDO OF AMERICA INC. BAY AREA MULTIMEDIA, INC. By: By: /s/ RAYMOND C. MUSCI ---------------------------- ----------------------------- Its: Executive Vice President, Its: President Administration ---------------------------- Date: Date: [Illegible] -------------------------- ---------------------------- PAGE 12 14 SCHEDULE 1 NINTENDO OF AMERICA INC. PRICE SHEET N64 LICENSED GAME PAKS
Memory Capacity NOA Price - ----------------------------------------------------------- 32 Megabit $ [*] 32 Megabit + 4K bit E. ROM $ [*] 32 Megabit + 16K bit E. ROM $ [*] 32 Megabit + 256K SRAM + Battery $ [*] 64 Megabit $ [*] 64 Megabit + 4K bit E. ROM $ [*] 64 Megabit + 16K bit E. ROM $ [*] 64 Megabit + 256K SRAM + Battery $ [*] 96 Megabit $ [*] 96 Megabit + 4K bit E. ROM $ [*] 96 Megabit + 16K bit E. ROM $ [*] 96 Megabit + 256K SRAM + Battery $ [*] 128 Megabit $ [*] 128 Megabit + 4K bit E. ROM $ [*] 128 Megabit + 16K bit E. ROM $ [*] 128 Megabit + 256K SRAM + Battery $ [*] 256 Megabit $ [*]
PAGE 13 * Confidential Portions Omitted and Filed Separately with the Commission. 15 256 Megabit + 4K bit E. ROM $[*] 256 Megabit + 16K bit E. ROM $[*] 256 Megabit + 256K SRAM + Battery $[*] Price includes an instruction manual up to 40 pages. There will be an extra charge for manuals larger than 40 pages (including the front and back cover). EXTRA PACKAGING (Must be ordered with product on a separate PO) Game Pak Box $[*] Instruction Manual $[*] (under 40 pages) Instruction Manual $[*] (over 40 pages) Game Pak Label $[*] Game Pak Poster $[*] Warranty Card $[*] Inner Carton $[*] Master Carton $[*] ALL PRICES ARE SUBJECT TO CHANGE WITHOUT NOTICE Revised 7/15/98 PAGE 14 * Confidential Portions Omitted and Filed Separately with the Commission. EX-10.32 42 v72115orex10-32.txt EXHIBIT 10.32 1 EXHIBIT 10.32 CONFIDENTIAL LICENSE AGREEMENT FOR GAME BOY ADVANCE (Western Hemisphere) THIS LICENSE AGREEMENT ("Agreement") is entered into between NINTENDO OF AMERICA INC. ("NOA"), at 4820 150th Avenue N.E., Redmond, WA 98052 Attn: General Counsel (Fax: 425-882-3585) and BAM Entertainment, Inc., ("LICENSEE") at 333 West Santa Clara Street, Suite 930, San Jose, CA 95113, Attn: Ray Musci (Fax: (408) 298-9600). NOA and LICENSEE agree as follows: 1. RECITALS 1.1 NOA markets and sells advanced design, high-quality video game systems, including the GAME BOY(R) ADVANCE system. 1.2 LICENSEE desires a license to use highly proprietary programming specifications, development tools, trademarks and other valuable intellectual property rights of NOA and its parent company, Nintendo Co., Ltd. (collectively "Nintendo"), to develop, have manufactured, advertise, market and sell video game software for play on the GAME BOY ADVANCE system. 1.3 NOA is willing to grant a license to LICENSEE on the terms and conditions set forth in this Agreement. 2. DEFINITIONS 2.1 "Artwork" means the design specifications for the Game Cartridge label and Printed Materials in the format specified by NOA in the Guidelines. 2.2 "Development Tools" means the development kits, programming tools, emulators, and other materials that may be used in the development of Games under this Agreement. 2.3 "Effective Date" means the last date on which all parties shall have signed this Agreement. 2.4 "Finished Product(s)" means the fully assembled and shrink-wrapped Licensed Products, each including a Game Cartridge, Game Cartridge label and Printed Materials. 2.5 "Game Cartridges(s)" means custom cartridges specifically manufactured under the terms of this Agreement for play on the GAME BOY ADVANCE system, incorporating semiconductor components in which a Game has been stored. 2.6 "Game(s)" means interactive video game programs (including source and object/binary code) developed for play on the GAME BOY ADVANCE system. 2.7 "Guidelines" means the current version or any future revision of the "Game Boy Packaging Guidelines", "Nintendo Trademark Guidelines", "Game Boy Advance Development Manual" and related guidelines. 2.8 "Independent Contractor" means any individual or entity that is not an employee of LICENSEE, including any independent programmer, consultant, contractor, board member or advisor. 2.9 "Intellectual Property Rights" means individually, collectively or in any combination, Proprietary Rights owned, licensed or otherwise held by Nintendo that are associated with the development, manufacturing, advertising, marketing or sale of the Licensed Products, including, without limitation, (a) registered and unregistered trademarks and trademark applications used in connection with video games for play on the GAME BOY ADVANCE system including "Nintendo(R)", "GAME BOY(R) ADVANCE," "AGB" and the "Official Nintendo Seal of Quality(R)", (b) select trade dress associated with the PAGE 1 2 GAME BOY ADVANCE system and licensed video games for play thereon, (c) Proprietary Rights in the Security Technology incorporated into the Game Cartridges, (d) rights in the Development Tools for use in developing the Games, (e) patents or design registrations associated with the Game Cartridges, (f) copyrights in the Guidelines, and (g) other Proprietary Rights of Nintendo in Confidential Information. 2.10 "Licensed Products" means (a) Finished Products, or (b) Stripped Products when fully assembled and shrink-wrapped with the Printed Materials. 2.11 "Marketing Materials" means marketing, advertising or promotional materials developed by or for LICENSEE (or subject to LICENSEE's approval) to promote the sale of the Licensed Products, including, but not limited to, television, radio and on-line advertising, point-of-sale materials (e.g. posters, counter-cards), package advertising and print media or materials. 2.12 "NDA" means the non-disclosure agreement providing for the protection of Confidential Information related to the GAME BOY ADVANCE system previously entered into between NOA and LICENSEE. 2.13 "Notice" means any notice permitted or required under this Agreement. All notices shall be sufficiently given when (a) personally served or delivered, or (b) transmitted by facsimile, with an original sent concurrently by first class U.S. mail, or (c) deposited, postage prepaid, with a guaranteed air courier service, in each case addressed as stated herein, or addressed to such other person or address either party may designate in a Notice. Notice shall be deemed effective upon the earlier of actual receipt or two (2) business days after transmittal. 2.14 "Price Schedule" means the current version or any future revision of NOA's schedule of purchase prices and minimum order quantities for the Licensed Products. 2.15 "Printed Materials" means the box, user instruction booklet, poster, warranty card and LICENSEE inserts incorporating the Artwork, together with a precautions booklet as specified by NOA. 2.16 "Proprietary Rights" means any rights or applications for rights owned, licensed or otherwise held in patents, trademarks, service marks, copyrights, mask works, trade secrets, trade dress, moral rights and publicity rights, together with all inventions, discoveries, ideas, technology, know-how, data, information, processes, formulas, drawings and designs, licenses, computer programs, software source code and object code, and all amendments, modifications, and improvements thereto for which such patent, trademark, service mark, copyright, mask work, trade secrets, trade dress, moral rights or publicity rights may exist or may be sought and obtained in the future. 2.17 "Reverse Engineer(ing)" means, without limitation, (a) the x-ray, electronic scanning or physical or chemical stripping of semiconductor components, (b) the disassembly, decompilation, decryption or simulation of object code or executable code, or (c) any other technique designed to extract source code or facilitate the duplication of a program or product. 2.18 "Security Technology" means, without limitation, any security signature, bios, data scrambling, password, hardware security apparatus, watermark, hologram, copyright management information system or any feature which facilitates or limits compatibility with other hardware or software outside of the Territory or on a different video game system. 2.19 "Stripped Product(s)" means the Game Cartridges with Game Cartridge labels affixed. 2.20 "Term" means three (3) years from the Effective Date. 2.21 "Territory" means all countries within the Western Hemisphere and their respective territories and possessions. PAGE 2 3 3. GRANT OF LICENSE; LICENSEE RESTRICTIONS 3.1 Limited License Grant. For the Term and for the Territory, NOA grants to LICENSEE a nonexclusive, nontransferable, limited license to use the Intellectual Property Rights to develop Games for manufacture, advertising, marketing and sale as Licensed Products, subject to the terms and conditions of this Agreement. Except as permitted under a separate written authorization from Nintendo, LICENSEE shall not use the Intellectual Property Rights for any other purpose. 3.2 LICENSEE Acknowledgement. LICENSEE acknowledges (a) the value of the Intellectual Property Rights, (b) the right, title, and interest of Nintendo in and to the Intellectual Property Rights, and (c) the right, title and interest of Nintendo in and to the Proprietary Rights associated with all aspects of the GAME BOY ADVANCE system. LICENSEE recognizes that the Games, Game Cartridges and Licensed Products will embody valuable rights of Nintendo and Nintendo's licensors. LICENSEE represents and warrants that it will not undertake any act or thing which in any way impairs or is intended to impair any part of the right, title, interest or goodwill of Nintendo in the Intellectual Property Rights. LICENSEE's use of the Intellectual Property Rights shall not create any right, title or interest of LICENSEE therein. 3.3 LICENSEE Restrictions and Prohibitions. LICENSEE represents and warrants that it will not at any time, directly or indirectly, do or cause to be done any of the following: (a) grant access to, distribute, transmit or broadcast a Game by electronic means or by any other means known or hereafter devised, including, without limitation, by wireless, cable, fiber optic, telephone lines, microwave, radiowave, computer or other device network; provided, however, that limited transmissions may be made for the sole purpose of facilitating development under the terms of this Agreement, but no right of retransmission shall attach to any such authorized transmission and, reasonable security measures, customary within the high technology industry, shall be utilized to reduce the risk of unauthorized interception or retransmission of any such authorized transmission, (b) authorize or permit any online activities involving a Game, including, without limitation, multiplayer, peer-to-peer or online play, (c) modify, install or operate a Game on any server or computing device for the purpose of or resulting in the rental, lease, loan or other grant of remote access to the Game, (d) emulate, interoperate, interface or link a Game for operation or use with any hardware or software platform, accessory, computer language, computer environment, chip instruction set, consumer electronics device or device other than the GAME BOY ADVANCE system or the Development Tools, (e) embed, incorporate, or store a Game in any media or format except the cartridge format utilized by the GAME BOY ADVANCE system, except as may be necessary as a part of the Game development process under this Agreement, (f) design, implement or undertake any process, procedure, program or act designed to circumvent the Security Technology, (g) utilize the Intellectual Property Rights to design or develop any interactive video game program, except as authorized under this Agreement, (h) manufacture or reproduce a Game developed under this Agreement, except through Nintendo, or (i) Reverse Engineer or assist in the Reverse Engineering of all or any part of the GAME BOY ADVANCE system, including the hardware or software (whether embedded or otherwise), or the Security Technology. PAGE 3 4 3.4 Development Tools. Nintendo may lease, loan or sell Development Tools to LICENSEE to assist in the development of Games under this Agreement. Ownership and use of any Development Tools provided to LICENSEE by Nintendo shall be subject to the terms of this Agreement. LICENSEE acknowledges the exclusive interest of Nintendo in and to the Proprietary Rights associated with the Development Tools. LICENSEE's use of the Development Tools shall not create any right, title or interest of LICENSEE therein. LICENSEE shall not, directly or indirectly, (a) use the Development Tools for any purpose except the design and development of Games under this Agreement, (b) reproduce or create derivatives of the Development Tools, except in association with the development of Games under this Agreement, (c) Reverse Engineer the Development Tools, or (d) sell, lease, assign, lend, license, encumber or otherwise transfer the Development Tools. Any tools developed or derived by LICENSEE as a result of a study of the performance, design or operation of the Development Tools shall be considered derivative works of the Intellectual Property Rights, but may be retained and utilized by LICENSEE in connection with this Agreement. In no event shall LICENSEE (i) seek, claim or file for any patent, copyright or other Proprietary Right with regard to any such derivative work, (ii) make available any such derivative work to any third party, or (iii) use any such derivative work except in connection with the design and development of Games under this Agreement. 4. SUBMISSION OF GAME AND ARTWORK FOR APPROVAL 4.1 Development and Sale of the Games. LICENSEE may develop Games and have manufactured, advertise, market and sell Licensed Products for play on the GAME BOY ADVANCE system only in accordance with this Agreement. 4.2 Third Party Developers. LICENSEE shall not disclose the Confidential Information, the Guidelines or the Intellectual Property Rights to any Independent Contractor, nor permit any Independent Contractor to perform or assist in development work for a Game, unless and until such Independent Contractor has been approved by NOA and has executed a written confidentiality agreement with NOA relating to the GAME BOY ADVANCE system. 4.3 Delivery of Completed Game. Upon completion of a Game, LICENSEE shall deliver a prototype of the Game to NOA in a format specified in the Guidelines, together with written user instructions, a complete description of any security holes, backdoors, time bombs, cheats, "easter eggs" or other hidden features or characters in the Game and a complete screen text script. NOA shall promptly evaluate the Game with regard to (a) its technical compatibility with and error-free operation on the GAME BOY ADVANCE system, and (b) its compliance with the game content guidelines of the Entertainment Software Ratings Board ("ESRB"). LICENSEE shall provide NOA with a certificate of a rating for the Game from the ESRB other than "AO" or "ADULTS ONLY". 4.4 Approval of Completed Game. NOA shall, within a reasonable period of time after receipt, approve or disapprove each submitted Game. If a Game is disapproved, NOA shall specify in writing the reasons for such disapproval and state what corrections or improvements are necessary. After making the necessary corrections or improvements, LICENSEE shall submit a revised Game to NOA for approval. NOA shall not unreasonably withhold or delay its approval of any Game. The approval of a Game by NOA shall not relieve LICENSEE of its sole responsibility for the development, quality and operation of the Game or in any way create any warranty for a Game or a Licensed Product by NOA. 4.5 Submission of Artwork. Upon submission of a completed Game to NOA, LICENSEE shall prepare and submit to NOA the Artwork for the proposed Licensed Product. Within ten (10) business days of receipt, NOA shall approve or disapprove the Artwork. If any Artwork is disapproved, NOA shall specify in writing the reasons for such disapproval and state what corrections or improvements are necessary. After making the necessary corrections or improvements, LICENSEE shall submit revised Artwork to NOA for approval. NOA shall not unreasonably withhold or delay its approval of any Artwork. The approval of the Artwork by NOA shall not relieve LICENSEE of its sole responsibility for the development and quality of the Artwork or in any way create any warranty for the Artwork or the Licensed product by NOA. PAGE 4 5 4.6 Artwork for Stripped Product. If LICENSEE submits an order for Stripped Product, all Artwork shall be submitted to NOA in advance of NOA's acceptance of the order and no production of Printed Materials shall occur until such Artwork has been approved by NOA under Section 4.5 herein. 5. ORDER PROCESS, PURCHASE PRICE, PAYMENT AND DELIVERY 5.1 Submission of Order by LICENSEE. LICENSEE may at any time submit written purchase orders to NOA for any approved Licensed Product title. The purchase order shall specify whether it is for Finished Product or Stripped Product. The terms and conditions of this Agreement shall control over any contrary terms of such purchase order or any other written documents submitted by LICENSEE. All orders are subject to acceptance by NOA in Redmond, WA. 5.2 Purchase Price and Minimum Order Quantities. The purchase price and minimum order quantities for the Licensed Products shall be set forth in NOA's then current Price Schedule. The purchase price includes the cost of manufacturing together with a royalty for the use of the Intellectual Property Rights. No taxes, duties, import fees and other tariffs related to the development, manufacture, import, marketing or sale of the Licensed Products are included in the purchase price and all such taxes are the responsibility of LICENSEE (except for taxes imposed on NOA's income). The Price Schedule is subject to change by NOA at any time without Notice. 5.3 Payment. Upon placement of an order with NOA, LICENSEE shall pay the full purchase price to NOA either (a) by placement of an irrevocable letter of credit in favor of NOA and payable at sight, issued by a bank acceptable to NOA and confirmed, if requested by NOA, at LICENSEE's expense, or (b) in cash, by wire transfer to NOA's designated account. All associated banking charges shall be for LICENSEE's account. 5.4 Shipment and Delivery. The Licensed Products shall be delivered F.O.B. Japan or such other delivery point specified by NOA, with shipment at LICENSEE's direction and expense. Orders may be delivered by NOA in partial shipments, each directed to not more than two (2) destinations designated by LICENSEE within the Territory. Title to the Licensed Products shall vest in accordance with the terms of the applicable letter of credit or, in the absence thereof, at the point of delivery. 6. MANUFACTURE OF THE LICENSED PRODUCT 6.1 Manufacturing. Nintendo Co., Ltd. shall be the exclusive source for the manufacture of the Game Cartridges, with responsibility for all aspects of the manufacturing process, including the selection of the locations and specifications for any manufacturing facilities, determination of materials and processes, appointment of suppliers and subcontractors and management of all work-in-progress. 6.2 Manufacture of the Licensed Products. Upon acceptance by NOA of a purchase order for an approved Licensed Product title and payment as provided for under Section 5.3 herein, NOA (through Nintendo Co., Inc., and/or its subcontractors), will arrange for the manufacture of Finished Product or Stripped Product, as specified in LICENSEE's purchase order. 6.3 Security Features. The final release version of the Game, Game Cartridges and Printed Materials shall include such Security Technology as Nintendo, in its sole discretion, may deem necessary or appropriate. 6.4 Production of Stripped Product Printed Materials. For Stripped Product, LICENSEE shall arrange and pay for the production of the Printed Materials using the Artwork. Upon receipt of an order of Stripped Product, LICENSEE shall assemble the Game Cartridges and Printed Materials into the Licensed Products. Licensed Products may be sold or otherwise distributed by LICENSEE only in fully assembled and shrink-wrapped condition. 6.5 Prior Approval of LICENSEE's Independent Contractor. Prior to the placement of a purchase order for Stripped Product, LICENSEE shall obtain NOA's approval of any independent PAGE 5 6 Contractors selected to perform the production and assembly operations. LICENSEE shall provide NOA with the names, addresses and all business documentation reasonably requested by NOA for such Independent Contractors. NOA may, prior to approval and at reasonable intervals thereafter, (a) require submission of additional business or financial information regarding the Independent Contractors, (b) inspect the facilities of the Independent Contractors, and (c) be present to supervise any work on the Licensed Products to be done by the Independent Contractors. If at any time NOA deems an Independent Contractor to be unable to meet quality, security or performance standards reasonably established by NOA, NOA may refuse to grant its approval or withdraw its approval upon Notice to LICENSEE. LICENSEE may not proceed with the production of the Printed Materials or assembly of the Licensed Product until NOA's concerns have been resolved to its satisfaction or until LICENSEE has selected and received NOA's approval of another Independent Contractor. 6.6 NOA Inserts for Stripped Product. NOA, at its option, may provide LICENSEE with NOA produced promotional materials (as provided for at Section 7.7(a) herein), which LICENSEE agrees to include in the assembly of the Licensed Products. 6.7 Sample Printed Materials and Stripped Product. Within a reasonable period of time after LICENSEE's assembly of the initial order for a Stripped Product title, LICENSEE shall provide NOA with (a) one (1) sample of the fully assembled shrink-wrapped Licensed Product, and (b) fifty (50) samples of LICENSEE produced Printed Materials for such Licensed Product. 6.8 Retention of Sample Licensed Products by Nintendo. Nintendo may, at its own expense, manufacture reasonable quantities of the Game Cartridges or the Licensed Products to be used for archival purposes, legal proceedings against infringers of the Intellectual Property Rights or for other lawful purposes. 7. MARKETING AND ADVERTISING 7.1 Approval of Marketing Materials. LICENSEE represents and warrants that the Marketing Materials shall (a) be of high quality and comply with the Guidelines, (b) comply with all voluntary ESRB advertising, marketing or merchandising guidelines, and (c) comply with all applicable laws and regulations in those jurisdictions in the Territory where they will be used or distributed. Prior to actual use or distribution, LICENSEE shall submit to NOA for review samples of all proposed Marketing Materials. NOA shall, within ten (10) business days of receipt, approve or disapprove the quality of such samples. If any of the samples are disapproved, NOA shall specify the reasons for such disapproval and state what corrections and/or improvements are necessary. After making the necessary corrections and/or improvements, LICENSEE shall submit revised samples for approval by NOA. No Marketing Materials shall be used or distributed by LICENSEE without NOA's prior written approval. NOA shall not unreasonably withhold or delay its approval of any proposed Marketing Materials. 7.2 No Bundling. LICENSEE shall not market or distribute any Finished Product or Stripped Product that has been bundled with (a) any peripheral designed for use with the GAME BOY ADVANCE system which has not been licensed or approved in writing by NOA, or (b) any other product or service where NOA's sponsorship, association, approval or endorsement might be suggested by the bundling of the products or services. 7.3 Warranty and Repair. LICENSEE shall provide the original consumer with a minimum ninety (90) day limited warranty on all Licensed Products. LICENSEE shall also provide reasonable product service, including out-of-warranty service, for all Licensed Products. 7.4 Business Facilities. LICENSEE agrees to develop and maintain (a) suitable office facilities within the United States, adequately staffed to enable LICENSEE to fulfill all responsibilities under this Agreement, (b) necessary warehouse, distribution, marketing, sales, collection and credit operations to facilitate proper handling of the Licensed Products, and (c) customer service and game counseling, including telephone service, to adequately support the Licensed Products. PAGE 6 7 7.5 No Sales Outside the Territory. LICENSEE represents and warrants that it shall not market, sell, offer to sell, import or distribute the Licensed Products outside the Territory, or within the Territory when with actual or constructive knowledge that a subsequent destination of the Licensed Product is outside the Territory. 7.6 Defects and Recall. In the event of a material programming defect in a Licensed Product that would, in NOA's reasonable judgment, significantly impair the ability of a consumer to play the Game, NOA may, after consultation with LICENSEE, require the LICENSEE to recall the Licensed Product and undertake suitable repairs or replacements. 7.7 NOA Promotional Materials, Publications and Events. At its option, NOA may (a) insert in the Printed Materials for the Licensed Products promotional materials concerning Nintendo Power magazine or other NOA products, services or programs, (b) utilize screen shots, Artwork and Information regarding the Licensed Products in Nintendo Power, Nintendo Power Source or other advertising, promotional or marketing media which promotes Nintendo products, services or programs, and (c) exercise public performance rights in the Games and use related trademarks and Artwork in connection with NOA sponsored contests, tours, conventions, trade shows, press briefings and similar events which promote the GAME BOY ADVANCE system. 7.8 Nintendo Gateway System. To promote and increase demand for games on Nintendo video game systems, NOA licenses a system (the "Nintendo Gateway System") in various non-coin activated commercial settings such as commercial airlines, cruise ships, rail systems and hotels, where customers play games on specially adapted Nintendo video game systems. If NOA identifies a Game for possible license on the Nintendo Gateway System, the parties agree to conduct good faith negotiations toward including the Game in the Nintendo Gateway System. 8. CONFIDENTIAL INFORMATION 8.1 Definition. "Confidential Information" means information provided to LICENSEE by Nintendo or any third party working with Nintendo relating to the hardware and software for the GAME BOY ADVANCE system or the Development Tools, including, but not limited to, (a) all current or future information, know-how, techniques, methods, information, tools, emulator hardware or software, software development specifications, and/or trade secrets, (b) any patents or patent applications, (c) any business, marketing or sales data or information, and (d) any other information or data relating to development, design, operation, manufacturing, marketing or sales. Confidential Information shall include all confidential information disclosed, whether in writing, orally, visually, or in the form of drawings, technical specifications, software, samples, pictures, models, recordings, or other tangible items which contain or manifest, in any form, the above listed information. Confidential Information shall not include (i) data and information which was in the public domain prior to LICENSEE's receipt of the same hereunder, or which subsequently becomes part of the public domain by publication or otherwise, except by LICENSEE's wrongful act or omission, (ii) data and information which LICENSEE can demonstrate, through written records kept in the ordinary course of business, was in its possession without restriction or use or disclosure, prior to its receipt of the same hereunder and was not acquired directly or indirectly from Nintendo under an obligation of confidentiality which is still in force, and (iii) data and information which LICENSEE can show was received by it from a third party who did not acquire the same directly or indirectly from Nintendo and to whom LICENSEE has no obligation of confidentiality. 8.2 Disclosures Required by Law. LICENSEE shall be permitted to disclose Confidential Information if such disclosure is required by an authorized governmental or judicial entity, provided that NOA is given Notice thereof at least thirty (30) days prior to such disclosure. LICENSEE shall use its best efforts to limit the disclosure to the greatest extent possible consistent with LICENSEE's legal obligations, and if required by NOA, shall cooperate in the preparation and entry of appropriate protective orders. 8.3 Disclosure and Use. NOA may provide LICENSEE with highly confidential development information, Guidelines, Development Tools, systems, specifications and related resources and information constituting and incorporating the Confidential Information to assist LICENSEE in the PAGE 7 8 development of Games. LICENSEE agrees to maintain all Confidential Information as strictly confidential and to use such Confidential Information only in accordance with this Agreement. LICENSEE shall limit access to the Confidential Information to LICENSEE's employees having a strict need to know and shall advise such employees of their obligation of confidentiality as provided herein. LICENSEE shall require each such employee to retain in confidence the Confidential Information pursuant to a written non-disclosure agreement between LICENSEE and such employee. LICENSEE shall use its best efforts to ensure that its employees working with or otherwise having access to Confidential Information shall not disclose or make any unauthorized use of the Confidential Information. 8.4 No Disclosure to Independent Contractors. LICENSEE shall not disclose the Confidential Information to any Independent Contractor without the prior written consent of NOA. Any Independent Contractor seeking access to Confidential Information shall be required to enter into a written non-disclosure agreement with NOA prior to receiving any access to or disclosure of the Confidential Information from either LICENSEE or NOA. 8.5 Agreement Confidentiality. LICENSEE agrees that the terms, conditions and contents of this Agreement shall be treated as Confidential Information. Any public announcement or press release regarding this Agreement or the release dates for Games developed by LICENSEE under this Agreement shall be subject to NOA's prior written approval. The parties may disclose this Agreement (a) to accountants, banks, financing sources, lawyers, parent companies and related parties under substantially equivalent confidentiality obligations, (b) in connection with any formal legal proceeding for the enforcement of this Agreement, (c) as required by the regulations of the Securities and Exchange Commission ("SEC"), provided that all Confidential Information regarding NOA shall be redacted from such disclosures to the maximum extent allowed by the SEC, and (d) in response to lawful process, subject to a written protective order approved in advance by NOA. 8.6 Notification Obligations. LICENSEE shall promptly notify NOA of the unauthorized use or disclosure of any Confidential Information and shall promptly act to recover any such information and prevent further breach of the obligations herein. The obligations of LICENSEE set forth herein are in addition to and not in lieu of any other legal remedy that may be available to NOA under this Agreement or applicable law. 8.7 Continuing Effect of the NDA. The terms of this Section 8 supplement the terms of the NDA, which shall remain in effect. In the event of a conflict between the terms of the NDA and this Agreement, the terms of this Agreement shall control. 9. REPRESENTATIONS AND WARRANTIES 9.1 LICENSEE's Representations and Warranties. LICENSEE represents and warrants that: (a) it is a duly organized and validly existing corporation and has full authority to enter into this Agreement and to carry out the provisions hereof, (b) the execution, delivery and performance of this Agreement by LICENSEE does not conflict with any agreement or understanding to which LICENSEE may be bound, and (c) excluding the Intellectual Property Rights, LICENSEE is either (i) the sole owner of all right, title and interest in and to the trademarks, copyrights and other intellectual property rights used on or in association with the development, advertising, marketing and sale of the Licensed Products and the Marketing Materials, or (ii) the holder of such rights to the trademarks, copyrights and other intellectual property rights which have been licensed from a third party as are necessary for the development, advertising, marketing and sale of the Licensed Products and the Marketing Materials under this Agreement. PAGE 8 9 9.2 NOA'S Representations and Warranties. NOA represents and warrants that: (a) it is a duly organized and validly existing corporation and has full authority to enter into this Agreement and to carry out the provisions hereof, and (b) the execution, delivery and performance of this Agreement by NOA does not conflict with any agreement or understanding to which NOA may be bound. 9.3 INTELLECTUAL PROPERTY RIGHTS DISCLAIMER BY NOA. NOA MAKES NO REPRESENTATION OR WARRANTY CONCERNING THE SCOPE OR VALIDITY OF THE INTELLECTUAL PROPERTY RIGHTS. NOA DOES NOT WARRANT THAT THE DESIGN, DEVELOPMENT, ADVERTISING, MARKETING OR SALE OF THE LICENSED PRODUCTS OR THE USE OF THE INTELLECTUAL PROPERTY RIGHTS BY LICENSEE WILL NOT INFRINGE UPON PATENT, COPYRIGHT, TRADEMARK OR OTHER PROPRIETARY RIGHTS OF A THIRD PARTY. ANY WARRANTY THAT MAY BE PROVIDED IN ANY APPLICABLE PROVISION OF THE UNIFORM COMMERCIAL CODE OR ANY OTHER COMPARABLE LAW OR STATUTE IS EXPRESSLY DISCLAIMED. LICENSEE HEREBY ASSUMES THE RISK OF INFRINGEMENT. 9.4 GENERAL DISCLAIMER BY NOA. NOA DISCLAIMS ANY AND ALL WARRANTIES WITH RESPECT TO THE LICENSED PRODUCTS, INCLUDING, WITHOUT LIMITATION, THE SECURITY TECHNOLOGY. LICENSEE PURCHASES AND ACCEPTS ALL LICENSED PRODUCTS ON AN "AS IS" AND "WHERE IS" BASIS. NOA DISCLAIMS ALL WARRANTIES UNDER THE APPLICABLE LAWS OF ANY COUNTRY, EXPRESS OR IMPLIED, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A GENERAL OR PARTICULAR PURPOSE. 9.5 LIMITATION OF LIABILITY. TO THE MAXIMUM EXTENT PERMITTED BY LAW, NEITHER NOA NOR NINTENDO CO., LTD. (OR THEIR RESPECTIVE AFFILIATES, LICENSORS OR SUPPLIERS) SHALL BE LIABLE FOR LOSS OF PROFITS, OR FOR ANY SPECIAL, PUNITIVE, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF LICENSEE OR ITS CUSTOMERS ARISING OUT OF OR RELATED TO THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE BREACH OF THIS AGREEMENT BY NOA, THE MANUFACTURE OF THE LICENSED PRODUCTS OR THE USE OF THE LICENSED PRODUCTS ON ANY NINTENDO VIDEO GAME SYSTEM BY LICENSEE OR ANY END USER. 10. INDEMNIFICATION 10.1 LICENSEE'S Indemnification. LICENSEE shall indemnify and hold harmless NOA and Nintendo Co., Ltd. (and any of their respective affiliates, subsidiaries, licensors, suppliers, officers, directors, employees or agents) from any claims, losses, liabilities, damages, expenses and costs, including, without limitation, reasonable attorney's fees and costs and any expenses incurred in the settlement or avoidance of any such claim, which result from or are in connection with: (a) a breach of any of the provisions, representations or warranties, undertaken by LICENSEE in this Agreement, (b) any infringement of a third party's Proprietary Rights as a result of the design, development, advertising, marketing, sale or use of the Licensed Products or the Marketing Materials. (c) any claims alleging a defect, failure to warn, bodily injury (including death) or other personal or property damage arising out of, or in connection with, the design, development, advertising, marketing, sale or use of any of the Licensed Products, and (d) any federal, state or foreign civil or criminal actions relating to the design, development, advertising, marketing, sale or use of the Licensed Products or the Marketing Materials. PAGE 9 10 NOA and LICENSEE shall give prompt Notice to the other of any indemnified claim under this Section 10.1. With respect to any third party claim subject to this indemnity clause, LICENSEE, as indemnitor, shall have the right to select counsel and to control the defense and/or settlement thereof. NOA may, at its own expense, participate in such action or proceeding with counsel of its own choice. LICENSEE shall not enter into any settlement of any such claim in which (i) NOA or Nintendo Co., Ltd. has been named as a party, or (ii) claims relating to the Intellectual Property Rights have been asserted, without NOA's prior written consent. NOA shall provide reasonable assistance to LICENSEE in its defense of any such claim. 10.2 LICENSEE's Insurance. LICENSEE shall, at its own expense, obtain a comprehensive policy of general liability insurance (including coverage for advertising injury and product liability claims) from a recognized insurance company. Such policy of insurance shall be in an amount of not less than Five Million Dollars ($5,000,000 US) on a per occurrence basis and shall provide for adequate protection against any suits, claims, loss or damage by the Licensed Products. Such policy shall name NOA and Nintendo Co., Ltd. as additional insureds and shall specify that it may not be canceled without thirty (30) days' prior written Notice to NOA. A Certificate of Insurance shall be provided to NOA's Licensing Department not later than the date of the initial order of Licensed Products under this Agreement. If LICENSEE fails to maintain such insurance at any time during the Term and for a period of two (2) years thereafter, NOA may secure such insurance at LICENSEE's expense. 10.3 Suspension of Production. In the event NOA deems itself at risk with respect to any claim, action or proceeding under this Section 10, NOA may, at its sole option, suspend production, delivery or order acceptance for any Licensed Products, in whole or in part, pending resolution of such claim, action or proceeding. 11. PROTECTION OF PROPRIETARY RIGHTS 11.1 Joint Actions Against Infringers. LICENSEE and NOA may agree to jointly pursue cases of infringement involving of the Licensed Products, as such Licensed Products will contain Proprietary Rights owned by each of them. Unless the parties otherwise agree, or unless the recovery is expressly allocated between them by the court, in the event of such an action, any recovery shall be used first to reimburse LICENSEE and NOA for their respective reasonable attorneys' fees and costs incurred in bringing such action, pro rata, and any remaining recovery shall be distributed to LICENSEE and NOA, pro rata, based upon the fees and costs incurred in bringing such action. 11.2 Actions by LICENSEE. LICENSEE, without the consent of NOA, may bring any action or proceeding relating to an infringement or potential infringement of LICENSEE's Proprietary Rights in the Licensed Products. LICENSEE shall make reasonable efforts to inform NOA of such actions in a timely manner. LICENSEE will have the right to retain all proceeds it may derive from any recovery in connection with such actions. 11.3 Actions by NOA. NOA, without the consent of LICENSEE, may bring any action or proceeding relating to an infringement or potential infringement of NOA's Intellectual Property Rights in the Licensed Products. NOA shall make reasonable efforts to inform LICENSEE of such actions in a timely manner. NOA will have the right to retain all proceeds it may derive from any recovery in connection with such actions. 12. ASSIGNMENT 12.1 No Assignment by LICENSEE. This Agreement is personal to LICENSEE and may not be sold, assigned, delegated, sublicensed or otherwise transferred or encumbered, in whole or in part, without NOA's prior written consent, which consent may be withheld by NOA in its sole discretion. In the event of an assignment or other transfer in violation of this Agreement, NOA shall have the unqualified right to immediately terminate this Agreement without further obligation to LICENSEE. 12.2 Assignment by Operation of Law. In the event of an assignment of this Agreement by operation of law, LICENSEE shall, not later than thirty (30) days thereafter, give Notice and seek consent PAGE 10 11 thereto from NOA. Such Notice shall disclose the name of the assignee, the effective date and the nature and extent of the assignment. An assignment by operation of law includes, but is not limited to (a) a merger of LICENSEE into another business entity or a merger of another business entity into LICENSEE, (b) the sale, assignment or transfer of all or substantially all of the assets of LICENSEE to a third party, (c) the sale, assignment or transfer to a third party of any of LICENSEE's intellectual property rights which are used in the development of or are otherwise incorporated into any Licensed Products, or (d) the sale, assignment or transfer of any of LICENSEE's stock resulting in the acquirer having management power over or voting control of LICENSEE. Following the later of (i) such an assignment by operation of law, or (ii) receipt of Notice therefor, NOA shall have the unqualified right for a period of ninety (90) days to immediately terminate this Agreement without further obligation to LICENSEE. 12.3 Non-Disclosure Obligation. In no event shall LICENSEE disclose or allow access to NOA's Confidential Information prior to or upon the occurrence of an assignment, whether by operation of law or otherwise, unless and until NOA gives its written consent to such disclosure. 13. TERM AND TERMINATION 13.1 Term. This Agreement shall commence on the Effective Date and continue for the Term, unless earlier terminated as provided for herein. 13.2 Default or Breach. In the event that either party is in default or commits a breach of this Agreement, which is not cured within thirty (30) days after Notice thereof, then this Agreement shall automatically terminate on the date specified in such Notice. 13.3 Bankruptcy. At NOA's option, this Agreement may be terminated immediately and without Notice in the event that LICENSEE (a) makes an assignment for the benefit of creditors, (b) becomes insolvent, (c) files a voluntary petition for bankruptcy, (d) acquiesces to any involuntary bankruptcy petition, (e) is adjudicated as a bankrupt, or (f) ceases to do business. 13.4 Termination Other Than by Breach. Upon the expiration of this Agreement or its termination other than by LICENSEE's breach, LICENSEE shall have a period of one hundred eighty (180) days to sell any unsold Licensed Products. All Licensed Products in LICENSEE's control following the expiration of such sell-off period shall be destroyed by LICENSEE within ten (10) days and proof of such destruction (certified by an officer of LICENSEE) shall be provided to NOA. 13.5 Termination by LICENSEE's Breach. If this Agreement is terminated by NOA as a result of a breach of its terms and conditions by LICENSEE, LICENSEE shall immediately cease all distribution, advertising, marketing or sale of any Licensed Products. All Licensed Products in LICENSEE's control as of the date of such termination shall be destroyed by LICENSEE within ten (10) days and proof of such destruction (certified by an officer of LICENSEE) shall be provided to NOA. 13.6 Breach of NDA or Other NOA License Agreements. At NOA's option, any breach by LICENSEE of (a) the NDA, or (b) any other license agreement between NOA and LICENSEE relating to the development of games for any Nintendo video game system which is not cured within the time period for cure allowed under the applicable agreement, shall be considered a material breach of this Agreement entitling NOA to terminate this Agreement in accordance with Section 13.5 herein. 13.7 No Further Use of the Intellectual Property Rights. Upon expiration and/or termination of this Agreement, LICENSEE shall cease all use of the Intellectual Property Rights for any purpose, except as may be required in connection with the sale of Licensed Products authorized under Section 13.4 herein. LICENSEE shall, within thirty (30) days thereafter, return or destroy all Guidelines, writings, drawings, models, data, tools and other materials and things in LICENSEE's possession or in the possession of any past or present employee, agent or contractor receiving the information through LICENSEE, which constitute or relate to or disclose any Confidential Information, without making copies or otherwise retaining any such information. Proof of any destruction shall be certified by an officer of LICENSEE and promptly provided to NOA. PAGE 11 12 13.8 Termination by NOA's Breach. If this Agreement is terminated by LICENSEE as a result of a breach of its terms or conditions by NOA, LICENSEE may continue to sell the Licensed Products in the Territory until the expiration of the Term, at which time the provisions of Section 13.4 shall apply. 14. GENERAL PROVISIONS 14.1 Export Control. LICENSEE agrees to comply with the export laws and regulations of the United States and any other country with jurisdiction over the Licensed Products and/or either party. 14.2 Force Majeure. Neither party shall be liable for any breach of this Agreement occasioned by any cause beyond the reasonable control of such party, including governmental action, war, riot or civil commotion, fire, natural disaster, labor disputes, restraints affecting shipping or credit, delay of carriers, inadequate supply of suitable materials or any other cause which could not with reasonable diligence be controlled or prevented by the parties. In the event of material shortages, including shortages of materials or production facilities necessary for production of the Licensed Products, NOA reserves the right to allocate such resources among itself and its licensees. 14.3 Records and Audit. During the Term and for a period of two (2) years thereafter, LICENSEE agrees to keep accurate, complete and detailed records related to the development and sale of the Licensed Products and the Marketing Materials. Upon reasonable Notice to LICENSEE, NOA may, at its expense, audit LICENSEE's records, reports and other information related to LICENSEE's compliance with this Agreement. 14.4 Waiver, Severability, Integration, and Amendment. The failure of a party to enforce any provision of this Agreement shall not be construed to be a waiver of such provision or of the right of such party to thereafter enforce such provision. In the event that any term, cause or provision of this Agreement shall be construed to be or adjudged invalid, void or unenforceable, such term, clause or provision shall be construed as severed from this Agreement, and the remaining terms, clauses and provisions shall remain in effect. Together with the NDA, this Agreement constitutes the entire agreement between the parties relating to the subject matter hereof. All prior negotiations, representations, agreements and understandings are merged into, extinguished by and completely expressed by this Agreement and the NDA. Any amendment to this Agreement shall be in writing, signed by both parties. 14.5 Survival. In addition to those rights specified elsewhere in this Agreement, the rights and obligations set forth in Sections 3, 8, 9, 10 and 13 shall survive any expiration or termination of this Agreement to the degree necessary to permit their complete fulfillment of discharge. 14.6 Governing Law and Venue. This agreement shall be governed by the laws of the State of Washington, without regard to its conflict of laws principles. Any legal action (including judicial and administrative proceedings) with respect to any matter arising under or growing out of this Agreement, shall be brought in a court of competent jurisdiction in King County, Washington. Each party hereby consents to the jurisdiction and venue of such courts for such purposes. 14.7 Equitable Relief. LICENSEE acknowledges that in the event of its breach of this Agreement, no adequate remedy at law may be available to NOA and that NOA shall be entitled to seek injunctive or other equitable relief in addition to any relief available at law. 14.8 Attorneys' Fees. In the event it is necessary for either party to this Agreement to undertake legal action to enforce or defend any action arising out of or relating to this Agreement, the prevailing party in such action shall be entitled to recover from the other party all reasonable attorneys' fees, costs and expenses relating to such legal action or any appeal therefrom. 14.9 Counterparts and Signature by Facsimile. This Agreement may be signed in counterparts, which shall together constitute a complete Agreement. A signature transmitted by facsimile shall be considered an original for purposes of this Agreement. PAGE 12 13 IN WITNESS WHEREOF, the parties have entered into this Agreement on the dates set forth below. NOA: LICENSEE: NINTENDO OF AMERICA INC. BAM ENTERTAINMENT, INC. By: /s/ John Bauer By: /s/ Raymond C. Musci ---------------------------- ------------------------- Title: Executive VP, Administration Title: President ---------------------------- ------------------------- Date: 05/29/01 Date: May 21, 2001 ---------------------------- ------------------------- PAGE 13 EX-10.33 43 v72115orex10-33.txt EXHIBIT 10.33 1 EXHIBIT 10.33 Consumer Group Contract No. 19355 (Confidential Portions Omitted) MICROSOFT CORPORATION XBOX(TM) PUBLISHER LICENSE AGREEMENT This License Agreement (the "Agreement") is entered into and effective as of Nov. 28, 2000 (the "Effective Date") by and between MICROSOFT CORPORATION, a Washington corporation ("Microsoft"), and BAY AREA MULTI MEDIA, INC., a Delaware corporation ("Licensee"). A. Whereas, Microsoft develops and licenses a computer game system, known as the Xbox(TM) game system; and B. Whereas, Licensee is an experienced publisher of software products that wishes to develop and/or publish one or more software products running on the Xbox game system, and to license proprietary materials from Microsoft, on the terms and conditions set forth herein. Accordingly, for and in consideration of the mutual covenants and conditions contained herein, and for other good and valuable consideration, receipt of which each party hereby acknowledges, Microsoft and Licensee agree as follows: 1. DEFINITIONS. For the purposes of this Agreement, the following terms will have the respective indicated meanings. 1.1 "Art & Marketing Materials" shall mean art and mechanical formats for a Software Title including the retail packaging, end user instruction manual with end user license agreement and warranties, Finished Product Unit media label, and any promotional inserts and other materials that are to be included in the retail packaging, as well as all press releases, marketing, advertising or promotional materials related to the Software Title and/or Finished Product Units (including without limitation web advertising and Licensee's web pages to the extent they refer to the Software Title(s) or the Finished Product Units). 1.2 "Authorized Replicator" shall mean a software replicator certified and approved by Microsoft for replication of games that run on Xbox. Upon Licensee's written request, Microsoft will provide Licensee with a copy of the then-current list of Authorized Replicators, but the status of a particular replicator and such list may change from time to time in Microsoft's sole and absolute discretion. 1.3 "Branding Specifications" shall mean the specifications in Exhibit C, and such other design specifications as Microsoft may hereafter provide from time to time, for using the Licensed Trademarks on a Software Title and/or on related product packaging, documentation, and other materials. 1.4 "Commercial Release" shall mean (a) with respect to Xbox, the first distribution of an Xbox to the public for payment, and (b) with respect to a Software Title, the earlier of the first distribution of the Software Title for payment or distribution of Finished Product Units that are not designated as beta or prerelease versions. 1.5 "Finished Product Unit" shall mean a DVD-9 copy, in software object code only, of a Software Title, in whole or in part. 1.6 "Licensed Trademarks" shall mean the Microsoft trademarks depicted in Exhibit B (which Microsoft unilaterally may modify from time to time during the term of this Agreement upon written notice to Licensee). 1 2 Consumer Group Contract No. 19355 1.7 "Software Title" shall mean the single software product as described in the applicable Exhibit A (i.e., Exhibit A-1, Exhibit A-2, or Exhibit A-n, as the case may be), developed by Licensee, and running on Xbox. A Software Title shall include the improvements and patches thereto (if and to the extent approved by Microsoft), but shall not include any "prequel" or "sequel." If Microsoft approves one or more additional concept(s) for another single software product proposed by Licensee to run on Xbox, pursuant to the procedure set forth in Section 2.1.1 below and the Xbox Guide (as defined in Section 2.1), then upon Microsoft's written approval of such concept, this Agreement, and the term "Software Title," shall be broadened automatically to cover the respective new software product and the parties will prepare, initial and append to this Agreement a new Exhibit A-n for each such additional new software product. 1.8 "Certification Requirements" shall mean the requirements specified in this Agreement (including without limitation the Xbox Guide) for quality, compatibility, and/or performance of a Software Title, and, to the extent not inconsistent with the foregoing standards, the standards of quality and performance generally accepted in the console game industry. 1.9 "Territory" shall be determined on a Software Title-by-Software Title basis, and shall mean such countries as may be specified in writing by Microsoft when the concept of the applicable Software Title is approved pursuant to Section 2.1.1 below. 1.10 "Xbox" shall mean the first version (as of the Commercial Release) of Microsoft's Xbox game system, including operating system software and hardware design specifications. 2. DEVELOPMENT; DELIVERY; APPROVAL 2.1 Software Title Development. Licensee's development activities with respect to each Software Title shall be in accordance with the development schedule set forth in the applicable Exhibit A-n. Furthermore, Licensee agrees to be bound by all provisions contained in the then-applicable version of the "Xbox Guide", the current version of which Microsoft or its affiliate will deliver to Licensee when it is completed, after the execution of this Agreement. Licensee understands and agrees that Microsoft may, in its discretion, supplement, revise and update the Xbox Guide from time to time and that upon Licensee's receipt of the applicable supplement, revision or updated version, Licensee automatically shall be bound by all provisions of the then-current Xbox Guide; Microsoft will specify in each such supplement, revision or updated version a reasonable effective date of each change if such change or revision is not required to be effective immediately. If Licensee proceeds with the development of a Software Title, Licensee shall deliver each milestone (as described in this Section 2.1) to Microsoft for approval in writing. All certification and playtesting (and applicable fees therefor, if any) will be in accordance with the then-applicable version of the Xbox Guide. If Microsoft does not approve Licensee's submission for a given milestone then Licensee shall either correct the problems that contributed to the lack of approval or, if Microsoft gives Licensee written notice to cease development, Licensee shall immediately cease all development activities for the applicable Software Title's subsequent milestones. Each successive milestone shall comply in all material respects with the characteristics of previously approved milestones. Each software milestone shall be delivered in compiled object code form. 2.1.1 Concept. Licensee shall deliver to Microsoft a written and completed concept submission form (in the form provided by Microsoft to Licensee), including without limitation: (a) a detailed description of the Software Title, including but not limited to (to the extent applicable) title, theme, plot, characters, play elements, and technical specifications; (b) the identities of any proposed subcontractors, and general information about the principal team of individual developers, and (c) an explanation of the design, technical and marketing suitability of the Software Title. Evaluation of the proposed design will be based on criteria including, but not necessarily limited to, the following: (i) originality; (ii) play breadth and depth; (iii) playability; (iv) replayability and long-term interest; and (v) theme, characters and storyline. Technical evaluation of the concept will be based on criteria including, but not necessarily limited to, feasibility of execution and usage of system capabilities (such as graphics, audio, hard drive, play control, online capabilities and peripherals). Marketing suitability will be evaluated based on criteria including, but not necessarily limited to, the following: (i) market viability; (ii) Licensee's 2 3 Consumer Group Contract No. 19355 marketing commitment (if any); (iii) suitability to the target demographic; and (iv) overall fit with the Xbox certified software products portfolio. 2.1.2 Preliminary Versions. Licensee may, but will not be required to, deliver to Microsoft certain preliminary versions of the Software Title, as addressed in the Xbox Guide. 2.1.3 Feature-Complete Version. Licensee shall deliver to Microsoft a feature-complete version of the Software Title (the "Beta Version"), which includes all features of the Software Title and such other content as may be required under the Xbox Guide. Concurrently with delivery of the Beta Version, Licensee will disclose in writing to Microsoft the details about any and all so-called "hidden characters," "cheats," "easter eggs," "bonus video and/or audio," and similar elements included in the Beta Version and/or intended to be included in the final release version of the Software Title. 2.1.4 Final Release Version. Licensee shall deliver to Microsoft, Licensee's proposed final release version of the applicable Software Title that is complete and ready for manufacture and commercial distribution, with the final content rating certification, with identified program errors corrected, and with any and all changes previously requested by Microsoft implemented. However, nothing herein will be deemed to relieve Licensee of its obligation to correct program bugs and errors, whenever discovered (including without limitation after Commercial Release), and Licensee agrees to correct such bugs and errors as soon as possible after discovery (provided that, with respect to bugs or errors discovered after Commercial Release of the applicable Software Title, Licensee will use commercially reasonable efforts to correct the bug/error in all Finished Product Units manufactured after discovery). In addition, Licensee will comply with all certification procedures, guidelines and standards set forth in the then-applicable version of the Xbox Guide. Licensee shall not distribute the Software Title, nor manufacture any Finished Product Units intended for distribution, unless and until Microsoft shall have given its final certification and approval of the final release version of the Software Title, and Microsoft shall have provided the code for the final release version to the applicable Authorized Replicator(s). 2.1.5 Playtesting. Microsoft will playtest the Beta Version and proposed final release version of each Software Title; if Licensee delivers preliminary versions of a Software Title, Microsoft may (but will not be obligated to) playtest such versions. Microsoft will provide written comments to Licensee regarding the results of its playtest results, and Licensee shall comply with any requests made by Microsoft to improve the applicable Software Title based on such playtest results. Licensee acknowledges that, notwithstanding its receipt of approvals from Microsoft for prior milestones or versions during the development process, Licensee's proposed final release version of each Software Title must be approved by Microsoft, as set forth in the Xbox Guide. In addition to conforming with the approved concept, with all technical specifications, and with all other requirements set by Microsoft during the development and approval process, each Software Title must achieve a satisfactory rating in final playtesting. Notwithstanding anything to the contrary contained herein, Licensee acknowledges and understands that, in part, the results of playtesting will be subjective, that Microsoft will have the right to deny final approval based on its determination, and that Licensee has and will have no expectation of final approval of any Software Title regardless of any approvals or assessments given or made by Microsoft, informally or formally, at any time. 2.1.6 Art & Marketing Materials. Licensee shall deliver to Microsoft for approval all Art & Marketing Materials as and when developed, whether during development activities or thereafter. Licensee shall not distribute any specific Art & Marketing Materials unless and until Microsoft shall have given its final certification and approval of the specific item. 2.2 Content Rating. Licensee understands and agrees that, without limitation, Microsoft will not give final certification and approval of a Software Title unless and until Licensee shall have obtained, at Licensee's sole cost, a rating of no higher than "Mature (17+)" or its equivalent from the appropriate rating bodies for the applicable Territory (such as, ESRB, ELSPA, etc.) and/or any and all other independent content rating authority/authorities reasonably designated by Microsoft. Licensee shall make any changes to the Software Title required to obtain a rating of no higher than "Mature (17+)" (or its equivalent). In no 3 4 Consumer Group Contract No. 19355 event shall Licensee distribute any Software Title under an "Adults Only" or higher rating (or equivalent rating). Licensee shall include the applicable rating(s) prominently on Finished Product Units, in accordance with the applicable rating body guidelines. 2.3 Development Kit License. Microsoft or its affiliate will offer to Licensee the opportunity to enter into one or more development kit licensee(s) (each an "XDK License") pursuant to which Microsoft would license software development tools and hardware to assist Licensee in the development of Software Titles, including without limitation certain sample code and other redistributable code which Licensee could incorporate into Software Titles, on such terms and conditions as are contained in the XDK License. 2.4 Subcontractors. Licensee shall not use any subcontractors or any other third parties to perform software development work in connection with a Software Title unless and until (i) the proposed subcontractor or other third party and (ii) Microsoft shall have executed an XDK license; provided that nothing contained herein will be deemed to require Microsoft or its affiliate to execute an XDK License with any particular person or entity if Microsoft or its affiliate determines that it is not appropriate to execute such an XDK License. 2.5 Changes of Requirements by Microsoft. Unless otherwise reasonably specified by Microsoft at the respective time: (a) after approval by Microsoft of the Beta Version of a Software Title, Licensee will not be obligated to comply, with respect to such Software Title only, with any subsequent changes made by Microsoft to the technical or content requirements for Software Titles generally in the Xbox Guide; and (b) subject to the immediately preceding clause (a), any changes made by Microsoft in Branding Specifications or other requirements after final certification of a Software Title by Microsoft will be effective as to such Software Title only on a "going forward" basis (i.e., only to such Art & Marketing Materials and/or Finished Product Units as are manufactured after Microsoft notifies Licensee of the change), unless (i) the change can be accommodated by Licensee with insignificant added expense, or (ii) Microsoft pays for Licensee's direct, out-of-pocket expenses necessarily incurred as a result of its retrospective compliance with the change. 3. RIGHTS AND RESTRICTIONS 3.1 Trademarks. 3.1.1 License. In each Software Title, and on each Finished Product Unit (and the packaging therefor), Licensee shall incorporate the Licensed Trademarks and include credit and acknowledgement to Microsoft as set forth in the Branding Specifications and the Xbox Guide. Microsoft grants to Licensee a non-exclusive, non-transferable, personal license to use the Licensed Trademarks, according to the Branding Specifications and other conditions herein, and solely in connection with marketing, sale, and distribution in the Territory of Finished Product Units that meet the Certification Requirements. 3.1.2 Limitations. Licensee is granted no right, and shall not purport, to permit any third party to use the Licensed Trademarks in any manner without Microsoft's prior written consent. Licensee's license to use Licensed Trademarks in connection with the Software Title and Finished Product Units shall not extend to the merchandising or sale of related or promotional products under the Licensed Trademarks. 3.1.3 Branding Specifications. Licensee's use of the Licensed Trademarks (including without limitation in Finished Product Unit and Art & Marketing Materials) shall comply with the Branding Specifications in Exhibit C. Licensee shall not use Licensed Trademarks in association with any third party trademarks in a manner that might suggest co-branding or otherwise create potential confusion as to source or sponsorship of the Software Title or Finished Product Units or ownership of the Licensed Trademarks. Upon notice or other discovery of any non-conformance with the requirements or 4 5 Consumer Group Contract No. 19355 prohibitions of this section, Licensee shall promptly remedy such non-conformance and notify Microsoft of the non-conformance and remedial steps taken. 3.14 Certification Requirements. Licensee may use the Licensed Trademarks only in connection with the copies of the Software Title that meet the Certificate Requirements. Licensee shall test the Software Title and Finished Product Units for conformance with the Certification Requirements according to generally accepted and best industry practices, and shall keep written or electronic records of such testing during the term of this Agreement and for no less than two (2) years thereafter ("Test Records"). Upon Microsoft's request, Licensee shall provide Microsoft with copies of or reasonable access to inspect the Test Records, Finished Product Units and Software Title (either in pre-release or commercial release versions, as Microsoft may request). Upon notice or other discovery of any non-conformance with the Certification Requirements, Licensee shall promptly remedy such non-conformance in all Finished Product Units wherever in the chain of distribution (subject to Sections 2.1.4 and 2.5 above), and shall notify Microsoft of the non-conformance and remedial steps taken. 3.1.5 Protection of Licensed Trademarks. Licensee shall assist Microsoft in protecting and maintaining Microsoft's rights in the Licensed Trademarks, including preparation and execution of documents necessary to register the Licensed Trademarks or record this Agreement, and giving immediate notice to Microsoft of potential infringement of the Licensed Trademarks. Licensee shall be reimbursed by Microsoft for all reasonable expenses incurred by Licensee in connection with the foregoing. Microsoft shall have the sole right to and in its sole discretion may commence, prosecute or defend, and control any action concerning the Licensed Trademarks, either in its own name or by joining Licensee as a party thereto. Licensee shall not during the Term of this Agreement contest the validity of, by act or omission jeopardize, or take any action inconsistent with, Microsoft's rights or goodwill in the Licensed Trademarks in any country, including attempted registration of any Licensed Trademark, or use or attempted registration of any mark confusingly similar thereto. 3.1.6 Ownership. Licensee acknowledges Microsoft's ownership of all Licensed Trademarks, and all goodwill associated with the Licensed Trademarks. Use of the Licensed Trademarks shall inure solely to the benefit of Microsoft. 3.1.7 No Bundling with Unapproved Peripherals, Products or Software. Licensee shall not market or distribute any Finished Product Unit bundled with a peripheral product software or other products, nor shall Licensee knowingly permit or assist any third party in such bundling, without Microsoft's prior written consent. 3.2 EULA. Licensee shall distribute (directly or indirectly) the Software Title to end users subject to an end user license agreement ("EULA") in a form to be approved by Microsoft prior to any distribution of the Software Title; provided that, in any event, Licensee's EULA for the Software Title shall (a) name Microsoft as a third party beneficiary, with the right to enforce the agreement, (b) grant the end user the right to use the Software Title on only one Xbox console at a time, and (c) forbid the end user from reverse engineering or decompiling the Software Title or Xbox. Microsoft will have the right to modify its requirements for the EULA at any time, in its discretion, and Licensee shall implement, at its sole cost, all such new requirements as soon as reasonably possible after receiving written notice from Microsoft of such required modifications. 3.3 No Electronic Transmission; No Online Activities. Licensee shall distribute the Software Title only as embodied in Finished Product Units; specifically, but without limitation, Licensee shall not distribute the Software Title by any means of electronic transmission without the prior written approval of Microsoft, which Microsoft may grant or withhold in its discretion. Furthermore, Licensee will not authorizer or permit any online activities involving the Software Title, including without limitation multiplayer, peer-to-peer and/or online play, without the prior written approval of Microsoft, which Microsoft may grant or withhold in its discretion. 5 6 Consumer Group Contract No. 19355 3.4 No Distribution Outside the Territory. Licensee shall distribute Finished Product Units only in the Territory. Licensee shall not directly or indirectly export any Finished Product Units from the Territory nor shall Licensee knowingly permit or assist any third party in doing so, nor shall Licensee distribute Finished Product Units to any person or entity that it has reason to believe may re-distribute or sell such Finished Product Units outside the Territory. 3.5 No Reproduction of Finished Product Units Except by Microsoft or Authorized Replicators. Licensee acknowledges that this Agreement does not grant Licensee the right to reproduce or otherwise manufacture Finished Product Units itself, or on its behalf, other than with Microsoft or an Authorized Replicator. Licensee must use Microsoft or an Authorized Replicator to produce Finished Product Units, pursuant to Section 4. 3.6 No Reverse Engineering. Licensee may utilize and study the design, performance and operation of Xbox solely for the purposes of developing the Software Title. Notwithstanding the foregoing, Licensee shall not, directly or indirectly, reverse engineer or aid or assist in the reverse engineering of all or any part of Xbox except and only to the extent that such activity is expressly permitted by applicable law notwithstanding this limitation. Reverse engineering includes, without limitation, decompiling, disassembly, sniffing, peeling semiconductor components, or otherwise deriving source code. In addition to any other rights and remedies that Microsoft may have under the circumstances, Licensee shall be required in all cases to pay royalties to Microsoft in accordance with Section 6 below with respect to any games or other products that are developed, marketed or distributed by Licensee, and derived in whole or in part from the reverse engineering of Xbox or any Microsoft data, code or other material. 3.7 Reservation of Rights. Microsoft reserves all rights not explicitly granted herein. 3.8 Ownership of the Software Titles. Except for the intellectual property supplied by Microsoft to Licensee (including without limitation the licenses in the Licensed Trademarks hereunder and the licenses in certain software and hardware granted by an XDK License), ownership of which is retained by Microsoft, insofar as Microsoft is concerned, Licensee will own all rights in and to the Software Titles. 4. MANUFACTURING 4.1 Approved Replicators. Licensee shall retain only an Authorized Replicator to manufacture all Finished Product Units. 4.2 Terms of Use of Authorized Replicator. Licensee will notify Microsoft in writing of the identity of the applicable Authorized Replicator and unless Microsoft agrees otherwise, the Agreement for such manufacturing/replication services shall be as negotiated by Licensee and the applicable Authorized Replicator, subject to the following requirements: 4.2.1 Microsoft, and not Licensee, will provide to the single applicable Authorized Replicator the final release version of the Software Title and all specifications required by Microsoft for the manufacture of the Finished Product Units (including without limitation the Security Technology (as defined in Section 4.4 below); Licensee will be responsible for preparing and delivering to the Authorized Replicator all other items required for manufacturing Finished Product Units; and Licensee agrees that all Finished Product Units must be replicated in conformity with all of the quality standards and manufacturing specifications, policies and procedures that Microsoft requires of its Authorized Replicators, and that all so-called "adders" must be approved by Microsoft prior to packaging (in accordance with Section 2.1.6 above); 4.2.2 Microsoft will have the right, but not the obligation, to be supplied with up to [*] Finished Product Units (including pre-production samples and random units manufactured during production runs) at Licensee's cost but without royalties, for quality assurance and archival purposes; 6 * Confidential Portions Omitted and Filed Separately with the Commission. 7 Consumer Group Contract No. 19355 4.2.3 the initial manufacturing order for Finished Product Units of each Software Title may not be less than [*]; although such number may change from time to time during the term of this Agreement, initially it will be [*]; 4.2.4 as between Licensee and Microsoft, Licensee shall be responsible for ensuring that all Finished Product Units are free of all defects; 4.2.5 Licensee will use commercially reasonable efforts to cause the Authorized Replicator to deliver to Microsoft true and accurate monthly statements of Finished Product Units manufactured in each calendar month, on a Software Title-by-Software Title basis and in sufficient detail to satisfy Microsoft, within fifteen (15) days after the end of the applicable month, and Microsoft will have reasonable audit rights to examine the records of the Authorized Replicator regarding the number of Finished Product Units manufactured; 4.2.6 Microsoft will have the right to have included in the packaging of Finished Product Units such marketing materials for Xbox and/or other Xbox products or services as Microsoft may determine in its reasonable discretion. Microsoft will be responsible for delivering to the Authorized Replicator all such marketing materials as it desires to include with Finished Product Units, and any incremental insertion costs relating to such marketing materials will be borne by Microsoft; 4.2.7 Microsoft does not guarantee any level of performance by its Authorized Replicators, and Microsoft will have no liability to Licensee for any Authorized Replicator's failure to perform its obligations under any applicable agreement between Microsoft and such Authorized Replicator and/or between Licensee and such Authorized Replicator; 4.2.8 Prior to placing an order with a replicator/manufacturer for Finished Product Units, Licensee shall confirm with Microsoft that such entity is an Authorized Replicator; Microsoft will endeavor to keep an up-to-date list of Authorized Replicators in the Xbox Guide. Licensee will not place any order for Finished Product Units with any entity that is not at such time an Authorized Replicator. 4.3 Approval of New Authorized Replicator. If Licensee requests that Microsoft certify and approve a third party replicator that is not then an Authorized Replicator, Microsoft will consider such request in good faith. Licensee acknowledges and agrees that Microsoft may condition certification and approval of such third party on the execution of an agreement in a form satisfactory to Microsoft pursuant to which such third party agrees to strict quality standards, non-disclosure requirements, license fees for use of Microsoft intellectual property and trade secrets, and procedures to protect Microsoft's intellectual property and trade secrets. Notwithstanding anything contained herein, Licensee acknowledges that Microsoft is not required to certify or approve any particular third party as an Authorized Replicator, and that the certification and approval process may be time-consuming. 4.4 Security. Microsoft will have the right to add to the final release version of the Software Title delivered by Licensee to Microsoft, and to all Finished Product Units, such digital signature technology and other security technology and copyright management information (collectively, "Security Technology") as Microsoft may determine to be necessary, and/or Microsoft may modify the signature included in any Security Technology included in the Software Title by Licensee at Microsoft's direction. Additionally, Microsoft may add Security Technology that prohibits the play of Software Titles on Xbox units manufactured in a region or country different from the location of manufacture of the respective Finished Product Units. 7 * Confidential Portions Omitted and Filed Separately with the Commission. 8 Consumer Group Contract No. 19355 5. MARKETING, SALES AND SUPPORT 5.1 Licensee Responsible. As between Microsoft and Licensee, Licensee shall be solely responsible for marketing and sales of the Software Title, and for providing technical and all other support to the end users of the Finished Product Units. Licensee will provide all end users of Software Titles contact information (including without limitation Licensee's street address and telephone number, and the applicable individual/group responsible for customer support). Such end user support will be consistent with the then-applicable console game industry standards. Licensee acknowledges and agrees that Microsoft will have no support responsibilities whatsoever to end users of the Software Title or with Respect to Finished Product Units. 5.2 Art & Marketing Materials. In accordance with Section 2.1.6 above, Licensee shall submit all Art & Marketing Materials to Microsoft, and Licensee shall not distribute such Art & Marketing Materials unless and until Microsoft has approved them in writing. Prior to publication of any Art & Marketing Materials, Licensee agrees to incorporate all changes relating to use of the Licensed Trademarks that Microsoft may request, and will use its commercially reasonable efforts to incorporate other changes reasonably suggested by Microsoft (provided, however, that Licensee shall at all times comply with the requirements set forth in the Branding Specifications and/or the Xbox Guide). 5.3 Warranty. Licensee shall provide the original end user of any Finished Product Unit a minimum ninety (90) day limited warranty that the Finished Product Unit will perform in accordance with its user documentation or Licensee will provide a replacement Finished Product Unit at no charge. 5.4 Recall. Notwithstanding anything to the contrary contained in this Agreement (including without limitation Section 2.1.4), in the event of a material defect in a Software Title and/or any Finished Product Units, which defect in the reasonable judgement of Microsoft would significantly impair the ability of an end user to play such Software Title or Finished Product Unit, Microsoft may require Licensee to recall Finished Product Units and undertake prompt repair or replacement of such Software Title and/or Finished Product Units. Microsoft shall also entertain in good faith any proposals by Licensee of additional or alternative remedial measures to effectively address such situation. 5.5 Software Title License. Subject to third party rights of which Licensee shall have informed Microsoft in writing at the time of delivery of the feature-complete version of the applicable Software Title, Licensee hereby grants to Microsoft a fully-paid, royalty-free, non-exclusive license (i) to publicly perform the Software Titles at conventions, events, trade shows, press briefings, and the like; and (ii) to use the title of the Software Title, and screen shots from the Software Title, in advertising and promotional material relating to Xbox and related Microsoft products and services, as Microsoft may reasonably deem appropriate. 6. PAYMENTS 6.1 Royalties. Licensee shall pay Microsoft royalties, on a Software Title-by-Software Title basis, for each Finished Product Unit manufactured, in accordance with the following table:
FINISHED PRODUCT UNITS MANUFACTURED ROYALTY PER APPLICABLE FINISHED PRODUCT UNIT ----------------------------------- -------------------------------------------- US DOLLARS ---------- YEN --- EUROS ----- Units [*] [*] [*] [*]
8 * Confidential Portions Omitted and Filed Separately with the Commission. 9 Consumer Group Contract No. 19355
FINISHED PRODUCT UNITS MANUFACTURED ROYALTY PER APPLICABLE FINISHED PRODUCT UNIT - ----------------------------------- -------------------------------------------- US DOLLARS ---------- YEN --- EUROS ----- Units [*] [*] [*] [*] Units [*] [*] [*] [*] Units [*] [*] [*] [*]
Notwithstanding the foregoing, no royalties will be payable hereunder with respect to any Demo Finished Product Units. For the purposes hereof, a "Demo Finished Product Unit" will mean a Finished Product Unit that (i) contains only a small portion of the applicable Software Title, (ii) is provided to end users only to advertise or promote the applicable Software Title (although it may include demonstration versions of other games for Xbox published by Licensee), (iii) is manufactured in a number of units that has been approved in advance by Microsoft, which approval Microsoft agrees not to unreasonably withhold, and (iv) is distributed free or with a suggested retail price of not more than US$[*]. 6.2 Royalty Payments. Licensee shall have the option of paying the above royalties in US Dollars, Japanese Yen or Euros, according to the terms of this Section. By designating the appropriate box below, Licensee may choose to pay royalties on either a "Worldwide" or "Regional" basis. Such designation shall be binding throughout the term of this Agreement for all of Licensee's Software Titles. If Licensee elects to pay on a Worldwide basis, it shall pay royalties in US Dollars regardless of where the Finished Product Units are distributed or manufactured. If Licensee elects to pay on a Regional basis, it shall pay royalties in US Dollars, Japanese Yen or Euros in accordance with the table set forth in Section 6.1 but subject to the rest of this Section 6.2: (i) If the Authorized Replicator manufacturing the Finished Product Units is located in Japan, Singapore, Malaysia or Taiwan, Licensee shall pay its royalty denominated in Japanese Yen for such Finished Product Units. (ii) If the Authorized Replicator manufacturing the Finished Product Units is located in a member country of the European Union, Licensee shall pay its royalty denominated in Euros for such Finished Product Units. (iii) If the Authorized Replicator manufacturing the Finished Product Units is located in any other country or region of the world, Licensee shall pay its royalty denominated in US Dollars for such Finished Product Units. Notwithstanding the foregoing, in the event the conversion ratio for either Yen or Euros to Dollars, as described in the US edition of the Wall Street Journal, falls outside the foreign exchange trading range as set forth in the chart below, for a period of time greater than 30 consecutive days, Microsoft may then readjust the royalty amounts set forth in Section 6.1 for that currency. Such readjustments shall be made in Microsoft's good faith discretion according to its normal practices. 9 * Confidential Portions Omitted and Filed Separately with the Commission. 10 Consumer Group Contract No. 19355
YEN/EURO TO US DOLLAR TRADING RANGE MINIMUM MAXIMUM ------- ------- Yen [*] [*] Euros [*] [*]
[ ] Worldwide (initials) ----------- [X] Regional [INITIALED] (initials) ----------- 6.3 Payment Process. After its receipt from the applicable Authorized Replicator(s) of each monthly statement of Finished Product Units manufactured, Microsoft will invoice Licensee for the amount owed to Microsoft pursuant to Section 6.1 above based upon the applicable statement. Licensee shall pay to Microsoft the full amount invoiced within thirty (30) calendar days after the date of the respective invoice. Payment will be made by wire transfer, in immediately available funds, to an account, and in accordance with a reasonable procedure, to be specified in writing by Microsoft. 6.4 Audit. Licensee shall keep all usual and proper records related to its performance (and any subcontractor's performance) under this Agreement, including support for any cost borne by or income due to Microsoft, for a minimum period of three (3) years from the date they are created. Such records, books of account, and entries shall be kept in accordance with generally accepted accounting principles. Microsoft reserves the right, upon twenty-four (24) hours' notice, to audit Licensee's records and consult with Licensee's accountants for the purpose of verifying Licensee's compliance with the terms of this Agreement and for a period of two (2) years thereafter. Any such audit shall be made by Microsoft's internal audit team or any Microsoft designee, and shall be conducted during regular business hours at the Licensee's (or any applicable subcontractor's) offices. Any such audit shall be paid for by Microsoft unless material discrepancies are disclosed. "Material" shall mean [*] of the royalties due to Microsoft within the audit period. If material discrepancies are disclosed, Licensee agrees to pay Microsoft for the costs associated with the audit, as well as reimburse Microsoft for all over-charged amounts, plus interest at a rate of 12% per annum. 6.5 Taxes. 6.5.1 The royalties to be paid by Licensee to Microsoft herein do not include any foreign, U.S. federal, state, local, municipal or other governmental taxes, customs and other duties, levies, fees, excises or tariffs, arising as a result of or in connection with the transactions contemplated under this Agreement including, without limitation, any state or local sales or use taxes or consumption tax or any value added tax or business transfer tax now or hereafter imposed on the provision of goods and services to Licensee by Microsoft under this Agreement, regardless of whether the same are separately stated by Microsoft (all such taxes and other charges being referred to herein as "Taxes"). All Taxes (and any penalties, interest, or other additions to any Taxes), with the exception of taxes imposed on Microsoft's net income or with respect to Microsoft's property ownership, shall be the financial responsibility of Licensee. Licensee agrees to indemnify, defend and hold Microsoft harmless from any such Taxes or claims, causes of action, costs (including without limitation, reasonable attorneys' fees) and any other liabilities of any nature whatsoever related to such Taxes. 6.5.2 Licensee will pay all applicable value added, sales and use taxes and other taxes levied on it by a duly constituted and authorized taxing authority on the XDKs or any transaction related thereto in each country in which the services and/or property are being provided or in which the transactions contemplated hereunder are otherwise subject to tax, regardless of the method of delivery. Any taxes that are owed by Licensee, (i) as a result of entering into this Agreement and the payment of the fees hereunder, (ii) are required or permitted to be collected from Licensee by Microsoft under applicable law, and (iii) are based upon the amounts payable under this Agreement (such taxes described in (i), (ii), and (iii) above the "Collected Taxes"), shall be remitted by Licensee to Microsoft, whereupon, upon request, Microsoft shall 10 * Confidential Portions Omitted and Filed Separately with the Commission. 11 Consumer Group Contract No. 19355 provide to Licensee tax receipts or other evidence indicating that such Collected Taxes have been collected by Microsoft and remitted to the appropriate taxing authority. Licensee may provide to Microsoft an exemption certificate acceptable to Microsoft and to the relevant taxing authority (including without limitation a resale certificate) in which case, after the date upon which such certificate is received in proper form, Microsoft shall not collect the taxes covered by such certificate. 6.5.3 If, after a determination by foreign tax authorities, any taxes are required to be withheld, on payments made by Licensee to Microsoft, Licensee may deduct such taxes from the amount owed Microsoft and pay them to the appropriate taxing authority; provided however, that Licensee shall promptly secure and deliver to Microsoft an official receipt for any such taxes withheld or other documents necessary to enable Microsoft to claim a U.S. Foreign Tax Credit. Licensee will make certain that any taxes withheld are minimized to the extent possible under applicable law. 6.5.4 This tax Section 6.5 shall govern the treatment of all taxes arising as a result of or in connection with this Agreement notwithstanding any other section of this Agreement. 7. NON-DISCLOSURE; ANNOUNCEMENTS 7.1 Non-Disclosure Agreement. The information, materials and software exchanged by the parties hereunder or under an XDK License, including the terms and conditions hereof and of the XDK License, shall be subject to the Non-Disclosure Agreement between the parties attached hereto and incorporated herein by reference as Exhibit D. 7.2 Public Announcements. The parties contemplate that they will coordinate the issuance of initial press releases, or a joint press release, announcing the relationship established by the execution of this Agreement. However, neither party shall issue any such press release or make any such public announcement(s) without the express prior consent of the other party, which consent will not be unreasonably withheld or delayed. Furthermore, the parties agree to use their commercially reasonable efforts to coordinate in the same manner any subsequent press releases and public announcements relating to their relationship hereunder prior to the issuance of the same. Nothing contained in this Section 7.2 will relieve Licensee of any other obligations it may have under this Agreement, including without limitation its obligations to seek and obtain Microsoft approval of Art & Marketing Materials. 7.3 Required Public Filings. Notwithstanding Sections 7.1 and 7.2, the parties acknowledge that this Agreement, or portions thereof, may be required under applicable law to be disclosed, as part of or an exhibit to a party's required public disclosure documents. If either party is advised by its legal counsel that such disclosure is required, it will notify the other in writing and the parties will jointly seek confidential treatment of this Agreement to the maximum extent reasonably possible, in documents approved by both parties and filed with the applicable governmental or regulatory authorities, and/or Microsoft will prepare a redacted version of this Agreement for filing. 8. TERM AND TERMINATION 8.1 Term. The term of this Agreement shall commence on the Effective Date and unless terminated earlier as provided herein, shall continue until three (3) years after Commercial Release of Xbox. 8.2 Termination for Breach. In the event either party shall materially fail to perform or comply with this Agreement or any provision thereof, and fail to remedy the default within fifteen (15) days after the receipt of notice to that effect, then the other party shall have the right, at its sole option and upon written notice to the defaulting party, to terminate this Agreement upon written notice. Any notice of default hereunder shall be prominently labeled "NOTICE OF DEFAULT"; provided, however, that if the default is of Section 3 or 7.1 above, or an XDK License, then the non-defaulting party may terminate this Agreement immediately upon written notice, without being obligated to provide a fifteen-day cure period. The rights and remedies provided in this Section shall not be exclusive and are in addition to any other rights and remedies provided by law or this Agreement. If the uncured default is related to a particular 11 12 Consumer Group Contract No. 19355 Software Title, then the party not in default will have the right, in its discretion, to terminate this Agreement in its entirety or with respect to the applicable Software Title. 8.3 Termination for Creative Reasons. In the event that Microsoft determines, at any time prior to the Commercial Release of a Software Title, that such Software Title does not comply with the requirements set forth in the Xbox Guide, and Licensee fails to remedy the noncompliance within fifteen (15) days after the receipt of notice to that effect, then Microsoft will have the right to terminate this Agreement, without cost or penalty, upon written notice to Licensee solely with respect to such Software Title, in Microsoft's sole discretion and notwithstanding any prior approvals given by Microsoft pursuant to Section 2 above. 8.4 Effect of Termination; Sell-off Rights. Upon termination or expiration of this Agreement, Licensee shall have no further right to exercise the rights licensed hereunder or otherwise acquired in relation to this Agreement and shall promptly return any and all copies of the Licensed Trademarks. Licensee shall have a period of six (6) months following expiration of this Agreement, or termination for a reason other than Licensee's breach, to sell-off its inventory of Finished Product Units existing as of the date of termination or expiration, after which sell-off period Licensee immediately shall destroy all Finished Product Units then in its possession or under its control. All of Licensee's obligations under this Agreement shall continue to apply during such six-month sell-off period. If this Agreement is terminated due to Licensee's breach, Licensee shall immediately destroy all Finished Product Units not yet distributed to Licensee's distributors, dealers and/or end users. If requested by Microsoft in writing, Licensee will deliver to Microsoft the written certification by an officer of Licensee confirming the destruction of Finished Product Units required hereunder. 8.5 Survival. The following provisions shall survive termination of this Agreement: 1, 3.6, 5.1, 5.3, 5.4, 6, 7, 8.4, 8.5, 9, 10, 11 and 12. 9. WARRANTIES 9.1 Licensee. Licensee warrants and represents that: 9.1.1 It has the full power to enter into this Agreement; 9.1.2 It has not previously and will not grant any rights to any third party that are inconsistent with the rights granted to Microsoft herein; and 9.1.3 The Software Title, Finished Product Units, Art & Marketing Materials (excluding those portions that consist of the Licensed Material, Licensed Trademarks, and redistributable components of the so-called "XDK" in the form as delivered to Licensee by Microsoft pursuant to an XDK License) do not and will not infringe upon or misappropriate any third party trade secrets, copyrights, trademarks, patents, publicity, privacy or other proprietary rights. 9.2 Microsoft. Microsoft warrants and represents that: 9.2.1 It has the full power to enter into this Agreement; and 9.2.2 It has not previously and will not grant any rights to any third party that are inconsistent with the rights granted to Licensee herein. 9.3 DISCLAIMER. EXCEPT AS EXPRESSLY STATED IN THIS SECTION 9, MICROSOFT PROVIDES ALL MATERIALS (INCLUDING WITHOUT LIMITATION THE SECURITY TECHNOLOGY) AND SERVICES HEREUNDER ON AN "AS IS" BASIS, AND MICROSOFT DISCLAIMS ALL OTHER WARRANTIES UNDER THE APPLICABLE LAWS OF ANY COUNTRY, EXPRESS OR IMPLIED, REGARDING THE MATERIALS AND SERVICES IT PROVIDES HEREUNDER, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY, 12 13 Consumer Group Contract No. 19355 FITNESS FOR A PARTICULAR PURPOSE, OR WARRANTY OF FREEDOM FROM COMPUTER VIRUSES. WITHOUT LIMITATION, MICROSOFT PROVIDES NO WARRANTY OF NON-INFRINGEMENT. 9.4 LIMITATION OF LIABILITY. THE MAXIMUM LIABILITY OF MICROSOFT TO LICENSEE OR ANY THIRD PARTY ARISING OUT OF THIS AGREEMENT SHALL BE THE TOTAL AMOUNTS RECEIVED BY MICROSOFT HEREUNDER. FURTHERMORE, UNDER NO CIRCUMSTANCES SHALL MICROSOFT BE LIABLE TO LICENSEE FOR ANY DAMAGES WHATSOEVER WITH RESPECT TO ANY CLAIMS RELATING TO THE SECURITY TECHNOLOGY AND/OR ITS AFFECT ON ANY SOFTWARE TITLE. 10. INDEMNITY 10.1 Indemnification. A claim for which indemnity may be sought hereunder shall be referred to as a "Claim." 10.1.1 Mutual Indemnification. Each party hereby agrees to indemnify, defend and hold the other party harmless from any and all claims, demands, costs, liabilities, losses, expenses and damages (including reasonable attorneys' fees, costs, and expert witnesses' fees) arising out of or in connection with any claim that, taking the claimant's allegations to be true, would result in a breach by the indemnifying party of any of its warranties and covenants set forth in Section 9. 10.1.2 Additional Licensee Indemnification Obligation. Licensee further agrees to indemnify, defend and hold Microsoft harmless from any and all claims, demands, costs, liabilities, losses, expenses and damages (including reasonable attorneys' fees, costs, and expert witnesses' fees) arising out of or in connection with any claim regarding any Software Title or Finished Product Unit, including without limitation any claim relating to quality, performance, safety or conformance with the Certification Requirements, or arising out of Licensee's use of the Licensed Trademarks in breach of this Agreement. 10.2 Notice and Assistance. The indemnified party shall: (i) provide the indemnifying party reasonably prompt notice in writing of any Claim and permit the indemnifying party to answer and defend such Claim through counsel chosen and paid by the indemnifying party; and (ii) provide information, assistance and authority to help the indemnifying party defend such Claim. The indemnified party may participate in the defense of any Claim at its own expense. The indemnifying party will not be responsible for any settlement made by the indemnified party without the indemnifying party's written permission, which will not be unreasonably withheld or delayed. In the event the indemnifying party and the indemnified party agree to settle a Claim, the indemnified party agrees not to publicize the settlement without first obtaining the indemnifying party's written permission. 10.3 Insurance. Prior to distribution of any Software Title, Licensee at its sole cost and expense shall have endorsed Microsoft as an additional insured on Licensee's media perils errors and omissions liability policy for claims arising in connection with production, development and distribution of each Software title in an amount no less than $5,000,000 on a per occurrence or per incident basis. Coverage provided to Microsoft under the policy shall be primary to and not contributory with any insurance maintained by Microsoft. Upon request, Licensee agrees to furnish copies of the additional insured endorsement and/or a certificate of insurance evidencing compliance with this requirement. 13 14 Consumer Group Contract No. 19355 11. PROTECTION OF PROPRIETARY RIGHTS 11.1 Microsoft Intellectual Property. In the event Licensee learns of any infringement or imitation of the Licensed Trademarks, the Software Title or the Finished Product Units, or the proprietary rights in or related to any of them, it will promptly notify Microsoft thereof. Microsoft may take such action as it deems advisable for the protection of its rights in and to such proprietary rights, and Licensee shall, if requested by Microsoft, cooperate in all reasonable respects therein at Microsoft's expense. In no event, however, shall Microsoft be required to take any action if it deems it inadvisable to do so. Microsoft will have the right to retain all proceeds it may derive from any recovery in connection with such actions. 11.2 Licensee Intellectual Property. Licensee, without the express written permission of Microsoft, may bring any action or proceeding relating to this infringement or potential infringement, to the extent such infringement involves any proprietary rights of Licensee (provided that Licensee will not have the right to bring any such action or proceeding involving Microsoft's intellectual property). Licensee shall make reasonable efforts to inform Microsoft regarding such actions in a timely manner. Licensee will have the right to retain all proceeds it may derive from any recovery in connection with such actions. Licensee agrees to use all commercially reasonable efforts to protect and enforce its proprietary rights in the Software Title. 11.3 Joint Actions. Licensee and Microsoft may agree to jointly pursue cases of infringement involving the Software Titles (since such products will contain intellectual property owned by each of them). Unless the parties otherwise agree, or unless the recovery is expressly allocated between them by the court (in which case the terms of Sections 11.1 and 11.2 will apply), in the event Licensee and Microsoft jointly prosecute an infringement lawsuit under this provision, any recovery shall be used first to reimburse Licensee and Microsoft for their respective reasonable attorneys' fees and expenses, pro rata, and then to reimburse Licensee and Microsoft pro rata for the respective damages incurred by each party as a result of the infringement. If the parties can not agree in good faith within a reasonable period of time on the proper parties' respective damages and the proper allocation of proceeds therefor, then any remaining recovery shall also be given to Licensee and Microsoft pro rata based upon the fees and expenses incurred in bringing such action. 12. GENERAL 12.1 Governing Law; Venue; Attorneys Fees. This Agreement shall be construed and controlled by the laws of the State of Washington, U.S.A., and Licensee consents to exclusive jurisdiction and venue in the federal courts sitting in King County, Washington, U.S.A., unless no federal jurisdiction exists, in which case Licensee consents to exclusive jurisdiction and venue in the Superior Court of King County, Washington, U.S.A. Licensee waives all defenses of lack of personal jurisdiction and forum non conveniens. Process may be served on either party in the manner authorized by applicable law or court rule. If either party employes attorneys to enforce any rights arising out of or relating to this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees, costs and other expenses. This choice of jurisdiction provision does not prevent Microsoft from seeking injunctive relief with respect to a violation of intellectual property rights or confidentiality obligations in any appropriate jurisdiction. 12.2 Notices; Requests. All notices and requests in connection with this Agreement shall be deemed given as of the day they are (i) deposited in the U.S. mails, postage prepaid, certified or registered, return receipt requested; or (ii) sent by overnight courier, charges prepaid, with a confirming fax; and addressed as follows: 14 15 Consumer Group Contract No. 19355 Licensee: Bay Area Multimedia, Inc. 333 West Santa Clara St., Ste 930 San Jose, CA 95113 Attention: Mr. Ray Musci, President Fax: (408) 298-9600 Phone: (408) 298-7500 Microsoft: MICROSOFT CORPORATION One Microsoft Way Redmond, WA 98052-6399 Attention: Xbox Business Development with a cc to: MICROSOFT CORPORATION One Microsoft Way Redmond, WA 98052-6399 Attention: Law & Corporate Affairs Department Product Development & Marketing Fax: (425) 936-7329 or to such other address as the party to receive the notice or request so designates by written notice to the other. 12.3 Assignment. Licensee may not assign this Agreement or any portion thereof, to any third party unless Microsoft expressly consents to such assignment in writing. Microsoft will have the right to assign this Agreement and/or any portion thereof as Microsoft may deem appropriate. For the purposes of this Agreement, a merger, consolidation, or other corporate reorganization, or a transfer or sale of a controlling interest in a party's stock, or of all or substantially all of its assets shall be deemed to be an assignment. This Agreement will inure to the benefit of and be binding upon the parties, their successors, administrators, heirs, and permitted assigns. 12.4 No Partnership. Microsoft and Licensee are entering into a license pursuant to this Agreement and nothing in this Agreement shall be construed as creating an employer-employee relationship, a partnership, or a joint venture between the parties. 12.5 Severability. In the event that any provision of this Agreement is found invalid or unenforceable pursuant to judicial decree or decision, the remainder of this Agreement shall remain valid and enforceable according to its terms. The parties intend that the provisions of this Agreement be enforced to the fullest extent permitted by applicable law. Accordingly, the parties agree that if any provisions are deemed not enforceable, they shall be deemed modified to the extent necessary to make them enforceable. 12.6 Injunctive Relief. The parties agree that Licensee's threatened or actual unauthorized use of the Licensed Trademarks whether in whole or in part, may result in immediate and irreparable damage to Microsoft for which there is no adequate remedy at law, and that either party's threatened or actual breach of the confidentiality provisions may cause like damage to the nonbreaching party, and in such event the nonbreaching party shall be entitled to appropriate injunctive relief, without the necessity of posting bond or other security. 15 16 Consumer Group Contract No. 19355 12.7 Entire Agreement; Modification; No Offer. The parties hereto agree that this Agreement (including all Exhibits hereto, and the Microsoft Non-Disclosure Agreement to the extent incorporated herein) and the Xbox Guide (as applicable from time to time) constitute the entire agreement between the parties with respect to the subject matter hereof and merges all prior and contemporaneous communications. It shall not be modified except by a written agreement dated subsequent hereto signed on behalf of Licensee and Microsoft by their duly authorized representatives. Neither this Agreement nor any written or oral statement related hereto constitute an offer, and this Agreement shall not be legally binding until executed by both parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the Effective Date on the dates indicated below. MICROSOFT CORPORATION BAY AREA MULTIMEDIA, INC. /s/ J. ALLARP /s/ RAYMOND MUSCI - ---------------------- ------------------------- By (sign) By (sign) J. Allarp Raymond Musci - ---------------------- ------------------------- Name (Print) Name (Print) GEN MGR President - ---------------------- ------------------------- Title Title 11/20/00 10/18/2000 - ---------------------- ------------------------- Date Date 16 17 Consumer Group Contract No. 19355 EXHIBIT A-1 DESCRIPTION OF SOFTWARE TITLE 17 18 Consumer Group Contract No. 19355 EXHIBIT B LICENSED TRADEMARKS [insert Xbox design here] 18 19 Consumer Group Contract No. 19355 EXHIBIT C BRANDING SPECIFICATIONS The following guidelines apply whenever Licensee places a copy of any Licensed Trademark on the Software Title, or related collateral materials. - Licensee may use the Licensed Trademarks solely on the retail box, documentation, and Art & Marketing Materials for the Software Title, and in no other manner. - Licensee's name, logo, or trademark must appear on any materials where the Licensed Trademarks are used, and must be larger and more prominent than the Licensed Trademarks. - The Licensed Trademarks may not be used in any manner that expresses or might imply Microsoft's affiliation, sponsorship, endorsement, certification, or approval, other than as contemplated by this Agreement. - The Licensed Trademarks may not be included in any non-Microsoft trade name, business name, domain name, product or service name, logo, trade dress, design, slogan, or other trademark. - Licensee may use the Licensed Trademarks only as provided by Microsoft electronically or in hard copy form. Except for size subject to the restrictions herein, the Licensed Trademarks may not be altered in any manner, including proportions, colors, elements, etc., or animated, morphed, or otherwise distorted in perspective or dimensional appearance. - The Licensed Trademarks may not be combined with any other symbols, including words, logos, icons, graphics, photos, slogans, numbers, or other design elements. - The Licensed Trademarks (including but not limited to Microsoft's logos, logotypes, trade dress, and other elements of product packaging and web sites) may not be imitated. - The Licensed Trademarks may not be used as a design feature in any materials. - The Licensed Trademarks must stand alone. A minimum amount of empty space must surround the Licensed Trademarks separating it from any other object, such as type, photography, borders, edges, and so on. The required areas of empty space around the Licensed Trademarks must be 1/2x, where x equals the height of the Licensed Trademarks. - Each use of the Licensed Trademarks must include the notice: "Xbox is a trademark of Microsoft Corporation in the United States and/or other countries and is used under license from Microsoft". ADDITIONAL GUIDELINES FOR PROPER USE OF THE "XBOX" WORD MARK: - Use the trademark symbol ("(TM)") at the upper right corner or baseline immediately following the name "Xbox". This symbol should be used at the first or most prominent mention. Please be sure to spell Xbox as one word, with no hyphen and with no space between "X" and "box". - Include the following notice on materials referencing Xbox: "Xbox is a trademark of Microsoft Corporation." - Trademarks identify a company's goods or services. Xbox is not a generic thing, but rather a brand of game system from Microsoft. A trademark is a proper adjective that modifies the genetic name or descriptor of a product or service. The descriptor for Xbox is "game system," i.e., "Xbox(TM) game system." Use the descriptor immediately after mention of "Xbox". You should not combine the Xbox trademark with an improper generic name or descriptor. For example, game programs designed to run on the Xbox game system are not "Xbox games," but rather "games for the Xbox system" or "Xbox certified games." - The Xbox trademark may never by abbreviated. Do not use "X" by itself to represent "Xbox." 19 20 Consumer Group Contract No. 19355 EXHIBIT D NON-DISCLOSURE AGREEMENT 20 EX-10.34 44 v72115orex10-34.txt EXHIBIT 10.34 1 EXHIBIT 10.34 (Confidential Portions Omitted) RETAIL LICENSE WARNER BROS. CONSUMER PRODUCTS #12177-PPG LICENSE AGREEMENT made March 8, 2000, by and between Warner Bros. Consumer Products, a Division of Time Warner Entertainment Company, L.P., whose address is 4000 Warner Blvd., Burbank, CA 91522 (hereinafter referred to as "LICENSOR") and Bay Area Multimedia, whose address is 333 West Santa Clara Avenue, Suite 930, San Jose, CA 95113 Attention: Ray Musci hereinafter referred to as "LICENSEE"). WITNESSETH: The parties hereto hereby agree as follows: 1. DEFINITIONS. As used in this Agreement the following terms shall have the following respective meanings: (a) CONTRACTUAL MARKETING COMMITMENT: Licensee shall spend $[*] in advertising on the Cartoon Network Television and On-line mediums; $[*] of which will be spent no later than December 31, 2000 and the remainder being spent over the Term of this Agreement. (b) LICENSED PROPERTY: The fictional cartoon characters as they appear in the animated television series entitled "THE POWERPUFF GIRLS" as follows: BLOSSOM, BUBBLES, BUTTERCUP, PROFESSOR UTONIUM, MS. KEANE, MAYOR, SARA BELLUM, TALKING DOG, MOJO JOJO, FUZZY LUMPKINS, HIM, THE AMOEBA BOYS, SEDUCA/"IMA GOODLAD", THE FLYING SQUIRREL, ROWDY ROUGH BOYS, BRATTY LITTLE PRINCESS, BROCCOLI ALIENS, PASTE MONSTER, GANG GREEN GANG and ROACH COACH including said characters' representations, names, likenesses and all environmental settings, artwork and other materials associated therewith. Without limitation to any other reservations, terms and conditions herein, specifically excluded herefrom are rights to any and all other versions including without limitation sequels, spin-offs or live action versions of said series. Furthermore, no sound bites, voices, music or other audio is included herein. If Licensee wishes to use any such elements, Licensee must separately procure the necessary rights and any rights clearance or related fees arising from same shall be at Licensee's sole expense. (c) LICENSED PRODUCT(S): Line of action/adventure products for the following platforms: i) Nintendo 64 ii) GameBoy Color (three titles) iii) GameBoy Advance IT IS UNDERSTOOD AND AGREED THAT NINTENDO DOLPHIN MAY BE ADDED AS AN ADDITIONAL PLATFORM UPON THIRTY (30) DAYS PRIOR WRITTEN NOTICE FROM LICENSEE TO LICENSOR. THE ADDITIONAL GUARANTEED CONSIDERATION FOR SUCH PLATFORM SHALL BE $[*], PAYMENT TO BE MADE WITH THE NOTICE. (d) MARKETING DATE: For purposes of subdivision 15(a)(vii), the Marketing Date for the first Licensed Product(s) set forth above shall be no later than March 31, 2001. It is understood and agreed that all Licensed Product(s) must be marketed no later than August 1, 2002. * Confidential Portions Omitted and Filed Separately with the Commission. 2 (e) TERRITORY: Worldwide excluding China, Guam and Saipan and for purposes of this Agreement will be described as the following Regions: NORTH AMERICA (UNITED STATES AND CANADA) LATIN AMERICA EUROPE JAPAN 2. GRANT OF LICENSE. (a) Upon the terms and conditions hereinafter set forth, Licensor hereby grants to Licensee and Licensee hereby accepts for the Term of this Agreement, as hereinafter defined, a license to utilize the Licensed Property solely upon or in connection with the manufacture, distribution and sale of the Licensed Products solely for retail sale throughout the Territory; no license is granted hereunder for the manufacture, distribution or sale of the Licensed Product(s) for publicity purposes, for sale or gift in combination with other products or services, as giveaways, as premiums used for the purpose of publicizing, promoting or increasing sales of any other product(s) or service(s), or in connection with any similar method of merchandising. Notwithstanding anything to the contrary contained herein, Licensee may, i) distribute up to [*] units for each game in the United States and [*] units for each game in International territories of each Licensed Product for publicity purposes, as well as [*] "time limited" or reduced feature "demo" versions, subject to Licensor's approval rights set forth in Paragraph 10; and ii) on a case-by-case basis, with prior written approval by Licensor, bundle Licensed Products with other products. (b) EXCLUSIVITY: The License granted herein shall be nonexclusive for the Licensed Property with respect to the Licensed Product(s) in the Territory during the Term, as hereinafter defined. (c) Licensee specifically understands and agrees that no rights are granted herein with respect to the Warner Bros. "shield" logo or trademark, or any other trademark(s), logo(s) or copyrights owned by Licensor other than those specifically set forth above in the Licensed Property, it being understood that all rights in and to said properties are reserved exclusively to Licensor for use and/or licensing as it deems appropriate to third party(s) of its choice. (d) Notwithstanding anything to the contrary contained herein, including the general prohibition on use of the Warner Bros. Shield, the Licensed Property shall also include the Warner Bros. Interactive Entertainment Name/Logo (the "Name/Logo") as shall be provided by Licensor and as such may be changed by Licensor from time to time. Licensee shall utilize the Name/Logo on such Licensed Products and in such manner as Licensor shall designate. The parties agree that, notwithstanding anything to the contrary contained elsewhere in this Agreement, Licensee's use of the Name/Logo shall be on a non-exclusive basis. (e) Without limiting any other approval rights of Licensor as contained herein, no television commercials may be utilized under this Agreement without the specific prior written approval of Licensor. 3. TERM. The term ("Term") of the Agreement with respect to Licensed Product(s) referred to above shall commence on March 1, 2000 and terminate on March 15, 2003. Page 2 * Confidential Portions Omitted and Filed Separately with the Commission. 3 4. CONSIDERATION. In full consideration for the rights, licenses and privileges herein granted to Licensee, Licensee shall pay to Licensor the following royalty payments: (a) GUARANTEED CONSIDERATION: For the rights herein granted the sum of $[*] payable as follows:
DATE AMOUNT - ---- ----------- Upon execution of this Agreement $[*] On or before August 1, 2000 $[*] On or before December 1, 2000 $[*] On or before March 1, 2001 $[*]
All Guaranteed Consideration paid by Licensee pursuant to this Subparagraph (a) shall be applied against such royalties as are or have become due Licensor under Subparagraph (b). No part of the Guaranteed Consideration shall be repayable to Licensee. (b) ROYALTY PAYMENTS: With respect to the Licensed Product(s) referred to above, Licensee shall pay to Licensor a sum equal to [*] of all net sales (as such term "net sales" is defined herein) by Licensee or any of its affiliated, associated or subsidiary companies of the Licensed Product(s) covered by this Agreement. The term "Net Sales" shall mean all monies billed or billable by Licensee, from the exercise of its rights to distribute and sell Licensed Product(s) in the Territory before any allowances or discounts which have been deducted from the normal selling price, and any other payment charges whatsoever, less the following items only: (i) any sales, excise or value added taxes, which are separately stated, and which are required to be collected from customers as part of Net Sales, and which are payable to taxing authorities; (ii) quantity discounts; and (iii) actual returns not exceeding 10% of total sales. It is specifically understood and agreed that no deduction may be made for any bad debts, or any reserves therefor, any manufacturing costs, importing costs, selling costs, advertising costs, any real estate taxes, business license taxes, net income taxes, franchise taxes, withholding taxes or any other taxes not billed as part of net sales. Net Sales shall not include any sales by Licensee or its affiliated companies to Licensee or its affiliated companies, the primary purpose of which is the transfer of Licensed Product for eventual resale. Royalties as a result of such sales shall be based upon and paid when the Licensed Product is ultimately sold to the distributor, retailer, consumer or other unaffiliated third party. Licensee will pay all taxes, customs, duties, assessments, excise except as provided in sub-paragraph (i), and other charges levied upon the importation of or assessed against the Licensed Product under this Agreement, as well as all Licensee's costs of doing business and Licensor shall have no liability therefor. Page 3 * Confidential Portions Omitted and Filed Separately with the Commission. 4 Royalties shall be payable concurrently with the periodic statements required in Paragraph 6 hereof except to the extent offset by Guaranteed Consideration theretofore remitted. It is a material term and condition of this Agreement that Licensee report net sales and report and pay royalties on a country-by-country basis. In the event Licensee fails to do so, Licensor shall have the right to terminate this Agreement, in accordance with the provisions of Paragraph 15 herein. Royalties earned in excess of the Guaranteed Consideration applicable to the Term hereof shall not offset any Guaranteed Consideration required in respect of the succeeding renewal term (if any); likewise, royalties earned in excess of the Guaranteed Consideration applicable to the renewal term shall not offset any Guaranteed Consideration applicable to any prior term. 5. RESERVATION OF RIGHTS; PREMIUMS. (a) Licensor reserves all rights not expressly conveyed to Licensee hereunder, and Licensor may grant licenses to others to use the Licensed Property, artwork and textual matter in connection with other uses, services and products without limitation. (b) Notwithstanding anything to the contrary stated herein, Licensor, for itself and its affiliates, specifically reserves the right, without limitation throughout the world, to use, or license any third party(s) of its or their choice to use the Licensed Property for the marketing, promotion, manufacture, distribution and sale of products similar or identical to those licensed herein in Paragraph 1(c) above including without limitation for sale through any catalogue(s) produced or distributed by or on behalf of Licensor or its affiliated companies, or for sale or distribution in any theaters or arenas, or for sale or distribution in connection with any home video product, including DVD or other formats, or for sale or distribution in any retail stores operated by or on behalf of Licensor, its affiliated companies or franchisees, or for sale or distribution in any theme/amusement parks operated by or on behalf of Licensor or its licensees, Six Flags, Premier Parks, Movie World, or their affiliated companies. In addition, Licensor reserves the right to allow Six Flags, Premier Parks and Movie World to manufacture (or have manufactured by a third party) products similar or identical to those licensed herein for distribution or sale in theme and/or amusement parks owned or operated by Six Flags, Premier Parks and/or Movie World. Further, Licensor reserves the right to use, or license others to use, and/or manufacture products similar or identical to those licensed herein for use as premiums. (c) Licensee agrees that it will not use, or knowingly permit the use of, and will exercise due care that its customers likewise will refrain from the use of, the Licensed Products as a premium, except with the prior written consent of Licensor. Subject to Licensor's prior written approval as aforesaid, Licensee shall pay to Licensor a sum equal to [*] of all premium sales. For purposes of this paragraph, the term "premium" shall be defined as including, but not necessarily limited to, combination sales, free or self-liquidating items offered to the public in conjunction with the sale or promotion of a product or service, including traffic building or continuity visits by the consumer/customer, or any similar scheme or device, the prime intent of which is to use the Licensed Products in such a way as to promote, publicize and or sell the products, services or business image of the user of such item. 6. PERIODIC STATEMENTS. (a) Within thirty (30) days after the end of the first calendar quarter after the date of execution of the License Agreement and promptly on the 15th day after the end of each calendar month Page 4 * Confidential Portions Omitted and Filed Separately with the Commission. 5 thereafter, Licensee shall furnish to Licensor complete and accurate statements certified to be accurate by Licensee, or if a corporation, by an officer of Licensee, showing with respect to all Licensed Products distributed and sold by Licensee during the preceding calendar month the (i) number of units; (ii) country in which manufactured, sold and/or to which shipped; (iii) description (as such term is defined below) of the Licensed Products; (iv) gross sales price; and (v) itemized deductions from gross sales price, and net sales price together with any returns made during the preceding calendar month. Such statements shall be furnished to Licensor whether or not any of the Licensed Products have been sold during calendar month to which such statements refer. In the event Licensee has Royalties earned in currencies other than in U.S. Dollars, then Licensee shall convert said amounts into U.S. Dollars based upon the exchange rate published by the Wall Street Journal as of the fifteenth day of the applicable month or if such day shall fall on a non-business day then as of the first business day following said fifteenth day. Receipt or acceptance by Licensor of any of the statements furnished pursuant to this Agreement or of any sums paid hereunder shall not preclude Licensor from questioning the correctness thereof at any time, and in the event that any inconsistencies or mistakes are discovered in such statements or payments, they shall immediately be rectified and the appropriate payments made by Licensee. Upon demand of Licensor, Licensee shall at its own expense, but not more than once in any twelve (12) month period, furnish to Licensor a detailed statement by an independent certified public accountant showing the (i) number of units; (ii) country in which manufactured, sold and/or to which shipped; (iii) description of the Licensed Products; (iv) gross sales price; and (v) itemized deductions from gross sales price and net sales price of the Licensed Products covered by this Agreement distributed and/or sold by Licensee up to and including the date upon which Licensor has made such demand. For purposes of this Subparagraph, the term "Description" shall mean a detailed description of the Licensed Products including the nature of each of the Licensed Products, any and all names and likenesses, whether live actors or animated characters, from the Licensed Property utilized on the Licensed Products and/or any related packaging and/or wrapping material, and any other components of the Licensed Property utilized on the Licensed Products and/or any related packaging and/or wrapping material. In the event Licensor is responsible for the payment of any additional third party participations based on Licensee not reporting by character name and likeness as provided above, Licensee shall be responsible for reimbursing Licensor for the full amount of all such third party claims, including without limitation, the participation itself, interest, audit and attorneys' fees. Licensee understands and agrees that it is a material term and condition of this Agreement that Licensee include the Description on all statements. In the event Licensee fails to do so, Licensor shall have the right to terminate this Agreement, in accordance with the provisions of Paragraph 15 herein. (b) For the statements and payments required hereunder (please reference the contract number(s) on all statements and payments) if the United States Postal Service is used deliver to the following: WARNER BROS. CONSUMER PRODUCTS 21477 Network Place Chicago, IL 60673-1214 For the statements and payments required hereunder (please reference the contract number(s) on all statements and payments) if sent by Federal Express or any other Courier Service deliver to the following: Page 5 6 FIRST CHICAGO NATIONAL BANK Attention WBCP lockbox #21477 525 West Monroe 8th Floor Mail Room Chicago, IL 60661 Telephone Number 312-732-5500 (c) Any payments which are made to Licensor hereunder after the due date required therefor, shall bear interest at the then current prime rate plus six (6%) percent (or the maximum rate permissible by law, if less than the current prime rate) from the date such payments are due to the date of payment. Licensor's right hereunder to interest on late payments shall not preclude Licensor from exercising any of its other rights or remedies pursuant to this Agreement or otherwise with regard to Licensee's failure to make timely remittances. (d) Licensee hereby grants to Licensor (subject to any liens or security interests granted by Licensee which are approved in writing by Licensor) a first-priority lien and security interest in Licensee's inventory, contract rights and accounts receivable, and all proceeds thereof, with respect to the Licensed Products only. In the event Licensee defaults in any of its obligations under this Agreement, Licensee further agrees to provide, at Licensor's request: (i) a letter of credit issued in favor of Licensor from a financial institution as approved by Licensor in an amount up to the Guaranteed Consideration; and/or (ii) such other form of security acceptable to Licensor. Licensee agrees to execute all documentation as Licensor may require in connection with perfecting such security interests. 7. BOOKS AND RECORDS. (a) Licensee shall keep, maintain and preserve (in Licensee's principal place of business) for at least two (2) years following termination or expiration of the Term of this Agreement or any renewal(s) hereof (if applicable), complete and accurate records of accounts including, without limitation, purchase orders, inventory records, invoices, correspondence, banking and financial and other records pertaining to the various items required to be submitted by Licensee as well as to ensure Licensee's compliance with local laws as required pursuant to Paragraph 13(k) hereof. Such records and accounts shall be available for inspection and audit at any time or times during or after the Term of this Agreement or any renewal(s) hereof (if applicable) during reasonable business hours and upon reasonable notice by Licensor or its nominees. Licensee agrees not to cause or permit any interference with Licensor or nominees of Licensor in the performance of their duties. During such inspections and audits, Licensor shall have the right to take extracts and/or make copies of Licensee's records as it deems necessary. (b) The exercise by Licensor in whole or in part, at any time of the right to audit records and accounts or of any other right herein granted, or the acceptance by Licensor of any statement or statements or the receipt and/or deposit by Licensor, of any payment tendered by or on behalf of Licensee shall be without prejudice to any rights or remedies of Licensor and such acceptance, receipt and/or deposit shall not preclude or prevent Licensor from thereafter disputing the accuracy of any such statement or payment. Page 6 7 (c) If pursuant to its right hereunder Licensor causes an audit and inspection to be instituted which thereafter discloses a deficiency between the amount found to be due to Licensor and the amount actually received or credited to Licensor, then Licensee shall, upon Licensor's demand, promptly pay the deficiency, together with interest thereon at the then current prime rate from the date such amount became due until the date of payment, and, if the deficiency is more than [*] of all royalties paid by Licensee during the period covered by the audit, then Licensee shall pay the reasonable costs and expenses of such audit and inspection. 8. INDEMNIFICATIONS. (a) During the Term, and continuing after the expiration or termination of this Agreement, Licensor shall indemnify Licensee and shall hold it harmless from any loss, liability, damage, cost or expense, arising out of any claims or suits which may be brought or made against Licensee by reason of the breach by Licensor of the warranties or representations as set forth in Paragraph 12 hereof, provided that Licensee shall give prompt written notice, and full cooperation and assistance to Licensor relative to any such claim or suit and provided, further, that Licensor shall have the option to undertake and conduct the defense of any suit so brought. Licensee shall not, however, be entitled to recover for lost profits. Licensee shall cooperate fully in all respects with Licensor in the conduct and defense of said suit and/or proceedings related thereto. (b) During the Term, and continuing after the expiration or termination of this Agreement, Licensee shall indemnify Licensor, Time Warner Entertainment Company, L.P. ("TWE") and each of its affiliates and shall hold them harmless from any loss, liability, damage, cost or expense arising out of any claims or suits which may be brought or made against Licensor, TWE or any of its affiliates, by reason of: (i) any breach of Licensee's covenants and undertakings hereunder; (ii) any unauthorized use by Licensee of the Licensed Property; (iii) any use of any trademark, or copyright (except trademarks or copyrights in the Licensed Property used in accordance with the terms of this Agreement), design, patent, process, method or device; (iv) Licensee's noncompliance with any applicable federal, state or local laws or with any other applicable regulations; and (v) any alleged defects and/or inherent dangers (whether obvious or hidden) in the Licensed Products or the use thereof. (c) With regard to 8(b) above, Licensee agrees to obtain, at its own expense, Comprehensive Commercial General Liability Insurance, including product liability and contractual liability coverage providing adequate protection for Licensor and Licensee against any such claims or suits in amounts no less than three million dollars ($3,000,000) per occurrence, combined single limits. Simultaneously with the execution of this Agreement, Licensee undertakes to submit to Licensor a fully paid policy or certificate of insurance naming Licensor, TWE and each of its affiliates as additional insured parties and, requiring that the insurer shall not terminate or materially modify such policy or certificate of insurance without written notice to Licensor at least twenty (20) days in advance thereof. Such insurance shall at all times be primary and not contributory with any insurance carried by Licensor, TWE or any of their affiliates. Further the delivery of the policy or certificate, as provided in this Paragraph 8(c) are material obligations of Licensee. 9. ARTWORK; TRADEMARKS AND COPYRIGHTS. Licensee shall, within thirty (30) days of receiving an invoice, pay Licensor for artwork executed for Licensee by Licensor (or by third parties under contract to Licensor) for use in the development of the Licensed Products and any related Page 7 * Confidential Portions Omitted and Filed Separately with the Commission. 8 packaging, display and promotional materials at Licensor's prevailing commercial art rates. The foregoing shall include any artwork that, in Licensor's opinion, is necessary to modify artwork initially prepared by Licensee and submitted for approval. Estimates of artwork charges are available upon request. (a) TRADEMARKS: (i) Licensee agrees that it will cause to appear indelibly and legibly on each of the Licensed Product(s) and all advertising material, tags, labels and devices bearing the Licensed Property, the following notice or such other notice as may be approved by Licensor: THE POWERPUFF GIRLS AND ALL RELATED CHARACTERS AND ELEMENTS ARE TRADEMARKS OF CARTOON NETWORK(C) 20XX. (The year date shall be as instructed by Licensor) (ii) Licensee further agrees that it will not apply for or seek to obtain trademark registration for the Licensed Property and that Licensor may, at its option, apply for and obtain in its own name trademark registrations for the Licensed Product(s), and that, upon request, Licensee will furnish necessary specimens or facsimiles for such purpose free of cost, as well as evidence of the date of first shipment or sale of each Licensed Product in interstate or foreign or other federally regulable U.S. commerce and, if earlier, also in intrastate commerce. (iii) Licensee agrees that if Licensee receives knowledge of the use of the Licensed Property by anyone other than Licensee on Licensed Product(s) or products confusingly similar thereto, Licensee will call such fact to the attention of Licensor. Licensor shall then have the option to institute legal proceedings to prevent such use, and Licensee shall cooperate and assist in the prosecution of any such action. If demanded by Licensor, Licensee shall join in or cooperate in the prosecution of any such legal proceeding as may be instituted by Licensor. Any such legal proceedings shall be solely at Licensor's expense. If Licensee is joined in such proceeding, Licensor shall indemnify and hold harmless Licensee from and against any claim, sanction, liability, damages, attorney's fees, judgments or orders of any kind arising out of such proceeding. (b) COPYRIGHTS: (i) GAME PROGRAM: The copyright in and to the computer program (object and source code) for any game which is incorporated in the Licensed Product (herein the "Program") shall be owned as follows: (a) If a Program is created solely by Licensee or an approved sublicensee under license or authority of Licensee without any contribution by Licensor to the creation of that Program in the form of programming effort, then the copyright in and to such Program shall be owned solely by Licensee; (b) If a Program is created jointly by Licensee and Licensor, then the copyright in and to such Program shall be owned jointly by Licensor and Licensee. (ii) AUDIO-VISUAL DISPLAY: The copyright in and to the images displayed on the screen and the sounds produced during the course of the game play, including all possible combinations and sequences thereof, in both the "attract mode" and the "play mode" and the underlying script for therefor (herein the "Audio-Visual Display") shall be owned as follows: Page 8 9 (a) The copyright in and to all elements of the Audio-Visual Display constituting pre-existing material of Licensor from Licensor's fictional cartoon characters as set forth in Paragraph 1(a) "Licensed Property" such as, without limitation, the characters portrayed in such television series or any reproductions thereof (hereinafter "Pre-Existing Material"), are acknowledged to be the sole and exclusive property of Licensor and shall remain the sole and exclusive property of Licensor; (b) The copyright in and to all elements of the Audio-Visual Display constituting original material created by Licensee shall be the sole and exclusive property of Licensee. Licensee retains sole and exclusive ownership of all of Licensee's inventions, whether patented or not, trade secrets and similar information and processes of a confidential nature, and works of authorship, whether copyrighted or not, whether manifested in the Audio-Visual Display or not, and whether embodied in hardware or software used to create the Audio-Visual Display. Licensee shall be free to use and license others to use elements of the Audio-Visual Display owned by Licensee. (iii) PACKAGING, ADVERTISING AND PROMOTIONAL MATERIALS: Except as otherwise provided herein, the copyrights in and to any original material, other than the Programs and the Audio-Visual Displays, which is created by or for Licensee for the purpose of packaging, advertising or promoting the Licensed Product(s), including but not limited to the enclosure for the Licensed Product(s), all cartons, containers, packing and wrapping material, tags, labels, imprints or other devices, and all advertising and promotional materials (all such material hereinafter referred to as the "Other Materials"), shall be owned solely and exclusively by Licensee. Providing that the copyright in and to all elements of the Other Materials that constitute Licensor's Pre-Existing Material, material furnished to Licensee by or on behalf of Licensor, or any material that is derivative of the foregoing, is acknowledged to be owned solely and exclusively by Licensor and shall remain the sole and exclusive property of Licensor. (iv) LIMITATIONS ON OWNERSHIP RIGHTS: The parties agree and acknowledge that each shall have the same right as any person or party with regard to any material incorporated in the Licensed Product (s), Other Materials, Programs, or Audio-Visual Displays which is in the public domain (provided that it has not entered into the public domain as the result of an act or omission in breach of this Agreement or any other written agreement by or between the parties hereto). (v) WORK-MADE-FOR-HIRE: Licensee agrees and acknowledges that any Artwork created by Licensee or for Licensee hereunder is a "work made for hire" for Cartoon Network under the U.S. Copyright Act, and any and all similar provisions of law under other jurisdictions, and that Cartoon Network is the author of such works for all purposes, and that Cartoon Network is the exclusive owner of all the rights comprised in the undivided copyright and all renewals, extensions and reversions therein, in and to such works in perpetuity and throughout the universe. Licensee hereby waives and releases in favor of Cartoon Network all rights (if any) of "droit moral," rental rights and similar rights in and to the Artwork (the "Intangible Rights") and agrees that Cartoon Network shall have the right to revise, condense, abridge, expand, adapt, change, modify, add to, subtract from, re-title, re-draw, re-color, or otherwise modify the Artwork, without the consent of Licensee. Licensee hereby irrevocably Page 9 10 grants, transfers and assigns to Licensor all right, title and interest, including copyrights, trademark rights, patent rights and other proprietary rights, it may have in and to the Artwork, in perpetuity and throughout the universe, and to all proprietary depictions, expressions or derivations of the Licensed Property created by or for Licensee. Licensee acknowledges that Licensor shall have the right to terminate this Agreement in the event Licensee asserts any rights (other than those specifically granted pursuant to this Agreement) in or to the Licensed Property or Artwork. Licensee hereby warrants that any and all work created by Licensee under this Agreement apart from the materials provided to Licensee by Licensor is and shall be wholly original with or fully cleared by Licensee and shall not copy or otherwise infringe the rights of any third parties, and Licensee hereby indemnifies Licensor and will hold Licensor harmless from any such claim of infringement or otherwise involving Licensee's performance hereunder. At the request of Licensor, Licensee shall execute such form(s) of assignment of copyright or other papers as Licensor may reasonably request in order to confirm and vest in Licensor the rights in the properties as provided for herein. In addition, Licensee hereby appoints Licensor as Licensee's Attorney-in-Fact to take such actions and to make, sign, execute, acknowledge and deliver all such documents as may from time to time be necessary to confirm in Licensor, its successors and assigns, all rights granted herein. If any third party makes or has made any contribution to the creation of Artwork authorized for use hereunder, Licensee agrees to obtain from such party a full confirmation and assignment of rights so that the foregoing rights shall vest fully in Licensor, in the form of the Contributor's Agreement attached hereto as Exhibit 1 and by this reference made a part hereof, prior to commencing work, and subject to the prior written approval of Licensor, and subject to the prior written approval of Licensor ensuring that all rights in the Artwork and Licensed Property arise in and are assigned to Licensor. Promptly upon entering into each such Contributor's Agreement, Licensee shall give Licensor a copy of such Contributor's Agreement. Licensee assumes all responsibility for such parties and agrees that Licensee shall bear any and all risks arising out of or relating to the performance of services by them and to the fulfillment of their obligations under the Contributor's Agreement. (vi) USE OF THIRD PARTY CONTENT: Licensee shall not use any third party content or technology in the Licensed Product(s), including without limitation any audio elements from the soundtracks of any motion picture or television series based upon the Licensed Property without Licensor's prior written approval, and unless: (i) Licensee is expressly permitted to use such third party content or technology pursuant to written agreements with all third party rights holders; and (ii) Licensee has acquired for Licensee and Licensor all rights, permissions, clearances, releases or other authorizations necessary to use such third party content or technology in conjunction with the development and exploitation of the Licensed Products(s) anywhere in the Territory by Licensee or Licensor or by either party's licensees, successors or assigns in perpetuity. Licensee shall be responsible, in perpetuity, for all payments in connection with the use of third party content or technology, except as the parties mutually agree upon at such time as Licensor approves of the use of such third party content or technology. Licensee shall have the right to review all Licensee agreements with third parties to ensure their acceptability and Licensee shall deliver such agreements to Licensor within fourteen (14) business days of Licensor's request therefor. 10. QUALITY OF LICENSED PRODUCT(S). (a) Licensee agrees that the Licensed Product(s) shall be of high Page 10 11 standard and of such style, appearance and quality as shall be adequate and suitable to their promotion, distribution and sale to the best advantage of Licensee and Licensor. The quality and style of such product and its cartons and containers shall be subject to Licensor's approval. To this end Licensee shall, before selling or distributing any of the Licensed Product(s), furnish to Licensor free of cost for its written approval as to quality and style, the materials specified in the "MILESTONES" set forth on Exhibit 2 attached hereto. In the event that any Milestone deliverable shall not have been approved, disapproved, or otherwise commented upon within ten (10) business days after receipt thereof by Licensor, then Licensee shall have the right to so notify Licensor of such fact by facsimile or by overnight delivery service. In the event that Licensor fails to then approve, disapprove or otherwise comment upon the submitted items within seven (7) business days after receipt by it of such communication, any items so submitted shall be deemed to have been approved. Licensee shall, in addition, thereafter furnish to Licensor free of cost, for its written approval, [*] production samples of each such Licensed Product(s) together with their cartons and containers including packaging and wrapping material, to ensure quality control simultaneously upon distribution to the public. In addition, Licensee shall provide Licensor with six (6) catalogs which display all of Licensee's products, not just the Licensed Products, if such catalogs exist. Further, Licensor shall have the right to purchase any and all Licensed Products in any quantity at the maximum discount price Licensee charges its best customer purchasing the same quantity of Licensed Products under the same terms and conditions for delivery during the same period of time in the same general geographical area for sales throughout the same sales channel. After samples of Licensed Product(s) have been approved pursuant to this paragraph, Licensee shall not depart therefrom in any material respect without Licensor's prior written consent or add any additional element(s) such as in-pack flyers, business reply cards and so on without Licensor's approval in each case. Licensor shall have the right to withdraw its approval of samples if the quality of any Licensed Product ceases to be acceptable. (b) Any modification of a Licensed Product must be submitted in advance for Licensor's written approval as if it were a new Licensed Product. Approval of a Licensed Product which uses particular artwork does not imply approval of such artwork for use with a different Licensed Product. (c) Licensed Products must conform in all material respects to the final production samples approved by Licensor. If in Licensor's reasonable judgement, the quality of a Licensed Product originally approved has deteriorated in later production runs, or if a Licensed Product has otherwise been altered, Licensor may, in addition to other remedies available to it, require that such Licensed Product be immediately withdrawn from the market. (d) If any changes or modifications are required to be made to any material submitted to Licensor for its written approval in order to ensure compliance with Licensor's specifications or standards of quality, Licensee agrees promptly to make such changes or modifications. (e) Licensee shall permit Licensor to inspect Licensee's manufacturing operations, testing and payroll records (including those operations and records of any supplier or manufacturer approved pursuant to Paragraph 10(b) hereof) with respect to the Licensed Products. (f) Subject to the terms hereof, Licensee may utilize the Licensed Property for such advertising, promotional and display Page 11 * Confidential Portions Omitted and Filed Separately with the Commission. 12 materials for the Licensed Product(s) as in its judgment will best promote the sale of said Licensed Product(s). Licensee agrees that it will not use the Licensed Property or any reproduction thereof in any advertising, promotional or display material or in any other manner without Licensor's prior written approval not to be unreasonably withheld. Without limiting the foregoing no television commercials may be utilized under this License without the specific prior approval of Licensor. In the event that any advertising, promotional or display material submitted to Licensor shall not have been approved, disapproved or otherwise commented upon within thirty (30) days after receipt thereof by Licensor, then Licensee shall have the right to so notify Licensor of such fact by facsimile or by overnight delivery service. In the event that Licensor fails to then approve, disapprove or otherwise comment upon the submitted items within ten (10) business days after receipt by it of such facsimile or overnight delivery service any items so submitted shall be deemed to have been approved. A reasonable number of production copies of all such advertising, promotional and display materials will be furnished to Licensor free of charge. (g) To avoid confusion of the public, Licensee agrees not to associate other characters or properties with the Licensed Property on the Licensed Products or in any packaging, promotional or display materials unless Licensee receives Licensor's prior written approval. Furthermore, Licensee agrees not to use the Licensed Property (or any component thereof) on any business sign, business cards, stationery or forms, nor as part of the name of Licensee's business or any division thereof. (h) Licensee shall use its best efforts to notify its customers of the requirement that Licensor has the right to approve all promotional, display and advertising material pursuant to this Agreement. (i) It is understood and agreed that any animation used in electronic media, including but not limited to animation for television commercials and character voices for radio commercials, shall be produced by Warner Bros. Animation pursuant to a separate agreement between Licensee and Warner Bros. Animation, subject to Warner Bros. Animation customary rates. Any payments made to Warner Bros. Animation for such animation shall be in addition to and shall not offset the Consideration set forth in Paragraph 4 above. (j) Licensor's approval of Licensed Product(s) (including without limitation, the Licensed Product(s) themselves as well as promotional, display, and advertising materials) shall in no way constitute or be construed as an approval by Licensor of Licensee's use of any trademark, copyright and/or other proprietary materials, not owned by Licensor. 11. DISTRIBUTION; SUBLICENSE/MANUFACTURE. (a) Licensee shall sell the Licensed Products either to jobbers, wholesalers, distributors or retailers for sale or resale and distribution directly to the public. Licensee shall not sell the Licensed Products through any cable home shopping service or through electronic media, including on any on-line network or service. If Licensee sells or distributes the Licensed Products at a special price, directly or indirectly, to itself, including without limitation, any subsidiary of Licensee or to any other person, firm, or corporation affiliated with Licensee or its officers, directors or major stockholders, for ultimate sale to unrelated third parties, Licensee shall pay royalties with respect to such sales or distribution, based upon the price generally charged the trade by Licensee. (b) Except as to materials set forth in Paragraph 9(b)(ii)(b), Licensee shall not be entitled to sublicense any of the Computer Page 12 13 Program or Audio-Visual Display developed by Licensee pursuant to this Agreement. In the event Licensee is not the manufacturer of the Licensed Products, Licensee shall, subject to the prior written approval of Licensor, which approval shall not be unreasonably withheld, be entitled to utilize a third party manufacturer in connection with the manufacture and production of the Licensed Products, provided that such manufacturer shall execute a letter in the form of Exhibit 3 attached hereto and by this reference made a part hereof. In such event, Licensee shall remain primarily obligated under all of the provisions of this Agreement and any default of this Agreement by such manufacturer shall be deemed a default by Licensee hereunder. In no event shall any such third party manufacturer agreement include the right to grant any rights to subcontractors. 12. GOOD WILL. Licensee recognizes the great value of the publicity and good will associated with the Licensed Property and acknowledges: (i) such good will is exclusively that of Licensor; and (ii) that the Licensed Property has acquired a secondary meaning as Licensor's trademarks and/or identifications in the mind of the purchasing public. Licensee further recognizes and acknowledges that a breach by Licensee of any of its covenants, agreements or undertakings hereunder will cause Licensor irreparable damage, which cannot be readily remedied in damages in an action at law, and may, in addition thereto, constitute an infringement of Licensor's copyrights, trademarks and/other proprietary rights in, and to the Licensed Property, thereby entitling Licensor to equitable remedies, and costs. 13. LICENSOR'S WARRANTIES AND REPRESENTATIONS. Licensor represents and warrants to Licensee that: (a) It has, and will have throughout the Term of this Agreement, the right to license the Licensed Property to Licensee in accordance with the terms and provisions of this Agreement; and (b) The making of this Agreement by Licensor does not violate any agreements, rights or obligations of any person, firm or corporation. 14. LICENSEE'S WARRANTIES AND REPRESENTATIONS. Licensee represents and warrants to Licensor that, during the Term and thereafter: (a) It will not attack the title of Licensor (or third parties that have granted rights to Licensor) in and to the Licensed Property or any copyright or trademarks pertaining thereto, nor will it attack the validity of the license granted hereunder; (b) It will not harm, misuse or bring into disrepute the Licensed Property, but on the contrary, will maintain the value and reputation thereof to the best of its ability; (c) It will manufacture, sell, promote and distribute the Licensed Products in an ethical manner and in accordance with the terms and intent of this Agreement, and in compliance with all applicable government regulations and industry standards; (d) It will not create any expenses chargeable to Licensor without the prior written approval of Licensor in each and every instance. It will not cause or allow any liens or encumbrances to be placed against, or grant any security interest (except to Licensor as provided hereunder) in, the Licensed Property and/or Licensee's inventory, contract rights and/or accounts receivables, and/or proceeds thereof, with respect to the Licensed Products without Licensor's prior written consent; Page 13 14 (e) It will protect to the best of its ability its right to manufacture, sell, promote, and distribute the Licensed Products hereunder; (f) It will at all times comply with all government laws and regulations, including but not limited to product safety, food, health, drug, cosmetic, sanitary or other similar laws, and all voluntary industry standards relating or pertaining to the manufacture, sale, advertising or use of the Licensed Products, and shall maintain its appropriate customary high quality standards during the Term hereof. It shall comply with any regulatory agencies which shall have jurisdiction over the Licensed Products and shall procure and maintain in force any and all permissions, certifications and/or other authorizations from governmental and/or other official authorities that may be required in response thereto. Each Licensed Product and component thereof distributed hereunder shall comply with all applicable laws, regulations and voluntary industry standards. Licensee shall follow reasonable and proper procedures for testing that all Licensed Products comply with such laws, regulations and standards. Licensee shall permit Licensor or its designees to inspect testing records and procedures with respect to the Licensed Products for compliance. Licensed Products that do not comply with all applicable laws, regulations and standards shall automatically be deemed unapproved and immediately taken off the market; (g) It shall, upon Licensor's request, provide credit information to Licensor including, but not limited to, fiscal year-end financial statements (profit-and-loss statement and balance sheet) and operating statements; (h) It will provide Licensor with the date(s) of first use of the Licensed Products in interstate and intrastate commerce, where appropriate; (i) It will, pursuant to Licensor's instructions, duly take any and all necessary steps to secure execution of all necessary documentation for the recordation of itself as user of the Licensed Property in any jurisdiction where this is required or where Licensor reasonably requests that such recordation shall be effected. Licensee further agrees that it will at its own expense cooperate with Licensor in cancellation of any such recordation at the expiration of this Agreement or upon termination of Licensee's right to use the Licensed Property. Licensee hereby appoints Licensor its Attorney-in-Fact for such purpose; (j) It will use its best efforts to manufacture, distribute and sell the Licensed Product(s) throughout the Territory; specifically, it shall: (i) Manufacture, distribute and sell the Licensed Product (s) in such price and quality brackets as are required to meet competition by reputable manufacturers of similar articles; (ii) Make and maintain adequate arrangements for the distribution of the Licensed Product(s) throughout the Territory; (iii) Supply said retail outlets with the necessary types of the Licensed Product(s) during the first and final thirds of each calendar year; and (iv) It will not deliver or sell Licensed Product(s) outside the Territory or knowingly sell Licensed Product(s) to a third party for delivery outside the Territory. (k) It shall at all times comply with all manufacturing, sales, distribution, retail and marketing policies and strategies promulgated by Licensor from time-to-time; Page 14 15 (1) If requested by Licensor to do so, it will utilize specific design elements of the Licensed Property provided to Licensee by Licensor on hangtags, labels, and other materials; (m) It will participate in a maximum of two (2) Warner Bros. Consumer Products' sponsored creative programs per contract year. 15. TERMINATION BY LICENSOR. (a) Licensor shall have the right to terminate this Agreement without prejudice to any rights which it may have, whether pursuant to the provisions of this Agreement, or otherwise in law, or in equity, or otherwise, upon the occurrence of any one or more of the following events (herein called "defaults"): (i) Licensee defaults in the performance of any of its obligations provided for in this Agreement; or (ii) Licensee shall have failed to deliver to Licensor or to maintain in full force and effect the insurance referred to in Paragraph 8(b) hereof; or (iii) Licensee shall fail to make any payment due hereunder on the date due; or (iv) Licensee shall fail to deliver any of the statements hereinabove referred to or to give access to the premises and/or license records pursuant to the provisions hereof to Licensor's authorized representatives for the purposes permitted hereunder, and such failure shall continue for ten (10) days after written notice thereof is sent by Licensor to the Licensee; or (v) Licensee shall fail to comply with any laws, regulations or voluntary industry standards as provided in Paragraph 14(f) hereof or any governmental agency or other body, office or official vested with appropriate authority finds that the Licensed Products are harmful or defective in any way, manner or form, or are being manufactured, sold or distributed in contravention of applicable laws, regulations or standards, or in a manner likely to cause harm; or (vi) Licensee shall be unable to pay its debts when due, or shall make any assignment for the benefit of creditors, or shall file any petition under the bankruptcy or insolvency laws of any nation, jurisdiction, county or place, or shall have or suffer a receiver or trustee to be appointed for its business or property, or be adjudicated a bankrupt or an insolvent; or (vii) Licensee does not commence in good faith to manufacture, distribute and sell each Licensed Products and utilize each character set forth in the Licensed Property ("Character") throughout the Territory on or before the Marketing Date and thereafter fails to diligently and continuously manufacture, distribute and sell each of the Licensed Products and utilize each Character throughout the Territory. Such default and Licensor's resultant right of termination (or recapture) shall only apply to the specific Character(s) and/or the specific Licensed Products, which or wherein Licensee fails to meet said Marketing Date requirement; or (viii) Licensee shall manufacture, sell or distribute, whichever first occurs, any of the Licensed Product(s) without the prior written approval of Licensor as provided in Paragraph 10 hereof; or (ix) Licensee undergoes a substantial change of management or control: or (x) A manufacturer approved pursuant to Paragraph 11(b) hereof shall sell Licensed Products to parties other than Licensee Page 15 16 or engage in conduct, which conduct if engaged in by Licensee would entitle Licensor to terminate this Agreement; or (xi) Licensee delivers or sells Licensed Products outside the Territory or knowingly sells Licensed Products(s) to a third party who Licensee knows intends to, or who Licensee reasonably should suspect intends to, sell or deliver such Licensed Products outside the Territory; or (xii) Licensee uses any labor that violates any local labor laws and/or it uses prison, slave or child labor in connection with the manufacture of the Licensed Products; or (xiii) Licensee has made a material misrepresentation or has omitted to state a material fact necessary to make the statements not misleading; or (xiv) Licensee shall breach any other agreement in effect between Licensee on the one hand and Licensor on the other. (b) In the event any of these defaults occur, Licensor shall give notice of termination in writing to Licensee by facsimile and certified mail. Licensee shall have ten (10) days from the date of giving notice in which to correct any of these defaults (except subdivisions (vii), (viii), (xi) and (xiii) above which are not curable), and failing such, this Agreement shall thereupon immediately terminate, and any and all payments then or later due from Licensee hereunder (including Guaranteed Consideration) shall then be promptly due and payable in full and no portion of those prior payments shall be repayable to Licensee. 16. FINAL STATEMENT UPON TERMINATION OR EXPIRATION. Licensee shall deliver, as soon as practicable, but not later than thirty (30) days following expiration or termination of this Agreement, a statement indicating the number and description of Licensed Products on hand together with a description of all advertising and promotional materials relating thereto. Following expiration or termination of this Agreement, Licensee shall immediately cease any and all manufacturing of the Licensed Product. However, if Licensee has complied with all the terms of this Agreement, including, but not limited to, complete and timely payment of the Guaranteed Consideration and Royalty Payments, then Licensee may continue to distribute and sell its remaining inventory for a period not to exceed sixty (60) days following such termination or expiration (the "Sell-Off Period"), subject to payment of applicable royalties thereto. In no event, however, may Licensee distribute and sell during the Sell-Off Period an amount of Licensed Products that exceeds the average amount of Licensed Products sold during any consecutive sixty (60) day period during the Term. In the event this Agreement is terminated by Licensor for any reason under this Agreement, Licensee shall be deemed to have forfeited its Sell-Off Period. If Licensee has any remaining inventory of the Licensed Products following the Sell-Off Period, Licensee shall, at Licensor's option, make available such inventory to Licensor for purchase at or below cost, deliver up to Licensor for destruction said remaining inventory or furnish to Licensor an affidavit attesting to the destruction of said remaining inventory. Licensor shall have the right to conduct a physical inventory in order to ascertain or verify such inventory and/or statement. In the event that Licensee refuses to permit Licensor to conduct such physical inventory, Licensee shall forfeit its right to the Sell-Off Period hereunder or any other rights to dispose of such inventory. In addition to the forfeiture, Licensor shall have recourse to all other legal remedies available to it. Page 16 17 17. PAYMENTS AND NOTICES. Except as otherwise specifically provided herein, all notices which either party hereto is required or may desire to give to the other shall be given by addressing the same to the other at the address set forth above, or at such other address as may be designated in writing by any such party in a notice to the other given in the manner prescribed in this paragraph. All such notices shall be sufficiently given when the same shall be deposited so addressed, postage prepaid, in the United States mail and/or when the same shall have been delivered, so addressed, by facsimile or by overnight delivery service and the date of transmission by facsimile, receipt of overnight delivery service or two business days after mailing shall for the purposes of this Agreement be deemed the date of the giving of such notice. 18. NO PARTNERSHIP, ETC. This Agreement does not constitute and shall not be construed as constitution of a partnership or joint venture between Licensor and Licensee. Neither party shall have any right to obligate or bind the other party in any manner whatsoever, and nothing herein contained shall give, or is intended to give, any rights of any kind to any third persons. 19. NO SUBLICENSING/NON-ASSIGNABILITY. This Agreement shall bind and inure to the benefit of Licensor, its successors and assigns. This Agreement is personal to Licensee. Licensee shall not sublicense, franchise or delegate to third parties its rights hereunder (except as set forth in Paragraph 11 (b) hereof). Neither this Agreement nor any of the rights of Licensee hereunder shall be sold, transferred or assigned by Licensee and no rights hereunder shall devolve by operation of law or otherwise upon any receiver, liquidator, trustee or other party. 20. BANKRUPTCY RELATED PROVISIONS. (a) The parties hereby agree and intend that this Agreement is an executory contract governed by Section 365 of the bankruptcy Code. (b) In the event of Licensee's bankruptcy, the parties intend that any royalties payable under this Agreement during the bankruptcy period be deemed administrative claims under the Bankruptcy Code because the parties recognize and agree that the bankruptcy estate's enjoyment of this Agreement will (i) provide a material benefit to the bankruptcy estate during its reorganization and (ii) deny Licensor the benefit of the exploitation of the rights through alternate means during the bankruptcy reorganization. (c) The parties acknowledge and agree that any delay in the decision of trustee of the bankruptcy estate to assume or reject the Agreement (the "Decision Period") materially harms Licensor by interfering with Licensor's ability to alternatively exploit the rights granted under this Agreement during a Decision Period of uncertain duration. The parties recognize that arranging appropriate alternative exploitation would be a time consuming and expensive process and that it is unreasonable for Licensor to endure a Decision Period of extended uncertainty. Therefore, the parties agree that the Decision Period shall not exceed sixty (60) days. (c) Licensor, in its interest to safeguard its valuable interests (including, without limitation, its intellectual property rights in the Licensed Property), has relied on the particular skill and knowledge base of Licensee. Therefore, the parties acknowledge and agree that in a bankruptcy context this Page 17 18 Agreement is a license of the type described by Section 365(c)(1) of the Bankruptcy Code and may not be assigned without the prior written consent of the Licensor. 21. CONSTRUCTION. This Agreement shall be construed in accordance with the laws of the State of California of the United States of America without regard to its conflicts of laws provisions. 22. WAIVER, MODIFICATION, ETC. No waiver, modification or cancellation of any term or condition of this Agreement shall be effective unless executed in writing by the party charged therewith. No written waiver shall excuse the performance of any acts other than those specifically referred to therein. The fact that the Licensor has not previously insisted upon Licensee expressly complying with any provision of this Agreement shall not be deemed to be a waiver of Licensor's future right to require compliance in respect thereof and Licensee specifically acknowledges and agrees that the prior forbearance in respect of any act, term or condition shall not prevent Licensor from subsequently requiring full and complete compliance thereafter. If any term or provision of this Agreement is held to be invalid or unenforceable by any court of competent jurisdiction or any other authority vested with jurisdiction, such holding shall not affect the validity or enforceability of any other term or provision hereto and this Agreement shall be interpreted and construed as if such term or provision, to the extent the same shall have been held to be invalid, illegal or unenforceable, had never been contained herein. Headings of paragraphs herein are for convenience only and are without substantive significance. 23. CONFIDENTIALITY. The Artwork and the materials and information supplied to Licensee hereunder constitute, relate to, contain and form a part of confidential and proprietary information of Licensor, including, but not limited to, Style Guides, design elements, character profiles, unpublished copyrighted material, release dates, marketing and promotional strategies, information about new products, properties and characters, the terms and conditions of this Agreement, and other information which is proprietary in nature or is a trade secret (collectively, the "Proprietary Information"). Licensee acknowledges and agrees that the Proprietary Information is highly confidential and that disclosure of the Proprietary Information will result in serious harm to Licensor. Among other damage, unauthorized disclosure of the Proprietary Information will (i) damage Licensor's carefully planned marketing strategies, (ii) reduce interest in the Licensed Property, (iii) make unique or novel elements of the Licensed Property susceptible to imitation or copying by competitors, infringers or third parties prior to Licensor's release of the information or materials, (iv) damage Licensor's proprietary protection in undisclosed or unpublished information or materials, and (v) provide unauthorized third parties with materials capable of being used to create counterfeit and unauthorized merchandise, audio-visual products or other products, all of which will seriously damage Licensor's rights and business. Except as expressly approved in writing by Licensor, Licensee shall not reproduce or use the Proprietary Information and shall not discuss, distribute, disseminate or otherwise disclose the Proprietary Information or the substance or contents thereof, in whole or in part, in its original form or in any other form, with or to any other person or entity other than Licensee's employees and third parties who have executed a Contributor's Agreement (as provided in paragraph 8(b)) or third party manufacturer's agreement (as provided in paragraph 10(b)) and been approved by Page 18 19 Licensor as provided hereunder, and such employees and third parties shall be given access to the Proprietary Information only on a "need-to-know" basis. 24. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement between the parties concerning the subject matter hereof and cancels and supersedes any prior understandings and agreements between the parties hereto with respect thereto. There are no representations, warranties, terms, conditions, undertakings or collateral agreements, expressed, implied or statutory, between the parties other than as expressly set forth in this Agreement. 25. ACCEPTANCE BY LICENSOR. This instrument, when signed by Licensee, shall be deemed an application for license and not a binding agreement unless and until accepted by Warner Bros. Consumer Products by signature of a duly authorized officer and the delivery of such a signed copy to Licensee. The receipt and/or deposit by Warner Bros. Consumer Products of any check or other consideration given by Licensee and/or delivery of any material by Warner Bros. Consumer Products to Licensee shall not be deemed an acceptance By Warner Bros. Consumer Products of this application. The foregoing shall apply to any documents relating to renewals or modifications hereof. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. AGREED AND ACCEPTED: AGREED AND ACCEPTED: LICENSOR: LICENSEE: WARNER BROS. CONSUMER PRODUCTS, BAY AREA MULTIMEDIA a Division of Time Warner Entertainment Company, L.P. By: /s/ GARY R. SIMON By: /s/ RAY MUSCI ------------------------------ ------------------------------------- Gary R. Simon Vice President & General Counsel Date: 3/8/00 Date: 3/7/00 ----------------------------- ----------------------------------- Page 19 20 EXHIBIT 1 #12177-PPG CONTRIBUTOR'S AGREEMENT I, ___________________________________ , the undersigned ("Contributor"), have been engaged by BAY AREA MULTIMEDIA ("Licensee") to work on or contribute to the creation of Licensed Products, described as _______________________________, by Licensee under an agreement between Licensee and Warner Bros. Consumer Products, a division of Time Warner Entertainment Company L.P. ("Warner") dated ____________________. I understand and agree that the Licensed Products, and all artwork or other results of my services for Licensee in connection with such Licensed Products ("Work") is a "work made for hire" for Cartoon Network and that all right, title and interest in and to the Work shall vest and remain with Cartoon Network I reserve no rights therein. Without limiting the foregoing, I hereby assign and transfer to Cartoon Network all other rights whatsoever, in perpetuity throughout the universe which I may have or which may arise in me or in connection with the Work. I hereby waive all moral rights in connection with such Work together with any other rights which are not capable of assignment. I further agree to execute any further documentation relating to such transfer or waiver or relating to such Work at the request of Cartoon Network or Licensee, failing which Cartoon Network is authorized to execute same as my Attorney-in-Fact. Contributor: BY: ------------------------------------- signature ------------------------------------- print name ------------------------------------- address ------------------------------------- ------------------------------------- country ------------------------------------- date Warner Bros. Consumer Products: By: ---------------------------- Date: -------------------------- Page 20 21 EXHIBIT 2 #12177-PPG MILESTONE 1 CONCEPT DESIGN: General description of proposed program, game play and overall look and feel. Includes user interface, list of characters and time line for production and release. MILESTONE 2 FUNCTIONAL DESIGN SPECIFICATION/DESIGN DOCUMENT: Detailed description of the program including: synopsis, overview and logic flowchart. MILESTONE 3 SCRIPT: Dialogue script. MILESTONE 4 GAME PLAY AND CHARACTER ANIMATION: MILESTONE 5 ALPHA: Initial combination of all product elements and art in a usable working prototype. MILESTONE 6 BETA: Almost final version of the License Product(s) that is a fully functional, nearly bug-free disk that incorporates finalized art and game play. MILESTONE 7 GOLDEN, MASTER: Final disk that results from Milestone 6 which includes a fully tested program containing all elements and game play.
Page 21 22 EXHIBIT 3 #12177-PPG WARNER BROS. CONSUMER PRODUCTS 4000 Warner Boulevard Bridge Building 156 South - 4th Floor Burbank, CA 91522 Re: Approval of Third Party Manufacturer Gentlemen: This letter will serve as notice to you that pursuant to Paragraph 11(b) of the License Agreement dated __________, 2000 between you and BAY AREA MULTIMEDIA ("Licensee"), we have been engaged as the manufacturer for Licensee in connection with the manufacture of the Licensed Products as defined in the aforesaid License Agreement. We hereby acknowledge that we may not manufacture Licensed Products for, or sell or distribute Licensed Products to, anyone other than Licensee. We hereby further acknowledge that we have received a copy and are cognizant of the terms and conditions set forth in said License Agreement and hereby agree to observe those provisions of said License Agreement which are applicable to our function as manufacturer of the Licensed Products. It is expressly understood that we are obligated to comply with all local laws, including without limitation, labor laws, wage and hour laws and anti-discrimination laws and that you or your representatives shall, at anytime, have the right to inspect our facilities and review our records to ensure compliance therewith. It is understood that this engagement is on a royalty free basis and that we may not subcontract any of our work without your prior written approval. We understand that our engagement as the manufacturer for Licensee is subject to your written approval. We request, therefore, that you sign in the space below, thereby showing your acceptance of our engagement as aforesaid. Very truly yours, ------------------------------------- manufacturer/company name By: ------------------------------------- signature ------------------------------------- print name ------------------------------------- address ------------------------------------- ------------------------------------- country ------------------------------------- date ------------------------------------- product(s) manufacturing AGREED TO AND ACCEPTED: WARNER BROS. CONSUMER PRODUCTS, a Division of Time Warner Entertainment Company, L.P. By: -------------------------------- Gary R. Simon Vice President & General Counsel Date: -------------------------------- Page 22 EX-10.35 45 v72115orex10-35.txt EXHIBIT 10.35 1 EXHIBIT 10.35 (Confidential Portions Omitted) WARNER BROS. [LOGO] WARNER BROS. CONSUMER PRODUCTS November 17, 2000 BAY AREA MULTIMEDIA 333 West Santa Clara Avenue Suite 930 San Jose, CA 95113 Attn: Ray Musci Re: WARNER BROS. LICENSE AGREEMENT #12177-PPG (POWERPUFF GIRLS) - AMENDMENT #1 Gentlemen: This letter when fully executed shall formally amend that certain License Agreement made March 8, 2000, relative to certain rights owned and controlled by our client, Warner Bros. By our mutual execution hereof, it is agreed as follows: 1. PARAGRAPH 1(a) CONTRACTUAL MARKETING COMMITMENT: is hereby amended by adding the following: In the United States Licensee shall spend an additional $[*] in advertising on the Cartoon Network Television and Cartoon Network.com on-line mediums and to be spent as follows:
DATE AMOUNT ---- ------ On or before December 31, 2001 $[*] On or before December 31, 2002 $[*] On or before December 31, 2003 $[*]
IT IS UNDERSTOOD AND AGREED THAT THE ADDITIONAL $1,250,000.00 CANNOT BE CROSS-COLLATERALIZED WITH the ORIGINAL $1,000,000.00 ADVERTISING SPEND. *Confidential Portions Omitted and Filed Separately with the Commission. 2 BAY AREA MULTIMEDIA WARNER BROS. [LOGO] NOVEMBER 17, 2000 PAGE 2 2. PARAGRAPH 1(c) LICENSED PRODUCT(S): is hereby amended by adding the following: iv) PC/CD Rom v) Nintendo GameCube vi) Playstation I vii) Playstation II viii) Microsoft X-Box ix) Sega Dreamcast It is understood and agreed that the Nintendo Dolphin platform (now known as Nintendo GameCube) option has been exercised. 3. PARAGRAPH 1(d) MARKETING DATE: is hereby deleted and replaced with the following: For purposes of subdivision 15(a)(vii), the Marketing Date for the first product on each of the platforms defined by 1(c) shall be no later than August 31, 2002. 4. PARAGRAPH 3 TERM: is hereby deleted and replaced with the following: The term ("Term") of the Agreement with respect to Licensed Product(s) referred to above shall commence on March 1, 2000 and terminate on March 15, 2005. It being specifically understood and agreed that for Licensed Products iv)-ix) while development may begin on, prior to, or after March 15, 2001, retail sales of such products will only take place on or after March 15, 2001 and last through the term of the Agreement. 5. PARAGRAPH 4(a) GUARANTEED CONSIDERATION: is hereby deleted and replaced with the following: GUARANTEED CONSIDERATION: the sum of $[*] payable as follows:
DATE AMOUNT ---- ------ Upon execution of the Agreement $[*] of which Licensor acknowledges has been paid On or before August 1, 2000 $[*] of which Licensor acknowledges has been paid On or before December 1, 2000 $[*] On or before March 1, 2001 $[*]
*Confidential Portions Omitted and Filed Separately with the Commission. 3 BAY AREA MULTIMEDIA WARNER BROS. [LOGO] NOVEMBER 17, 2000 PAGE 3 On or before June 1, 2001 [*] On or before September 1, 2001 [*] On or before December 1, 2001 [*] On or before March 1, 2002 [*]
6. PARAGRAPH 4(b) GUARANTEED CONSIDERATION: royalty rate percentage is hereby deleted and replaced the following: For Licensed Products i)-vi) [*] of Net Sales; and For Licensed Products vii)-ix) [*] of Net Sales for unit sales from [*]; [*] from [*]; and [*] from [*]. 7. PARAGRAPH 2 GRANT OF LICENSE: is hereby amended by adding the following: (d) FIRST RIGHT OF REFUSAL: If during the Term of this Agreement, Licensor determines that it wishes to have developed and distributed any computer software game for the Licensed Media, to include any of the Licensed Property (a "New Product"), Licensee shall have the first right of refusal to develop, manufacture, sell and distribute the New Product in accordance with the terms contained herein. If Licensor desires to develop a New Product, Licensor shall so notify Licensee in a writing that sets forth in reasonable detail the concept and demographic information relating to such concept ("New Product Notice"). Licensee shall have the right for a period of twenty (20) business days after receipt of the New Product Notice, to elect, by written notice to Licensor, to develop, manufacture, sell and distribute the New Product in accordance with the terms of this Agreement. Licensee and Licensor shall thereafter enter into an amendment to this Agreement to provide for this New Product. Such amendment shall require Licensee to begin the development process of the New Product within three (3) months and shall also include a mutually agreeable marketing date for such New Product. If after twenty (20) business days following its receipt of the New Product Notice, Licensee does not render notice to Licensor to exercise its option to develop, manufacture, sell and distribute the New Product in accordance with the terms *Confidential Portions Omitted and Filed Separately with the Commission. 4 BAY AREA MULTIMEDIA WARNER BROS. [LOGO] NOVEMBER 17, 2000 PAGE 4 contained herein, or Licensee renders notice declining to exercise its option, Licensor shall be released from any obligation with respect to the New Product with Licensee. 8. PARAGRAPH 15 TERMINATION BY LICENSOR (a)(vii): is hereby deleted and replaced with the following: (vii) Licensee does not commence in good faith to manufacture, distribute and sell a Licensed Product throughout the Territory on or before the Marketing Date as defined in Paragraph 1(c). Such default and Licensor's resultant right of termination (or recapture) shall only apply to the specific regions/countries within the Territory in which or wherein Licensee fails to meet said Marketing Date requirement; or In all other respects, other than as noted above, the subject License Agreement and all of its terms and conditions shall continue to govern our relationship. Please show your concurrence with the above by signing all copies and returning same to Warner Bros. Consumer Products. Upon final execution, one copy will be sent to you for your files. This letter shall have no legal effect unless and until signed by all parties noted below. Sincerely, AGREED AND ACCEPTED: WARNER BROS. CONSUMER PRODUCTS, BAY AREA MULTIMEDIA a Division of Time Warner Entertainment Company, L.P. By: /s/ GARY R. SIMON By: /s/ RAY MUSCI -------------------------------- -------------------------------- Gary R. Simon Senior Vice President, Business and Legal Affairs Date 11/29/00 Date Nov 27, 2000 ------------------------------ ------------------------------ EX-10.36 46 v72115orex10-36.txt EXHIBIT 10.36 1 EXHIBIT 10.36 (Confidential Portions Omitted) RETAIL LICENSE WARNER BROS. CONSUMER PRODUCTS #12697-DEX LICENSE AGREEMENT made October 4, 2000, by and between Warner Bros. Consumer Products, a Division of Time Warner Entertainment Company, L.P., whose address is 4000 Warner Blvd., Burbank, CA 91522 (hereinafter referred to as "LICENSOR") and Bay Area Multimedia, whose address is 333 West Santa Clara Avenue, Suite 930, San Jose, CA 95113 Attention: Ray Musci hereinafter referred to as "LICENSEE"). WITNESSETH: The parties hereto hereby agree as follows: 1. DEFINITIONS. As used in this Agreement the following terms shall have the following respective meanings: (a) LICENSED PROPERTY: The fictional cartoon characters as they appear in the animated television series entitled "DEXTER'S LABORATORY" as follows: DEXTER, DEE DEE, MOM, DAD and MANDARK including said characters' representations, names, likenesses and all environmental settings, artwork and other materials associated therewith. Without limitation to any other reservations, terms and conditions herein, specifically excluded herefrom are rights to any and all other versions including without limitation sequels, spin-offs or live action versions of said series. Furthermore, no sound bites, voices, music or other audio is included herein. If Licensee wishes to use any such elements, Licensee must separately procure the necessary rights and any rights clearance or related fees arising from same shall be at Licensee's sole expense. (b) LICENSED PRODUCT(S): Line of action/adventure products for the following platforms: i) GameBoy Color ii) GameBoy Advance IT IS UNDERSTOOD AND AGREED THAT NINTENDO GAMECUBE MAY BE ADDED AS AN ADDITIONAL PLATFORM UPON THIRTY (30) DAYS PRIOR WRITTEN NOTICE FROM LICENSEE TO LICENSOR. THE ADDITIONAL GUARANTEED CONSIDERATION FOR SUCH PLATFORM SHALL BE $[*], PAYMENT TO BE MADE WITH THE NOTICE. (c) MARKETING DATE: For purposes of subdivision 15(a)(vii), the Marketing Date for the first product on each of the platforms defined by 1(c)(i) and 1(c)(ii) shall be no later than December 31, 2002. (d) TERRITORY: Worldwide excluding China, Guam, Japan and Saipan 2. GRANT OF LICENSE. (a) Upon the terms and conditions hereinafter set forth, Licensor hereby grants to Licensee and Licensee hereby accepts for the Term of this Agreement, as hereinafter defined, a license to utilize the Licensed Property solely upon or in connection with the manufacture, distribution and sale of the Licensed Products solely for retail sale throughout the Territory; no license is granted hereunder for the manufacture, distribution or sale of the Licensed Product(s) for publicity purposes, for sale or gift in combination with other products or services, as giveaways, as premiums used for the purpose of publicizing, promoting or increasing sales of any other product(s) or service(s), or in connection with any similar method of merchandising. *Confidential Portions Omitted and Filed Separately with the Commission. 2 Notwithstanding anything to the contrary contained herein, Licensee may, i) distribute up to [*] units for each game in the United States and [*] units for each game in International territories of each Licensed Product for publicity purposes, as well as [*] "time limited" or reduced feature "demo" versions, subject to Licensor's approval rights set forth in Paragraph 10; and ii) on a case-by-case basis, with prior written approval by Licensor, bundle Licensed Products with other products. (b) EXCLUSIVITY: The License granted herein shall be non-exclusive for the Licensed Property with respect to the Licensed Product(s) in the Territory during the Term, as hereinafter defined. (c) Licensee specifically understands, and agrees that no rights are granted herein with respect to the Warner Bros. "shield" logo or trademark, or any other trademark(s), logo(s) or copyrights owned by Licensor other than those specifically set forth above in the Licensed Property, it being understood that all rights in and to said properties are reserved exclusively to Licensor for use and/or licensing as it deems appropriate to third party(s) of its choice. (d) Notwithstanding anything to the contrary contained herein, including the general prohibition on use of the Warner Bros. Shield, the Licensed Property shall also include the Warner Bros. Interactive, Entertainment Name/Logo (the "Name/Logo") as shall be provided by Licensor and as such may be changed by Licensor from time to time. Licensee shall utilize the Name/Logo on such Licensed Products and in such manner as Licensor shall designate. The parties agree that, notwithstanding anything to the contrary contained elsewhere in this Agreement, Licensee's use of the Name/Logo shall be on a non-exclusive basis. (e) Without limiting any other approval rights of Licensor as contained herein, no television commercials may be utilized under this Agreement without the specific prior written approval of Licensor. 3. TERM. The term ("Term") of the Agreement with respect to Licensed Product(s) referred to above shall commence on September 1, 2000 and terminate on September 1, 2003. 4. CONSIDERATION. In full consideration for the rights, licenses and privileges herein granted to Licensee, Licensee shall pay to Licensor the following royalty payments: (a) GUARANTEED CONSIDERATION: For the rights herein granted the sum of $275,000.00 payable as follows:
DATE AMOUNT - ---- ------ Upon execution of this Agreement $[*] On or before December 1, 2000 $[*] On or before April 1, 2001 $[*] On or before August 1, 2001 $[*] On or before December 1, 2001 $[*]
All Guaranteed Consideration paid by Licensee pursuant to this Subparagraph (a) shall be applied against such royalties as are or have become due Licensor under Subparagraph (b). No part of the Guaranteed Consideration shall be repayable to Licensee. *Confidential Portions Omitted and Filed Separately with the Commission. Page 2 3 (b) ROYALTY PAYMENTS: With respect to the Licensed Product(s) referred to above, Licensee shall pay to Licensor a sum equal to [*] of all net sales (as such term "net sales" is defined herein) by Licensee or any of its affiliated, associated or subsidiary companies of the Licensed Product(s) covered by this Agreement. The term "Net Sales" shall mean all monies billed or billable by Licensee, from the exercise of its rights to distribute and sell Licensed Product(s) in the Territory before any allowances or discounts which have been deducted from the normal selling price, and any other payment charges whatsoever, less the following items only: (i) any sales, excise or value added taxes, which are separately stated, and which are required to be collected from customers as part of Net Sales, and which are payable to taxing authorities; (ii) quantity discounts; and (iii) actual returns not exceeding 10% of total sales. It is specifically understood and agreed that no deduction may be made for any bad debts, or any reserves therefor, any manufacturing costs, importing costs, selling costs, advertising costs, any real estate taxes, business license taxes, net income taxes, franchise taxes, withholding taxes or any other taxes not billed as part of net sales. Net Sales shall not include any sales by Licensee or its affiliated companies to Licensee or its affiliated companies, the primary purpose of which is the transfer of Licensed Product for eventual resale. Royalties as a result of such sales shall be based upon and paid when the Licensed Product is ultimately sold to the distributor, retailer, consumer or other unaffiliated third party. Licensee will pay all taxes, customs, duties, assessments, excise except as provided in sub-paragraph (i), and other charges levied upon the importation of or assessed against the Licensed Product under this Agreement, as well as all Licensees costs of doing business and Licensor shall have no liability therefor. Royalties shall be payable concurrently with the periodic statements required in Paragraph 6 hereof except to the extent offset by Guaranteed Consideration theretofore remitted. It is a material term and condition of this Agreement that Licensee report net sales and report and pay royalties on a country-by-country basis. In the event Licensee fails to do so, Licensor shall have the right to terminate this Agreement, in accordance with the provisions of Paragraph 15 herein. Royalties earned in excess of the Guaranteed Consideration applicable to the Term hereof shall not offset any Guaranteed Consideration required in respect of the succeeding renewal term (if any); likewise, royalties earned in excess of the Guaranteed consideration applicable to the renewal term shall not offset any Guaranteed Consideration applicable to any prior term. 5. RESERVATION OF RIGHTS; PREMIUMS. (a) Licensor reserves all rights not expressly conveyed to Licensee hereunder, and Licensor may grant licenses to others to use the Licensed Property, artwork and textual matter in connection with other uses, services and products without limitation. (b) Notwithstanding anything to the contrary stated herein, Licensor, for itself and its affiliates, specifically reserves the right, without limitation throughout the world, to use, or license any third party(s) of its or their choice to use the Licensed Property for the marketing, promotion, manufacture, distribution and sale of products similar or identical to those licensed herein *Confidential Portions Omitted and Filed Separately with the Commission. Page 3 4 in Paragraph 1(c) above including without limitation for sale through any catalogue(s) or online website produced or distributed by or on behalf of Licensor or its affiliated companies, or for sale or distribution in any theaters, arenas or restaurants, or for sale or distribution in connection with any home video product, including DVD or other formats, or for sale or distribution in any retail stores operated by or on behalf of Licensor, its affiliated companies or franchisees, or for sale or distribution in any theme/amusement parks operated by or on behalf of Licensor or its licensees, Six Flags, Premier Parks, Movie World, or, their affiliated companies. In addition, Licensor reserves the right to allow Six Flags, Premier Parks and Movie World to manufacture (or have manufactured by a third party) products similar or identical to those licensed herein for distribution or sale in theme and/or amusement parks owned or operated by six Flags, Premier Parks and/or Movie World. Further, Licensor reserves the right to use, or license others to use, and/or manufacture products similar or identical to those licensed herein for use as premiums. (c) Licensee agrees that it will not use, or knowingly permit the use of, and will exercise due care that its customers likewise will refrain from the use of, the Licensed Products as a premium, except with the prior written consent of Licensor. Subject to Licensor's prior written approval as aforesaid, Licensee shall pay to Licensor a sum equal to [*] of all premium sales. Any such royalties on premium sales shall not offset the Guaranteed Consideration hereunder. For purposes of this paragraph, the term "premium" shall be defined as including, but not necessarily limited to, combination sales, free or self-liquidating items offered to the public in conjunction with the sale or promotion of a product or service, including traffic building or continuity visits by the consumer/customer, or any similar scheme or device, the prime intent of which is to use the Licensed Products in such a way as to promote, publicize and or sell the products, services or business image of the user of such item. 6. PERIODIC STATEMENTS. Within thirty (30) days after the end of the first calendar quarter after the date of execution of the License Agreement and promptly on the 15th day after the end of each calendar month thereafter, Licensee shall furnish to Licensor complete and accurate statements certified to be accurate by Licensee, or if a corporation, by an officer of Licensee, showing with respect to all Licensed Products distributed and sold by Licensee during the preceding calendar month the (i) number of units; (ii) country in which manufactured, sold and/or to which shipped; (iii) description (as such term is defined below) of the Licensed Products; (iv) gross sales price; and (v) itemized deductions from gross sales price, and net sales price together with any returns made during the preceding calendar month. Such statements shall be in such formats as Licensor shall require (which formats may be amended by Licensor from time to time), and shall be furnished to Licensor whether or not any of the Licensed Products have been sold during calendar month to which such statements refer. In the event Licensee has Royalties earned in currencies other than in U.S. Dollars, then Licensee shall convert said amounts into U.S. Dollars based upon the exchange rate published by the Wall Street Journal as of the fifteenth day of the applicable month or if such day shall fall on a non-business day then as of the first business day following said fifteenth day. Receipt or acceptance by Licensor of any of the statements furnished pursuant to this Agreement or of any sums paid hereunder shall not preclude Licensor from questioning the correctness thereof at any time, and in the event that any inconsistencies or mistakes are discovered in such statements or payments, they shall immediately be rectified and the appropriate payments made by Licensee. Upon demand of Licensor, Licensee shall at its own expense, but not more than once in any twelve (12) month period, furnish to Licensor a detailed statement by an independent certified public accountant showing the (i) number of units; (ii) country in which manufactured, sold and/or to which shipped; (iii) description of *Confidential Portions Omitted and Filed Separately with the Commission. Page 4 5 the Licensed Products; (iv) gross sales price; and (v) itemized deductions from gross sales price and net sales price of the Licensed Products covered by this Agreement distributed and/or sold by Licensee up to and including the date upon which Licensor has made such demand. For purposes of this Subparagraph, the term "Description" shall mean a detailed description of the Licensed Products including the nature of each of the Licensed Products, any and all names and likenesses, whether live actors or animated characters, from the Licensed Property utilized on the Licensed Products and/or any related packaging and/or wrapping material, and any other components of the Licensed Property utilized on the Licensed Products and/or any related packaging and/or wrapping material. In the event Licensor is responsible for the payment of any additional third party participations based on Licensee not reporting by character name and likeness as provided above, Licensee shall be responsible for reimbursing Licensor for the full amount of all such third party claims, including without limitation, the participation itself, interest, audit and attorneys' fees. Licensee understands and agrees that it is a material term and condition of this Agreement that Licensee include the Description on all statements. In the event Licensee fails to do so, Licensor shall have the right to terminate this Agreement, in accordance with the provisions of Paragraph 15 herein. (b) For the statements and payments required hereunder (please reference the contract number(s) on all statements and payments) if the United States Postal Service is used deliver to the following: WARNER BROS. CONSUMER PRODUCTS 21477 Network Place Chicago, IL 60673-1214 For the statements and payments required hereunder (please reference the contract number(s) on all statements and payments) if sent by Federal Express or any other Courier Service deliver to the following: BANK ONE Attention WBCP lockbox #21477 525 West Monroe 8th Floor Mail Room Chicago, IL 60661 Telephone Number 312-732-5500 (c) Any payments which are made to Licensor hereunder after the due date required therefor, shall bear interest at the then current prime rate plus six (6%) percent (or the maximum rate permissible by law, if less) from the date such payments are due to the date of payment. Licensor's right hereunder to interest on late payments shall not preclude Licensor from exercising any of its other rights or remedies pursuant to this Agreement or otherwise with regard to Licensee's failure to make timely remittances. (d) Licensee hereby grants to Licensor (subject to any liens or security interests granted by Licensee which are approved in writing by Licensor) a first-priority lien and security interest in Licensee's inventory, contract rights and accounts receivable, and all proceeds thereof, with respect to the Licensed Products only. Licensee further agrees to provide, at Licensor's request: (i) a letter of credit issued in favor of Licensor from a financial institution as approved by Licensor in an amount up to the Guaranteed Consideration; and/or (ii) such other form of security acceptable to Licensor. Licensee agrees to execute all documentation as Licensor may require in connection with perfecting such security interests. 7. BOOKS AND RECORDS. (a) Licensee shall keep, maintain and preserve (in Licensee's principal place of business) for at least two (2) years following termination or expiration of the Term of this Agreement or any Page 5 6 renewal(s) hereof (if applicable), complete and accurate records of accounts including, without limitation, purchase orders, inventory records, invoices, correspondence, banking and financial and other records pertaining to the various items required to be submitted by Licensee as well as to ensure Licensee's compliance with local laws as required pursuant to Paragraph 13(k) hereof. Such records and accounts shall be available for inspection and audit at any time or times during or after the Term of this Agreement or any renewal(s) hereof (if applicable) during reasonable business hours and upon reasonable notice by Licensor or its nominees. Licensee agrees not to cause or permit any interference with Licensor or nominees of Licensor in the performance of their duties. During such inspections and audits, Licensor shall have the right to take extracts and/or make copies of Licensee's records as it deems necessary. (b) The exercise by Licensor in whole or in part, at any time of the right to audit records and accounts or of any other right herein granted, or the acceptance by Licensor of any statement or statements or the receipt and/or deposit by Licensor, of any payment tendered by or on behalf of Licensee shall be without prejudice to any rights or remedies of Licensor and such acceptance, receipt and/or deposit shall not preclude or prevent Licensor from thereafter disputing the accuracy of any such statement or payment. (c) If pursuant to its right hereunder Licensor causes an audit and inspection to be instituted which thereafter discloses a deficiency between the amount found to be due to Licensor and the amount actually received or credited to Licensor, then Licensee shall, upon Licensor's demand, promptly pay the deficiency, together with interest thereon at the then current prime rate from the date such amount became due until the date of payment, and, if the deficiency is more than [*] of all royalties paid by Licensee during the period covered by the audit, then Licensee shall pay the reasonable costs and expenses of such audit and inspection. 8. INDEMNIFICATIONS. (a) During the Term, and continuing after the expiration or termination of this Agreement, Licensor shall indemnify Licensee and shall hold it harmless from any loss, liability, damage, cost or expense, arising out of any claims or suits which may be brought or made against Licensee by reason of the breach by Licensor of the warranties or representations as set forth in Paragraph 12 hereof, provided that Licensee shall give prompt written notice, and full cooperation and assistance to Licensor relative to any such claim or suit and provided, further, that Licensor shall have the option to undertake and conduct the defense of any suit so brought. Licensee shall not, however, be entitled to recover for lost profits. Licensee shall cooperate fully in all respects with Licensor in the conduct and defense of said suit and/or proceedings related thereto. (b) During the Term, and continuing after the expiration or termination of this Agreement, Licensee shall indemnify Licensor, Time Warner Entertainment Company, L.P. ("TWE") and each of its affiliates and shall hold them harmless from any loss, liability, damage, cost or expense arising out of any claims or suits which may be brought or made against Licensor, TWE or any of its affiliates, by reason of: (i) any breach of Licensee's covenants and undertakings hereunder; (ii) any unauthorized use by Licensee of the Licensed Property; (iii) any use of any trademark, or copyright (except trademarks or copyrights in the Licensed Property used in accordance with the terms of this Agreement), design, patent, process, method or device; (iv) Licensee's noncompliance with any applicable federal, state or local laws or with any other applicable regulations; and (v) any alleged defects and/or inherent dangers (whether obvious or hidden) in the Licensed Products or the use thereof. (c) With regard to 8(b) above, Licensee agrees to obtain, at its own expense, Comprehensive Commercial General Liability Insurance, including product liability and contractual liability coverage *Confidential Portions Omitted and Filed Separately with the Commission. Page 6 7 providing adequate protection for Licensor and Licensee against any such claims or suits in amounts no less than three million dollars ($3,000,000) per occurrence, combined single limits. Simultaneously with the execution of this Agreement, Licensee undertakes to submit to Licensor a fully paid policy or certificate of insurance naming Licensor, TWE and each of its affiliates as additional insured parties and, requiring that the insurer shall not terminate or materially modify such policy or certificate of insurance without written notice to Licensor at least twenty (20) days in advance thereof. Such insurance shall at all times be primary and not contributory with any insurance carried by Licensor, TWE or any of their affiliates. Further the delivery of the policy or certificate, as provided in this Paragraph 8(c) are material obligations of Licensee. 9. ARTWORK; TRADEMARKS AND COPYRIGHTS. Licensee shall, within thirty (30) days of receiving an invoice, pay Licensor for artwork executed for Licensee by Licensor (or by third parties under contract to Licensor) for use in the development of the Licensed Products and any related packaging, display and promotional materials at Licensor's prevailing commercial art rates. The foregoing shall include any artwork that, in Licensor's opinion, is necessary to modify artwork initially prepared by Licensee and submitted for approval. Estimates of artwork charges are available upon request. (a) TRADEMARKS: (i) Licensee agrees that it will cause to appear indelibly and legibly on each of the Licensed Product(s) and all advertising material, tags, labels and devices bearing the Licensed Property, the following notice or such other notice as may be approved by Licensor: DEXTER'S LABORATORY AND ALL RELATED CHARACTERS AND ELEMENTS ARE TRADEMARKS OF CARTOON NETWORK (C) 200X. (The year date shall be as instructed by Licensor) (ii) Licensee further agrees that it will not apply for or seek to obtain trademark registration for the Licensed Property and that Licensor may, at its option, apply for and obtain in its own name trademark registrations for the Licensed Product(s), and that, upon request, Licensee will furnish necessary specimens or facsimiles for such purpose free of cost, as well as evidence of the date of first shipment or sale of each Licensed Product in interstate or foreign or other federally regulable U.S. commerce and, if earlier, also in intrastate commerce. (iii) Licensee agrees that if Licensee receives knowledge of the use of the Licensed Property by anyone other than Licensee on Licensed Product(s) or products confusingly similar thereto, Licensee will call such fact to the attention of Licensor. Licensor shall then have the option to institute legal proceedings to prevent such use, and Licensee shall cooperate and assist in the prosecution of any such action. If demanded by Licensor, Licensee shall join in or cooperate in the prosecution of any such legal proceeding as may be instituted by Licensor. Any such legal proceedings shall be solely at Licensor's expense. If Licensee is joined in such proceeding, Licensor shall indemnify and hold harmless Licensee from and against any claim, sanction, liability, damages, attorney's fees, judgments or orders of any kind arising out of such proceeding. (b) COPYRIGHTS: (i) GAME PROGRAM: The copyright in and to the computer program (object and source code) for any game which is incorporated in the Licensed Product (herein the "Program") shall be owned as follows: Page 7 8 (a) If a program is created solely by Licensee or an approved sublicensee under license or authority of Licensee without any contribution by Licensor to the creation of that Program in the form of programming effort, then the copyright in and to such Program shall be owned solely by Licensee; (b) If a Program is created jointly by Licensee and Licensor, then the copyright in and to such Program shall be owned jointly by Licensor and Licensee. (ii) AUDIO-VISUAL DISPLAY: The copyright in and to the images displayed on the screen and the sounds produced during the course of the game play, including all possible combinations and sequences thereof, in both the "attract mode" and the "play mode" and the underlying script for therefor (herein the "Audio-Visual Display") shall be owned as follows: (a) The copyright in and to all elements of the Audio-Visual Display constituting pre-existing material of Licensor from Licensor's fictional cartoon characters as set forth in Paragraph 1(a) "Licensed Property" such as, without limitation, the characters portrayed in such television series or any reproductions thereof (hereinafter "Pre-Existing Material"), are acknowledged to be the sole and exclusive property of Licensor and shall remain the sole and exclusive property of Licensor; (b) The copyright in and to all elements of the Audio-Visual Display constituting original material created by Licensee shall be the sole and exclusive property of Licensee. Licensee retains sole and exclusive ownership of all of Licensee's inventions, whether patented or not, trade secrets and similar information and processes of a confidential nature, and works of authorship, whether copyrighted or not, whether manifested in the Audio-Visual Display or not, and whether embodied in hardware or software used to create the Audio-Visual Display. Licensee shall be free to use and license others to use elements of the Audio-Visual Display owned by Licensee. (iii) PACKAGING, ADVERTISING AND PROMOTIONAL MATERIALS: Except as otherwise provided herein, the copyrights in and to any original material, other than the Programs and the Audio-Visual Displays, which is created by or for Licensee for the purpose of packaging, advertising or promoting the Licensed Product(s), including but not limited to the enclosure for the Licensed Product(s), all cartons, containers, packing and wrapping material, tags, labels, imprints or other devices, and all advertising and promotional materials (all such material hereinafter referred to as the "Other Materials"), shall be owned solely and exclusively by Licensee. Providing that the copyright in and to all elements of the Other Materials that constitute Licensor's Pre-Existing Material, material furnished to Licensee by or on behalf of Licensor or any material that is derivative of the foregoing, is acknowledged to be owned solely and exclusively by Licensor and shall remain the sole and exclusive property of Licensor. (iv) LIMITATIONS ON OWNERSHIP RIGHTS: The parties agree and acknowledge that each shall have the same right as any person or party with regard to any material incorporated in the Licensed Product(s), Other Materials, Programs, or Audio-Visual Displays which is in the public domain (provided that it has not entered into the public domain as the result of an act or omission in breach of this Agreement or any other written agreement by or between the parties hereto). Page 8 9 (v) ARTWORK: The Licensed Property shall be displayed or used only in such form and in such manner as has been specifically approved in writing by Licensor in advance and Licensee undertakes to assure usage of the trademark(s) and characters) solely as approved hereunder. Licensee further agrees and acknowledges that any and all Artwork (defined below) created, utilized, approved and/or authorized for use hereunder by Licensor in connection with the Licensed Products or which otherwise features or includes the Licensed Property shall be owned in its entirety exclusively by Licensor, "Artwork" as need herein shall include, without limitation, all pictorial, graphic, visual, audio, audio-visual, digital, literary, animated, artistic, dramatic, sculptural, musical or any other type of creations and applications, whether finished or not, including, but not limited to, animation, drawings, designs, sketches, images, tooling and tooling aids, illustrations, film, video, electronic, digitized or computerized information, software, object code, source code, on-line elements, music, text, dialogue, stories, visuals, effects, scripts, voiceovers, logos, one-sheets, promotional pieces, packaging, display materials, printed materials, photographs, interstitials, notes, shot logs, character profiles and translations, produced by Licensee or for Licensee, pursuant to this Agreement. Licensor reserves for itself or its designees all rights to use any and all Artwork created, utilized and/or approved hereunder without limitation. Licensee acknowledges that, as between Licensor and Licensee, the Licensed Property and Artwork and all other depictions expressions and derivations thereof, and all copyrights, trademarks and other proprietary rights therein are owned exclusively by Licensor and Licensee shall have no interest in or claim thereto, except for the limited right to use the same pursuant to this Agreement and subject to its terms and conditions. (vi) WORK-MADE-FOR-HIRE: Licensee agrees and acknowledges that any Artwork created by Licensee or for Licensee hereunder is a "work made for hire" for Cartoon Network under the U.S. Copyright Act, and any and all similar provisions of law under other jurisdictions, and that Cartoon Network is the author of such works for all purposes, and that Cartoon Network is the exclusive owner of all the rights comprised in the undivided copyright and all renewals, extensions and reversions therein, in and to such works in perpetuity and throughout the universe. Licensee hereby waives and releases in favor of Cartoon Network all rights (if any) of "droit moral," rental rights and similar rights in and to the Artwork (the "Intangible Rights") and agrees that Cartoon Network shall have the right to revise, condense, abridge, expand, adapt, change, modify, add to, subtract from, re-title, re-draw, re-color, or otherwise modify the Artwork, without the consent of Licensee. Licensee hereby irrevocably grants, transfers and assigns to Licensor all right, title and interest, including copyrights, trademark rights, patent rights and other proprietary rights, it may have in and to the Artwork, in perpetuity and throughout the universe, and to all proprietary depictions, expressions or derivations of the Licensed Property created by or for Licensee. Licensee acknowledges that Licensor shall have the right to terminate this Agreement in the event Licensee asserts any rights (other than those specifically granted pursuant to this Agreement) in or to the Licensed Property or Artwork. Licensee hereby warrants that any and all work created by Licensee under this Agreement apart from the materials provided to Licensee by Licensor is and shall be wholly original with or fully cleared by Licensee and shall not copy or otherwise infringe the rights of any third parties, and Licensee hereby indemnifies Licensor and will hold Licensor harmless from, any such claim of infringement ox otherwise involving Licensee's performance hereunder. At the request of Licensor, Licensee shall execute such form (a) of assignment of copyright or other papers as Licensor may reasonably request in order to confirm and vest in Licensor the rights in the properties as provided for herein. In addition, Licensee hereby appoints Licensor as Licensee's Page 9 10 Attorney-in-Fact to take such actions and to make, sign, execute, acknowledge and deliver all such documents as may from time to time be necessary to confirm in Licensor, its successors and assigns, all rights granted herein. If any third party makes or has made any contribution to the creation of Artwork authorized for use hereunder, Licensee agrees to obtain from such party a full confirmation and assignment of rights so that the foregoing rights shall vest fully in Licensor, in the form of the Contributor's Agreement attached hereto as Exhibit 1 and by this reference made a part hereof, prior to commencing work, and subject to the prior written approval of Licensor, and subject to the prior written approval of Licensor ensuring that all rights in the Artwork and Licensed Property arise in and are assigned to Licensor. Promptly upon entering into each such Contributor's Agreement, Licensee shall give Licensor a copy of such Contributor's Agreement. Licensee assumes all responsibility for such parties and agrees that Licensee shall bear any and all risks arising out of or relating to the performance of services by them and to the fulfillment of their obligations under the Contributor's Agreement. (vii) USE OF THIRD PARTY CONTENT: Licensee shall not use any third party content or technology in the Licensed Product(s), including without limitation any audio elements from the soundtracks of any motion picture or television series based upon the Licensed Property without Licensor's prior written approval, and unless: (i) Licensee is expressly permitted to use such third party content or technology pursuant to written agreements with all third party rights holders; and (ii) Licensee has acquired for Licensee and Licensor all rights, permissions, clearances, releases or other authorizations necessary to use such third party content or technology in conjunction with the development and exploitation of the Licensed Products(s) anywhere in the Territory by Licensee or Licensor or by either party's licensees, successors or assigns in perpetuity. Licensee shall be responsible, in perpetuity, for all payments in connection with the use of third party content or technology, except as the parties mutually agree upon at such time as Licensor approves of the use of such third party content or technology. Licensee shall have the right to review all Licensee agreements with third parties to ensure their acceptability and Licensee shall deliver such agreements to Licensor within fourteen (14) business days of Licensor's request therefor. 10. QUALITY OF LICENSED PRODUCT(S). (a) Licensee agrees that the Licensed Product(s) shall be of high standard and of such style, appearance and quality as shall be adequate and suitable to their promotion, distribution and sale to the best advantage of Licensee and Licensor. The quality and style of such product and its cartons and containers shall be subject to Licensor's approval. To this end Licensee shall, before selling or distributing any of the Licensed Product(s), furnish to Licensor free of cost for its written approval as to quality and style, the materials specified in the "MILESTONES" set forth on Exhibit 2 attached hereto. In the event that any Milestone deliverable shall not have been approved, disapproved, or otherwise commented upon within ten (10) business days after receipt thereof by Licensor, then Licensee shall have the right to so notify Licensor of such fact by facsimile or by overnight delivery service. In the event that Licensor fails to then approve, disapprove or otherwise comment upon the submitted items within seven (7) business days after receipt by it of such communication, any items so submitted shall be deemed to have been approved. Licensee shall, in addition, thereafter furnish to Licensor free of cost, for its written approval, [*] production samples of each such Licensed Product(s) together with their cartons and containers including packaging and wrapping material, to ensure quality control simultaneously upon distribution to the public. In addition, Licensee shall provide Licensor with six (6) catalogs which display all of Licensee's products, not just the Licensed Products, if such catalogs exist. Further, Licensor shall have the right to purchase any and all Licensed Products in any quantity at the maximum discount price Licensee charges its best *Confidential Portions Omitted and Filed Separately with the Commission. Page 10 11 customer purchasing the same quantity of Licensed Products under the same terms and conditions for delivery during the same period of time in the same general geographical area for sales throughout the same sales channel. After samples of Licensed Product(s) have been approved pursuant to this paragraph, Licensee shall not depart therefrom in any material respect without Licensor's prior written consent or add any additional element(s) such as in-pack flyers, business reply cards and so on without Licensor's approval in each case. Licensor shall have the right to withdraw its approval of samples if the quality of any Licensed Product ceases to be acceptable. (b) Any modification of a Licensed Product must be submitted in advance for Licensor's written approval as if it were a new Licensed Product. Approval of a Licensed Product which uses particular artwork does not imply approval of such artwork for use with a different Licensed Product. (c) Licensed Products must conform in all material respects to the final production samples approved by Licensor. If in Licensor's reasonable judgement, the quality of a Licensed Product originally approved has deteriorated in later production runs, or if a Licensed Product has otherwise been altered, Licensor may, in addition to other remedies available to it, require that such Licensed Product be immediately withdrawn from the market. (d) If any changes or modifications are required to be made to any material submitted to Licensor for its written approval in order to ensure compliance with Licensor's specifications or standards of quality, Licensee agrees promptly to make such changes or modifications. (e) Licensee shall permit Licensor to inspect Licensee's manufacturing operations, testing and payroll records (including those operations and records of any supplier or manufacturer approved pursuant to Paragraph 10(b) hereof) with respect to the Licensed Products. (f) Subject to the terms hereof, Licensee may utilize the Licensed Property for such advertising, promotional and display materials for the Licensed Product(s) as in its judgment will best promote the sale of said Licensed Product(s). Licensee agrees that it will not use the Licensed Property or any reproduction thereof in any advertising, promotional or display material or in any other manner without Licensor's prior written approval. Without limiting the foregoing no television commercials may be utilized under this License without the specific prior approval of Licensor. In the event that any advertising, promotional or display material submitted to Licensor shall not have been approved, disapproved or otherwise commented upon within thirty (30) days after receipt thereof by Licensor, then Licensee shall have the right to so notify Licensor of such fact by facsimile or by overnight delivery service. In the event that Licensor fails to then approve, disapprove or otherwise comment upon the submitted items within ten (10) business days after receipt by it of such facsimile or overnight delivery service any items so submitted shall be deemed to have been approved. A reasonable number of production copies of all such advertising, promotional and display materials will be furnished to Licensor free of charge. (g) To avoid confusion of the public, Licensee agrees not to associate other characters or properties with the Licensed Property on the Licensed Products or in any packaging, promotional or display materials unless Licensee receives Licensor's prior written approval. Furthermore, Licensee agrees not to use the Licensed Property (or any component thereof) on any business sign, business cards, stationery or forms, nor as part of the name of Licensee's business or any division thereof. Page 11 12 (h) Licensee shall use its best efforts to notify its customers of the requirement that Licensor has the right to approve all promotional, display and advertising material pursuant to this Agreement. (i) It is understood and agreed that any animation used in electronic media, including but not limited to animation for television commercials and character voices for radio commercials, shall be produced by Warner Bros. Animation pursuant to a separate agreement between Licensee and Warner Bros. Animation, subject to Warner Bros. Animation customary rates. Any payments made to Warner Bros. Animation for such animation shall be in addition to and shall not offset the Consideration set forth in Paragraph 4 above. (j) Licensor's approval of Licensed Product(s) (including without limitation, the Licensed Products) themselves as well as promotional, display, and advertising materials) shall in no way constitute or be construed as an approval by Licensor of Licensee's use of any trademark, copyright and/or other proprietary materials, not owned by Licensor. 11. DISTRIBUTION; SUBLICENSE/MANUFACTURE. (a) Licensee shall sell the Licensed Products either to jobbers, wholesalers, distributors or retailers for sale or resale and distribution directly to the public. Licensee shall not sell the Licensed Products through any cable home shopping service or through electronic media, including on any on-line network or service. If Licensee sells or distributes the Licensed Products at a special price, directly or indirectly, to itself, including without limitation, any subsidiary of Licensee (including any affiliated distributors) or to any other person, firm, or corporation affiliated with Licensee or its officers, directors or major stockholders, for ultimate sale to unrelated third parties, Licensee shall pay royalties with respect to such sales or distribution, based upon the price generally charged the trade by Licensee. (b) Except as to materials set forth in Paragraph 9(b)(ii)(b), Licensee shall not be entitled to sublicense any of the Computer Program or Audio-Visual Display developed by Licensee pursuant to this Agreement. In the event Licensee is not the manufacturer of the Licensed Products, Licensee shall, subject to the prior written approval of Licensor, which approval shall not be unreasonably withheld, be entitled to utilize a third party manufacturer in connection with the manufacture and production of the Licensed Products, provided that such manufacturer shall execute a letter in the form of Exhibit 3 attached hereto and by this reference made a part hereof. In such event, Licensee shall remain primarily obligated under all of the provisions of this Agreement and any default of this Agreement by such manufacturer shall be deemed a default by Licensee hereunder. In no event shall any such third party manufacturer agreement include the right to grant any rights to subcontractors. 12. GOODWILL. Licensee recognizes the great value of the publicity and goodwill associated with the Licensed Property and acknowledges: (i) such goodwill is exclusively that of Licensor; and (ii) that the Licensed Property has acquired a secondary meaning as Licensor's trademarks and/or identifications in the mind of the purchasing public. Licensee further recognizes and acknowledges that a breach by Licensee of any of its covenants, agreements or undertakings hereunder will cause Licensor irreparable damage, which cannot be readily remedied in damages in an action at law, and may, in addition thereto, constitute an infringement of Licensor's copyrights, trademarks and/other proprietary rights in, and to the Licensed Property, thereby entitling Licensor to equitable remedies, and costs. Page 12 13 13. LICENSOR'S WARRANTIES AND REPRESENTATIONS. Licensor represents and warrants to Licensee that: (a) It has, and will have throughout the Term of this Agreement, the right to license the Licensed Property to Licensee in accordance with the terms and provisions of this Agreement; and (b) The making of this Agreement by Licensor does not violate any agreements, rights or obligations of any person, firm or corporation. 14. LICENSEE'S WARRANTIES AND REPRESENTATIONS. Licensee represents and warrants to Licensor that, during the Term and thereafter: (a) It will not attack the title of Licensor (or third parties that have granted rights to Licensor) in and to the Licensed Property or any copyright or trademarks pertaining thereto, nor will it attack the validity of the license granted hereunder; (b) It will not harm, misuse or bring into disrepute the Licensed property, but on the contrary, will maintain the value and reputation thereof to the best of its ability; (c) It will manufacture, sell, promote and distribute the Licensed Products in accordance with the terms and intent of this Agreement, and in compliance with all applicable government regulations and industry standards; (d) It will not create any expenses chargeable to Licensor without the prior written approval of Licensor in each and every instance. It will not cause or allow any liens or encumbrances to be placed against, or grant any security interest (except to Licensor as provided hereunder) in, the Licensed Property and/or Licensee's inventory, contract rights and/or accounts receivables, and/or proceeds thereof, with respect to the Licensed Products without Licensor's prior written consent; (e) It will protect to the best of its ability its right to manufacture, sell, promote, and distribute the Licensed Products hereunder; (f) It will at all times comply with all government laws and regulations, including but not limited to product safety, food, health, drug, cosmetic, sanitary or other similar laws, and all voluntary industry standards relating or pertaining to the manufacture, sale, advertising or use of the Licensed Products, and shall maintain its appropriate customary high quality standards during the Term hereof. It shall comply with any regulatory agencies which shall have jurisdiction over the Licensed Products and shall procure and maintain in force any and all permissions, certifications and/or other authorizations from governmental and/or other official authorities that may be required in response thereto. Each Licensed Product and component thereof distributed hereunder shall comply with all applicable laws, regulations and voluntary industry standards. Licensee shall follow reasonable and proper procedures for testing that all Licensed Products comply with such laws, regulations and standards. Licensee shall permit Licensor or its designees to inspect testing records and procedures with respect to the Licensed Products for compliance. Licensed Products that do not comply with all applicable laws, regulations and standards shall automatically be deemed unapproved and immediately taken off the market; (g) It shall, upon Licensor's request, provide credit information to Licensor including, but not limited to, fiscal year-end financial statements (profit-and-loss statement and balance sheet) and operating statements; Page 13 14 (h) It will provide Licensor with the date(s) of first use of the Licensed Products in interstate and intrastate commerce, where appropriate; (i) it will, pursuant to Licensor's instructions, duly take any and all, necessary steps to secure execution of all necessary documentation for the recordation of itself as user of the Licensed Property in any jurisdiction where this is required or where Licensor reasonably requests that such recordation shall be effected. Licensee further agrees that it will at its own expense cooperate with Licensor in cancellation of any such recordation at the expiration of this Agreement or upon termination of Licensee's right to use the Licensed Property. Licensee hereby appoints Licensor its Attorney-in-Fact for such purpose; (j) It will use its best efforts to manufacture, distribute and sell the Licensed Product(s) throughout the Territory; (k) It will not deliver or sell Licensed Product(s) outside the Territory or knowingly sell Licensed Product(s) to a third party for delivery outside the Territory; (l) It shall at all times comply with all manufacturing, sales, distribution, retail and marketing policies and strategies promulgated by Licensor from time-to-time; (m) If requested by Licensor to do so, it will utilize specific design elements of the Licensed Property provided to Licensee by Licensor on hangtags, labels, and other materials. 15. TERMINATION BY LICENSOR. (a) Licensor shall have the right to terminate this Agreement without prejudice to any rights which it may have, whether pursuant to the provisions of this Agreement, or otherwise in law, or in equity, or otherwise, upon the occurrence of any one or more of the following events (herein called "defaults"): (i) Licensee defaults in the performance of any of its obligations provided for in this Agreement; or (ii) Licensee shall have failed to deliver to Licensor or to maintain in full force and effect the insurance referred to in Paragraph 8(b) hereof; or (iii) Licensee shall fail to make any payment due hereunder on the date due; or (iv) Licensee shall fail to deliver any of the statements hereinabove referred to or to give access to the premises and/or license records pursuant to the provisions hereof to Licensor's authorized representatives for the purposes permitted hereunder, and such failure shall continue for ten (10) days after written notice thereof is sent by Licensor to the Licensee; or (v) Licensee shall fail to comply with any laws, regulations or voluntary industry standards as provided in Paragraph 14(f) hereof or any governmental agency or other body, office or official vested with appropriate authority finds that the Licensed Products are harmful or defective in any way, manner or form, or are being manufactured, sold-or distributed in contravention of applicable laws, regulations or standards, or in a manner likely to cause harm; or (vi) Licensee shall be unable to pay its debts when due, or shall make any assignment for the benefit of creditors, or shall file any petition under the bankruptcy or insolvency laws of any nation, jurisdiction, county or place, or shall have or suffer a receiver or trustee to be appointed for its business or property, or be adjudicated a bankrupt or an insolvent; or Page 14 15 (vii) Licensee does not commence in good faith to manufacture, distribute and sell a Licensed Product throughout the Territory on or before the Marketing Date as defined in Paragraph 1(c). Such default and Licensor's resultant right of termination (or recapture) shall only apply to the specific regions/countries within the Territory in which or wherein Licensee fails to meet said Marketing Date requirement; or (viii) Licensee shall manufacture, sell or distribute, whichever first occurs, any of the Licensed Product(s) without the prior written approval of Licensor as provided in Paragraph 10 hereof; or (ix) Licensee undergoes a substantial change of management or control. The term "control" as used in the preceding sentence shall mean the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights attributable to the shares of the controlled entity; or (x) Licensee uses Artwork which has not been approved by Licensor in compliance with the provisions of Paragraph 9 hereof; or (xi) A manufacturer approved pursuant to Paragraph 11(b) hereof shall sell Licensed Products to parties other than Licensee or engage in conduct, which conduct if engaged in by Licensee would entitle Licensor to terminate this Agreement; or (xii) Licensee delivers or sells Licensed Products outside the Territory or knowingly sells Licensed Products(s) to a third party who Licensee knows intends to, or who Licensee reasonably should suspect intends to, sell or deliver such Licensed Products outside the Territory; or (xiii) Licensee uses any labor that violates any local labor laws and/or it uses prison, slave or child labor in connection with the manufacture of the Licensed Products; or (xiv) Licensee has made a material misrepresentation or has omitted to state a material fact necessary to make the statements not misleading; or (xvi) Licensee shall breach any other agreement in effect between Licensee on the one hand and Licensor on the other. (b) In the event any of these defaults occur, Licensor shall give notice of termination in writing to Licensee by facsimile and certified mail. Licensee shall have ten (10) days from the date of giving notice in which to correct any of these defaults (except subdivisions (vii), (viii), (xii) and (xiv) above which are not curable), and failing such, this Agreement shall thereupon immediately terminate, and any and all payments then or later due from Licensee hereunder (including Guaranteed Consideration) shall then be promptly due and payable in full and no portion of those prior payments shall be repayable to Licensee. 16. FINAL STATEMENT UPON TERMINATION OR EXPIRATION. Licensee shall deliver, as soon as practicable, but not later than thirty (30) days following expiration or termination of this Agreement, a statement indicating the number and description of Licensed Products on hand together with a description of all advertising and promotional materials relating thereto. Following expiration or termination of this Agreement, Licensee shall immediately cease any and all manufacturing of the Licensed Product. However, if Licensee has complied with all the terms of this Agreement, including, but not limited to, complete and timely payment of the Guaranteed Consideration and Royalty Payments, then Licensee may continue to distribute and sell its remaining inventory, on a non-exclusive basis only, for a period not to exceed sixty (60) days following such termination or expiration (the "Sell-Off Period"), subject to payment of applicable royalties thereto. In no event, however, may Licensee distribute and sell during the Sell-Off Period an amount of Licensed Products Page 15 16 that exceeds the average amount of Licensed Products sold during any consecutive sixty (60) day period during the Term. In the event this Agreement is terminated by Licensor for any reason under this Agreement, Licensee shall be deemed to have forfeited its Sell-Off Period. if Licensee has any remaining inventory of the Licensed Products following the sell-Off Period, Licensee shall, at Licensor's option, make available such inventory to Licensor for purchase at or below cost, deliver up to Licensor for destruction said remaining inventory or furnish to Licensor an affidavit attesting to the destruction of said remaining inventory. Licensor shall have the right to conduct a physical inventory in order to ascertain or verify such inventory and/or statement. In the event that Licensee refuses to permit Licensor to conduct such physical inventory, Licensee shall forfeit its right to the Sell-Off Period hereunder or any other rights to dispose of such inventory. In addition to the forfeiture, Licensor shall have recourse to all other legal remedies available to it. 17. PAYMENTS AND NOTICES. Except as otherwise specifically provided herein, all notices which either party hereto is required or may desire to give to the other shall be given by addressing the same to the other at the address set forth above, or at such other address as may be designated in writing by any such party in a notice to the other given in the manner prescribed in this paragraph. All such notices shall be sufficiently given when the same shall be deposited so addressed, postage prepaid, in the United states mail and/or when the same shall have been delivered, so addressed, by facsimile or by overnight delivery service and the date of transmission by facsimile, receipt of overnight delivery service or two business days after mailing shall for the purposes of this Agreement be deemed the date of the giving of such notice. 18. NO PARTNERSHIP, ETC. This Agreement does not constitute and shall not be construed as constitution of a partnership or joint venture between Licensor and Licensee. Neither party shall have any right to obligate or bind the other party in any manner whatsoever, and nothing herein contained shall give, or is intended to give, any rights of any kind to any third persons. 19. NO SUBLICENSING/NON-ASSIGNABILITY. This Agreement shall bind and inure to the benefit of Licensor, its successors and assigns. This Agreement is personal to Licensee. Licensee shall not sublicense, franchise or delegate to third parties its rights hereunder (except as set forth "in Paragraph 11(b) hereof). Neither this Agreement nor any of the rights of Licensee hereunder shall be sold, transferred or assigned by Licensee and no rights hereunder shall devolve by operation of law or otherwise upon any receiver, liquidator, trustee or other party. 20. BANKRUPTCY RELATED PROVISIONS. (a) The parties hereby agree and intend that this Agreement is an executory contract governed by Section 365 of the Bankruptcy Code. (b) In the event of Licensee's bankruptcy, the parties intend that any royalties payable under this Agreement during the bankruptcy period be deemed administrative claims under the Bankruptcy Code because the parties recognize and agree that the bankruptcy estate's enjoyment of this Agreement will (i) provide a material benefit to the bankruptcy estate during its reorganization. and (ii) deny Licensor the benefit of the exploitation of the rights through alternate means during the bankruptcy reorganization. (c) The parties acknowledge and agree that any delay in the decision of trustee of the bankruptcy estate to assume or reject the Agreement (the "Decision Period") materially harms Licensor by Page 16 17 interfering with Licensor's ability to alternatively exploit the rights granted under this Agreement during a Decision Period of uncertain duration. The parties recognize that arranging appropriate alternative exploitation would be a time consuming and expensive process and that it is unreasonable for Licensor to endure a Decision Period of extended uncertainty. Therefore, the parties agree that the Decision Period shall not exceed sixty (60) days. (d) Licensor, in its interest to safeguard its valuable interests (including, without limitation, its intellectual property rights in the Licensed property), has relied on the particular skill and knowledge base of Licensee. Therefore, the parties acknowledge and agree that in a bankruptcy context this Agreement is a license of the type described by Section 365(c)(1) of the Bankruptcy Code and may not be assigned without the prior written consent of the Licensor. 21. CONSTRUCTION. This Agreement shall be construed in accordance with the laws of the State of California of the United States of America without regard to its conflicts of laws provisions. 22. WAIVER, MODIFICATION, ETC. No waiver, modification or cancellation of any term or condition of this Agreement shall be effective unless executed in writing by the party charged therewith. No written waiver shall excuse the performance of any acts other than those specifically referred to therein. The fact that the Licensor has not previously insisted upon Licensee expressly complying with any provision of this Agreement shall not be deemed to be a waiver of Licensor's future right to require compliance in respect thereof and Licensee specifically acknowledges and agrees that the prior forbearance in respect of any act, term or condition shall not prevent Licensor from subsequently requiring full and complete compliance thereafter. If any term or provision of this Agreement is held to be invalid or unenforceable by any court of competent jurisdiction or any other authority vested with jurisdiction, such holding shall not affect the validity or enforceability of any other term or provision hereto and this Agreement shall be interpreted and construed as if such term or provision, to the extent the same shall have been held to be invalid, illegal or unenforceable, had never been contained herein. Headings of paragraphs herein are for convenience only and are without substantive significance. 23. CONFIDENTIALITY. The Artwork and the materials and information supplied to one party by the other hereunder constitute, relate to, contain and form a part of confidential and proprietary information of the disclosing party, including, but not limited to, Style Guides, design elements, character profiles, unpublished copyrighted material, release dates, marketing and promotional strategies, information about new products, properties and characters, the terms and conditions of this Agreement, and other information which is proprietary in nature or is a trade secret (collectively, the "Proprietary Information"). The parties acknowledge and agree that the Proprietary Information is highly confidential and that disclosure of the Proprietary Information will result in serious harm to the owner thereof. Among other damage, unauthorized disclosure of the Proprietary Information will (i) damage carefully planned marketing strategies, (ii) reduce interest in the Licensed Property, (iii) make unique or novel elements of the Licensed Property susceptible to imitation or copying by competitors, infringers or third parties prior to Licensor's release of the information or materials, (iv) damage proprietary protection in undisclosed or unpublished information or materials, and (v) provide unauthorized third parties with materials capable of being used to create counterfeit and unauthorized merchandise, audio-visual products or other products, all of which will seriously damage the parties' rights and business. Except as Page 17 18 expressly approved in writing by the owner of the Proprietary Information, the other party shall not reproduce or use the Proprietary Information of the other party and shall not discuss, distribute, disseminate or otherwise disclose the Proprietary Information or the substance or contents thereof, in whole or in part, in its original form or in any other form, with or to any other person or entity other than employees of the parties and, in the case of Licensee, third parties who have executed a Contributor's Agreement (as provided in Paragraph 8(b)) or third party manufacturer's agreement (as provided in paragraph 10(b)) and been approved by Licensor as provided hereunder, and such employees and third parties shall be given access to the Proprietary Information only on a "need-to-know" basis. The foregoing restrictions shall not apply to any information which, (i) at the time of disclosure, is in the public domain or which, after disclosure, becomes part of the public domain by publication or otherwise through no action or fault of the receiving party; (ii) information which the receiving party can show was in its possession at the time of disclosure and was not acquired, directly or indirectly, from the other party; (iii) information which was received from a third party having the legal right to transmit the same; (iv) information which is independently developed, conceived, or created without use of or reference to any Proprietary Information of the other party; or (v) information which is disclosed pursuant to valid court order or other legal process. 24. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement between the parties concerning the subject matter hereof and cancels and supersedes any prior understandings and agreements between the parties hereto with respect thereto. There are no representations, warranties, terms, conditions, undertakings or collateral agreements, expressed, implied or statutory, between the parties other than as expressly set forth in this Agreement. 25. ACCEPTANCE BY LICENSOR. This instrument, when signed by Licensee, shall be deemed an application for license and not a binding agreement unless and until accepted by Warner Bros. Consumer Products by signature of a duly authorized officer and the delivery of such a signed copy to Licensee. The receipt and/or deposit by Warner Bros. Consumer Products of any check or other consideration given by Licensee and/or delivery of any material by Warner Bros. Consumer Products to Licensee shall not be deemed an acceptance by Warner Bros. Consumer Products of this application. The foregoing shall apply to any documents relating to renewals or modifications hereof. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. AGREED AND ACCEPTED: AGREED AND ACCEPTED: LICENSOR: LICENSEE: WARNER BROS. CONSUMER PRODUCTS, BAY AREA MULTIMEDIA (BAM) a Division of Time Warner Entertainment Company, L.P. By: /s/ GARY R. SIMON By: /S/ RAYMOND C. MUSCI ------------------------------- --------------------------------- Gary R. Simon Raymond C. Musci Senior Vice President, Business and Legal Affairs Date: 10/4/00 Date: 10/3/00 ----------------------------- ------------------------------- Page 18 19 EXHIBIT 1 #12697-DEX CONTRIBUTOR'S AGREEMENT I, __________________________, the undersigned ("Contributor"), have been engaged by BAY AREA MULTIMEDIA (BAM) ("Licensee") to work on or contribute to the creation of Licensed Products, described as _______________________, by Licensee under an agreement between Licensee and Warner Bros., a division of Time Warner Entertainment Company, L.P., c/o Warner Bros. Consumer Products, a division of Time Warner Entertainment Company, L.P. ("Warner") dated ___________________. I understand and agree that the Licensed Products, and all artwork or other results of my services for Licensee in connection with such Licensed Products ("Work") is a "work made for hire" for Cartoon Network and that all right, title and interest in and to the work shall vest and remain with Cartoon Network I reserve no rights therein. Without limiting the foregoing, I hereby assign and transfer to Cartoon Network all other rights whatsoever, in perpetuity throughout the universe which I may have or which may arise in me or in connection with the Work. I hereby waive all moral rights in connection with such Work together with any other rights which are not capable of assignment. I further agree to execute any further documentation relating to such transfer or waiver or relating to such Work at the request of Cartoon Network or Licensee, failing which Cartoon Network is authorized to execute same as my Attorney-in-Fact. By: --------------------------------- signature --------------------------------- print name --------------------------------- address --------------------------------- --------------------------------- --------------------------------- --------------------------------- country --------------------------------- date Warner Bros. Consumer Products: By: ------------------------------- Date: ----------------------------- Page 19 20 EXHIBIT 2 #12697-DEX Milestone 1 CONCEPT DESIGN: General description of proposed program, game play and overall look and feel. Includes user interface, list of characters and time line for production and release, Milestone 2 FUNCTIONAL DESIGN SPECIFICATION/DESIGN DOCUMENT: Detailed description of the program including: synopsis, overview and logic flowchart. Milestone 3 SCRIPT: Dialogue script. Milestone 4 GAME PLAY AND CHARACTER ANIMATION: Milestone 5 ALPHA: Initial combination of all product elements and art in a usable working prototype. Milestone 6 BETA: Almost final version of the License Product(s) that is a fully functional, nearly bug-free disk that incorporates finalized art and game play. Milestone 7 GOLDEN MASTER: Final disk that results from Milestone 6 which includes a fully tested program containing all elements and game play. Page 20 21 EXHIBIT 3 #12697-DEX WARNER BROS. CONSUMER PRODUCTS 4000 Warner Boulevard Bridge Building 156 South - 4th Floor Burbank, CA 91522 Re: Approval of Third Party Manufacturer Gentlemen: This letter will serve as notice to you that pursuant to Paragraph 11(b) of the License Agreement dated ______________, 2000 between you and BAY AREA MULTIMEDIA (BAM), we have been engaged as the manufacturer for Licensee in connection with the manufacture of the Licensed Products as defined in the aforesaid License Agreement. We hereby acknowledge that we may not manufacture Licensed Products for, or sell or distribute Licensed Products to, anyone other than Licensee. We hereby further acknowledge that we have received a copy and are cognizant of the terms and conditions set forth in said License Agreement and hereby agree to observe those provisions of said License Agreement which are applicable to our function as manufacturer of the Licensed Products. It is expressly understood that we are obligated to comply with all local laws, including without limitation, labor laws, wage and hour laws and anti-discrimination laws and that you or your representatives shall, at anytime, have the right to inspect our facilities and review our records to ensure compliance therewith. It is understood that this engagement is on a royalty free basis and that we may not subcontract any of our work without your prior written approval. We understand that our engagement as the manufacturer for Licensee is subject to your written approval. We request, therefore, that you sign in the space below, thereby showing your acceptance of our engagement as aforesaid. Very truly yours, -------------------------------- manufacturer/company name By: -------------------------------- signature -------------------------------- print name -------------------------------- address -------------------------------- -------------------------------- -------------------------------- country -------------------------------- date -------------------------------- product(s) manufacturing AGREED TO AND ACCEPTED: WARNER BROS. CONSUMER PRODUCTS, a Division of Time Warner Entertainment company, L.P. By: ------------------------------- Gary R. Simon Senior Vice President, Business and Legal Affairs Date: ----------------------------- Page 21 EX-10.37 47 v72115orex10-37.txt EXHIBIT 10.37 1 EXHIBIT 10.37 (Confidential Portions Omitted) RETAIL LICENSE WARNER BROS. CONSUMER PRODUCTS #12698-YOGI LICENSE AGREEMENT made OCTOBER 4, 2000, by and between Warner Bros. Consumer Products, a Division of Time Warner Entertainment Company, L.P., whose address is 4000 Warner Blvd., Burbank, CA 91522 (hereinafter referred to as "LICENSOR") and Bay Area Multimedia, whose address is 333 West Santa Clara Avenue, Suite 930, San Jose, CA 95113 Attention: Ray Musci hereinafter referred to as "LICENSEE"). WITNESSETH: The parties hereto hereby agree as follows: 1. DEFINITIONS. As used in this Agreement the following terms shall have the following respective meanings: (a) LICENSED PROPERTY: The fictional cartoon characters as they appear in the animated television series entitled "YOGI BEAR" as follows: YOGI BEAR, CINDY BEAR, BOO BOO and RANGER SMITH including said characters' representations, names, likenesses and all environmental settings, artwork and other materials associated therewith. Without limitation to any other reservations, terms and conditions herein, specifically excluded herefrom are rights to any and all other versions including without limitation sequels, spin-offs or live action versions of said series. Furthermore, no sound bites, voices, music or other audio is included herein. If Licensee wishes to use any such elements, Licensee must separately procure the necessary rights and any rights clearance or related fees arising from same shall be at Licensee's sole expense. (b) LICENSED PRODUCT(s): Line of action/adventure products for the following platforms: i) GameBoy Color (1 SKU) (c) MARKETING DATE: For purposes of subdivision 15 (a) (vii) , the Marketing Date for the Licensed Product (s) set forth above shall be no later than September 1, 2001. (d) TERRITORY: worldwide excluding China, Guam, Japan and Saipan 2. GRANT OF LICENSE. (a) Upon the terms and conditions hereinafter set forth, Licensor hereby grants to Licensee and Licensee hereby accepts for the Term of this Agreement, as hereinafter defined, a license to utilize the Licensed Property solely upon or in connection with the manufacture, distribution and sale of the Licensed Products Solely for retail sale throughout the Territory; no license is granted hereunder for the manufacture, distribution or sale of the Licensed Product (s) for publicity purposes, fox' sale or gift in combination with other products or services, as giveaways, as premiums used for the purpose of publicizing, promoting or increasing sales of any other product (s) or service (s), or in connection with any similar method of merchandising. Notwithstanding anything to the contrary contained herein, Licensee may, i) distribute up to [*] units for each game in the United States and [*] units for each game in International * Confidential Portions Omitted and Filed Separately with the Commission. 2 territories of each Licensed Product for publicity purposes, as well as [*] "time limited" or reduced feature "demo" versions, subject to Licensor's approval rights set forth in Paragraph 10; and ii) on a case-by-case basis, with prior written approval by Licensor, bundle Licensed Products with other products. (b) EXCLUSIVITY: The License granted herein shall be nonexclusive for the Licensed Property with respect to the Licensed Product(s) in the Territory during the Term, as hereinafter defined. (c) Licensee specifically understands and agrees that no rights are granted herein with respect to the Warner Bros. "shield" logo or trademark, or any other trademark(s), logo (s) or copyrights owned by Licensor other than those specifically set forth above in the Licensed Property, it being understood that all rights in and to said properties are reserved exclusively to Licensor for use and/or licensing as it deems appropriate to third party(s) of its choice. (d) Notwithstanding anything to the contrary contained herein, including the general prohibition on use of the Warner Bros. Shield, the Licensed Property shall also include the Warner Bros. Interactive Entertainment Name/Logo (the "Name/Logo") as shall be provided by Licensor and as such may be changed by Licensor from time to time. Licensee shall utilize the Name/Logo on such Licensed Products and in such manner as Licensor shall designate. The parties agree that, notwithstanding anything to the contrary contained elsewhere in this Agreement, Licensee's use of the Name/Logo shall be on a non-exclusive basis. (e) Without limiting any other approval rights of Licensor as contained herein, no television commercials may be utilized under this Agreement without the specific prior written approval of Licensor. 3. TERM. The term ("Term") of the Agreement with respect to Licensed Product(s) referred to above shall commence on September 1, 2000 and terminate on September 1, 2002. 4. CONSIDERATION. In, full consideration for the rights, licenses and privileges herein granted to Licensee, Licensee shall pay to Licensor the following royalty payments: (a) GUARANTEED CONSIDERATION: for the rights herein granted the sum of $[*] payable as follows:
DATE AMOUNT ---- ------ Upon execution of this Agreement $[*]
All Guaranteed Consideration paid by Licensee pursuant to this subparagraph (a) shall be applied against such royalties as are or have become due Licensor under Subparagraph (b). No part of the Guaranteed Consideration shall be repayable to Licensee. (b) ROYALTY PAYMENTS: With respect to the Licensed Product(s) referred to above, Licensee shall pay to Licensor a sum equal to [*] of all net sales (as such term "net sales" is defined herein) by Licensee or any of its affiliated, associated or subsidiary companies of the Licensed Product(s) covered by this Agreement. Page 2 * Confidential Portions Omitted and Filed Separately with the Commission. 3 The term "Net Sales" shall mean all monies billed or billable by Licensee, from the exercise of its rights to distribute and sell Licensed Product(s) in the Territory before any allowances or discounts which have been deducted from the normal selling price, and any other payment charges whatsoever, less the following items only: (i) any sales, excise or value added taxes, which are separately stated, and which are required to be collected from customers as part of Net Sales, and which are payable to taxing authorities; (ii) quantity discounts; and (iii) actual returns not exceeding 10% of total sales. It is specifically understood and agreed that no deduction may be made for any bad debts, or any reserves therefor, any manufacturing costs, importing costs, selling costs, advertising costs, any real estate taxes, business license taxes, net income taxes, franchise taxes, withholding taxes or any other taxes not billed as part of net sales. Net Sales shall not include any sales by Licensee or its affiliated companies to Licensee or its affiliated companies, the primary purpose of which is the transfer of Licensed Product for eventual resale. Royalties as a result of such sales shall be based upon and paid when the Licensed Product is ultimately sold to the distributor, retailer, consumer or other unaffiliated third party. Licensee will pay all taxes, customs, duties, assessments, excise except as provided in sub-paragraph (i), and other charges levied upon the importation of or assessed against the Licensed Product under this Agreement, as well as all Licensee's costs of doing business and Licensor shall have no liability therefor. Royalties shall be payable concurrently with the periodic statements required in Paragraph 6 hereof except to the extent offset by Guaranteed Consideration theretofore remitted. It is a material term and condition of this Agreement that Licensee report net sales and report and pay royalties on a country-by-country basis. In the event Licensee fails to do so, Licensor shall have the right to terminate this Agreement, in accordance with the provisions of Paragraph 15 herein. Royalties earned in excess of the Guaranteed Consideration applicable to the Term hereof shall not offset any Guaranteed Consideration required in respect of the succeeding renewal term (if any); likewise, royalties-earned in excess of the Guaranteed Consideration applicable to the renewal term shall not offset any Guaranteed Consideration applicable to any prior term. 5. RESERVATION OF RIGHTS; PREMIUMS. (a) Licensor reserves all rights not expressly conveyed to Licensee hereunder, and Licensor may grant licenses to others to use the Licensed Property, artwork and textual matter in connection with other uses, services and products without limitation. (b) Notwithstanding anything to the contrary stated herein, Licensor' for itself and its affiliates, specifically reserves the right, without limitation throughout the world, to use, or license any third party(s) of its or their choice to use the Licensed Property for the marketing, promotion, manufacture, distribution and sale of products similar or identical to those licensed herein in Paragraph 1(c) above including without limitation for sale through any catalogue(s) or online website produced or distributed by or on behalf of licensor or its affiliated companies, or for sale or distribution in any theaters, arenas or restaurants, or Page 3 4 for sale or distribution in connection with any home video product, including DVD or other formats, or for sale or distribution in any retail stores operated by or on behalf of Licensor, its affiliated companies or franchisees, or for sale or distribution in any theme/amusement parks operated by or on behalf of Licensor or its licensees, Six Flags, Premier Parks, Movie world, or their affiliated companies. In addition, Licensor reserves the right to allow Six Flags, Premier Parks and Movie world to manufacture (or have manufactured by a third party) products similar or identical to those licensed herein for distribution or sale in theme and/or amusement parks owned or operated by Six Flags, Premier Parks and/or Movie World. Further, Licensor reserves the right to use, or license others to use, and/or manufacture products similar or identical to those licensed herein for use as premiums. (c) Licensee agrees that it will not use, or knowingly permit the use of, and will exercise due care that its customers likewise will refrain from the use of, the Licensed Products as a premium, except with the prior written consent of Licensor. Subject to Licensor's prior written approval as aforesaid, Licensee shall pay to Licensor a sum equal to [*] of all premium sales. Any such royalties on premium sales shall not offset the Guaranteed Consideration hereunder. For purposes of this paragraph, the term "premium" shall be defined as including, but not necessarily limited to, combination sales, free or self-liquidating items offered to the public in conjunction with the sale or promotion of a product or service, including traffic building or continuity visits by the consumer/ customer, or any similar scheme or device, the prime intent of which is to use the Licensed Products in such a way as to promote, publicize and or sell the products, services or business image of the user of such item. 6. PERIODIC STATEMENTS. Within thirty (30) days after the end of the first calendar quarter after the date of execution of the License Agreement and promptly on the 15th day after the end of each calendar month thereafter, Licensee shall furnish to Licensor complete and accurate statements certified to be accurate by Licensee, or if a corporation, by an officer of Licensee, showing with respect to all Licensed Products distributed and sold by Licensee during the preceding calendar month the (i) number of units; (ii) country in which manufactured, sold and/or to which shipped; (iii) description (as such term is defined below) of the Licensed Products; (iv) gross sales price; and (v) itemized deductions from gross sales price, and net sales price together with any returns made during the preceding calendar month. Such statements shall be in such formats as Licensor shall require (which formats may be amended by Licensor from time to time), and shall be furnished to Licensor whether or not any of the Licensed Products have been sold during calendar month to which such statements refer. In the event Licensee has Royalties earned in currencies other than in U.S. Dollars, then Licensee shall convert said amounts into U.S. Dollars based upon the exchange rate published by the Wall Street Journal as of the fifteenth day of the applicable month or if such day shall fall on a non-business day then as of the first business day following said fifteenth day. Receipt or acceptance by Licensor of any of the statements furnished pursuant to this Agreement or of any sums paid hereunder shall not preclude Licensor from questioning the correctness thereof at any time, and in the event that any inconsistencies or mistakes are discovered in such statements or payments, they shall immediately be rectified and the appropriate payments made by Licensee. Upon demand of Licensor, Licensee shall at its own expense, but not more than once in any twelve (12) month period, furnish to Licensor a detailed statement by an independent certified public accountant showing the (i) number of units; (ii) country in which manufactured, sold and/or to which shipped; (iii) description of the Licensed Products; (iv) gross sales price; and (v) itemized Page 4 * Confidential Portions Omitted and Filed Separately with the Commission. 5 deductions from gross sales price and net sales price of the Licensed Products covered by this Agreement distributed and/or sold by Licensee up to and including the date upon which Licensor has made such demand. Fox purposes of this Subparagraph, the term "Description" shall mean a detailed description of the Licensed Products including the nature of each of the Licensed Products, any and all names and likenesses, whether live actors or animated characters, from the Licensed Property utilized on the Licensed Products and/or any related packaging and/or wrapping material, and any other components of the Licensed Property utilized on the Licensed Products and/or any related packaging and/or wrapping material. In the event Licensor is responsible for the payment of any additional third party participations based on Licensee not reporting by character name and likeness as provided above, Licensee shall be responsible for reimbursing Licensor for the full amount of all such third party claims, including without limitation, the participation itself, interest, audit and attorneys' fees. Licensee understands and agrees that it is a material term and condition of this Agreement that Licensee include the Description on all statements. In the event Licensee fails to do so, Licensor shall have the right to terminate this Agreement, in accordance with the provisions of Paragraph 15 herein. (b) For the statements and payments required hereunder (please reference the contract number(s) on all statements and payments) if the United States Postal Service is used deliver to the following: WARNER BROS. CONSUMER PRODUCTS 21477 Network Place Chicago, IL 60673-1214 For the statements and payments required hereunder (please reference the contract number (s) on all statements and payments) if sent by Federal Express or any other Courier Service deliver to the following: BANK ONE Attention WBCP lockbox #21477 525 West Monroe 8th Floor Mail Room Chicago, IL 60661 Telephone Number 312-732-5500 (c) Any payments which are made to Licensor hereunder after the due date required therefor, shall bear interest at the then current prime rate plus six, (6%) percent (or the maximum rate permissible by law, if less) from the date such payments are due to the date of payment. Licensor's right hereunder to interest on late payments shall not preclude Licensor from exercising any of its other rights or remedies pursuant to this Agreement or otherwise with regard to Licensee's failure to make timely remittances. (d) Licensee hereby grants to Licensor (subject to any liens or security interests granted by Licensee which are approved in writing by Licensor) a first-priority lien and security interest in Licensee's inventory, contract rights and accounts receivable, and all proceeds thereof, with respect to the Licensed Products only. Licensee further agrees to provide, at Licensor's request: (i) a letter of credit issued in favor of Licensor from a financial institution as approved by Licensor in an amount up to the Guaranteed Consideration; and/or (ii) such other form of security acceptable to Licensor. Licensee agrees to execute all documentation as Licensor may require in connection with perfecting such security interests. Page 5 6 7. BOOKS AND RECORDS. (a) Licensee shall keep, maintain and preserve (in Licensee's principal place of business) for at least two (2) years following termination or expiration of the Term of this Agreement or any renewal(s) hereof (if applicable), complete and accurate records of accounts including, without limitation, purchase orders, inventory records, invoices, correspondence, banking and financial and other records pertaining to the various items required to be submitted by Licensee as well as to ensure Licensee's compliance with local laws as required pursuant to Paragraph 13(k) hereof. Such records and accounts shall be available for inspection and audit at any time or times during or after the Term of this Agreement or any renewal(s) hereof (if applicable) during reasonable business hours and upon reasonable notice by Licensor or its nominees. Licensee agrees not to cause or permit any interference with Licensor or nominees of Licensor in the performance of their duties. During such inspections and audits, Licensor shall have the right to take extracts and/or make copies of Licensee's records as it deems necessary. (b) The exercise by Licensor in whole or in part, at any time of the right to audit records and accounts or of any other right herein granted, or the acceptance by Licensor of any statement or statements or the receipt and/or deposit by Licensor, of any payment tendered by or on behalf of Licensee shall be without prejudice to any rights or remedies of Licensor and such acceptance, receipt and/or deposit shall not preclude or prevent Licensor from thereafter disputing the accuracy of any such statement or payment. (c) If pursuant to its right hereunder Licensor causes an audit and inspection to be instituted which thereafter discloses a deficiency between the amount found to be due to Licensor and the amount actually received or credited to Licensor, then Licensee shall, upon Licensor's demand, promptly pay the deficiency, together with interest thereon at the then current prime rate from the date such amount became due until the date of payment, and, if the deficiency is more than [*] of all royalties paid by Licensee during the period covered by the audit, then Licensee shall pay the reasonable costs and expenses of such audit and inspection. 8. INDEMNIFICATIONS. (a) During the Term, and continuing after the expiration or termination of this Agreement, Licensor shall indemnify Licensee and shall hold it harmless from any loss, liability, damage, cost or expense, arising out of any claims or suits which may be brought or made against Licensee by reason of the breach by Licensor of the warranties or representations as set forth in Paragraph 12 hereof, provided that Licensee shall give prompt written notice, and full cooperation and assistance to Licensor relative to any such claim or suit and provided, further, that Licensor shall have the option to undertake and conduct the defense of any suit so brought. Licensee shall not, however, be entitled to recover for lost profits. Licensee shall cooperate fully in all respects with Licensor in the conduct and defense of said suit and/or proceedings related thereto. (b) During the Term, and continuing after the expiration or termination of this Agreement, Licensee shall indemnify Licensor, Time Warner Entertainment Company, L.P. ("TWE") and each of its affiliates and shall hold them harmless from any loss, liability, damage, cost or expense arising out of any claims or suits which may be brought or made against Licensor, TWE or any of its affiliates, by reason of: (i) any breach of Licensee's covenants and undertakings hereunder; (ii) any unauthorized use by Licensee of the Licensed Property; (iii) any use of any trademark, or copyright (except trademarks or copyrights in the Licensed Page 6 * Confidential Portions Omitted and Filed Separately with the Commission. 7 Property used in accordance with the terms of this Agreement), design, patent, process, method or device; (iv) Licensee's noncompliance with any applicable federal, state or local laws or with any other applicable regulations; and (v) any alleged defects and/or inherent dangers (whether obvious or hidden) in the Licensed Products or the use thereof. (c) With regard to 8(b) above, Licensee agrees to obtain, at its own expense, Comprehensive Commercial General Liability Insurance, including product liability and contractual liability coverage providing adequate protection for Licensor and Licensee against any such claims or suits in amounts no less than three million dollars ($3,000,000) per occurrence, combined single limits. Simultaneously with the execution of this Agreement, Licensee undertakes to submit to Licensor a fully paid policy or certificate of insurance naming Licensor, TWE and each of its affiliates as additional insured parties and, requiring that the insurer shall not terminate or materially modify such policy or certificate of insurance without written notice to Licensor at least twenty (20) days in advance thereof. Such insurance shall at all times be primary and not contributory with any insurance carried by Licensor, TWE or any of their affiliates. Further the delivery of the policy or certificate, as provided in this Paragraph 8(c) are material obligations of Licensee. 9. ARTWORK; TRADEMARKS AND COPYRIGHTS. Licensee shall, within thirty (30) days of receiving an invoice, pay Licensor for artwork executed for Licensee by Licensor (or by third parties under contract to Licensor) for use in the development of the Licensed Products and any related packaging, display and promotional materials at Licensor's prevailing commercial art rates. The foregoing shall include any artwork that, in Licensor's opinion, is necessary to modify artwork initially prepared by Licensee and submitted for approval. Estimates of artwork charges are available upon request. (a) TRADEMARKS (i) Licensee agrees that it will cause to appear indelibly and legibly on each of the Licensed Product(s) and all advertising material, tags, labels and devices bearing the Licensed Property, the following notice or such other notice as may be approved by Licensor: YOGI BEAR AND ALL RELATED CHARACTERS AND ELEMENTS ARE TRADEMARKS OF HANNA-BARBERA(C) 200X. (The year date shall be as instructed by Licensor) (ii) Licensee further agrees that it will not apply for or seek to obtain trademark registration for the Licensed Property and that Licensor may, at its option, apply for and obtain in its own name trademark registrations for the Licensed Product(s), and that, upon request, Licensee will furnish necessary specimens or facsimiles for such purpose free of cost, as well as evidence of the date of first shipment or sale of each Licensed Product in interstate or foreign or other federally regulable U.S. commerce and, if earlier, also in intrastate commerce. (iii) Licensee agrees that if Licensee receives knowledge of the use of the Licensed Property by anyone other than Licensee on Licensed Product(s) or products confusingly similar thereto, Licensee will call such fact to the attention of Licensor. Licensor shall then have the option to institute legal proceedings to prevent such use, and Licensee shall cooperate and assist in the prosecution of any such action. If demanded by Licensor, Licensee shall join in or cooperate in the prosecution of any such legal proceeding as may be instituted by Licensor. Any such legal proceedings shall be solely at Licensor's expense. If Licensee is joined in such proceeding, Licensor shall indemnify and hold Page 7 8 harmless Licensee from and against any claim, sanction, liability, damages, attorney's fees, judgments or orders of any kind arising out of such proceeding, (b) COPYRIGHTS: (i) GAME PROGRAM: The copyright in and to the computer program (object and source code) for any game which is incorporated in the Licensed Product (herein the "Program") shall be owned as follows: (a) If a Program is created solely by Licensee or an approved sublicensee under license or authority of Licensee without any contribution by Licensor to the creation of that Program in the form of programming effort, then the copyright in and to such Program shall be owned solely by Licensee; (b) If a Program is created jointly by Licensee and Licensor, then the copyright in and to such Program shall be owned jointly by Licensor and Licensee. (ii) AUDIO-VISUAL DISPLAY: The copyright in and to the images displayed on the screen and the sounds produced during the course of the game play, including all possible combinations and sequences thereof, in both the "attract mode" and the "play mode" and the underlying script for therefor (herein the "Audio-Visual Display") shall be owned as follows: (a) The copyright in and to all elements of the Audio-Visual Display constituting pre-existing material of Licensor from Licensor's fictional cartoon characters as set forth in Paragraph 1(a) "Licensed Property" such as, without limitation, the characters portrayed in such television series or any reproductions thereof (hereinafter "Pre-Existing Material"), are acknowledged to be the sole and exclusive property of Licensor and shall remain the sole and exclusive property of Licensor; (b) The copyright in and to all elements of the Audio-Visual Display constituting original material created by Licensee shall be the sole and exclusive property of Licensee. Licensee retains sole and exclusive ownership of all of Licensee's inventions, whether patented or not, trade secrets and similar information and processes of a confidential nature, and works of authorship, whether copyrighted or not, whether manifested in the Audio-Visual Display or not, and whether embodied in hardware or software used to create the Audio-Visual Display. Licensee shall be free to use and license others to use elements of the Audio-Visual Display owned by Licensee. (iii) PACKAGING, ADVERTISING and PROMOTIONAL MATERIALS: Except as otherwise provided herein, the copyrights in and to any original material, other than the Programs and the Audio-Visual Displays, which is created by or for Licensee for the purpose of packaging, advertising or promoting the Licensed Product(s), including but not limited to the enclosure for the Licensed Product(s), all cartons, containers, packing and wrapping material, tags, labels, imprints or other devices, and all advertising and promotional materials (all such material hereinafter referred to as the "Other Materials"), shall be owned solely and exclusively by Licensee. Providing that the copyright in and to all elements of the Other Materials that constitute Licensor's Pre-Existing Material, material furnished to Licensee by or on behalf of Licensor, or any material that is derivative of Page 8 9 the foregoing, is acknowledged to be owned solely and exclusively by Licensor and shall remain the sole and exclusive property of Licensor. (iv) LIMITATIONS ON OWNERSHIP RIGHTS: The parties agree and acknowledge that each shall have the same right as any person or party with regard to any material incorporated in the Licensed Product(s), Other Materials, Programs, or Audio-Visual Displays which is in the public domain (provided that it has not entered into the public domain as the result of an act or omission in breach of this Agreement or any other written agreement by or between the parties hereto). (v) ARTWORK: The Licensed Property shall be displayed or used only in such form and in such manner as has been specifically approved in writing by Licensor in advance and Licensee undertakes to assure usage of the trademark(s) and character(s) solely as approved hereunder. Licensee further agrees and acknowledges that any and all Artwork (defined below) created, utilized, approved and/or authorized for use hereunder by Licensor in connection with the Licensed Products or which otherwise features or includes the Licensed Property shall be owned in its entirety exclusively by Licensor. "Artwork" as used herein shall include, without limitation, all pictorial, graphic, visual, audio, audio-visual, digital, literary, animated, artistic, dramatic, sculptural, musical, or any other type of creations and applications, whether finished or not, including, but not limited to, animation, drawings, designs, sketches, images, tooling and tooling aids, illustrations, film, video, electronic, digitized or computerized information, software, object code, source code, on-line elements, music, text, dialogue, stories, visuals, effects, scripts, voiceovers, logos, one-sheets, promotional pieces, packaging, display materials, printed materials, photographs, interstitials, notes, shot logs, character profiles and translations, produced by Licensee or for Licensee, pursuant to this Agreement. Licensor reserves for itself or its designees all rights to use any and all Artwork created, utilized and/or approved hereunder without limitation. Licensee acknowledges that, as between Licensor and Licensee, the Licensed Property and Artwork and all other depictions expressions and derivations thereof, and all copyrights, trademarks and other proprietary rights therein are owned exclusively by Licensor and Licensee shall have no interest in or claim thereto, except for the limited right to use the same pursuant to this Agreement and subject to its terms and conditions. (vi) WORK-MADE-FOR-HIRE: Licensee agrees and acknowledges that any Artwork created by Licensee or for Licensee hereunder is a "work made for hire" for Hanna-Barbera Productions, Inc. under the U.S. Copyright Act, and any and all similar provisions of law under other jurisdictions, and that Hanna-Barbera Productions, Inc. is the author of such works for all purposes, and that Hanna-Barbera Productions, Inc. is the exclusive owner of all the rights comprised in the undivided copyright and all renewals, extensions and reversions therein, in and to such works in perpetuity and throughout the universe. Licensee hereby waives and releases in favor of Hanna-Barbera Productions, Inc. all rights (if any) of "droit moral," rental rights and similar rights in and to the Artwork (the "Intangible Rights") and agrees that Hanna-Barbera Productions, Inc. shall have the right to revise, condense, abridge, expand, adapt, change, modify, add to, subtract from, re-title, re-draw, re-color, or otherwise modify the Artwork, without the consent of Licensee. Licensee hereby irrevocably grants, transfers and assigns to Licensor all right, title and interest, including copyrights, trademark rights, patent rights and other proprietary rights, it may have in and to the Artwork, in perpetuity and throughout the universe, and to all proprietary depictions, expressions or derivations of the Licensed Property created by or for Licensee. Licensee acknowledges that Licensor shall have the right to terminate this Page 9 10 Agreement in the event Licensee asserts any rights (other than those specifically granted pursuant to this Agreement) in or to the Licensed Property or Artwork. Licensee hereby warrants that any and all work created by Licensee under this Agreement apart from the materials provided to Licensee by Licensor is and shall be wholly original with or fully cleared by Licensee and shall not copy or otherwise infringe the rights of any third parties, and Licensee hereby indemnifies Licensor and will hold Licensor harmless from any such claim of infringement or otherwise involving Licensee's performance hereunder. At the request of Licensor, Licensee shall execute such form(s) of assignment of copyright or other papers as Licensor may reasonably request in order to confirm and vest in Licensor the rights in the properties as provided for herein. In addition, Licensee hereby appoints Licensor as Licensee's Attorney-in-Fact to take such actions and to make, sign, execute, acknowledge and deliver all such documents as may from time to time be necessary to confirm in Licensor, its successors and assigns, all rights granted herein. If any third party makes or has made any contribution to the creation of Artwork authorized for use hereunder, Licensee agrees to obtain from such party a full confirmation and assignment of rights so that the foregoing rights shall vest fully in Licensor, in the form of the Contributor's Agreement attached hereto as Exhibit 1 and by this reference made a part hereof, prior to commencing work, and subject to the prior written approval of Licensor, and subject to the prior written approval of Licensor ensuring that all rights in the Artwork and Licensed Property arise in and are assigned to Licensor. Promptly upon entering into each such Contributor's Agreement, Licensee shall give Licensor a copy of such Contributor's Agreement. Licensee assumes all responsibility for such parties and agrees that Licensee shall bear any and all risks arising out of or relating to the performance of services by them and to the fulfillment of their obligations under the Contributor's Agreement. (vii) USE OF THIRD PARTY CONTENT: Licensee shall not use any third party content or technology in the Licensed Product(s), including without limitation any audio elements from the soundtracks of any motion picture or television series based upon the Licensed Property without Licensor's prior written approval, and unless: (i) Licensee is expressly permitted to use such third party content or technology pursuant to written agreements with all third party rights holders; and (ii) Licensee has acquired for Licensee and Licensor all rights, permissions, clearances, releases or other authorizations necessary to use such third party content or technology in conjunction with the development and exploitation of the Licensed Products(s) anywhere in the Territory by Licensee or Licensor or by either party's licensees, successors or assigns in perpetuity. Licensee shall be responsible, in perpetuity, for all payments in connection with the use of third party content or technology, except as the parties mutually agree upon at such time as Licensor approves of the use of such third party content or technology. Licensee shall have the right to review all Licensee agreements with third parties to ensure their acceptability and Licensee shall deliver such agreements to Licensor within fourteen (14) business days of Licensor's request therefor. 10. QUALITY OF LICENSED PRODUCT(S). (a) Licensee agrees that the Licensed Product(s) shall be of high standard and of such style, appearance and quality as shall be adequate and suitable to their promotion, distribution and sale to the best advantage of Licensee and Licensor. The quality and style of such product and its cartons and containers shall be subject to Licensor's approval. To this end Licensee shall, before selling or distributing any of the Licensed Product(s), furnish to Licensor free of cost for its written approval as to quality and style, the materials specified in the "MILESTONES" set forth on Exhibit 2 Page 10 11 attached hereto. In the event that any Milestone deliverable shall not have been approved, disapproved, or otherwise commented upon within ten (10) business days after receipt thereof by Licensor, then Licensee shall have the right to so notify Licensor of such fact by facsimile or by overnight delivery service. In the event that Licensor fails to then approve, disapprove or otherwise comment upon the submitted items within seven (7) business days after receipt by it of such communication, any items so submitted shall be deemed to have been approved. Licensee shall, in addition, thereafter furnish to Licensor free of cost, for its written, approval, [*] production samples of each such Licensed Product(s) together with their cartons and containers including packaging and wrapping material, to ensure quality control simultaneously upon distribution to the public. In addition, Licensee shall provide Licensor with six (6) catalogs which display all of Licensee's products, not just the Licensed Products, if such catalogs exist. Further, Licensor shall have the right to purchase any and all Licensed Products in any quantity at the maximum discount price Licensee charges its best customer purchasing the same quantity of Licensed Products under the same terms and conditions for delivery during the same period of time in the same general geographical area for sales throughout the same sales channel. After samples of Licensed Product(s) have been approved pursuant to this paragraph, Licensee shall not depart therefrom in any material respect without Licensor's prior written consent or add any additional element(s) such as in-pack flyers, business reply cards and so on without Licensor's approval in each case. Licensor shall have the right to withdraw its approval of samples if the quality of any Licensed Product ceases to be acceptable. (b) Any modification of a Licensed Product must be submitted in advance for Licensor's written approval as if it were a new Licensed Product. Approval of a Licensed Product which uses particular artwork does not imply approval of such artwork for use with a different Licensed Product. (c) Licensed Products must conform in all material respects to the final production samples approved by Licensor. If in Licensor's reasonable judgement, the quality of a Licensed Product originally approved has deteriorated in later production runs, or if a Licensed Product has otherwise been altered, Licensor may, in addition to other remedies available to it, require that such Licensed Product be immediately withdrawn from the market. (d) If any changes or modifications are required to be made to any material submitted to Licensor for its written approval in order to ensure compliance with Licensor's specifications or standards of quality, Licensee agrees promptly to make such changes or modifications. (8) Licensee shall permit Licensor to inspect Licensee's manufacturing operations, testing and payroll records (including those operations and records of any supplier or manufacturer approved pursuant to Paragraph 10(b) hereof) with respect to the Licensed Products. (f) Subject to the terms hereof, Licensee may utilize the Licensed Property for such advertising, promotional and display materials for the Licensed Product(s) as in its judgment will best promote the sale of said Licensed Product(s). Licensee agrees that it will not use the Licensed Property or any reproduction thereof in any advertising, promotional or display material or in any other manner without Licensor's prior written approval. Without limiting the foregoing no television commercials may be utilized under this License without the specific prior approval of Licensor. In the event that any advertising, promotional or display material, submitted to Licensor shall not have been Page 11 * Confidential Portions Omitted and Filed Separately with the Commission. 12 approved, disapproved or otherwise commented upon within thirty (30) days after receipt thereof by Licensor, then Licensee shall have the right to so notify Licensor of such fact by facsimile or by overnight delivery service. In the event that Licensor fails to then approve, disapprove or otherwise comment upon the submitted items within ten (10) business days after receipt by it of such facsimile or overnight delivery service any items so submitted shall be deemed to have been approved. A reasonable number of production copies of all such advertising, promotional and display materials will be furnished to Licensor free of charge. (g) To avoid confusion of the public, Licensee agrees not to associate other characters or properties with the Licensed Property on the Licensed Products or in any packaging, promotional or display materials unless Licensee receives Licensor's prior written approval. Furthermore, Licensee agrees not to use the Licensed Property (or any component thereof) on any business sign, business cards, stationery or forms, nor as part of the name of Licensee's business or any division thereof. (h) Licensee shall use its best efforts to notify its customers of the requirement that Licensor has the right to approve all promotional, display and advertising material pursuant to this Agreement, (i) It is understood and agreed that any animation used in electronic media, including but not limited to animation for television commercials and character voices for radio commercials, shall be produced by Warner Bros. Animation pursuant to a separate agreement between Licensee and Warner Bros. Animation, subject to Warner Bros. Animation customary rates. Any payments made to Warner Bros. Animation for such animation shall be in addition to and shall not offset the Consideration set forth in Paragraph 4 above. (j) Licensor's approval of Licensed Product(s) (including without limitation, the Licensed Product(s) themselves as well as promotional, display, and advertising materials) shall in no way constitute or be construed as an approval by Licensor of Licensee's use of any trademark, copyright and/or other proprietary materials, not owned by Licensor. 11. DISTRIBUTION; SUBLICENSE/MANUFACTURE. (a) Licensee shall sell the Licensed Products either to jobbers, wholesalers, distributors or retailers for sale or resale and distribution directly to the public. Licensee shall not sell the Licensed Products through any cable home shopping service or through electronic media, including on any on-line network or service. If Licensee sells or distributes the Licensed Products at a special price, directly or indirectly, to itself, including without limitation, any subsidiary of Licensee (including any affiliated distributors) or to any other person, firm, or corporation affiliated with Licensee or its officers, directors or major stockholders, for ultimate sale to unrelated third parties, Licensee shall pay royalties with respect to such sales or distribution, based upon the price generally charged the trade by Licensee. (b) Except as to materials set forth in Paragraph 9(b)(ii)(b), Licensee shall not be entitled to sublicense any of the Computer Program or Audio-Visual Display developed by Licensee pursuant to this Agreement. In the event Licensee is not the manufacturer of the Licensed Products, Licensee shall, subject to the prior written approval of Licensor, which approval shall not be unreasonably withheld, be entitled to utilize a third party manufacturer in connection with the manufacture and production of the Licensed Products, provided that such manufacturer shall execute a letter in the form of Exhibit 3 attached hereto and by this reference made a part hereof. In such event, Licensee shall remain primarily obligated under all of the provisions of Page 12 13 this Agreement and any default of this Agreement by such manufacturer shall be deemed a default by Licensee hereunder. In no event shall any such third party manufacturer agreement include the right to grant any rights to subcontractors. 12. GOODWILL. Licensee recognizes the great value of the publicity and goodwill associated with the Licensed Property and acknowledges: (i) such goodwill is exclusively that of Licensor; and (ii) that the Licensed Property has acquired a secondary meaning as Licensor's trademarks and/or identifications in the mind of the purchasing public. Licensee further recognizes and acknowledges that a breach by Licensee of any of its covenants, agreements or undertakings hereunder will cause Licensor irreparable damage, which cannot be readily remedied in damages in an action at law, and may, in addition thereto, constitute an infringement of Licensor's copyrights, trademarks and/other proprietary rights in, and to the Licensed Property, thereby entitling Licensor to equitable remedies, and costs. 13. LICENSOR'S WARRANTIES AND REPRESENTATIONS. Licensor represents and warrants to Licensee that: (a) It has, and will have throughout the Term of this Agreement, the right to license the Licensed Property to Licensee in accordance with the terms and provisions of this Agreement; and (b) The making of this Agreement by Licensor does not violate any agreements, rights or obligations of any person, firm or corporation. 14. LICENSEE'S WARRANTIES AND REPRESENTATIONS. Licensee represents and warrants to Licensor that, during the Term and thereafter: (a) It will not attack the title of Licensor (or third parties that have granted rights to Licensor) in and to the Licensed Property or any copyright or trademarks pertaining thereto, nor will it attack the validity of the license granted hereunder; (b) It will not harm, misuse or bring into disrepute the Licensed Property, but on the contrary, will maintain the value and reputation thereof to the best of its ability; (c) It will manufacture, sell, promote and distribute the Licensed Products in accordance with the terms and intent of this Agreement, and in compliance with all applicable government regulations and industry standards; (d) It will not create any expenses chargeable to Licensor without the prior written approval of Licensor in each and every instance. It will not cause or allow any liens or encumbrances to be placed against, or grant any security interest (except to Licensor as provided hereunder) in, the Licensed Property and/or Licensee's inventory, contract rights and/or accounts receivables, and/or proceeds thereof, with respect to the Licensed Products without Licensor's prior written consent; (e) It will protect to the best of its ability its right to manufacture, sell, promote, and distribute the Licensed Products hereunder; (f) It will at all times comply with all government laws and regulations, including but not limited to product safety, food, health, drug, cosmetic, sanitary or other similar laws, and all voluntary industry standards relating or pertaining to the manufacture, sale, advertising or use of the Licensed Products, and shall maintain its appropriate customary high quality standards during the Term hereof. It shall comply with any Page 13 14 regulatory agencies which shall have jurisdiction over the Licensed Products and shall procure and maintain in force any and all permissions, certifications and /or other authorizations from governmental and/or other official authorities that may be required in response thereto. Each Licensed Product and component thereof distributed hereunder shall comply with all applicable laws, regulations and voluntary industry standards. Licensee shall follow reasonable and proper procedures for testing that all Licensed Products comply with such laws, regulations and standards. Licensee shall permit Licensor or its designees to inspect testing records and procedures with respect to the Licensed Products for compliance. Licensed Products that do not comply with all applicable laws, regulations and standards shall automatically be deemed unapproved and immediately taken off the market; (g) It shall, upon Licensor's request, provide credit information to Licensor including, but not limited to, fiscal year-end financial statements (profit-and-loss statement and balance sheet) and operating statements; (h) It will provide Licensor with the date(s) of first use of the Licensed Products in interstate and intrastate commerce, where appropriate; (i) It will, pursuant to Licensor's instructions, duly take any and all necessary steps to secure execution of all necessary documentation for the recordation of itself as user of the Licensed Property in any jurisdiction where this is required or where Licensor reasonably requests that such recordation shall be effected. Licensee further agrees that it will at its own expense cooperate with Licensor in cancellation of any such recordation at the expiration of this Agreement or upon termination of Licensee's right to use the Licensed Property. Licensee hereby appoints Licensor its Attorney-in-Fact for such purpose; (j) It will use its best efforts to manufacture, distribute and sell the Licensed Product(s) throughout the Territory; (k) It will not deliver or sell Licensed Product(s) outside the Territory or knowingly sell Licensed Product(s) to a third party for delivery outside the Territory; (1) It shall at all times comply with all manufacturing, sales, distribution, retail and marketing policies and strategies promulgated by Licensor from time-to-time; (m) If requested by Licensor to do so, it will utilize specific design elements of the Licensed Property provided to Licensee by Licensor on hangtags, labels, and other materials. 15. TERMINATION BY LICENSOR. (a) Licensor shall have the right to terminate this Agreement without prejudice to any rights which it may have, whether pursuant to the provisions of this Agreement, or otherwise in law, or in equity, or otherwise, upon the occurrence of any one or more of the following events (herein called "defaults"): (i) Licensee defaults in the performance of any of its obligations provided for in this Agreement; or (ii) Licensee shall have failed to deliver to Licensor or to maintain in full force and effect the insurance referred to in Paragraph 8(b) hereof; or (iii) Licensee shall fail to make any payment due hereunder on the date due; or Page 14 15 (iv) Licensee shall fail to deliver any of the statements hereinabove referred to or to give access to the premises and/or license records pursuant to the provisions hereof to Licensor's authorized representatives for the purposes permitted hereunder, and such failure shall continue for ten (10) days after written notice thereof is sent by Licensor to the Licensee; or (v) Licensee shall fail to comply with any laws, regulations or voluntary industry standards as provided in Paragraph 14(f) hereof or any governmental agency or other body, office or official vested with appropriate authority finds that the Licensed Products are harmful or defective in any way, manner or form, or are being manufactured, sold or distributed in contravention of applicable laws, regulations or standards, or in a manner likely to cause harm; or (vi) Licensee shall be unable to pay its debts when due, or shall make any assignment for the benefit of creditors, or shall file any petition under the bankruptcy or insolvency laws of any nation, jurisdiction, county or place, or shall have or suffer a receiver or trustee to be appointed for its business or property, or be adjudicated a bankrupt or an insolvent; or (vii) Licensee does not commence in good faith to manufacture, distribute and sell the Licensed Product throughout the Territory on or before the Marketing Date as defined in Paragraph 1(c). Such default and Licensor's resultant right of termination (or recapture) shall only apply to the specific regions/countries within the Territory in which or wherein Licensee fails to meet said Marketing Date requirement; or (viii) Licensee shall manufacture, sell or distribute, whichever first occurs, any of the Licensed Product(s) without the prior written approval of Licensor as provided in Paragraph 10 hereof; or (ix) Licensee undergoes a substantial change of management or control. The term "control" as used in the preceding sentence shall mean the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights attributable to the shares of the controlled entity; or (x) Licensee uses Artwork which has not been approved by Licensor in compliance with the provisions of Paragraph 9 hereof; or (xi) A manufacturer approved pursuant to Paragraph 11(b) hereof shall sell Licensed Products to parties other than Licensee or engage in conduct, which conduct if engaged in by Licensee would entitle Licensor to terminate this Agreement; or (xii) Licensee delivers or sells Licensed Products outside the Territory or knowingly sells Licensed Product(s) to a third party who Licensee knows intends to, or who Licensee reasonably should suspect intends to, sell or deliver such Licensed Products outside the Territory; or (xiii) Licensee uses any labor that violates any local labor laws and/or it uses prison, slave or child labor in connection with the manufacture of the Licensed Products; or (xiv) Licensee has made a material misrepresentation or has omitted to state a material fact necessary to make the statements not misleading; or (xvi) Licensee shall breach any other agreement in effect between Licensee on the one hand and Licensor on the other. Page 15 16 (b) In the event any of these defaults occur, Licensor shall give notice of termination in writing to Licensee by facsimile and certified mail. Licensee shall have ten (10) days from the date of giving notice in which to correct any of these defaults (except subdivisions (vii), (viii), (xii) and (xiv) above which are not curable), and failing such, this Agreement shall thereupon immediately terminate, and any and all payments then or later due from Licensee hereunder (including Guaranteed Consideration) shall then be promptly due and payable in full and no portion of those prior payments shall be repayable to Licensee. 16. FINAL STATEMENT UPON TERMINATION OR EXPIRATION. Licensee shall deliver, as soon as practicable, but not later than thirty (30) days following expiration or termination of this Agreement, a statement indicating the number and description of Licensed Products on hand together with a description of all advertising and promotional materials relating thereto. Following expiration or termination of this Agreement, Licensee shall immediately cease any and all manufacturing of the Licensed Product. However, if Licensee has complied with all the terms of this Agreement, including, but not limited to, complete and timely payment of the Guaranteed Consideration and Royalty Payments, then Licensee may continue to distribute and sell its remaining inventory, on a non-exclusive basis only, for a period not to exceed sixty (60) days following such termination or expiration (the "Sell-Off Period"), subject to payment of applicable royalties thereto. In no event, however, may Licensee distribute and sell during the Sell-Off Period an amount of Licensed Products that exceeds the average amount of Licensed Products sold during any consecutive sixty (60) day period during the Term. In the event this Agreement is terminated by Licensor for any reason under this Agreement, Licensee shall be deemed to have forfeited its Sell-Off Period. If Licensee has any remaining inventory of the Licensed Products following the Sell-Off Period, Licensee shall, at Licensor's option, make available such inventory to Licensor for purchase at or below cost, deliver up to Licensor for destruction said remaining inventory or furnish to Licensor an affidavit attesting to the destruction of said remaining inventory. Licensor shall have the right to conduct a physical inventory in order to ascertain or verify such inventory and/or statement. In the event that Licensee refuses to permit Licensor to conduct such physical inventory, Licensee shall forfeit its right to the Sell-Off Period hereunder or any other rights to dispose of such inventory. In addition to the forfeiture, Licensor shall have recourse to all other legal remedies available to it. 17. PAYMENTS AND NOTICES. Except as otherwise specifically provided herein, all notices which either party hereto is required or may desire to give to the other shall be given by addressing the same to the other at the address set forth above, or at such other address as may be designated in writing by any such party in a notice to the other given in the manner prescribed in this paragraph. All such notices shall be sufficiently given when the same shall be deposited so addressed, postage prepaid, in the United States mail and/or when the same shall have been delivered, so addressed, by facsimile or by overnight delivery service and the date of transmission by facsimile, receipt of overnight delivery service or two business days after mailing shall for the purposes of this Agreement be deemed the date of the giving of such notice. 18. NO PARTNERSHIP, ETC. This Agreement does not constitute and shall not be construed as constitution of a partnership or joint venture between Licensor and Licensee. Neither party shall have any right to obligate or Page 16 17 bind the other party in any manner whatsoever, and nothing herein contained shall give, or is intended to give, any rights of any kind to any third persons. 19. NO SUBLICENSING/NON-ASSIGNABILITY. This Agreement shall bind and inure to the benefit of Licensor, its successors and assigns. This Agreement is personal to Licensee. Licensee shall not sublicense, franchise or delegate to third parties its rights hereunder (except as set forth in Paragraph 11(b) hereof). Neither this Agreement nor any of the rights of Licensee hereunder shall be sold, transferred or assigned by Licensee and no rights hereunder shall devolve by operation of law or otherwise upon any receiver, liquidator, trustee or other party. 20. BANKRUPTCY RELATED PROVISIONS. (a) The parties hereby agree and intend that this Agreement is an executory contract governed by Section 365 of the Bankruptcy Code. (b) In the event of Licensee's bankruptcy, the parties intend that any royalties payable under this Agreement during the bankruptcy period be deemed administrative claims under the Bankruptcy Code because the parties recognize and agree that the bankruptcy estate's enjoyment of this Agreement will (i) provide a material benefit to the bankruptcy estate during its reorganization and (ii) deny Licensor the benefit of the exploitation of the rights through alternate means during the bankruptcy reorganization. (c) The parties acknowledge and agree that any delay in the decision of trustee of the bankruptcy estate to assume or reject the Agreement (the "Decision Period") materially harms Licensor by interfering with Licensor's ability to alternatively exploit the rights granted under this Agreement during a Decision Period of uncertain duration. The parties recognize that arranging appropriate alternative exploitation would be a time consuming and expensive process and that it is unreasonable for Licensor to endure a Decision Period of extended uncertainty. Therefore, the parties agree that the Decision Period shall not exceed sixty (60) days. (d) Licensor, in its interest to safeguard its valuable interests (including, without limitation, its intellectual property rights in the Licensed Property), has relied on the particular skill and knowledge base of Licensee. Therefore, the parties acknowledge and agree that in a bankruptcy context this Agreement is a license of the type described by Section 365(c)(1) of the Bankruptcy Code and may not be assigned without the prior written consent of the Licensor. 22. CONSTRUCTION. This Agreement shall be construed in accordance with the laws of the State of California of the United States of America without regard to its conflicts of laws provisions. 22. WAIVER, MODIFICATION, ETC. No waiver, modification or cancellation of any term or condition of this Agreement shall be effective unless executed in writing by the party charged therewith. No written waiver shall excuse the performance of any acts other than those specifically referred to therein. The fact that the Licensor has not previously insisted upon Licensee expressly complying with any provision of this Agreement shall not be deemed to be a waiver of Licensor's future right to require compliance in respect thereof and Licensee specifically acknowledges and agrees that the prior forbearance in respect of any act, term or condition shall not Page 17 18 prevent Licensor from subsequently requiring full and complete compliance thereafter. If any term or provision of this Agreement is held to be invalid or unenforceable by any court of competent jurisdiction or any other authority vested with jurisdiction, such holding shall not affect the validity or enforceability of any other term or provision hereto and this Agreement shall be interpreted and construed as if such term or provision, to the extent the same shall have been held to be invalid, illegal or unenforceable, had never been contained herein. Headings of paragraphs herein are for convenience only and are without substantive significance. 23. CONFIDENTIALITY. The Artwork and the materials and information supplied to one party by the other hereunder constitute, relate to, contain and form a part of confidential and proprietary information of the disclosing party, including, but not limited to, Style Guides, design elements, character profiles, unpublished copyrighted material, release dates, marketing and promotional strategies, information about new products, properties and characters, the terms and conditions of this Agreement, and other information which is proprietary in nature or is a trade secret (collectively, the "Proprietary Information"). The parties acknowledge and agree that the Proprietary Information is highly confidential and that disclosure of the Proprietary Information will result in serious harm to the owner thereof. Among other damage, unauthorized disclosure of the Proprietary Information will (i) damage carefully planned marketing strategies, (ii) reduce interest in the Licensed Property, (iii) make unique or novel elements of the Licensed Property susceptible to imitation or copying by competitors, infringers or third parties prior to Licensor's release of the information or materials, (iv) damage proprietary protection in undisclosed or unpublished information or materials, and (v) provide unauthorized third parties with materials capable of being used to create counterfeit and unauthorized merchandise, audio-visual products or other products, all of which will seriously damage the parties' rights and business. Except as expressly approved in writing by the owner of the Proprietary Information, the other party shall not reproduce or use the Proprietary Information of the other party and shall not discuss, distribute, disseminate or otherwise disclose the Proprietary Information or the substance or contents thereof, in whole or in part, in its original form or in any other form, with or to any other person or entity other than employees of the parties and, in the case of Licensee, third parties who have executed a Contributor's Agreement (as provided in Paragraph 8(b)) or third party manufacturer's agreement (as provided in paragraph 10(b)) and been approved by Licensor as provided hereunder, and such employees and third parties shall be given access to the Proprietary Information only on a "need-to-know" basis. The foregoing restrictions shall not apply to any information which, (i) at the time of disclosure, is in the public domain or which, after disclosure, becomes part of the public domain by publication or otherwise through no action or fault of the receiving party; (ii) information which the receiving party can show was in its possession at the time of disclosure and was not acquired, directly or indirectly, from the other party; (iii) information which was received from a third party having the legal right to transmit the same; (iv) information which is independently developed, conceived, or created without use of or reference to any Proprietary Information of the other party; or (v) information which is disclosed pursuant to valid court order or other legal process. 24. ENTIRE AGREEMENT This Agreement constitutes the entire Agreement between the parties concerning the subject matter hereof and cancels and supersedes any prior understandings and agreements between the parties hereto with respect thereto. There are no Page 18 19 representations, warranties, terms, conditions, undertakings or collateral agreements, expressed, implied or statutory, between the parties other than as expressly set forth in this Agreement. 25. ACCEPTANCE BY LICENSOR. This instrument, when signed by Licensee, shall be deemed an application for license and not a binding agreement unless and until accepted by Warner Bros. Consumer Products by signature of a duly authorized officer and the delivery of such a signed copy to Licensee. The receipt and/or deposit by Warner Bros. Consumer Products of any check or other consideration given by Licensee and/or delivery of any material by Warner Bros. Consumer Products to Licensee shall not be deemed an acceptance by Warner Bros. Consumer Products of this application. The foregoing shall apply to any documents relating to renewals or modifications hereof. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. AGREED AND ACCEPTED: AGREED AND ACCEPTED: LICENSOR: LICENSEE: WARNER BROS. CONSUMER PRODUCTS, BAY AREA MULTIMEDIA (BAM) a Division of Time Warner Entertainment Company, L.P. By: /s/ GARY R. SIMON By: /s/ RAY MUSCI --------------------------------- ------------------------------------ Gary R. Simon Senior Vice President, Business and Legal Affairs Date: 10/4/00 Date: 10/3/00 Page 19 20 EXHIBIT 1 #12698-YOGI CONTRIBUTOR'S AGREEMENT I, ______________, the undersigned ("Contributor"), have been engaged by BAY AREA MULTIMEDIA (BAM) ("Licensee") to work on or contribute to the creation of Licensed Products, described as ____________________________, by Licensee under an agreement between Licensee and Warner Bros., a division of Time Warner Entertainment Company, L.P., c/o Warner Bros. Consumer Products, a division of Time Warner Entertainment Company, L.P. ("Warner") dated __________________________. I understand and agree that the Licensed Products, and all artwork or other results of my services for Licensee in connection with such Licensed Products ("Work") is a "work made for hire" for Hanna-Barbera Productions, Inc. and that all right, title and interest in and to the Work shall vest and remain with Hanna-Barbera Productions, Inc. I reserve no rights therein. Without limiting the foregoing, I hereby assign and transfer to Hanna-Barbera Productions, Inc. all other rights whatsoever, in perpetuity throughout the universe which I may have or which may arise in me or in connection with the Work. I hereby waive all moral rights in connection with such Work together with any other rights which are not capable of assignment. I further agree to execute any further documentation relating to such transfer or waiver or relating to such Work at the request of Hanna-Barbera Productions, Inc. or Licensee, failing which Hanna-Barbera Productions, Inc. is authorized to execute same as my Attorney-in-Fact. By: ---------------------------------------- Signature ---------------------------------------- Print Name ---------------------------------------- Address ---------------------------------------- ---------------------------------------- ---------------------------------------- County ---------------------------------------- Date Warner Bros. Consumer Products: By: -------------------------------- Date: -------------------------------- Page 20 21 EXHIBIT 2 #12698-YOGI Milestone 1 CONCEPT DESIGN: General description of proposed program, game play and overall look and feel. Includes user interface, list of characters and time line for production and release. Milestone 2 FUNCTIONAL DESIGN SPECIFICATION/DESIGN DOCUMENT: Detailed description of the program including: synopsis, overview and logic flowchart. Milestone 3 SCRIPT: Dialogue script. Milestone 4 GAME PLAY AND CHARACTER ANIMATION: Milestone 5 ALPHA: Initial combination of all product elements and art in a usable working prototype. Milestone 6 BETA: Almost final version of the License Product(s) that is a fully functional, nearly bug-free disk that incorporates finalized art and game play. Milestone 7 GOLDEN MASTER: Final disk that results from Milestone 6 which includes a fully tested program containing all elements and game play. Page 21 22 EXHIBIT 3 #12698-YOGI WARNER BROS. CONSUMER PRODUCTS 4000 Warner Boulevard Bridge Building 156 South - 4th Floor Burbank, CA 91522 Re: Approval of Third Party Manufacturer Gentlemen: This letter will serve as notice to you that pursuant to Paragraph 11(b) of the License Agreement dated ___________________, 2000 between you and BAY AREA MULTIMEDIA (BAM), we have been engaged as the manufacturer for Licensee in connection with the manufacture of the Licensed Products as defined in the aforesaid License Agreement. We hereby acknowledge that we may not manufacture Licensed Products for, or sell or distribute Licensed Products to, anyone other than Licensee. We hereby further acknowledge that we have received a copy and are cognizant of the terms and conditions set forth in said License Agreement and hereby agree to observe those provisions of said License Agreement which are applicable to our function as manufacturer of the Licensed Products. It is expressly understood that we are obligated to comply with all local laws, including without limitation, labor laws, wage and hour laws and anti-discrimination laws and that you or your representatives shall, at any time, have the right to inspect our facilities and review our records to ensure compliance therewith. It is understood that this engagement is on a royalty free basis and that we may not subcontract any of our work without your prior written approval. We understand that our engagement as the manufacturer for Licensee is subject to your written approval. We request, therefore, that you sign in the space below, thereby showing your acceptance of our engagement as aforesaid. Very truly yours, ---------------------------------------- Manufacturer/company name By: ---------------------------------------- signature ---------------------------------------- print name ---------------------------------------- address ---------------------------------------- ---------------------------------------- ---------------------------------------- country ---------------------------------------- date ---------------------------------------- product(s) manufacturing AGREED TO AND ACCEPTED: WARNER BROS. CONSUMER PRODUCTS, a Division of Time Warner Entertainment Company, L.P. By: -------------------------------- Gary R. Simon Senior Vice President, Business and Legal Affairs Date: -------------------------------- Page 22 EX-10.38 48 v72115orex10-38.txt EXHIBIT 10.38 1 EXHIBIT 10.38 (Confidential Portions Omitted) BAY AREA MULTIMEDIA, INC. - TAKARA CO., LTD. LICENSE AGREEMENT THIS AGREEMENT is made and entered into this 31 day of March 2000 (the "EXECUTION DATE"), by and between TAKARA CO., LTD., a corporation formed in accordance with the laws of Japan at 4-19-16 Aoto, Katsushika-Ku, Tokyo 125-8503 Japan ("LICENSOR") and BAY AREA MULTIMEDIA, INC, a California corporation at 20760 Monte Sunset Drive, San Jose, CA 95120 ("LICENSEE"). RECITALS A. LICENSOR is in the business of developing and licensing products for interactive media. B. LICENSEE is in the business of acquiring, marketing, and distributing products for interactive media. C. LICENSOR (1) has developed and is developing and (2) owns certain proprietary rights or has obtained all necessary rights to a product known as "Transformers, Beast Wars Transmetals" described in greater detail in EXHIBIT A attached hereto. (All rights, title, and interest in the copyrights, trademarks, likenesses, and all other proprietary rights relating to or connected with such product, collectively shall be referred to as the "PRODUCT"). D. LICENSOR desires to grant to LICENSEE and LICENSEE desires to obtain a license to market, distribute and sell products incorporating the PRODUCT, subject to the terms and conditions set forth in this AGREEMENT. NOW, THEREFORE, the parties agree as follows: 1. Ownership. Subject to the license granted LICENSEE in Section 2 below, LICENSOR shall retain all ownership rights in the PRODUCT. 2 . Grant of Exclusive License in the USA, its Possessions, Canada, and the Sales Territories of the Sony Computer Entertainment of America and Nintendo of America. 2.1 The Grant. LICENSOR hereby grants to LICENSEE, and LICENSEE accepts from LICENSOR a license (the "LICENSE") to display, advertise, promote, manufacture or have manufactured, license, sell, or otherwise distribute products (collectively the "DISTRIBUTION RIGHTS") incorporating the PRODUCT, subject to the terms and conditions contained herein. 2.2 Scope. The LICENSE granted herein shall be exclusive with respect to the platforms and within the territory as defined herein. The platforms are Nintendo 64 ("N64") and the Sony Playstation ("PLAYSTATION"). The territory is North America. (The products LICENSEE distributes which incorporate the PRODUCT and which are subject to this AGREEMENT hereafter are referred to as the "LICENSED PRODUCTS"). 3. Term. The term of this AGREEMENT shall expire on December 31, 2002, unless terminated sooner in accordance with the provisions of this AGREEMENT (the "TERM"). After the original term, the AGREEMENT automatically extends for additional one-year terms unless either party indicates its intent to terminate the AGREEMENT by delivery of notice thereof not less than ninety (90) days prior to the end of such term. 2 4. Completion. 4.1 Finalization. LICENSOR exclusively shall be responsible for the completion and localization of the LICENSED PRODUCTS for the various territories within North America; and shall bear all costs associated with such activities, In addition, LICENSOR shall be responsible for and bear all costs associated with obtaining the approval of the distribution of the LICENSED PRODUCT in North America by Nintendo of America ("NINTENDO") and Sony Computer Entertainment of America ("SONY"), respectively. 4.2 Maintenance. During the term of this AGREEMENT, LICENSOR shall exercise its best efforts to correct defects in the PRODUCT as promptly as reasonably possible. LICENSEE shall be solely responsible for providing support and maintenance to its customers. 5. Compensation. 5.1 GUARANTEED COMPENSATION Amount. LICENSEE shall pay to LICENSOR the following guaranteed compensation (the "GUARANTEED COMPENSATION):
VERSION GUARANTEED COMPENSATION ------- ----------------------- N64 $[*] PLAYSTATION $[*]
5.2 GUARANTEED COMPENSATION Payment Terms. GUARANTEED COMPENSATION shall be due and payable [*] upon execution of this AGREEMENT; [*] upon completion of each version of the LICENSED PRODUCT; and [*] on the approval of each version of the LICENSED PRODUCT by NINTENDO or SONY, as appropriate. In the event both LICENSED PRODUCTS are not completed and approved as contemplated above ("FINALIZED") by April 30, 2000, LICENSEE shall have the right to notify LICENSOR of its intent to terminate this AGREEMENT ("FINALIZATION TERMINATION NOTICE"). GUARANTEED COMPENSATION and ROYALTY PAYMENTS, defined in Section 5.3 below, shall be transmitted by telegraph to The Fuji Bank Ltd., Katsushika-Branch at 1-3-12 Tateishi, Katsushika-Ku Tokyo, Japan, account number 12185, account name Takara Co., Ltd., within seven (7) days of LICENSEE's FINALIZATION TERMINATION NOTICE. If within thirty (30) days of delivery of the FINALIZATION TERMINATION NOTICE both LICENSED PRODUCTS are not FINALIZED, notwithstanding any other term of this AGREEMENT, LICENSEE shall have the immediate right to terminate this AGREEMENT and receive from LICENSOR all funds previously delivered by LICENSEE to LICENSOR under this AGREEMENT. 5.3 ROYALTY COMPENSATION. LICENSEE shall pay LICENSOR additional compensation equal to $[*] per PLAYSTATION unit; $[*] per N64 unit ("ROYALTY COMPENSATION"), less returns and units sold to existing customers as replacement products. ROYALTY COMPENSATION shall not be payable on units sold at or below cost. In each contract year LICENSEE shall be permitted an allowance of up to [*] units of each LICENSED PRODUCT per platform, royalty-free ("ROYALTY FREE PROMOTIONAL UNITS"), provided that such ROYALTY FREE PROMOTIONAL UNITS must be distributed at no charge as samples and/or as review copies, or as otherwise permitted by this AGREEMENT, and LICENSEE shall provide an accounting thereof. *Confidential Portions Omitted and Filed Separately with the Commission. 2 3 LICENSOR shall have the right to check the ROYALTY COMPENSATION records of LICENSEE during normal business hours upon two (2) weeks written notice. LICENSEE shall keep such records for five (5) years from the EXECUTION DATE of this AGREEMENT. 5.4 ROYAL COMPENSATION Payment Terms. ROYALTY COMPENSATION shall be payable quarterly in arrears within forty-five (45) days after the conclusion of the respective calendar quarter. LICENSEE shall provide LICENSOR a full and accurate written accounting of sales during the preceding quarter ("QUARTERLY SALES REPORT"). 5.5 Recoupment. The payments otherwise required under Sections 6.3 and 6.4 shall not apply until the aggregate amounts due thereunder for both versions of the LICENSED PRODUCTS exceeds $[*]. 5.6 USD. All payments under this AGREEMENT shall be made in USD. 5.7 Deduction of Taxes. LICENSEE shall be authorized to withhold from payments to LICENSOR under this AGREEMENT the amount of any taxes assessed, if any, by any governmental entity in any jurisdiction on amounts payable to LICENSOR hereunder and shall effect payment to the appropriate tax authority. LICENSEE shall promptly forward to LICENSOR copies of all receipts and other relevant documents evidencing payment of applicable withholding taxes. 6. LICENSOR Copyright and Trademark. 6.1 Notice. "NOTICE" as used in this Section, shall mean the copyright notice defined in EXHIBIT B. 6.2 PUBLISHED MATERIALS. LICENSEE must receive approval from LICENSOR for the design and copyright of all "PUBLISHED MATERIALS". "PUBLISHED MATERIALS" shall include manuals, flyers, labels, and sales catalogues. All such copyrights shall be owned by LICENSOR. 7. Infringement Litigation. 7.1 Assistance. LICENSEE agrees to assist LICENSOR, at LICENSOR's sole expense, to the extent necessary in the procurement of any protection or to protect any of LICENSOR's rights to the PRODUCT. 7.2 Notification. Each party hereto shall promptly notify the other party of an infringement or possible infringement (collectively, "INFRINGEMENT") of any rights granted to LICENSEE hereunder. 7.3 Defense. Upon notification of an INFRINGEMENT, the parties shall promptly confer with respect thereto and, if no mutually satisfactory agreement is reached concerning remedial action, or, if the INFRINGEMENT is not terminated within thirty (30) days after the date of receipt by a party hereto of a notice contemplated by Section 8.2, LICENSOR shall have the exclusive right for a period of sixty (60) days, commencing the day after the last day of said thirty (30) day period, to institute legal action (at its own expense), against the INFRINGER or to otherwise terminate such INFRINGEMENT; provided, however, that LICENSEE shall have the right to join such action as a party to protect its interests in any rights granted to LICENSEE hereunder (at its own expense). If, within said sixty (60) day period, LICENSOR should fail to institute legal action against the INFRINGER or to otherwise terminate the INFRINGEMENT, LICENSEE shall have the right to institute such action at LICENSOR'S expense or to otherwise *Confidential Portions Omitted and Filed Separately with the Commission. 3 4 terminate such INFRINGEMENT; provided, however, that LICENSOR shall have the right to join such action as a party to protect its interest in the PRODUCT at its own expense. 7.4 Settlement. Neither party hereto shall enter into any settlement with an INFRINGER of any rights granted by LICENSOR to LICENSEE hereunder without the prior written consent of the other party; provided, however, that such consent shall not be unreasonably delayed or withheld. The parties agree to cooperate with each other with respect to any suits or other action taken under this Section and to keep the other party promptly and fully advised. with respect thereto. 7.5 Communication. In the event a party elects to prosecute a legal action pursuant to this Section, such party agrees, to the extent procedurally practicable, to furnish to the other party copies of all pleadings, motions, briefs, and other papers proposed to be served or filed in connection with such action reasonably prior to the contemplated date of service or filing. 8. LICENSOR Representations and Warranties. 8.1 LICENSOR's Representations. LICENSOR represents and warrants to LICENSEE that: a. LICENSOR has not previously granted and will not grant any rights in the PRODUCT to any third party which are inconsistent with the rights granted to LICENSEE herein; LICENSOR has full power to enter into this AGREEMENT, to carry out its obligations hereunder and to grant the rights herein granted to LICENSEE; and the PRODUCT is the creation, work, and property of LICENSOR and does not infringe or misappropriate the rights or intellectual property of any third party. b. The PRODUCT will perform in accordance with reasonable industry standards. If any failure to so perform is reported to LICENSOR by LICENSEE, LICENSOR will exercise its best efforts to correct such nonconformity. 8.2 Infringement. If LICENSEE has been given notice that the PRODUCT infringes or misappropriates an intellectual property right of a third party ("INFRINGEMENT CLAIM"), LICENSEE shall so notify LICENSOR ("INFRINGEMENT NOTIFICATION"). Then, in addition to the obligation to defend and indemnify against damages as described below, LICENSOR shall: a. Procure for LICENSEE the right to continue to utilize and market the PRODUCT; or b. Replace or modify the PRODUCT in such a way that it will not continue to constitute an infringement; or c. If a. or b. is not provided within one hundred twenty (120) days of the INFRINGEMENT NOTIFICATION, if the following calculation provides a positive number, LICENSOR immediately shall pay to LICENSEE the difference between (i)(a) the GUARANTEED COMPENSATION plus (b) all costs incurred by LICENSEE in conjunction with the sale of the LICENSED PRODUCTS minus (ii) the ROYALTY COMPENSATION paid by LICENSEE to LICENSOR hereunder. 9. Indemnification. 9.1 By LICENSOR. LICENSOR agrees to indemnify LICENSEE (including its officers, employees, and agents) from and against all claims, suits, damages and expenses 4 5 (including attorneys' fees) directly or indirectly arising out of or relating to any breach of LICENSOR's representations, agreements or obligations under this AGREEMENT or to LICENSOR's performance of activities related to this AGREEMENT. 9.2 By LICENSEE. Except with respect to matters for which LICENSEE is entitled to indemnification under Section 9.1, LICENSEE agrees to indemnify, defend and hold harmless LICENSOR and its officers, employees, and agents from and against any and all claims, losses, damages, costs and expenses (including attorneys' fees), directly or indirectly arising out of or relating to any breach of LICENSEE's representations, agreements or obligations under this AGREEMENT or to LICENSEE's activities related to this AGREEMENT including the production and distribution of the PRODUCTS. 10. Materials Supplied to LICENSEE. LICENSOR shall provide LICENSEE with the following: a. a copy of the object code for the PRODUCTS; b. currently available transparencies of character images and documentation in English that LICENSEE may use to develop marketing advertisements and packaging; c. manuals/documentation of the game; d. video tapes of the game (entire game played and video ROM samples). 11. Termination. 11.1 Procedure. a. Except for FINALIZATION TERMINATION as provided in Section 6.2, in the event that either party is in default or commits a breach of this AGREEMENT, and if such default or breach is not cured within 30 days after written notice of such default or breach is given by the non-defaulting party to the defaulting party, then at any time after the expiration of such 30 days, the non-defaulting party may terminate this AGREEMENT by giving written notice to the defaulting party of its election to terminate; provided, however, that the parties recognize that it may not be practical to complete within 30 days a cure of certain types of breaches or defaults. Therefore in situations in which the cure of a default or breach cannot reasonably be completed within 30 days, this AGREEMENT shall not be subject to termination if the defaulting party in breach reasonably commences a cure of a breach or default within 30 days of receiving notice from the other party and diligently pursues the cure to completion; provided, further, that with respect to LICENSEE obligation to submit reports and make payments as provided herein, such defaulting party shall have only 15 days to cure a default or breach of such obligations. b Such right of termination will not be exclusive of any other remedies or means of redress to which the non-defaulting party may be lawfully entitled. 11.2 Survival. The following rights and obligations survive any expiration or termination of this AGREEMENT to the degree necessary to permit their complete fulfillment or discharge: a LICENSEE' obligation to pay and LICENSOR's right to receive payments in accordance with this AGREEMENT, including payments on account of any sales of PRODUCTS after the date of expiration or termination; 5 6 b. The obligation of confidentiality of each party as provided in Section 18; c. Any cause of action or claim of either party, accrued or to accrue, because of any breach or default by the other party; and d. The warranties and indemnities of the parties set forth in this AGREEMENT. 12. Disposal of Inventory. Upon the expiration or termination of this AGREEMENT, LICENSEE shall have the right to sell the LICENSED PRODUCTS in accordance with this AGREEMENT. 13. Additional Acts. Each party, at the expense of the other, will deliver such documents and take such actions as such other party may reasonably request to evidence or otherwise perfect such other party's rights as specified in this AGREEMENT. 14. Applicable Law; Venue. Both parties hereby agree that the applicable law shall be the law of the State of California, except to the extent specifically superseded by the laws of the United States, in which case the laws of the United States shall apply. Both parties agree that the Federal Courts located in the State of California and the State Courts of the State of California shall have EXCLUSIVE jurisdiction over ALL issues which arise out of or relate to this AGREEMENT. 15. Obligations. Neither party is authorized to and shall not at any time attempt to act on behalf of the other to bind it in any manner whatsoever to any obligations whatsoever. Each party shall not act as an agent, or representative of the other, its parent, subsidiaries, or affiliate, without the prior written consent of the other. 16. Independent Contractor. Neither party is a partner or joint venturer with the other, or any parent, subsidiary, or affiliate of the other. The relationship between LICENSEE and LICENSOR is that of independent contractors. 17. PROPRIETARY INFORMATION. Each party agrees that any data, information and/or drawings, whether or not protected by patent, copyright or otherwise, including, but not limited to: (a) technical specifications which relate to the PRODUCT, (b) sales information and (c) account activity; which is disclosed to the other (the "PROPRIETARY INFORMATION"), shall be treated by the other as PROPRIETARY INFORMATION of such party and shall not be disclosed to any third party without the prior written consent of a duly authorized officer of such party for a period of 7 years after disclosure of such PROPRIETARY INFORMATION. Each party shall not reproduce, provide or otherwise make available any such confidential data or information to any person other than those employees of such party who have a need to know for the purpose of the performance of this AGREEMENT. Each party agrees that any such employees to whom such information is disclosed shall first execute an agreement with such party not to disclose such information to any third parties without the prior written permission of the other. 18. Amendments; Entire Agreement. No amendment to this AGREEMENT shall be valid, unless in writing and signed by all of the parties hereto. Further, the terms and conditions set forth in this AGREEMENT constitute the entire agreement between the parties respecting the subject matter hereof. 19. Notices, Payments, Etc. All reports, consents, payments, and notices required or permitted to be given under this AGREEMENT will be deemed to have been validly given if in writing and delivered or mailed via professional courier to the receiving party or transmitted by 6 7 facsimile, e-mail or other method of simultaneous transmission and will be deemed to have been received by the receiving party upon delivery. 20. Assignment. This AGREEMENT shall be binding upon and inure to the benefit of each party and its successors and/or permitted assigns. LICENSOR may not assign any of the rights or delegate any of the obligations of this AGREEMENT without the prior written consent of LICENSEE, which consent shall not be unreasonably withheld or delayed; provided, however, that LICENSOR may assign this AGREEMENT to a purchaser of the PRODUCT. Assignments by LICENSOR permitted by this Section shall be subject to the condition precedent that the assignee shall assume in writing all obligations and conditions of assignor under this AGREEMENT. 21. Attorneys' Fees. Should any party hereto institute legal action against the other to interpret or enforce any of the terms or provisions of this AGREEMENT, the prevailing party in such action shall be entitled to recover reasonable fees of attorneys, accountants and expert witnesses, as costs, in addition to any other damages that may otherwise be awarded by the court. 22. Waiver. A waiver by either party of any of the terms and conditions of this AGREEMENT in any instance will not be deemed or construed to be a waiver of such terms or conditions for the future, or of any subsequent breach thereof. 23. Severability. In the event that any term, clause or provision of this AGREEMENT is construed to be or adjudged invalid, void or unenforceable, such term, clause or provision will be construed as severed from this AGREEMENT, and the remaining terms, clauses and provisions will remain in full force and effect. 24. Interpretation. This AGREEMENT shall be construed without regard to the party responsible for the preparation of the same, and shall be deemed to have been prepared jointly by the parties. Any ambiguity or uncertainty existing herein shall not be interpreted against either party, but according to the application of other rules of contract interpretation. IN WITNESS WHEREOF, the parties hereto have executed this AGREEMENT as of the date first set forth above. LICENSOR: TAKARA CO., LTD. a Japan corporation /s/ KEITA SATOH, PRESIDENT ---------------------------------------- Keita Satoh, President LICENSEE: BAY AREA MULTIMEDIA, INC., a California corporation By: /s/ RAYMOND C. MUSCI ------------------------------------ Title: PRESIDENT ---------------------------------- 7 8 EXHIBIT A DECRIPTION OF THE PRODUCT Video Game Software titled "TRANSFORMERS, BEAST WARS TRANSMETALS" for Nintendo 64 and Sony PlayStation. (C) Takara Co., Ltd. 2000. i 9 EXHIBIT B NOTICE "TRANSFORMERS(TM), BEAST WARS(R) TRANSMETALS(R)" (C) Takara Co., Ltd. 2000 TRANSFORMERST(TM), BEAST WARS(R) and TRANSMETALS(R) are trademarks of Hasbro, Inc. (C) 2000 Hasbro, Inc. All Rights Reserved. Manufactured under license from Takara Co., Ltd. ii EX-10.39 49 v72115orex10-39.txt EXHIBIT 10.39 1 EXHIBIT 10.39 (Confidential Portions Omitted) EXCLUSIVE OUTPUT AGREEMENT This Agreement (the "Agreement") is being entered into as of this 7th day of April, 2000 by and between BAY MULTIMEDIA, INC. ("Bay") and FRANCHISE FILMS, INC. ("Franchise") and sets forth the terms and conditions of their agreement regarding Bay's acquisition of certain rights to Franchise's motion picture output on an exclusive basis and certain other motion picture product, all as more particularly set forth below. As used herein, the term "Parties" shall refer collectively to Bay and Franchise, and the term "Party" shall refer to Bay or Franchise individually. The Parties hereby agree as follows: 1. SCOPE OF THE AGREEMENT: For good and valuable consideration, receipt of which is hereby acknowledged: a. Exclusive First Look Obligation. During the Output Term (as defined herein), Franchise shall submit to Bay, on an exclusive, "first-look" basis, all Franchise Pictures (as defined herein) with respect to which Bay shall have the right to exploit Interactive Entertainment Rights (as defined in Paragraph 5 hereof) in perpetuity throughout the universe, in accordance with the terms and conditions hereof. Each submission shall be made by Franchise in accordance with the requirements and procedures set forth below. The term "Franchise Picture" shall mean an original first class theatrical motion picture: (i) to be produced or acquired for theatrical release by Franchise; and/or (ii) to be otherwise released under the Franchise name and/or logo and/or any other name and/or logo owned, operated or controlled by, or otherwise affiliated with, Franchise, by itself or through a joint venture with another entity. A motion picture project, property or film shall be deemed to be a Franchise Picture the first date upon which Franchise enters into an agreement to acquire the rights to cause such project, property or film to be produced, acquired or otherwise released in accordance with the definition of a Franchise Picture hereunder (the "Acquisition Date"). For purposes hereof, "first look" means that a Franchise Picture shall be submitted solely and exclusively to Bay for purposes of exploiting the Interactive Entertainment Rights in and to such Franchise Picture before the same is submitted to any other person or entity. It is the essence of this Agreement that Franchise will not submit any Franchise Picture to a third party for acquisition, licensing, exploitation or any other use of the Interactive Entertainment Rights unless and until the Franchise Picture has been submitted to Bay hereunder and Bay has declined to exploit the Interactive Entertainment Rights to the Franchise Picture (a "Rejected Picture"). A Franchise Picture for which Bay elects to exploit the Interactive Entertainment Rights shall be referred to as an "Included Picture." b. Grant of Rights. Franchise hereby irrevocably grants, transfers, assigns and licenses to Bay the Granted Rights (as defined in Paragraph 5 hereof) in and to each Franchise Picture during the Output Term (as defined herein) in perpetuity throughout the universe subject to, and in accordance with, the terms hereof. c. Output Term. The term "Output Term" shall mean the period commencing on the date hereof and expiring upon the later of (i) that date which is three (3) years from the date hereof or (ii) initial theatrical release in the United States of the tenth Included Picture. It is understood that notwithstanding the expiration of the Output Term, Bay's Granted Rights with respect to each Franchise Picture shall continue in perpetuity throughout the universe. 2 d. Wide Release Requirement. Notwithstanding anything to the contrary contained herein, the Parties agree that in the event that an Included Picture shall fail to be released theatrically by Franchise on at least 800 screens in the United States simultaneously at any time during the 8 weeks after initial release of such Included Picture (each Included Picture which fails to achieve such a theatrical release shall be referred to herein as a "Limited Release Picture"), such Limited Release Picture shall cease to be an Included Picture hereunder for purposes of determining the Output Term. 2. GRANTED RIGHTS: The term "Granted Rights" shall mean the exclusive Interactive Entertainment Rights (as defined herein) to each of the Franchise Pictures, all rights necessary to distribute, exploit, advertise, promote and publicize such Interactive Entertainment Rights, and the identical rights to all remakes, sequels and prequels of each Franchise Picture, for exploitation in perpetuity throughout the Universe. "Interactive Entertainment Rights" shall mean all of the following: (a) rights to develop and manufacture interactive software products (the "Products") on all interactive entertainment software platforms including, without limitation: (i) IBM PC, Apple Macintosh and Power PC compatible computers and any similar or successor personal computers, whether operating under DOS, Windows, OS/2, Macintosh OS, UNIX or any similar or successor operating system, and whether operating in stand-alone or networked configuration including, without limitation, on the interactive networks and the Internet, and regardless of storage media (e.g., whether on CD-ROM, magnetic, optical solid-state or other media), (ii) dedicated console gaming systems and any similar or successor gaming systems (e.g., Sony PlayStation, Sony PlayStation 2, Sega Dreamcast, Nintendo Dolphin, Nintendo 64, etc.), (iii) coin operated, token operated or other arcade games, and (iv) handheld consoles and devices (e.g., Nintendo Color Gameboy); and (b) rights to use elements of each Franchise Picture including, without limitation, the soundtrack to each Franchise Picture and the names, likenesses, biographies, photographs and recorded voices of all persons appearing in each Franchise Picture, to the extent Franchise possesses such rights, (i) as part of the name, label, packaging, or trade dress (i.e., overall appearance and commercial impression) of the Products, (ii) as part of the sound, graphics or other audio-visual elements integral to the Products for use in all interactive media whether heretofore known or hereafter developed, and (iii) in print media, point of sale, radio broadcast and television advertising, and in brochures, sales literature and promotional activities, including on-line promotional activities, for the Products. The Parties agree that the Granted Rights are subject only to any non-financial contractual restrictions thereon set forth in any bonafide agreement entered into by Franchise with third parties of which Bay has received written notice at the time of submission. 3. SUBMISSION PROCEDURES: a. Submission. Not later than five (5) business days following the Acquisition Date of a Franchise Picture, Franchise shall submit the screenplay for such Franchise Picture to Bay, along with a written notice ("Submission Notice") from Franchise to Bay stating the proposed budget amount for such Franchise Picture and informing Bay that the screenplay and notice constitute a submission hereunder. In addition, Franchise shall submit to Bay a statement of any and all creative elements attached to such Franchise Picture (e.g., director, writer, principal cast members) and all other relevant material Franchise has in connection with such Franchise Picture (e.g., chain-of-title documents, proposed schedule, expected date of initial United States theatrical release) (collectively, all of the foregoing shall be known as the "Submission Materials"). 3 b. Bay's Response to Submission. Within ninety (90) days following receipt by Bay of a Submission Notice, together with complete Submission Materials (the "Response Period"), Bay will provide written notice to Franchise whether Bay elects to exploit the Interactive Entertainment Rights to such Franchise Picture. The Response Period may be extended in writing by Bay as reasonably necessary to confirm the validity of the chain of title for such Franchise Picture. Bay's failure to respond within the Response Period shall be deemed to constitute Bay's rejection of such Franchise Picture and such Franchise Picture shall thereafter be deemed to be a Rejected Picture. c. Rejected Pictures. With respect to each Rejected Picture, Franchise will have the option to arrange for the Interactive Entertainment Rights to such Rejected Picture to be acquired by third parties; provided, however, that prior to the time that Franchise concludes any agreement to set up such rights with a third party, if there is any change in any of the elements set forth in the Submission Materials (e.g., additional writing, a change in the budget amount, a change in the principal cast), then Franchise shall resubmit the Rejected Picture to Bay in accordance with the terms of Paragraph 6.a. above and the Rejected Picture shall not be submitted to any third party unless and until Bay has again declined to exploit said rights. All of Bay's right, title, and interest in and to each Rejected Picture that is not required to be resubmitted to Bay pursuant to the terms of this Paragraph 6.c. shall revert to Franchise automatically. Bay shall quitclaim all rights in and to such Rejected Picture to Franchise. Upon Franchise's written request, Bay shall execute and deliver or cause to be executed and delivered to Franchise a customary quitclaim or such other instruments, documents or agreements as Franchise may reasonably deem necessary to effectuate such quitclaim. d. Submission by Bay. In addition to Franchise's submissions hereunder, Bay shall have the right, but not the obligation, to submit to Franchise, at any time, theatrical motion picture projects for which Bay is willing to exploit the Interactive Entertainment Rights. None of such projects shall be deemed a Franchise Picture hereunder unless and until Franchise enters into a binding written agreement to acquire the rights to cause such project to be produced, acquired or otherwise released in accordance with the definition of a Franchise Picture hereunder. 4. EQUITY INTEREST: a. Bay Common Stock. Franchise shall be entitled to receive up to an aggregate total of seven hundred fifty thousand (750,000) shares of Bay common stock (the "Equity Interest"), which shares shall accrue and be payable to Franchise in ten (10) equal installments (each installment representing one-tenth (1/10) of the Equity Interest) within 10 business days from initial United States theatrical release of each of the first ten (10) Included Pictures. b. Rights of First Refusal. i. Offer of Sale; Notice of Proposed Sale. If at any time Franchise desires to sell, transfer or otherwise dispose of any of its shares of the capital stock of Bay now or hereafter held or any interest in such shares of capital stock of Bay (referred to herein as "Shares"), Franchise shall deliver written notice of its desire to do so (the "Sale Notice") to Bay, which Sale Notice must be accompanied by a binding agreement (the "Binding Agreement"), which 4 Binding Agreement shall be expressly subject to Franchise's complying with the provisions of this Agreement, including this Paragraph 7, with a bona fide purchaser reasonably capable of completing such purchase (the "Proposed Transferee"). The Sale Notice and Binding Agreement shall specify (i) the name and address of the Proposed Transferee(s), (ii) the number of Shares Franchise proposes to sell, transfer or otherwise dispose of (referred to herein as "Offered Shares"), (iii) the consideration per Offered Share to be delivered to Franchise for the proposed sale, transfer or disposition and (iv) all other material terms and conditions of the proposed transaction. ii. Option to Purchase. Bay shall have the option to purchase all or any portion of the Offered Shares for the consideration per share and on the terms and conditions set forth in the Sale Notice and Binding Agreement. The Company may only exercise such option by delivery of written notice to Franchise prior to the date fifteen (15) business days after the date of delivery of the Sale Notice. If Bay delivers written notice of its intent to purchase all or any portion of the Offered Shares, then the closing of the purchase of the Offered Shares shall take place at the offices of Bay no later than ten (10) business days after the expiration of the fifteen (15) day period specified above. iii. Form of Consideration. To the extent that the consideration proposed to be paid by the Proposed Transferee for the Offered Shares consists of property other than cash or a promissory note (the "Non-Cash Consideration"), the consideration required to be paid by Bay exercising its option under this Paragraph 7.b. may consist of cash equal to the value of the Non-Cash Consideration, as determined in good faith by Bay's Board of Directors. Notwithstanding anything to the contrary set forth above, the fifteen (15) day period specified in Paragraph 7.b.ii. shall commence when the value of the Non-Cash Consideration is determined. iv. Sale to Proposed Transferee. To the extent Bay fails (i) to deliver written notice or notices of intent to purchase any of the Offered Shares within the fifteen (15) day period specified in Paragraph 7.b.ii. or (ii) to close the purchase of the Offered Shares within the applicable period specified in Paragraph 7.b.ii., then Franchise may sell, transfer or otherwise dispose of the remaining Offered Shares to the Proposed Transferee at any time within one hundred twenty (120) days after the date of the delivery of the Sale Notice on the terms set forth in the Sale Notice and Binding Agreement. Any Offered Shares not sold, transferred or otherwise disposed of within the applicable one hundred twenty (120) day period shall continue to be subject to all of the requirements of this Paragraph 7 as if there had been no prior offer or Sale Notice. Notwithstanding the above, the Offered Shares shall not be sold, transferred or otherwise disposed of unless such purchaser or acquirer is bound or agrees in writing to be bound by the provisions of this Paragraph 7, and any such sale, transfer or disposition where such purchaser or acquirer is not bound or does not so agree to be bound shall be void. 5 c. Additional Transfer Restrictions. Notwithstanding any provision of this Agreement to the contrary, no Shares or any other equity securities of Bay or rights or warrants exercisable, exchangeable or convertible into any equity securities of Bay may be made to any third party if such third party is engaged, directly or indirectly, whether as an owner or an employee, in a business that is similar to or in competition with the business of Bay. d. Lock-up Agreement. In consideration for Bay agreeing to its obligations under this Agreement, Franchise agrees, in connection with the first qualified public offering of Bay securities, upon request of Bay or the underwriters managing such offering, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of Bay (other than those included in the registration) without the prior written consent of Bay or such underwriters, as the case may be, for such period of time (not to exceed one hundred eighty (180) days) from the effective date of such registration as Bay or the underwriters may specify. Franchise agrees that Bay may instruct its transfer agent to place stop transfer notations in its records to enforce the provisions of this Paragraph 7. e. Effect of Not Following Procedures. Any sale, transfer or other disposition of any Shares not in accordance with the foregoing procedures of this Paragraph 7 shall be null and void and of no force and effect. Notwithstanding anything to the contrary contained herein, nothing shall prevent Franchise from pledging or otherwise encumbering its Shares; provided, however, that the pledgee or holder of such encumbrance shall not be entitled to acquire such Shares upon default or otherwise unless the provisions of this Paragraph 7 are first complied with. 5. ROYALTY PAYMENTS: a. Royalties. Provided Franchise is not in material breach of or default under the terms of this Agreement, and subject to the limitations set forth in Paragraph 8.b. hereof, Bay agrees to pay Franchise a royalty in the amount of [*] of Net Sales (as defined in Schedule NS attached hereto and incorporated herein by reference) of each of the Products developed by Bay in connection with an Included Picture hereunder. Any royalties due pursuant to this Section 8.a. shall be paid to Franchise on a quarterly basis for two (2) years, semiannually for the next three (3) years and annually thereafter, and shall be accompanied by a royalty statement. b. Limitations on Royalties. No royalties shall be due for the sale of Products that result in a loss to Bay. No royalties will be payable on returns that are accepted and credited by Bay or an affiliate of Bay, on units of the Products distributed exclusively for demonstration or promotional purposes, or for replacements. Bay shall have the right to retain a reasonable reserve from royalties for returned Products (provided that such reserve will be reviewed and, if appropriate, liquidated in good faith on a quarterly basis). To the extent that the actual returns to Bay or affiliates of Bay in any given quarter are greater than the expected returns based on which Bay has adjusted any royalty payments, such difference will be withheld by or payable to Bay, as the case may be. No royalties will be payable on sales or other transactions between Bay and any affiliates of Bay. If Bay makes a royalty payment to franchise where Bay is subsequently required to refund or reduce all or any part of the gross revenue collected by it, Bay shall have the right to a refund of overpayments of royalties made to Franchise. * Confidential Portion Omitted and Filed Separately with the Commission. 6 c. Books and Records Relating to Sales. Bay will maintain sufficient and accurate books and records relating to all transactions relevant to sales of the Products or in respect of which Bay is required to provide information in a royalty statement. d. Inspection. Bay will permit a chartered accountant reasonably acceptable to Bay and appointed by Franchise (the "Franchise Accountant") to inspect the books and records maintained by Bay after thirty (30) days notice at any reasonable time during normal business hours at Franchise's expense and in such manner as not to interfere with the business of Bay for the purpose of verifying the correctness of the royalty statements and the payments made by Bay to Franchise by way of royalty pursuant to this Paragraph 8. Franchise shall not be entitled to make such inspections more frequently than on one occasion in each period of twelve (12) calendar months unless it can demonstrate that there are exceptional circumstances requiring such additional inspections. In the event that the Franchise Accountant discovers an error of greater than [*] in favor of Franchise, Franchise shall be entitled to reimbursement by Bay for the costs of such a review. e. No Disclosure. Franchise shall not and shall cause the Franchise Accountant not to disclose any information acquired as a result of any such examination or inspection to any person, firm or corporation other than its employees, authorized representatives and as otherwise strictly necessary to enforce its rights hereunder. 6. CONSULTATION RIGHTS: Franchise shall regularly and meaningfully consult with Bay in good faith during the Output Term with respect to (a) Franchise's development/acquisition slate for Franchise Pictures and (b) all key creative elements of the Included Pictures. Franchise shall advise Bay as to the status of pre-production, production and post-production of each Included Picture on no less than a monthly basis. Without limiting the generality of the foregoing, Franchise agrees to provide Bay with regular production status reports during the period of principal photography and post-production of each Included Picture. Bay agrees to consult with Franchise with respect to the initial marketing campaign and release of all Products developed in connection with each Included Picture. 7. BOOKS AND RECORDS: Franchise shall at all times maintain customary production books and records (including copies of third party agreements and chain-of-title documentation) for each Included Picture and shall, upon Bay's request, for a period of up to two (2) years after initial United States theatrical release of the applicable Included Picture, provide Bay with reasonable access to review and copy the same during reasonable business hours. 8. DELIVERY: The term "Delivery" shall mean Bay's receipt and approval of all of the items listed in Schedule DS attached hereto (the "Delivery Items") and incorporated herein by reference relating to each Included Picture, by a date no later than two (2) weeks following completion of post production of each Included Picture ("Delivery Date"); provided, however, with respect to Franchise's acquisition of Included Pictures in completed form, in lieu of the foregoing, the Delivery Date shall be no later than thirty (30) days following Franchise's acquisition of such Included Picture. Notwithstanding the foregoing, Franchise agrees to use its best efforts to provide any Delivery Items to Bay as soon as is practicable during the course of production. Franchise agrees further to provide Bay reasonable access to the set during production of an Included Picture, on a non-interference basis with production, to enable Bay to photograph the set and to conduct motion capture sessions as Bay may arrange with cast members. If the Delivery Items are not fully delivered in accordance with this Paragraph 11 by the Delivery Date, Bay may choose, at Bay's sole discretion, to exclude such Included Picture from the total of Included Pictures hereunder for the * Confidential Portion Omitted and Filed Separately with the Commission. 7 purpose of determining the Output Term. Franchise agrees herein that the Delivery Items shall be fully paid for by Franchise and Bay shall not be responsible for any of the costs of Delivery. It is understood and agreed by Bay and Franchise that any Delivery Items delivered to Bay hereunder shall become the sole and exclusive property of Bay; provided, however, in no event shall Bay's ownership of such materials be deemed to give Bay any greater rights in the Included Picture than the Granted Rights. 9. PUBLICITY MATERIALS: Franchise agrees herein to provide Bay with free access to all publicity and advertising materials which have been prepared (and cleared by Franchise) in connection with the theatrical release of each Included Picture (provided, that any costs associated with duplication of such materials shall be borne by Bay and recoupable by Bay hereunder). The Parties agree that Bay may use such publicity and advertising materials to promote, advertise and market all Products developed in connection with the applicable Included Picture. 10. REPRESENTATIONS, WARRANTIES AND COVENANTS OF FRANCHISE: Franchise hereby represents, warrants and covenants to Bay as follows: a. Power. Franchise is a corporation duly formed and validly existing in good standing under the laws of the State of __________ and has the requisite power and authority to enter into this Agreement and to perform its obligations hereunder. b. Duly Authorized. The execution and delivery of this Agreement by Franchise and the consummation by Franchise of the transactions contemplated hereby have been duly authorized and no other corporate or partnership proceeding or consent on the part of Franchise is necessary to authorize this Agreement and the transactions contemplated hereby. c. No Liens. With respect to each Franchise Picture, the Granted Rights licensed hereunder to Bay are, as of the date of this Agreement (and shall hereafter continue to be), free and clear of any and all claims, liens, charges or encumbrances which materially impair or materially and adversely affect the Granted Rights; further, there are not, and there will not be outstanding at any time, any liens, claims, charges, encumbrances, restrictions, agreements, commitments, arrangements whatsoever with any person, firm or corporation, or any obligation (past, present or future), or any defaults under, or breaches of, any contract, license or agreement which can, or will, in any way interfere with, impair, abrogate, or adversely or otherwise affect any of the Granted Rights under this Agreement, and that there are not and will not be any payments of any kind required to be made by Bay in respect, or as a result, of any use of the Franchise Pictures pursuant to the rights and licenses herein granted to Bay. Notwithstanding anything to the contrary contained herein, Bay acknowledges and agrees that Franchise if permitted to accord applicable guilds, the financing bank, and the completion guarantor for a Franchise Picture, with a security interest that has priority over Bay's security interest; provided, however, Franchise shall use good faith efforts to require the applicable guilds to subordinate to Bay's security interest and shall require the financing bank's lien and the completion guarantor's lien in the Franchise Picture to terminate immediately upon delivery of such Franchise Picture to the distributor(s) of such Franchise Picture. d. No Infringement. With respect to each Franchise Picture and the advertising and publicity materials in connection therewith provided to Bay hereunder: (i) the foregoing does not and will not contain any language or material which is libelous, slanderous, or defamatory; and (ii) the foregoing will not, when used by Bay (or its permitted licensees and assigns) as authorized hereunder, violate, infringe upon or give rise to any adverse claim with respect to, any common law 8 or other right (including, without limitation, any copyright, trademark, service mark, literary, dramatic or musical right, or right of privacy or publicity) of any person, or violate any applicable law in a fashion which would adversely affect Bay's ability to exercise the Granted Rights hereunder. e. Music. With respect to each musical composition in each Franchise Picture, Franchise will own and control or will have been granted, without any limitations or restrictions whatsoever, all motion picture performance, synchronization, mechanical license and all other Granted Rights hereunder in and to the Franchise Pictures and all subsidiary rights embodied therein and has obtained all necessary licenses required for the exhibition, performance, duplication, distribution, marketing and exploitation of the Granted Rights in the Franchise Pictures hereunder (including the music contained therein) in perpetuity throughout the universe, for any and all purposes licensed hereunder and by every means, method and device now or hereafter known or required for the full, complete and unlimited exercise and enjoyment by Bay of each and all of the Granted Rights under this Agreement; and the non-dramatic musical performance rights in connection with such musical composition necessary for Bay's exercise of the Granted Rights hereunder are: (i) controlled by the American Society of Composers, Authors and Publishers, Broadcast Music, Inc. or SESAC; or (ii) owned by or licensed to Franchise so that no additional clearance of, or payment with respect to, such rights will be required by Bay in connection with the exercise of the Granted Rights; or (iii) in the public domain. f. No Payment Obligations. Franchise has acquired or will have acquired the valid and exclusive rights to exhibit, distribute, and/or exploit each Franchise Picture as provided herein; and all of the following has been or will be fully paid or discharged prior to Delivery: (i) except as to customary residual payments and payments due to performing rights societies, all claims and rights of owners of copyright in literary, dramatic, musical rights and other property or rights in or to all stories, plays, scripts, scenarios, themes, incidents, plots, characters, dialogue, music, words and other material of any nature whatsoever appearing, used or recorded in the Program; (ii) except as to customary residual payments and payments due to performing rights societies, all claims and rights with respect to the use, distribution, performances, exhibition and exploitation of each Franchise Picture, and any music contained therein, throughout the universe; (iii) all costs of producing and completing each Franchise Picture except for profit participations and deferments not yet due which Franchise represents and warrants are solely the responsibility of Franchise. Further, Bay will not be obligated to make any payments to any third party, unless otherwise expressly specified in this Agreement, in connection with the exercise by Bay or its licensees of the Granted Rights including, but not limited to: (x) any guild re-run, reuse, pension or residual payments of any kind, nature or description; or (y) any other payments (whether characterized as a deferment, participation, or otherwise) required to be made to any third party participant including without limitation investors in and/or financiers of any Franchise Picture. g. Copyrighted Material. Except with respect to incidental public domain elements, and subject to the applicable provisions of applicable copyright law as of the date hereof and as it may change in the future, the copyright(s) in each Franchise Picture and in the literary, dramatic and musical material upon which it is based or which is contained therein will be valid and subsisting during the Output Term for each Franchise Picture and Franchise has not done or permitted and will not do or permit any act or omission which would impair or diminish the validity or duration of such copyright. 9 h. No Conflicting Grant. With respect to its projects, properties and films, Franchise has not granted and will not grant to any third person (i) any of the Granted Rights granted to Bay hereunder nor (ii) any other rights which conflict with the Granted Rights exclusively granted to Bay hereunder, and has not entered and shall not hereafter enter into any agreement, which would violate or conflict with the Granted Rights granted to Bay or the restrictions imposed upon Franchise hereunder. i. Compliance With Laws. Each Franchise Picture, and all parts thereof, will be, or has been produced in compliance with any and all relevant laws, rules, regulations, guidelines, whether state, federal, international or local (i.e., those imposed by any union, guild or labor organization), applicable to the production and completion of motion pictures. Each Franchise Picture shall not, either in whole or in part constitute, or contain any material which constitutes, a violation of any law or administrative regulation or rule, or to the best of Franchise's knowledge in the exercise of due diligence, an invasion, violation or infringement of any right or interest of any third party; and shall be produced in accordance with all applicable laws, statutes, ordinances, rules, regulations and requirements of all governmental agencies and regulatory bodies, both domestic and foreign, having jurisdiction with respect to the production of each such Franchise Picture. To the extent required pursuant to any applicable law by reason of Franchise's or any other entity's activities, Franchise and/or such other entity or entities, as the case may be, shall have become signatory to all applicable collective bargaining agreements and Franchise's activities and those of such other entity or entities in connection with the Franchise Pictures have not, are not and will not be in violation of such collective bargaining agreements, to the extent same are applicable thereto. j. Advertising. Bay may use, subject only to contractual restrictions contained in applicable talent agreements, which Franchise has notified Bay of in writing prior to submission, the names and likenesses of all talent rendering services in connection with the Franchise Picture in any and all advertising and publicity materials and Bay will not be restricted in any way from using any of the talent's names and likenesses in connection with such advertising and publicity materials. k. Investment Experience. Franchise represents that it is experienced in evaluating and investing in companies in a similar stage of development as Bay and acknowledges that it is able to fend for itself in the transactions contemplated by this Agreement and has the ability to bear the economic risks of its investment pursuant to this Agreement. Franchise is capable of evaluating the merits and risks of the investment in the Shares and can bear the risk of the loss of the entire Equity Interest. Franchise has not been organized for the purpose of acquiring the Shares. Franchise is an "Accredited Investor" as defined in the Securities Act of 1933, as amended. l. Investment for Own Account. The Shares will be acquired for Franchise's own account, not as a nominee or agent, and not with a view to or in connection with the sale or distribution of any part thereof. There is no contract or arrangement with any person to sell, transfer or grant participations to any third person with respect to the Shares. 11. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BAY: Bay hereby represents, warrants and covenants to Franchise as follows: a. Power. Bay is a corporation duly formed and validly existing in good standing under the laws of the State of [California] and has the requisite power and authority to enter into this Agreement and to perform its obligations hereunder. 10 b. Duly Authorized. The execution and delivery of this Agreement by Bay and the consummation by Bay of the transactions contemplated hereby have been duly authorized and no other corporate or partnership proceeding or consent on the part of Bay is necessary to authorize this Agreement and the transactions contemplated hereby. c. Capitalization. As of the date hereof, the authorized capital stock of Bay consists solely of fifteen million (15 mil) shares of common stock, of which five mil seven thirty three thousand (5,733,333) shares have been issued. Each share issued has been issued in conformity with applicable law. 12. INDEMNITY: a. Franchise. Franchise hereby agrees to indemnify, defend and hold harmless Bay, its parent, subsidiaries and related companies, its licensees, subdistributors and affiliates, and their respective officers, directors, agents, and employees from any and all third party claims, actions or proceedings of any kind and from any and all damages, liabilities, costs and expenses (including reasonable legal fees and costs) relating to or arising out of any breach of any of the warranties, representations or agreements of Franchise hereunder or any error or omission in any of the material or information furnished to Bay in accordance with this Agreement. b. Bay. Bay hereby agrees to indemnify, defend and hold harmless Franchise, its parent, subsidiaries and related companies and affiliates, and their respective officers, directors, agents, and employees from any and all third party claims, actions or proceedings of any kind and from any and all damages, liabilities, costs and expenses (including reasonable legal fees and costs) relating to or arising out of any breach of any of the warranties, representations or agreements of Bay hereunder or otherwise in connection with the Products (except to the extent such claims, actions or proceedings give rise to Franchise's indemnification obligations under this Agreement). 13. REMEDIES: a. Franchise's Remedies. No action or omission by Bay shall constitute a breach of this Agreement unless Franchise first notifies Bay in writing setting forth the alleged breach or default and Bay does not cure the same. If Bay breaches its obligations hereunder, the damage, if any, caused Franchise shall not be irreparable or sufficient to entitle Franchise to injunctive or other equitable relief. Consequently, Franchise's rights and remedies shall be limited to the right, if any, to obtain damages at law and Franchise shall not have any right in such event to terminate or rescind this Agreement or any of the rights granted to Bay hereunder or to enjoin or restrain the advertising, promotion, distribution, exhibition or exploitation of the Franchise Pictures and/or any of Bay's rights hereunder. Bay's payment of any compensation or performance of any obligation hereunder shall not constitute a waiver by Bay of any breach by Franchise of any rights or remedies which Bay may have as a result of such breach, provided, however, that if such a breach by Franchise (i) is inadvertent and non-recurring (i.e., not intentional or repeated) and is by its nature reasonably curable and (ii) allowing Franchise to cure such a breach will not result in additional expense to Bay, then Franchise shall have a period of five (5) business days from the date of notice from Bay of such breach within which to cure such breach. c. Remedies Cumulative. Except as set forth in Paragraph 16.a. above, all remedies accorded herein or otherwise available to either Party hereto shall be cumulative, and no one such remedy shall be exclusive of, nor shall it be considered a waiver of, any other. 11 d. Rights Unique. Franchise acknowledges that the rights herein granted are of a special, unique, unusual, extraordinary and intellectual character giving them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law, and that a breach by Franchise will cause Bay irreparable injury and damage. Bay shall be entitled to injunctive and other equitable relief to prevent any breach by Franchise. 14. NOTICES: All notices shall be in writing and shall be delivered to the address(es) for notice set forth below or hereafter supplied by a Party to the other. Notices shall be effective on the date received, if delivered by hand or by facsimile, on the next business day following delivery thereof to an air courier for overnight delivery, and on the third business day after deposit into the United States mail, postage prepaid. (a) If to Bay: (b) If to Franchise: Bay Multimedia, Inc. Franchise Films, Inc. 333 W. Santa Clara Street 8228 Sunset Blvd. Suite 930 Suite 311 San Jose, CA 95113 Los Angeles, CA 90046 Attn: Ray Musci Attn: Elie Samaha Fax No. (408) 298-9600 Fax No. (323) 848-9612 With a copy to: Doty Sundheim & Gilmore 260 Sheridan Avenue Suite 200 Palo Alto, CA 94306 Attn: George Sundheim Fax No. (650) 327-0101 15. SUBSEQUENT PRODUCTIONS: Without regard to the expiration of the Output Term, Bay shall have a continuing rolling right of first negotiation/first refusal to exploit the Granted Rights with respect to sequels, prequels and/or remakes (as such terms are customarily defined in the United States entertainment industry, each a "Subsequent Production") of an Included Picture hereunder provided that Bay's right to exploit the Granted Rights in a Subsequent Production to an Included Picture on a rolling basis shall be conditioned on Bay having exploited the rights in the immediately prior Subsequent Production to such Included Picture. 16. KEY EXECUTIVES: If at any time during the Output Term, both of [Elie Samaha] and ___________ (or their Bay approved replacement; if applicable) are no longer rendering substantial in person services to Franchise as employees thereof, then Bay shall have the option, to be exercised in its sole discretion, to terminate the Output Term at any time thereafter upon 5 business days' notice (such termination shall not affect any Included Picture prior to the date of such termination), except that if Franchise finds replacements for [Elie Samaha] which are of comparable stature and which are acceptable to Bay (which acceptance shall not be unreasonably withheld), then Bay shall not have the right to terminate this Agreement pursuant to this Paragraph 19. 12 17. SECURITY DOCUMENTATION: Concurrent with the execution of this Agreement, Franchise hereby agrees to execute the security documentation set forth in Schedule SD attached hereto and incorporated herein by this reference, which documentation shall grant Bay a priority lien and security interest in each Franchise Picture, which security interest shall be terminable in accordance with the terms thereof. Franchise further agrees to promptly execute and deliver all further instruments and documents (including, without limitation, copyright registration of the underlying material upon which the Franchise Picture is based, any financing statements, continuation statements, mortgages of copyright and any amendments thereto), and take all further action that may be necessary or desirable, or that Bay may request, in order to perfect and protect any security interest granted or purported to be granted by the security documentation or to enable Bay to exercise and enforce its rights and remedies under the security documentation or with respect to any collateral thereunder. Franchise hereby irrevocably appoints and authorizes Bay, as Franchise's attorney-in-fact (Franchise acknowledges that said appointment is coupled with an interest) to take all steps in Franchise's name as may be reasonably required to execute such documentation in the event that Franchise fails to execute such documentation. 18. CONFIDENTIALITY: The Parties shall hold in confidence the terms of this Agreement and any negotiations relating thereto. Neither Party shall disclose, without the other Party's prior consent to any third party (other than its respective employees, directors, officers, attorneys and agents engaged in this transaction, in their capacity as such, on a need-to-know basis), any information with respect to the terms and provisions of this Agreement except: (a) to the extent necessary to comply with law or the valid order of a court of competent jurisdiction, in which event the party making such disclosure shall so notify the other party as promptly as practicable (if possible, prior to making such disclosure) and shall seek confidential treatment of such information; (b) as part of its normal reporting or review procedure to its parent company, banks, auditors, investment bankers, underwriters and/or attorneys (collectively, "Reporting Parties"), provided that such Reporting Parties agree to be bound by the provisions of this Paragraph 21; (c) in order to enforce its rights pursuant to this Agreement; and (d) when such information is otherwise publicly available. 19. INITIAL PRESS ANNOUNCEMENT: The Parties agree that the timing and content of the initial announcement (if any) relating to the completion of this Agreement will be mutually coordinated and agreed upon before being issued by Bay, Franchise, or any third party. 20. ASSIGNMENT: Franchise may not assign, transfer, sell, mortgage, pledge or hypothecate this Agreement or any interest herein or rights hereunder, in whole or in part, either voluntary or by operation of law (including without limitation by merger or consolidation or otherwise), without the prior written consent of Bay, except that Franchise may freely assign this Agreement to its successor or successors, to any of its associated, affiliated and subsidiary companies or to an entity which acquires all or substantially all of its assets on the condition that assignee assumes all of Franchise's obligations hereunder in writing; and, provided, further, Franchise shall be entitled to assign one time only its right to receive payments hereunder, without Bay's consent, if such assignment is made pursuant to a signed, written payment direction. 21. FURTHER INSTRUMENTS: Each Party hereto shall duly execute and deliver to the other Party, any and all agreements, documents and instruments reasonably required by the other Party to carry out and effectuate the purposes and intent of this Agreement. 13 22. GOVERNING LAW/DISPUTE RESOLUTION: a. Governing Law. The substantive laws (as distinguished from the choice of law rules) of the State of California and The United States of America applicable to contracts made and performed entirely in California shall govern (i) the validity and interpretation of this Agreement, (ii) the performance by the Parties of their respective obligations hereunder, and (iii) all other causes of action (whether sounding in contract or in tort) arising our of or relating to this Agreement or the termination of this Agreement. b. Dispute Resolution. The Parties hereto agree that any dispute or controversy relating to this Agreement shall be decided by a Rent-A-Judge, mutually selected by the Parties (or, if they cannot agree, by the Presiding Judge of the Los Angeles Superior Court) appointed in accordance with California Code of Civil Procedure Section 638, sitting without a jury, in Los Angeles County California, and the Parties hereby submit to the jurisdiction of such court. The prevailing Party shall be entitled to collect from the other Party all of its legal expenses incurred in said matter including, without limitation, reasonably attorneys' fees and costs. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be signed the day and year first written above. BAY MULTIMEDIA, INC. FRANCHISE FILMS, INC. By: /s/ RAYMOND C. MUSCI By: /s/ ELIE SAMAHA ------------------------------- -------------------------------- Its: President Its: Chairman ------------------------------ ------------------------------- 14 SCHEDULE NS ----------- NET SALES DEFINITION "Net Sales" means the gross revenue earned and actually received by Bay or any affiliated or related entity or any affiliate or related entity from the sale, lease, license, distribution or other exploitation of the Product less the following (all of which shall collectively be known as the "Cost of Goods"): (a) actual, direct, third party out-of-pocket charges or expenses incurred by Bay or any affiliate or related entity thereof in connection with transportation, handling, carriage, delivery, insurance, taxes (including withholding taxes and Value Added Tax), duties, tariffs, assessments, levies and other governmental and "pass-through" charges on or after sale of units of the Product; (b) actual, direct, third party costs of raw materials and all finished goods sold (e.g., cost of production, duplication, manufacturing and assembly, including related labor and overhead charge; cost of documentation, labels and packaging; etc.) incurred by Bay or any affiliate or related entity thereof; (c) actual, direct, third party sales commissions, discounts, advertising, promotional and marketing costs and other costs of sales; (d) any and all third party royalties and fees paid by Bay in connection with revenue earned from the sale and distribution of the Product (including, without limitation, royalties and fees paid by Bay to third party holders of rights in dedicated computer entertainment or gaming platforms or operating systems (e.g., Nintendo, Sega, Sony PlayStation, etc.); and (e) any rebates or allowances (including allowances credited to resellers or distributors in respect of marketing and promotional costs) paid by Bay in connection with the sale or distribution of the Product. If Bay earns revenue from distribution of a Product in combination or bundle with one or more other Bay products, such revenue will be allocated between that Product and such other products on a fair and reasonable basis taking into consideration the current or most recent wholesale prices of components of such compilation or bundle. 15 SCHEDULE DS DELIVERY SCHEDULE [Further specification to be provided by Bay.] 1. Soundtrack. 2. Access to computer graphics imaging (CGI) and models. 3. Still frame photographs of major sets and/or set pieces. 4. Access to physical models used in principal photography. 16 SCHEDULE SD SECURITY DOCUMENTATION [To be provided.] EX-10.41 50 v72115orex10-41.txt EXHIBIT 10.41 1 EXHIBIT 10.41 (Confidential Portions Omitted) LICENSING AGREEMENT AGREEMENT made as of 7/12/00, 2000 between Time Inc. ("Licensor"), a Delaware corporation, with offices at 1271 Avenue of the Americas, New York, New York 10020 for its SPORTS ILLUSTRATED FOR KIDS division ("SIFK") and Bay Area Multimedia ("Licensee"), a corporation with offices at 333 West Santa Clara Street, Suite 930, San Jose, California 95113. Licensor and Licensee agree as follows: 1. Definitions. (a) Licensed Property (i) Trademark(s) and logo SPORTS ILLUSTRATED FOR KIDS (Exhibit A) (ii) SIFK Content provided by Licensor (b) Products. Interactive games based on football, basketball, baseball, hockey, soccer, golf, tennis, snow skiing, water skiing, bicycle racing and extreme sports, appropriate for children aged 7-17 on the following Platforms (for purposes of this Agreement, "Platform" shall mean the hardware equipment on which Products can be played): (i) Handheld: Not more than five (5) original products for Nintendo's Game Boy, Game Boy Color and Game Boy Advanced. (ii) Console: Not more than eight (8) original products, exclusive of Ports between Platforms, for Nintendo 64, Nintendo Dolphin, PlayStation, PlayStation 2, Sega Dreamcast and Microsoft x-Box. (iii) Personal Computer (via CD-ROM). 2. LICENSE GRANTED. Licensor hereby grants to Licensee a non-exclusive, subject to Section 28(a) of this Agreement, non-transferable and non-assignable sub-license (the "License") to use the Licensed Property solely for the manufacture, advertising, promotion and sale (collectively "Sale") of the Products solely through the Channels of Distribution (defined in Section 4) within the Territory (defined in Section 5) and only during the Term. Licensee has no right to grant sub-licenses of the License. Licensor reserves all rights not expressly conveyed to Licensee hereunder, including, without limitation, the right of Licensor to grant sub-licenses to others to use the Licensed Property in connection with any other uses, services and products. 3. Development and Distribution of Products. 1 2 (a) Licensee represents and warrants that it is an official licensee of the following manufacturers: Nintendo, Sony, Sega and Microsoft and of the Platforms currently manufactured listed in Section 1. Licensee will use its best efforts to reach agreements with Platform manufacturers so that the Products will be included on the following Platforms: Game Boy Color, Game Boy Advance, Nintendo Dolphin, Microsoft X-Box, Sony Play Station 2 or Sega Dreamcast. The terms of any agreement between Licensee and a Platform manufacturer in connection with the Products shall be subject to the prior written approval of Licensor, which shall not be unreasonably withheld or delayed. If any agreement with a Platform manufacturer includes a period of time during which the Product must be exclusive to a particular Platform, Licensee shall in good faith explore the development of additional versions of said Product for use on other Platforms upon expiration of any period of exclusivity, or, if there is no such exclusive period, as soon as practicable after completing the Product for the initial Platform. Licensee agrees to consult with Licensor on any decisions about whether to create additional versions of a Product. For purposes of this Agreement, a version of a Product developed for any Platform other than the Platform that it is initially developed for shall be referred to as a "Port." (b) Licensee shall notify Licensor of the initial Product upon execution of this Agreement. Licensee shall then develop the initial Product and execute the retail launch of the initial Product in accordance with (or if possible more quickly than) the schedule set forth on Exhibit B attached to this Agreement. Additional Products shall be developed and launched in accordance with such schedules as Licensee and Licensor may agree. (c) Licensor shall have approval over development of the Products, and specifically shall be consulted for its written approval at the stages set forth below. Licensee shall not proceed to any subsequent stage of development without receiving said approval. Once Licensor provides written approval over a particular stage of development, such approval shall be deemed final for that stage. - - Concept/Design: Development of game concept and design layout. - - Mid Development: Preliminary visual, audio and game play elements of Products. - - Alpha: Product completed - - Beta: Product completed. - - "Gold Master" Candidate: Final version to be submitted to manufacturer. - - Packaging Materials and Product Marketing Plan: packaging, manuals and any other elements packaged with the Products, as well as marketing plan for specific product to be released. For purposes of this Agreement, "Alpha" and "Beta" shall have the following meanings: "Alpha" means one section of the Licensed Product is completed prior to alpha testing by Licensee, with 50% of the features implemented but not tuned or play balanced. "Beta" means that all features intended for the final version have been implemented in the program logic and at least representative data is in use, all features and all content (art, sound animation, etc.) are in place, with all features implemented, tuned and play balanced. 2 3 4. Channels of Distribution. Licensee may sell the Products through all retail channels of trade, including Original Equipment Manufacturers ("OEM's") as defined below (collectively, "Channels of Distribution"), provided, however, that the terms of any arrangement with OEM's shall be subject to Licensor's prior written approval which shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Licensee shall not sell Products through Time Warner Channels without Licensor's prior written consent. For purposes of this Agreement, "Time Warner Channels" means sales via SPORTS ILLUSTRATED FOR KIDS and SPORTS ILLUSTRATED magazines, sikids.com and CNNSI.com. "OEM" shall mean a person, firm or entity commonly known as an "original equipment manufacturer" which typically sells integrated microcomputer hardware and software to end users, including without limitation microcomputer manufacturers, manufacturers and distributors of components such as fax boards, sound cards, fixed disk or CD-ROM drives or modems. 5. Territory. United States, Canada, European Union and Japan (the "Territory"), provided that any OEM or co-publishing deals with companies based outside of the United States shall be subject to the prior written approval of Licensor, which shall not be unreasonably withheld or delayed. 6. Language. Any and all languages spoken in the Territory. 7. Term. Four (4) years. (a) The "Term" of this Agreement and the License granted hereunder shall commence May 1, 2000 and continue until April 30, 2004 subject to the provisions of Sections 29 and 30. (b) Licensee shall have the right to port any previously released Product onto any of the approved Platforms for a period of no more than twenty-four (24) months ("Sell-Off Period") following expiration or termination of this Agreement unless the Agreement has been terminated as a result of a breach by Licensee. 8. Minimum Guarantee; Royalties. (a) Guaranteed Minimum Royalty. Licensee shall pay a non-refundable guaranteed minimum royalty for the Term (the "Guaranteed Minimum Royalty") in the amount of $[*], payable as follows: [*] upon execution of this Agreement; [*] on December 15, 2000; [*] on June 30, 2001; [*] on December 15, 2001; and [*] on June 30, 2002. (b) Royalties. Licensee shall pay Licensor a royalty ("Royalty") based upon the Gross Wholesale Price (as defined below) for all Products sold as follows: *Confidential Portions Omitted and Filed Separately with the Commission. 3 4 (i) Handheld: Two percent (2%) on all Products sold; (ii) Other Consoles: On cumulative sales of all Products sold, [*] up to the first [*]; [*] from [*] to [*]; and [*] thereafter; (iii) Personal Computers: [*] on all Products sold; (iv) Ports: [*] on all Ports of handheld and console Products sold; and (v) Products sold via Time Warner Retailers: (A) [*] on Products sold through "bricks and mortar" Time Warner Retailers and (B) [*] on Products sold (i) through online Time Warner retailers or (ii) to wholesalers or distributors for resale to online Time Warner Retailers. "Time Warner Retailers" means Warner Brothers Stores, The WB Television Network, Warner Brothers Catalogs, Warner Brothers web sites, AOL and its subsidiaries and affiliates, Cartoon Network television station and web site and American Family Publisher catalogs, mailings and web site. (c) Provided that Licensor has not breached Sections 10, 18, 22 or 24 no part of the Guaranteed Minimum Royalty shall be refundable or repayable to Licensee under any circumstances. (d) Royalties shall be paid by Licensee to Licensor on all Products sold by Licensee, even if not invoiced or billed (such as introductory offers, samples, promotions and the like in excess of commercially reasonable quantities to prospective customers, as well as sales to affiliates, associates or subsidiaries of Licensee), and shall be based upon Licensee's usual Gross Wholesale Price (as defined below) for such Products sold during such period. (e) For the Term, Licensee shall pay to Licensor the Guaranteed Minimum Royalty. If, upon termination of this Agreement or expiration of the Term, the total royalties paid by Licensee to Licensor during the period of the Term immediately preceding such termination or expiration is less than the Guaranteed Minimum Royalty for such period, Licensee shall immediately pay an amount equal to such difference to Licensor. Royalty payments made for any year of the Term shall be credited against the Guaranteed Minimum Royalty. (f) "Gross Wholesale Price" shall mean Licensee's invoiced billing prices to its customers or distributors less actual discounts and actual returns not exceeding, in any Royalty Period (as defined below), [*] of the Licensee's sales of the Products during such Royalty Period. No other deductions shall be made in computing the Gross Wholesale Price whether for commissions, uncollectible accounts, taxes, fees, assessments, impositions, payments or expenses of any kind. If the billed price to a purchaser for any Product is less than the usual Gross Wholesale Price charged by the Licensee for such Products in the ordinary course of its *Confidential Portions Omitted and Filed Separately with the Commission. 4 5 normal business, the calculation of the Royalty due to Licensor for such sale shall be based upon the Licensee's usual Gross Wholesale Price. (g) All Royalties due to Licensor shall accrue upon the sale of the Products, regardless of the time of collection by the Licensee. A Product shall be considered "sold" hereunder as of the date on which such Product is billed, invoiced, shipped, or paid for, whichever event occurs first. If any Products are consigned to a distributor by the Licensee, the Products shall be considered "sold" hereunder upon the date on which such distributor bills, invoices, ships or receives payment for any of the Products, whichever event occurs first. Royalties payable by the Licensee on sales of the Product made in violation of any of the provisions of this Agreement shall not be taken into consideration in calculating whether the Licensee has met any Guaranteed Minimum Royalty. (h) If the Licensee proposes to sell any Product at a price which is less than [*] above the Licensee's manufactured cost of such Product, the Licensee shall so notify Licensor in writing, and the parties agree to negotiate in good faith with regard to a percentage royalty to be payable by the Licensee with respect to such sale higher than the Royalty and until such agreement is reached Licensee shall not sell any Product at a price which is less than [*] above the Licensee's manufactured cost of such Product. (i) There shall be no deduction from the Royalties owed to Licensor for uncollectible amounts, or for taxes, fees, assessments, or other expenses of any kind which may be incurred or paid by the Licensee in connection with: (i) Royalty payments to Licensor; (ii) the manufacture, sale, distribution or advertising of the Products in the Territory; or (iii) the transfer of funds or Royalties or the conversion of any currency into United States Dollars. (j) (i) All payments to be made to Licensor by Licensee hereunder shall be payable in United States Dollars. (ii) Licensee shall use its commercially reasonable efforts to provide that all amounts payable hereunder are paid gross to Licensor without deduction of any withholding taxes and shall take all reasonable and necessary steps to obtain requisite consent from all applicable taxing authorities to do so. In the event the laws of the Territory require that Licensee deduct income or remittance taxes from any payment to Licensor hereunder, Licensee shall inform Licensor in writing of such requirement at least thirty (30) days prior to the due date for any such payment and shall cooperate fully in securing the necessary governmental approvals to attempt to obviate the need for any such deduction. (iii) In the event that Licensee is required to impose withholding taxes assessed against Licensor, Licensee shall furnish Licensor, after imposition of any such withholding taxes, with a receipt for such withholding tax payment in the appropriate form for Licensor's claim for foreign tax credit under the United States Internal Revenue Code. In addition, the Licensee shall provide to Licensor at Licensor's expense any forms that are necessary to obtain relief from withholding (or any other) taxes under any income tax treaty. *Confidential Portions Omitted and Filed Separately with the Commission. 5 6 9. STATEMENTS AND PAYMENTS. (a) Licensee shall furnish to Licensor within forty-five (45) days after the end of each calendar quarter (the "Royalty Period") true and complete statements, certified as to accuracy by a senior officer of Licensee, which set forth the following with respect to each Product distributed and sold by Licensee during such Royalty Period: the (i) number of units; (ii) country in which manufactured, sold and/or to which shipped; (iii) Description (as defined below) of the Products; (iv) gross sales price; (v) itemized deductions from gross sales price; and (vi) Gross Wholesale Price together with any returns made during the preceding calendar quarter. Receipt or acceptance by Licensor of any of the statements furnished pursuant to this Agreement or of any sums paid hereunder shall not preclude Licensor from questioning the correctness thereof at any time through the date that is one year after the last date of any Sell-Off Period for the Product in question, and in the event that any inconsistencies or mistakes are discovered in such statements or payments, they shall immediately be corrected and the appropriate payments shall promptly be made by Licensee. Statements shall be furnished to Licensor whether or not any Products have been sold and whether or not Royalties have been earned during the Royalty Period. If the Territory includes more than a single country, the statement shall be broken down by country and all sales shall be stated in the currency of the country where they were made and shall also include the United States currency equivalent of each local currency figure in such statement and the exchange rate applied. The amount due Licensor for such Royalty Period shall be paid simultaneously with the submission of such statements. In no event shall the amount credited for returns during any Royalty Period exceed the Licensee's Royalty obligation for such Royalty Period or be used as a credit against past Royalty obligations of the Licensee. (b) Upon demand of Licensor, Licensee shall at its own expense, but not more than once in any twelve (12) month period, furnish to Licensor a detailed statement by an independent certified public accountant acceptable to Licensor showing the (i) number of units of the Product distributed and sold in such period; (ii) country in which manufactured, sold and/or shipped; (iii) Description (as defined below) of the Products (including each separate type, style and kind of Product); (iv) gross sales price; and (v) itemized deductions from gross sales price and Gross Wholesale Price of the Products covered by this Agreement distributed and/or sold by Licensee, including information as to discounts given and actual returns credited and any other information Licensor may request from time to time, up to and including the date upon which Licensor has made such demand. "Description" shall mean a detailed description of the Products, including the uses of the Trademark thereon or on any related packaging and/or wrapping material. (c) All statements required hereunder and all amounts payable to Licensor shall be sent to: Sports Illustrated For Kids 135 West 50th Street, New York, New York 10020 with copies of statements to Time Inc., General Counsel at the same address. Licensor reserves the right to at any time change its designation of the recipient of statements and payments upon written notice thereof to Licensee. (d) Licensee understands and agrees that time is of the essence with respect to all payments to be made hereunder by Licensee. Any payments which are made to Licensor hereunder after the due date required therefore shall bear interest at the then current prime rate 6 7 plus two percent (2%) from the date such payments are due to the date of payment. The preceding provision shall also apply to any amounts found to be unpaid following an examination of Licensee's books and records. Licensor's right hereunder to interest on late payments shall not preclude Licensor from exercising any of its other rights or remedies pursuant to this Agreement or otherwise with regard to Licensee's failure to make timely remittances. (e) Licensee hereby grants to Licensor a lien and security interest in Licensee's inventory, contract rights and accounts receivable, and all proceeds thereof, with respect to the Products only. Licensor agrees to execute all documentation as Licensor may require in connection with perfecting such security interests. (f) Licensee shall promptly advise Licensor in writing if Licensee shall be prohibited or restricted from making payment of any amount to Licensor when due and payable hereunder because of any legal or currency restriction within the Territory. Licensor may then direct Licensee to deposit such amount to the credit of Licensor in a bank designated by Licensor in the Territory or to pay such amount promptly to Licensor's designee. 10. Right of First Offer. (a) The License granted to License hereunder is non-exclusive. However, Licensee shall have the right of first offer to create and distribute Products using the Licensed Property during the Term of this Agreement, provided that at all times during the Term, Licensee (i) makes timely payments pursuant to Sections 8 and 9; (ii) meets development and retail distribution timelines pursuant to Section 3 and Exhibit B, provided that for purposes of this Section 10, if Licensee misses a deadline by no more than five (5) business days it shall be deemed to have met the deadline; (iii) fulfills the advertising commitment pursuant to Section 11 and Exhibit C, and (iv) is not in breach of any material term of this Agreement. (b) If at any time during the Term, Licensor wishes to develop or explore the development of a product not included in Section 1 above ("New Product"), Licensor shall give Licensee written notice of its intentions. If Licensee is interested in being the developer of the New Product, Licensee shall inform Licensor of its interest in writing, within ten (10) business days of receipt of Licensor's inquiry. Provided that the pre conditions set forth in Subsection 10(a) above are met the parties shall then negotiate in good faith for ninety (90) days to arrive at mutually agreeable terms and conditions for development of the New Product. If the parties cannot agree on acceptable terms and conditions, or if Licensee is not interested in developing the New Product, Licensor may contract with other Licensees without any further obligation to Licensee for the development of the New Products; provided that Licensor shall not offer the New Product to any such third party on terms any different than Licensor's last offer to Licensee. If Licensee offers different terms, then the right of first offer procedure in this Section 10(b) shall be triggered again, and Licensor shall so notify Licensee. 7 8 11. Advertising, Marketing Requirements. (a) Licensee, if so directed by Licensor, will use creative resources which are chosen by Licensor to assist Licensee in the creation of all promotional, advertising and packaging designs related to the Products to ensure that the Products as well as the overall marketing and presentation of the Products by Licensee are consistent with the image portrayed by the Licensed Property. The costs and fees related to the use of the selected creative resources shall be paid by; Licensee; provided that if Licensor selects creative resources whose fees and expenses exceed those of the creative resources chosen by Licensee, then Licensor shall be responsible for one-half of such excess (which may be deducted from the Royalties). (b) Licensee shall not disclose to third parties any confidential or proprietary information disclosed by Licensor in accordance with Subsection 11(a) above, which restriction shall survive the termination of this Agreement. (c) Provided Licensor does not breach this Agreement, Licensee agrees to spend no less than [*] during the Term on advertising in Licensor's media, SPORTS ILLUSTRATED FOR KIDS magazine and sikids.com, of which at least [*] shall be for advertising specifically for the Products. The advertising commitment shall be according to the schedule set forth on Exhibit C hereto; provided that if Licensee (i) does not place ads to meet the advertisement commitment in a particular calendar year, Licensee shall nevertheless pay the cash amount of such commitment and Licensor will grant Licensee a credit in such amount for a future ad which must be placed within twelve (12) months of the calendar quarter in which such advertising commitment short fall shall have occurred, and/or, provided a minimum of fifty percent (50%) of the quarterly advertising commitment has been placed in calendar years 2002, 2003 and 2004 only, eighteen (18) months of the calendar quarter in which such advertising commitment short fall shall have occurred in or it will be forfeited; or (ii) exceeds the advertising commitment in a particular fiscal year, such excess shall be deducted from the next fiscal year's commitment. (d) Notwithstanding anything to the contrary in Section 11(c) above, Licensee shall not be required to comply with the [*] minimum advertising commitment or the aggregate [*] commitment if SPORTS ILLUSTRATED FOR KIDS Magazine ceases to operate or materially reduces its operations, which shall be defined as (i) publishing fewer than nine (9) issues per calendar year, or (ii) if the rate base falls below 750,000. In such event, Licensor and Licensee shall negotiate in good faith to modify the balance of such advertising commitment not yet spent, and no advertising shall be required until the parties do agree on such modification. 12. Marketing Plan and Marketing Date. (a) Licensee shall prepare a brief annual marketing plan for the succeeding calendar year to present to and discuss with Licensor at such regular time as both parties agree but in any event no later than August 31st of each year of the Term of this Agreement. Each such marketing plan shall summarize market information relevant to the period to which it relates and should 8 * Confidential Portions Omitted and Filed Separately with the Commission. 9 include, but need not be limited to the following information: (i) a description of the Products to be sold and developed, together with proposals for categories and designs of new proposed Products; (ii) a list of customer accounts; including actual and projected sales (iii) a review of Licensee's market including any trends and/or sales competitive developments which affect the sale of the Products; (iv) estimated wholesale and retail price points for each of the Products; (v) anticipated volume expected to be sold of the Products; (vi) proposals for the interpretation of the brand image of the Licensed Property in terms of advertising concepts, points of sale and promotional and sale materials; (vii) proposed promotional activities and expenditures for the Products; (viii) a calendar or market schedule which specifies the dates of which annual markets in which the Products are shown to the trade; and (iv) sell-in and sell-through information by account [description tk from BAM]. (b) The Marketing Date of the first Product shall be December 31, 2001. 13. Legal Notice. Until such time as Licensor otherwise notifies Licensee, notices shall be in the following form: SPORTS ILLUSTRATED FOR KIDS is a registered trademark of Time Inc. Used Under License. 14. Miscellaneous. (a) Licensee shall provide Licensor with twelve (12) samples of each of the Products at no cost to Licensor. (b) Licensee shall sell to Licensor, if it so requests, additional quantities of each of the Products not to exceed one hundred (100) at Licensee's direct cost to manufacture, for Licensor's use in premiums and promotions. (c) Licensee shall sell to Licensor, if it so requests, additional quantities of the Products for direct marketing and direct response channels of distribution, for sale through the Time Warner Channels (excluding AOL) at prices and in quantities to be mutually agreed upon. (d) During the Term of this Agreement, Licensee agrees that it will not, without first complying with this Section 14(d), manufacture, produce, distribute or sell interactive games bearing the name and/or mark of the following competitive media: ESPN, Fox Sports, INSIDE SPORTS, SPORT, Disney and Nickelodeon magazines (collectively, the "Competitors") within the Territory which will compete with the Products. Provided that Licensor is not in default of this Agreement, if at any time during the Term the Licensee wishes to develop a product or a New Product for a Competitor, Licensee shall give Licensor written notice of the same. If Licensor and/or SPORTS ILLUSTRATED, a division of Time Inc., ("SI") is interested in such product for such Competitor, Licensor or SI as applicable shall so notify Licensee within ten (10) business days after receipt of such notice. Licensee and Licensor or SI, as applicable shall then have up to ninety (90) days to execute and deliver a definitive license agreement. If the parties fail to do so, or if Licensor or SI declines to pursue the product for such Competitor, 9 10 Licensee shall then immediately be free to negotiate with and enter into a definitive agreement with any such Competitor without any obligation to Licensor or SI whatsoever; provided that Licensee shall not offer the product to such Competitor on terms any different than the terms last offered to Licensor or SI. If such terms are different, then the right of first offer shall be triggered again. 15. Ownership of Rights. (a) As between Licensor and Licensee, all right, title and interest in the Licensed Property, including without limitation, the Trademark and any SIFK Content provided by Licensor are reserved by Licensor for use except for the rights specifically licensed to Licensee hereunder. Licensor acknowledges and agrees that as between Licensor and Licensee, Licensee owns all right, title and interest in the Products except for the Licensed Property. Notwithstanding the foregoing, Licensee agrees that is shall not re-market a Product that is identical to a Product containing the Licensed Property for itself, for an affiliate or for any third party until one year after the last date of any Sell-Off Period for such Product containing the Licensed Property. Nothing in this Section 15(a) shall be construed to prevent Licensee from marketing for itself or a third party any product item or category (e.g., football, hockey, etc.) which was not actually developed, marketed and sold as a Product with the Licensed Property. (b) No license other than for Sale of the Products in the Territory is being granted hereunder, and Licensor reserves for use as it may determine all other rights of any kind. Licensee recognizes that Licensor has already entered into license agreements with the persons listed on Exhibit E with respect to the Licensed Property for products which fall into the same general product category as one or more of the Products, and which may be similar or identical to one or more of the Products in terms of manufacture, design, appearance and the like. Licensee hereby expressly concedes that the existence of such licenses do not constitute a breach of this Agreement by Licensor. (c) Licensee shall not use Licensor's name or the Licensed Property other than as permitted hereunder and, in particular, shall not incorporate Licensor's name or the Licensed Property in Licensee's corporate or business name in any manner whatsoever. Licensee will in no way represent that it has any right, title or interest in the Licensed Property other than those expressly licensed to Licensee hereunder. Licensee will not use or authorize the use, either during or after the Term, of any configuration, trademark, service mark, trade name, domain name or other designation confusingly similar to Licensor's name or the Licensed Property. 16. NOTICES. All notices to be given under this Agreement shall be in writing and shall be delivered to the party to whom the notice is given (i) by hand or courier, (ii) by certified or registered mail, postage prepaid, or (ii) by facsimile (with a copy as provided in (i) or (ii) above) at the address or facsimile number given below or to such other address or facsimile number as may be advised by prior notice in writing to the other party from time to time. If to Licensor: 10 11 Time Inc. 1271 Avenue of the Americas New York, New York 10020 Attention: General Counsel with a copy to: SPORTS ILLUSTRATED FOR KIDS 135 West 50th Street New York, New York 10020 Attention: Publishing Director If to Licensee: Bay Area Multimedia 333 West Santa Clara Street, Suite 950 San Jose, California 95113 Attn: Raymond C. Musci, President with a copy to: Doty Sundheim & Gilmore 260 Sheridan Avenue, Suite 200 Palo Alto, CA 94306 Attn: George M. Sundheim, III 17. BOOKS AND RECORDS. (a) Licensee shall keep, maintain and preserve (in Licensee's principal place of business) for at least two (2) years following the expiration of the Term or other termination of this Agreement, complete and accurate records of accounts relating to the sale of the Products including, without limitation, purchase orders, inventory records, invoices, correspondence, banking and financial and other records pertaining to the various items required to be submitted by Licensee to Licensor hereunder as well as those records relating to Licensee's compliance with applicable regulations and law. Such records and accounts shall be available for inspection and audit by Licensor at any time or times during or after the Term during reasonable business hours and upon reasonable notice by Licensor or its designee. Licensee agrees not to cause or permit any interference with Licensor or the designees of Licensor in the performance of their duties during such inspection or audit. During such inspections and audits, Licensor shall have the right to take extracts and/or make copies of Licensee's records relating to matters relating to this Agreement. If any underpayment is greater than [*] of the amount payable by Licensee to Licensor for any Royalty Period, the Licensee shall reimburse Licensor for the costs and expenses of such audit. If any country in which the audit is to take place prohibits Licensor or its duly authorized representative from conducting such examination the examination shall be conducted by such person or party designated by Licensor as is permitted under the law of such *Confidential Portions Omitted and Filed Separately with the Commission. 11 12 country. (b) The exercise by Licensor at any time of the right to audit Licensee's records and accounts or of any other right herein granted, or the acceptance by Licensor of any statement or statements or the receipt and/or deposit by Licensor of any payment tendered by or on behalf of Licensee shall be without prejudice to any rights or remedies of Licensor and such acceptance, receipt and/or deposit shall not preclude or prevent Licensor from thereafter disputing the accuracy of any such statement or sufficiency of any such payment. 18. APPROVALS AND QUALITY CONTROLS. (a) Licensee agrees to strictly comply and maintain compliance with the quality standards, specifications and rights of approval of Licensor, in respect to any and all usage of the Licensed Property on or in relation to the Products, including, but not limited to, all wrapping, labeling materials, catalogs, trade advertisements, flyers, sales sheets, labels, package inserts, hangtags and displays (the "Promotional and Packaging Material"), throughout the Term. (b) The quality of the Products and the Promotional and Packaging Material shall be at least as high as the best quality of similar products and promotional, advertising and packaging material shipped, distributed, sold or used by Licensee in the Territory as of the date of this Agreement and shall be in full conformance with all applicable laws and regulations. The Licensee also hereby covenants to the Licensor that the Products will be of good quality in design, material, and workmanship that no injurious, deleterious, or toxic substances will be used in or on the Products; and that the Products will not cause harm when used as instructed and with ordinary care for. (c) No Products nor any Promotional and Packaging Material shall be manufactured, sold, distributed or promoted by Licensee until all material elements of same (including placement of legal notices) have been approved in writing by Licensor on the Quality Review Form annexed hereto as Exhibit D to be submitted pursuant to subsection (d). Licensor shall have a period of ten (10) business days from receipt of each such material element in which to approve or disapprove such element. In the event Licensor fails to notify Licensee of approval or disapproval within such ten (10) day period, Licensee shall then send Licensor a second notice. Licensor shall approve or disapprove the second notice within five (5) business days after receipt thereof. If Licensor fails to timely respond, then such material element submitted shall be deemed approved. Licensee shall not proceed beyond any stage where approval is required without first securing such approval. Licensee shall use the Quality Review Form in connection with all submissions. Licensee's failure to adhere to the aforesaid approval requirements shall constitute a material breach of this Agreement. No such approval by Licensor shall act to waive, diminish or negate Licensee's indemnification to Licensor hereunder. (d) Except as otherwise specified herein, any approval or disapproval of Licensor required hereunder shall be in Licensor's sole discretion. In the event of disapproval, all reasons therefor shall be given in writing on the Quality Review Form together with suggested changes for obtaining approval. If any unapproved Products are being sold, Licensor may, together with 12 13 other remedies available to it including, but not limited to, immediate termination of this Agreement, require such Products to be immediately withdrawn from the market and to be destroyed, such destruction to be attested to in a certificate signed by a senior officer of Licensee. (e) Any modification of a Product must be submitted in advance for Licensor's prior written approval as if it were a new Product. Approval of a Product which uses particular artwork does not imply approval of such artwork for use with a different Product. (f) Products must conform in all material respects to the final production samples approved by Licensor. If, in Licensor's reasonable judgment, the quality of a Product originally approved has deteriorated in later production runs, or if a Product has otherwise been altered, Licensor may, in addition to other remedies available to it, require that such Product be immediately withdrawn from the market and destroyed. (g) Licensee shall, upon Licensor's reasonable request and reasonable notice, permit Licensor to inspect Licensee's manufacturing operations, testing and payroll records (including those operations and records of any supplier or manufacturer approved by Licensor pursuant to the terms hereof) with respect to the Products. (h) If any changes or modifications are required to be made to any material submitted to Licensor for its written approval in order to ensure compliance with Licensor's specifications or the quality standards provided for in this Agreement, Licensee agrees promptly to make such changes or modifications. (i) Subsequent to final approval, no fewer than two (2) production samples of each Product should be sent to Licensor simultaneously upon distribution to the public. In addition, Licensee shall annually provide Licensor with two (2) catalogs which display all of Licensee's products. (j) Licensee agrees not to use the Trademark (or any component thereof) on any business sign, business cards, stationery or forms, or as part of the name of Licensee's business or any division thereof or in any marketing or promotional materials of Licensee. (k) Licensee shall use its best efforts to notify its customers of the requirement that Licensor has the right to approve all promotional, display and advertising material pursuant to this Agreement. (1) Licensor's approval of Products (including without limitation, the Products themselves as well as Promotional and Packaging Materials) shall in no way constitute or be construed as an approval by Licensor of Licensee's use of any trademark, copyright and/or other proprietary materials not owned by Licensor. 13 14 (m) All Products and all Promotional and Packaging Materials shall contain permanently affixed, non-removable appropriate legends, markings and notices as required from time to time by Licensor, to give appropriate notice to the public of Licensor's or other's rights therein. Unless otherwise expressly approved in writing by Licensor or until such time as Licensor advises Licensee otherwise, each usage of the Trademark shall be followed by either the TM or the R trademark notice symbol or the word "Trademark" as appropriate, and initially the notices and legends as set forth in Section 13 of the Agreement shall appear at least once on each Product and on each piece of Promotional and Packaging Material. (n) Without first obtaining Licensor's prior written approval Licensee shall use no markings, legends or notices on or in association with the Products or Promotional and Packaging Material other than the above specified legend and such other markings, legends and notices as may from time to time be required by Licensor. Licensee hereby covenants that it will not at any time without Licensor's prior written consent amend, revise, develop, or vary all or any part of the Licensed Property. (o) Licensor may from time to time during the Term require that Licensee submit to Licensor, at no cost to Licensor, up to six additional sets of Production Samples of each Product and Promotional and Packaging Material as reasonably requested by Licensor to enable Licensor to review continued compliance by Licensee with the requirements of this Agreement. (p) if the quality standards or trademark usage and notice requirements set forth herein are not met or maintained throughout the Term, then, upon receipt of written notice from Licensor, Licensee shall immediately discontinue all Sales, distribution or other activity with respect to the non-conforming Products or Promotional and Packaging Material. 19. ARTWORK. (a) The Trademark shall be displayed or used only in such form and in such manner as has been specifically approved in writing by Licensor in advance and Licensee undertakes to assure usage of the Trademark solely as approved hereunder. Licensee further agrees and acknowledges that any and all artwork created, utilized, approved and/or authorized for use hereunder by Licensor in connection with the Products or which otherwise features or includes the Trademark shall be owned exclusively in its entirety by Licensor. (b) Licensee acknowledges that, as between Licensor and Licensee, the Trademark and any artwork which includes the Trademark and is used in the sale of a Product, and all depictions, expressions and derivations thereof, and all copyrights, and other proprietary rights therein are owned exclusively by Licensor, and Licensee shall have no interest in or claim thereto, except for the limited right to use the same pursuant to this Agreement. Nothing in this Section 19(b) shall be construed to prevent Licensee from using any Artwork that has not actually been used in the sale of a Product under this Agreement, provided that the Trademark has been removed from such Artwork. 14 15 (c) Licensee hereby represents and warrants that any and all work created by Licensee under this Agreement apart from the materials provided to Licensee by Licensor is and shall be wholly original with or fully cleared by Licensee and shall not copy or otherwise infringe the rights of any third parties, and Licensee hereby indemnifies Licensor and will hold Licensor fully harmless from any claim of infringement or otherwise involving Licensee's performance hereunder. At the request of Licensor, Licensee shall execute such form(s) of assignment of copyright or other papers as Licensor may reasonably request in order to confirm and vest in Licensor the rights in the properties as provided for herein. If any third party makes or has made any contribution to the creation of the artwork authorized for use hereunder, Licensee agrees to obtain from such party, prior to commencing work, a full confirmation and assignment of rights so that the foregoing rights shall vest fully in Licensor ensuring that all rights in the artwork arise in and are assigned to the Licensee. Licensee assumes all responsibility for such third parties and agrees that Licensee shall bear any and all risks arising out of or relating to the performance of services by them and to the fulfillment of their obligations. (d) Upon expiration of the Term or termination of this Agreement for any reason, or upon demand by Licensor at any time, Licensee shall promptly destroy all materials which include the Trademark, whether finished or not, including drawings, drafts, sketches, illustrations, screens, data, digital files and information, copies or other items, information or things created in the course of preparing the Products and the Packaging and Promotional Material and all materials provided to Licensee by Licensor hereunder, and shall confirm to Licensor in writing that Licensee has done so. 20. GOODWILL AND PROMOTIONAL VALUE. (a) Licensee acknowledges Licensor's ownership of the Licensed Property and that all rights accruing from its use of the Licensed Property shall inure to the benefit of Licensor. All rights in the Licensed Property, other than those specifically granted to Licensee herein, are reserved to Licensor, Licensee shall not use the Licensed Property except in the manner authorized by this Agreement. Licensee shall not contest Licensor's title to, or the validity of the Licensed Property, or the validity of the license granted herein, during the Term of this Agreement or thereafter. Licensee shall execute any documents necessary to acknowledge such rights in Licensor. (b) Licensee's use of the Licensed Property shall inure to the benefit of Licensor and Licensee shall not, at any time, acquire any rights in the Licensed Property by virtue of such use. 15 16 (c) Licensee acknowledges that: (i) Licensor is entering into this Agreement not only in consideration of the Royalties to be paid hereunder but also for the promotional value to be secured by Licensor for the Licensed Property as a result of the Sale of the Products by Licensee; and (ii) its failure to manufacture, sell, advertise or promote the Products in accordance with the provisions of this Agreement or to fulfill any of Licensee's other obligations hereunder will result in immediate and irreparable injury to Licensor, and Licensor will have no adequate remedy at law. Therefore, Licensor, in addition to all other remedies it may have, shall be entitled to injunctive relief against any such breach. (d) Licensee shall not at any time apply for copyright, trademark or patent protection nor file any document with any governmental authority nor take any other action which could affect Licensor's rights in the Licensed Property. 21. INFRINGEMENTS. (a) Licensee shall assist Licensor in the enforcement of any rights of Licensor in the Licensed Property. Licensee shall promptly notify Licensor in writing of any infringements or imitations by third parties of the Licensed Property, the Products or the Promotional and Packaging Material which may come to the Licensee's attention. Licensor shall have sole right to determine whether or not any action shall be taken on account of any such infringement or imitation. Licensee shall not contact the third party, nor make any demands or claims, nor institute any suit nor take any other action on account of such infringements or imitations without first obtaining the prior written permission of the General Counsel of Time Inc. Licensor may commence or prosecute any claims or suits in its own name or in the name of Licensee or join Licensee as a party thereto, and Licensor shall pay all costs and expenses of such claims or suits. (b) With respect to all claims and suits, including suits in which Licensee is joined as a party, Licensor shall have the sole right to employ counsel of its choice and to control the litigation and any settlement thereof. Licensor shall be entitled to receive all amounts awarded as damages, profits, settlement or otherwise in connection with such suits. 22. INDEMNIFICATION BY LICENSOR. Licensor shall indemnify, defend and hold harmless Licensee and its affiliates and their respective officers, directors, employees, agents, and representatives from and against any loss, liability, damages, cost, claim, penalty, interest or expense (including attorneys' fees and costs) arising out of or relating to or in connection with any claims or suits which may be brought or made against Licensee: (i) by reason of a breach, or allegation which if true would constitute a breach, by Licensor of the covenants or representations and warranties set forth in this Agreement, or (ii) based solely on the use of the Licensed Property by the Licensee as authorized in this Agreement only for each country of the Territory in which Licensor has secured trademark registrations in the Trademark for the Product provided that Licensee shall give prompt written notice, and full cooperation and assistance to Licensor relative to any such claim or suit and provided, further, that Licensor shall have the option to undertake and conduct the defense of any suit so brought. Licensee shall not, however, be entitled to recover for lost profits or 16 17 consequential damages. Licensee shall cooperate fully in all respects with Licensor in the conduct and defense of said suit and/or proceedings related thereto. 23. INDEMNIFICATION BY LICENSEE AND INSURANCE. (a) During the Term and continuing after the expiration thereof or other termination of this Agreement, Licensee shall indemnify Licensor and its affiliates and shall hold it and them harmless from any loss, liability, damages, cost or expense, arising out of or relating to any claims or suits which may be brought or made against Licensee by reason of: (i) any breach, or allegation which if true would constitute a breach, of Licensee's representations and warranties made herein or its covenants or other undertakings made hereunder; (ii) any unauthorized use by Licensee of the Licensed Property; (iii) any use of any name, likeness, trademark, copyright, design, patent, process, method or device, except for those uses of the Licensed Property that are specifically approved by Licensor pursuant to the terms of this Agreement; (iv) Licensee's design, manufacture, distribution, shipment, advertising, promotion or sale of the Products or the Promotional and Packaging Material; (v) Licensee's non-compliance with any applicable federal, state or local laws or with any other applicable regulations; and (vi) any alleged defects and/or inherent dangers (whether obvious or hidden) in the Products or the use thereof. (b) Licensee shall obtain and maintain insurance in full force and effect, covering any claims arising out of or based upon the activities contemplated under this agreement (and the sublicensing thereof), including (i) a Media Errors and Omissions Insurance Policy with limits of no less than one million dollars ($1,000,000) for each wrongful act or series of related wrongful acts, including but not limited to coverage for trademark/copyright infringement; any form of defamation or disparagement; invasion of privacy; unauthorized use or misappropriation of names, trade dress, service mark, etc.; violation of Droit Moral; contractual liability covering liability assumed under this agreement; and bodily injury and property damage if arising in connection with other perils insured under the policy, and (ii) a Commercial General Liability Insurance Policy (on an occurrence form), including Blanket Contractual Liability covering liability assumed under this agreement, with limits of no less than one million dollars ($1,000,000) per occurrence, and three million dollars ($3,000,000) general aggregate. Both policies shall be endorsed to include Licensor, its corporate parent, and their respective officers, directors, and employees as additional insured parties. (c) Prior to commencing work under this Agreement, Licensee shall provide Licensor with copies of the policies of insurance or, at Licensor's sole option, certificates of insurance evidencing compliance with the foregoing requirements, accompanied by copies of the required additional insured endorsements. All certificates of insurance shall specify that the insurer shall give Licensor an unqualified (30) day's advance written notice prior to any cancellation of the policy (except in the event of non-payment of premium, in which case ten (10) day's notice shall be given). (d) All coverage required hereunder shall be written by insurers with an A.M. Best's rating of A- (VIII) or better (or equivalent), and shall be kept in full force and effect for the term of this Agreement plus an additional, uninterrupted period of three (3) years commencing at the end of the term, and shall include deductibles reasonably 17 18 acceptable to Licensor unless specified elsewhere herein. All coverage shall be written on a worldwide basis, covering claims made in the U.S. or in any other jurisdiction where the products may be licensed or exploited. Certificates of Insurance evidencing renewal of the required coverage shall be provided within ten (10) days of the expiration of any policy at any time during the period such policy is required to be maintained by Licensee hereunder. Any failure to comply with this requirement shall constitute a material breach of this Agreement. 24. REPRESENTATIONS AND WARRANTIES OF LICENSOR. Licensor represents and warrants to Licensee that: (a) It is authorized to sub-license the Trademark for use in connection with the Products in the Territory; (b) Licensor is the owner of the Trademark and has registered the SPORTS ILLUSTRATED FOR KIDS Trademark for magazines in the U.S. and has a registration pending for the Trademark for computer game software in the U.S.; which mark does not infringe upon or violate the rights of any third party; (c) Licensor is the owner of any SIFK Content provided to Licensee for incorporation into the Products and such SIFK Content does not infringe upon or violate the rights of any third party; and (d) The entering into of this Agreement by Licensor does not violate any agreement, rights or obligations of any person or entity. 25. COVENANTS OF LICENSEE. Licensee covenants to Licensor that, during the Term and thereafter: (a) It will not attack the title of Licensor (or third parties that have granted rights to Licensor) in and to the Licensed Property or any copyright pertaining thereto, nor will it attack the validity of the License granted hereunder; (b) It will not harm, misuse or bring into disrepute the Licensed Property, but on the contrary, will maintain the value and reputation thereof to the best of its ability; (c) It will not create any expenses chargeable to Licensor without the prior written approval of Licensor in each and every instance. It will not cause or allow any liens or encumbrances to be placed against, or grant any security interest (except to Licensor as provided hereunder) in the Licensed Property without Licensor's prior written consent; (d) It will protect to the best of its ability its right to manufacture, sell, promote and distribute the Products hereunder; 18 19 (e) Licensee covenants that the Products shall equal or exceed all industry and government standards established in respect of safety and fitness for use. All applicable government standards of the Territory shall apply, whether federal, state or local. Such standards shall include, but not be limited to, the Consumer Product Safety Act and all appropriate sections of the Code of Federal Regulations, and to the extent applicable, the Products shall equal or exceed the standards set forth in the Hazardous Substances Act, the Flammable Fabrics Act, the Child Safety Protection Act and the Toy Manufacturers of America Safety Standards as contained in ASTM F963 and comparable industry standards. Prior to commencing shipment of each Product and on a regular basis thereafter but no less frequently than annually, or as otherwise requested by Licensor, Licensee agrees to provide to Licensor at Licensee's expense a certificate of an approved independent testing laboratory certifying that the Products comply with such standards and regulations. Each certificate that is provided must specifically describe the Products that are covered by the certificate, including the manufacturing source of the Products being tested. Products that are shipped into more than one country must be certified separately with respect to the applicable requirements of each such country. Additional certificates shall be supplied with respect to any design or manufacturing change that may affect the Product's compliance with applicable standards. If there is any disagreement between Licensee and Licensor regarding compliance with safety standards, the Licensor's decision shall be final and Licensee agrees to fully comply with such decision. (f) It shall, upon Licensor's request, provide credit information to Licensor including, but not limited to, fiscal year-end financial statements (profit-and-loss statement and balance sheet) and operating statements; (g) It will provide Licensor with the date(s) of first use of the Products in interstate and intrastate commerce, where appropriate; (h) It will, pursuant to Licensor's instructions, duly take any and all necessary steps to secure execution of all necessary documentation for the recordation of itself as user of the Trademark in any jurisdiction where this is required or where Licensor reasonably requests that such recordation be effected. Licensee further agrees that it will at its own expense cooperate with Licensor in cancellation of any such recordation at the expiration of this Agreement or upon termination of Licensee's right to use the Trademark. Licensee hereby appoints Licensor at its Attorney-in-Fact for such purpose. (i) It will not deliver or sell Products outside the Territory or knowingly sell Products to a third party for delivery outside the Territory. (j) It will not use any labor that violates any local labor laws, including all wage and hour laws, laws against discrimination and that it will not use prison, slave or child labor in connection with the manufacture of the Products. (k) It shall be solely responsible for clearing any and all rights required for the use of any names or likenesses depicted on the Products and all Promotional and Packaging Materials. 19 20 26. EXPLOITATION BY LICENSEE. (a) Licensee shall commence the Sale of the Products in commercially reasonable quantities in each of the countries within the Territory by the Marketing Date. (b) During the Term, Licensee will use commercially reasonable efforts to diligently and continuously distribute, ship, sell, promote and meet the demand for all of the Products in all countries in the Territory. (c) Products will be sold, shipped and distributed outright, at a competitive price that does not exceed the price generally and customarily charged the particular purchaser by the Licensee, and not on an approval, consignment, sale or return basis. Licensee will not discriminate against the Products by granting commissions/discounts to salesmen, dealers or distributors in favor of Licensee's other products. Products will only be sold to retail stores and merchants for sale, shipment and distribution direct to the public. 27. PREMIUMS; PROMOTIONS; DIRECT MAIL AND SECONDS. (a) Licensor reserves the sole and exclusive right to utilize or license third parties to utilize any Product in connection with any premium, giveaway, promotional arrangement, etc. (collectively referred to as "Promotional Products"), which retained right may be exercised by Licensor concurrently with the rights licensed to the Licensee hereunder. Licensee agrees that it will not use, or knowingly permit the use of, and will exercise due care that its customers likewise will refrain from the use of the Products as a premium, except with the prior written consent of the Licensor. (b) Licensee shall not sell, ship, advertise, promote, distribute or use for any purpose whatsoever (or permit anyone else to do so) any Products or Promotional and Packaging Material which are damaged, defective, seconds or otherwise fail to meet the specifications or quality standards or trademark, patent and copyright usage and notice requirements of this Agreement. 28. ASSIGNABILITY AND SUBLICENSING. (a) The License granted pursuant to this Agreement is and shall be personal to Licensee and shall not be assigned by any act of Licensee or by operation of law; provided that Licensee may assign this Agreement to a Qualifying Person. For purposes of this Agreement, "Qualifying Person" shall mean: (a) any corporation, partnership limited liability company or other entity in which Raymond Musci (i) owns at least a five percent (5%) equity interest and (ii) is a member of the senior management or board of directors of such entity; or (b) Licensee following a change in control, provided that items (i) and (ii) above are satisfied. "Change in control" shall mean a person's acquisition of more than 50% of the outstanding shares of Licensee, a person's acquisition of substantially all of the assets of Licensee, or a merger pursuant to which the holders of 50% or more of Licensee's stock immediately before the merger own less than 50% of the company that survives immediately after the merger. 20 21 (b) Licensor shall have the right to assign its rights and obligations under this Agreement without Licensee's approval. (c) Licensee may have the Products manufactured by a third party on condition that Licensee: (i) provides Licensor with a list of the names and addresses of each such third party manufacturer; (ii) obtains Licensor's prior approval of each such third party manufacturer which shall not be unreasonably withheld or delayed; and (iii) shall indemnify Licensor against any loss or damage arising as a result of any breach by any third party manufacturer of Licensee's obligations under this Agreement or otherwise arising out of acts or omissions by any third party manufacturer, in derogation of Licensor's rights in and to the Licensed Property. 29. BREACH. The following shall be deemed Material Breaches of this Agreement: (a) Breach of any provision of Sections 10, 12(b), 19(c), 22, 23 (excluding 23(f)) 24 or 25, (excluding 25(f)) herein which in any such case (i) is not cured within ten (10) days after notice thereof to Licensee, (ii) if such breach is a breach which by its nature cannot be cured within such ten (10) days, is not cured as soon as reasonably possible, but in all events, within thirty (30) days of such notice; or (iii) occurs more than once in the same manner during any twelve (12) month period. (b) Failure to make any payments as required by Section 8 of this Agreement within ten (10) days after notice of the failure to so pay is received by Licensee. (c) A breach of Section 23(b) or 25(f) or any representation or warranty herein or any other material provision of this Agreement which (i) is not cured within thirty (30) days after notice thereof to the breaching party, (ii) if such breach is a breach which by its natures cannot be cured within such thirty (30) days, as soon as reasonably possible, but in all events, within sixty (60) days of such notice or (iii) occurs more than once in the same manner during any twelve (12) month period; and (d) If a receiver or liquidator of Licensee is appointed or if a resolution is passed or a judicial order is made for the winding up of Licensee and such appointment is not canceled or stayed or such resolution or order is not rescinded or vacated within thirty (30) days. 30. TERMINATION. (a) Licensor shall have the right to terminate this Agreement without prejudice to any rights which it may have, whether pursuant to the provisions of this Agreement, or in law, equity, or otherwise, upon the occurrence of any one or more of the following events (herein called "Defaults"): (i) In the event of a material breach which is not cured in the time period set forth in Section 29 above. 21 22 (ii) Licensee shall be unable to pay its debts when due, or shall make any assignment for the benefit of creditors, or shall file any petition under the bankruptcy or insolvency laws of any jurisdiction, or shall have or suffer a receiver or trustee to be appointed for its business or property, or an entry of an order for relief under the bankruptcy code; or (iii) Subject to the provisions of Section 28, Licensee undergoes a substantial change of management or control; or (iv) A manufacturer approved pursuant to Section 28(c) of this Agreement shall sell Products to parties other than Licensee or engage in conduct, which conduct if engaged in by Licensee would entitle Licensor to terminate this Agreement; or (v) Licensee delivers or sells Products outside the Territory or sells Products to a third party who Licensee knows intends to, or who Licensee reasonably should know intends to, sell or deliver such Products outside the Territory; or (vi) Licensee has made a material misrepresentation or has omitted to state a material fact necessary to make any of the statements made herein by Licensee not misleading; or (vii) Licensee shall breach any other agreement in effect between Licensee on the one hand and Licensor or any of its affiliates on the other, and such breach is not cured within thirty (30) days of notice of such breach. (b) In the event any Default occurs, Licensor shall give notice of termination of this Agreement in writing to Licensee and this Agreement shall thereupon immediately terminate, and any and all payments then or later due from Licensee hereunder (including any unpaid Royalty or Guaranteed Minimum Royalty) shall then be promptly due and payable in full. The Advertising Commitment shall survive any such termination and continue in full force and effect until fully satisfied. (c) Licensee may terminate this Agreement if Licensor breaches any of its material obligations, covenants or representations under this Agreement. 31. POST-TERMINATION AND EXPIRATION RIGHTS AND OBLIGATIONS. After the expiration or termination of the Term: (a) Licensee shall have no right to manufacture, offer, sell, ship, advertise, promote, distribute, use or deal with in any way the Products or Promotional and Packaging Material except as provided in subsection (c) below. (b) If the Term is terminated prior to its normal expiration date for any reason other than a material breach by Licensor, notwithstanding anything to the contrary herein, (i) all unpaid Royalty or Guaranteed Minimum Royalty which would be payable if the Term had continued shall nevertheless be payable in full upon the termination of the Term and (ii) the Advertising 22 23 commitment shall survive such termination and continue in full force and effect until fully satisfied. (c) Except upon termination of the Term pursuant to Section 30 above, Licensee may dispose of all Products which are on hand or in the process of manufacture at the time notice of termination is received or upon the expiration of the then in effect Term for the Sell-Off Period set forth in Section 7(b), provided that the Royalty with respect to that period are paid and the appropriate statements are furnished for that period. During such "Sell-Off Period" Licensor may itself use or license the use of the Licensed Property and/or the Trademark(s) in any manner at any time anywhere in the world as it sees fit. (d) All rights granted to Licensee shall forthwith revert to Licensor which shall be free to license others to use the Licensed Property in any manner. At Licensor's request, Licensee shall cause molds and such other materials to be destroyed and provide Licensor with satisfactory evidence of their destruction. Furthermore, upon expiration or termination of the Term (including any applicable Sell-Off Period as provided for in Section 7(b) and subsection (c) above), Licensee shall, at Licensor's election and in its sole discretion, either: (i) sell all remaining Products to Licensor at Licensee's direct cost of manufacture, excluding overhead; or (ii) cause all remaining Products to be destroyed and furnish Licensor with satisfactory evidence of their destruction. Licensee shall be responsible to Licensor for any damages caused by the unauthorized use by the Licensee or by others of such molds, reproduction materials or Products which are not so turned over to Licensor, sold to Licensor or destroyed. (e) Licensee acknowledges that its failure to cease the manufacture, offering for sale, sale, advertising, promotion, shipment, distribution or use of the Products or the Promotional and Packaging Material at the termination or expiration of the Term will result in immediate and irreparable damage to Licensor and to the rights of any subsequent licensee of Licensor. Licensee acknowledges that there is no adequate remedy at law for failure to cease such activities and, in the event of such failure, Licensor shall be entitled to injunctive or other equitable relief in addition to all other remedies Licensor may have. 32. FINAL INVENTORY UPON TERMINATION OR EXPIRATION. Licensee shall deliver, as soon as practicable, but not later than thirty (30) days following expiration or termination of this Agreement, a statement indicating the number and description of Products on hand or in the process of manufacturing at the end of the Term together with a description of all advertising and promotional materials relating thereto. Following expiration or termination of this Agreement, Licensee shall immediately cease any and all manufacturing of the Products. In the event this Agreement is terminated by Licensor for any reason under this Agreement, Licensee shall be deemed to have forfeited any Sell-Off Period. If Licensee has any remaining inventory of the Products following the Sell-Off Period, Licensee shall, at Licensor's option, make available such inventory to Licensor for purchase at or below cost, deliver up to Licensor for destruction said remaining inventory or furnish to Licensor an affidavit attesting to the destruction of said remaining inventory. Licensor shall have the right to conduct a physical inventory in order to ascertain or verify such inventory and/or statement. In the event that 23 24 Licensee refuses to permit Licensor to conduct such physical inventory, Licensee shall forfeit its right to the Sell-Off Period hereunder or any other rights to dispose of such inventory. In addition to the forfeiture, Licensor shall have recourse to all other legal remedies available to it. 33. CONFIDENTIALITY. (a) If either party shall provide any information that is proprietary to its business and is identified as "confidential" or "proprietary" thereon, the recipient of the information agrees not to disclose to any third-party, except its employees or agents who have a need to know, any such proprietary or confidential information received from the other. The foregoing confidentiality agreement shall not apply to (i) information that is substantially known to the receiving party or the public at the time of disclosure; (ii) information that becomes known to the public (other than through wrongful act of the receiving party) subsequent to the time of disclosure; (iii) information that is developed independently by the receiving party without reference to the confidential information; or (iv) information that the receiving party is required by law to disclose. Upon request, the receiving party shall return to the disclosing party all confidential or proprietary information received by such party (including all material developed or prepared by the receiving party based on such confidential or proprietary information). (b) During the Term and the sell-off period (if any), SIFK shall not offer or attempt to offer any employee or consultant of Licensee to accept employment with SIFK. 34. RELATIONSHIP OF THE PARTIES. This Agreement does not create a partnership or joint venture between the parties and Licensee shall have no power to obligate or bind Licensor. 35. AMENDMENTS. This Agreement maybe amended only in a writing signed by each of the parties. Any provision of this Agreement may be waived by the party entitled to the benefit thereof only in a writing executed by the party against whom such waiver is sought to be enforced. No waiver shall be deemed a waiver of any other provision of this Agreement, and no waiver of a breach hereunder shall be deemed a waiver of any other or subsequent breach of this Agreement. All of Licensor's rights and remedies hereunder or at law or in equity shall be cumulative and resort to one shall not be construed as a waiver of any other. 36. CAPTIONS. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 37. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, and all of which together shall be deemed to be one and the same instrument. This Agreement shall become effective when one or more such counterparts have been signed by each party and delivered to the other party. Facsimile signatures shall have the same force and effect as original signatures. 38. ENTIRE AGREEMENT. This Agreement contains the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. 24 25 39. GOVERNING LAW. This Agreement shall be governed by the laws of the State of New York excluding (to the greatest extent permissible by law) any rule of law that would cause the application of the law of any jurisdiction other than the State of New York. 40. NO THIRD-PARTY BENEFICIARIES. This Agreement is for the sole benefit of the parties hereto and their permitted assigns and nothing herein expressed or implied shall give or be construed to give to any person any legal or equitable rights hereunder, other than the parties hereto or such assigns. 41. SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any court of competent jurisdiction, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible. 42. SURVIVAL OF RIGHTS. Notwithstanding anything to the contrary contained herein, any obligations which remain executory after expiration of the Term of this Agreement shall remain in full force and effect until discharged by performance and such rights as pertain thereto shall remain in full force until their expiration. 43. ACCEPTANCE BY LICENSOR. When signed by Licensee this Agreement shall be deemed an application of license and not a binding agreement unless and until accepted by Licensor by signature of a duly authorized officer thereof and the delivery of such a signed copy to Licensee. The receipt and/or deposit by Licensor of any check or other consideration given by Licensee and/or delivery of any material by Licensor to Licensee shall not be deemed an acceptance by Licensor of this application. The foregoing shall apply to any documents relating to renewals or modifications thereof. 25 26 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. Time Inc. By: ------------------------------------- Its: ------------------------------------ SPORTS ILLUSTRATED FOR KIDS, a division of Time Inc. BY: /s/ TIMOTHY S. JARRELL ------------------------------------- Name: Timothy S. Jarrell Title: Vice President, Publishing Director AGREED AND ACCEPT: Bay Area Multimedia By: /s/ RAYMOND C. MUSCI ------------------------------- Name: Raymond C. Musci Title: President 26 27 EXHIBIT B
Product Development & Launch Schedule: Mid-Development complete 3/31/01 Alpha Stage complete 5/31/01 Package Development Complete 6/30/O1 Beta Stage complete 7/31/01 Gold Master (GM) Candidate 9/30/01 Ship Product 11/30/01
EXHIBIT C Advertising commitment; Q4 '00 - $[*] Total '00 - $[*] Q1 '01 - $[*] Q2 '01 - $[*] Q3 'O1 - $[*] Q4 '01 - $[*] Total '01 $[*] Q1 '02 - $[*] Q2'02 - $[*] Q3 '02 - $[*] Q4 '02 - $[*] Total '02 $[*] Q1 '03 - $[*] Q2 '03 - $[*] Q3 '03 - $[*] Q4 '03 - $[*] Total '03 $[*] Q1 '04 - $[*] Total '04 - $[*] Grand Total - $[*] *Confidential Portions Omitted and Filed Separately with the Commission. i 28 EXHIBIT D TIME INC. QUALITY REVIEW FORM (To Be Filled Out By Licensee) Date Submitted: Submitted For: ------------------------- ------------------------- (Licensee's Name) (Trademark) Items Submitted: (If submitting product, please include style number and description)
PLEASE CHECK THE APPROPRIATE CATEGORY AND STAGE ITEMS BELOW BASED ON THE SUBMISSION: Category: Category (select ones): - --------- ----------------------- [ ] Product OR [ ] Marketing Materials [ ] Packaging [ ] Advertising [ ] Signage Stage: Stage: - ------ ------ Sketch or layout of concept Sketch or layout of concept ------- ------- Pre-Production sample Copy ------- ------- Final Product Artwork/Photo ------- ------- Final Layout ------- ------- Additional Comments:
- -------------------------------------------------------------------------------- TO BE COMPLETED BY TIME INC. Date Received: ------- Date Returned: ------- Approved Approved with requested changes - ------- ------- Needs to be resubmitted - ------- 2 29 COMMENTS: REVIEWED BY: --------------------------------------------------------- 3 30 EXHIBIT E Persons who currently produce competitive Products and possess active licenses for the Property as of the date of this Agreement NONE. 4 EX-10.42 51 v72115orex10-42.txt EXHIBIT 10.42 1 EXHIBIT 10.42 (Confidential Portions Omitted) EXCLUSIVE OUTPUT AGREEMENT This Agreement (the "Agreement") is being entered into as of this 25th day of October, 2000 by and between BAY AREA MULTIMEDIA, INC. ("BAM") and SPYGLASS ENTERTAINMENT GROUP, L.P. ("SPYGLASS") and sets forth the terms and conditions of their agreement regarding BAM's acquisition of certain rights to SPYGLASS' motion picture output on an exclusive basis and certain other motion picture product, all as more particularly set forth below. As used herein, the term "Parties" shall refer collectively to BAM and SPYGLASS, and the term "Party" shall refer to BAM or SPYGLASS individually. The Parties hereby agree as follows: 1. SCOPE OF THE AGREEMENT: For good and valuable consideration, receipt of which is hereby acknowledged: a. Exclusive First Look Obligation. During the Output Term (as defined herein), SPYGLASS shall submit to BAM, on an exclusive, "first-look" basis, all SPYGLASS Pictures (as defined herein) with respect to which BAM shall have the right to exploit Interactive Entertainment Rights (as defined in Paragraph 5 hereof) in perpetuity throughout the universe, in accordance with the terms and conditions hereof. Each submission shall be made by SPYGLASS in accordance with the requirements and procedures set forth below. The term "SPYGLASS Picture" shall mean an original first class theatrical motion picture: (i) to be produced or acquired for theatrical release by SPYGLASS; and/or (ii) to be otherwise released under the SPYGLASS name and/or logo and/or any other name and/or logo owned, operated or controlled by, or otherwise affiliated with, SPYGLASS, by itself or through a joint venture with another entity, in each instance for which SPYGLASS controls the Granted Rights. A motion picture project, property or film shall be deemed to be a SPYGLASS Picture the first date upon which SPYGLASS enters into an agreement to acquire the rights to cause such project, property or film to be produced, acquired or otherwise released in accordance with the definition of a SPYGLASS Picture hereunder (the "Acquisition Date"). For purposes hereof, "first look" means that a SPYGLASS Picture shall be submitted solely and exclusively to BAM for purposes of exploiting the Interactive Entertainment Rights in and to such SPYGLASS Picture before the same is submitted to any other person or entity. It is the essence of this Agreement that SPYGLASS will not submit any SPYGLASS Picture to a third party for acquisition, licensing, exploitation or any other use of the Interactive Entertainment Rights unless and until the SPYGLASS Picture has been submitted to BAM hereunder and BAM has declined to exploit the Interactive Entertainment Rights to the SPYGLASS Picture (a "Rejected Picture"). A SPYGLASS Picture for which BAM elects to exploit the Interactive Entertainment Rights shall be referred to as an "Included Picture." b. Grant of Rights. SPYGLASS hereby irrevocably grants, transfers, assigns and licenses to BAM the Granted Rights (as defined in Paragraph 2 hereof) in and to each SPYGLASS Picture during the Output Term (as defined herein) in perpetuity throughout the universe subject to, and in accordance with, the terms hereof. c. Output Term. The term "Output Term" shall mean the period commencing on the date hereof and expiring five (5) years from the date hereof. It is understood that notwithstanding 1 2 the expiration of the Output Term, BAM's Granted Rights with respect to each SPYGLASS Picture shall continue in perpetuity throughout the universe. 2. GRANTED RIGHTS: a. Granted Rights. The term "Granted Rights" shall mean the exclusive Interactive Entertainment Rights (as defined herein) to each of the SPYGLASS Pictures, all rights necessary to distribute, exploit, advertise, promote and publicize such Interactive Entertainment Rights, and the identical rights to all remakes, sequels and prequels of each SPYGLASS Picture, for exploitation in perpetuity throughout the Universe. "Interactive Entertainment Rights" shall mean all of the following: (a) rights to develop and manufacture interactive software products (the "Products") on all interactive entertainment software platforms including, without limitation: (i) IBM PC, Apple Macintosh and Power PC compatible computers and any similar or successor personal computers, whether operating under DOS, Windows, OS/2, Macintosh OS, UNIX or any similar or successor operating system, and whether operating in stand-alone or networked configuration including, without limitation, on the interactive networks and the Internet, and regardless of storage media (e.g., whether on CD-ROM, magnetic, optical solid-state or other media), (ii) dedicated console gaming systems and any similar or successor gaming systems (e.g., Sony PlayStation, Sony PlayStation 2, Sega Dreamcast, Microsoft Xbox, Nintendo Dolphin, Nintendo 64, etc.), (iii) coin operated, token operated or other arcade games, and (iv) handheld consoles and devices (e.g., Nintendo Color Gameboy); and (b) rights to use elements of each SPYGLASS Picture including, without limitation, the soundtrack to each SPYGLASS Picture and the names, likenesses, biographies, photographs and recorded voices of all persons appearing in each SPYGLASS Picture, but only to the extent SPYGLASS possesses the right to grant any such rights, (i) as part of the name, label, packaging, or trade dress (i.e., overall appearance and commercial impression) of the Products, (ii) as part of the sound, graphics or other audio-visual elements integral to the Products for use in all interactive media whether heretofore known or hereafter developed, and (iii) in print media, point of sale, radio broadcast and television advertising, and in brochures, sales literature and promotional activities, including on-line promotional activities, for the Products. The Parties agree that the Granted Rights are subject only to any non-financial contractual restrictions thereon set forth in any bonafide agreement entered into by SPYGLASS with third parties of which BAM has received timely written notice. SPYGLASS will apprise BAM of any such restrictions it is aware of at the time of the submission. b. Exclusions. Notwithstanding the foregoing, BAM hereby acknowledges that pursuant to a prior existing agreement SPYGLASS is subject to certain rights of first negotiation/first refusal held by a third party regarding the distribution of Granted Rights in the territories of Germany, Austria, Liechtenstein, Switzerland, Luxembourg and Alto Adige and accordingly, BAM's exercise of the Granted Rights shall also subject to and limited by such pre-existing obligations. In addition, SPYGLASS hereby reserves the right, exercisable in its sole discretion, to exclude the Picture entitled "Reign of Fire" as a SPYGLASS Picture hereunder. 3. SUBMISSION PROCEDURES: 2 3 a. Submission. Not later than thirty (30) business days following the Acquisition Date of a SPYGLASS Picture, SPYGLASS shall submit the screenplay for such SPYGLASS Picture to BAM, along with a written notice ("Submission Notice") from SPYGLASS to BAM stating the proposed budget amount for such SPYGLASS Picture and informing BAM that the screenplay and notice constitute a submission hereunder. In addition, SPYGLASS shall submit to BAM a statement of any and all creative elements attached to such SPYGLASS Picture, if any (e.g., director, writer, principal cast members) and all other relevant material SPYGLASS has in connection with such SPYGLASS Picture (e.g., proposed schedule, expected date of initial United States theatrical release) (collectively, all of the foregoing shall be known as the "Submission Materials"). b. BAM's Response to Submission. Within ninety (90) days following receipt by BAM of a Submission Notice, together with complete Submission Materials (the "Response Period"), BAM will provide written notice to SPYGLASS whether BAM elects to exploit the Interactive Entertainment Rights to such SPYGLASS Picture. BAM's failure to respond within the Response Period shall be deemed to constitute BAM's rejection of such SPYGLASS Picture and such SPYGLASS Picture shall thereafter be deemed to be a Rejected Picture. c. Rejected Pictures. With respect to each Rejected Picture, SPYGLASS will have the option to arrange for the Interactive Entertainment Rights to such Rejected Picture to be acquired by third parties; provided, however, that prior to the time that SPYGLASS concludes any agreement to set up such rights with a third party, if there is a change in any of the following elements set forth in the Submission Materials (e.g., a change in the budget in excess of twenty-five percent (25%) of the total budget amount, a change in the principal cast), then SPYGLASS shall resubmit the Rejected Picture to BAM in accordance with the terms of Paragraph 3.a. above (provided BAM shall have 30 days from the date of such resubmission to make its determination) and the Rejected Picture shall not be submitted to any third party unless and until BAM has again declined to exploit said rights. All of BAM's right, title, and interest in and to each Rejected Picture that is not required to be resubmitted to BAM pursuant to the terms of this Paragraph 3.c. shall revert to SPYGLASS automatically. BAM shall quitclaim all rights in and to such Rejected Picture to SPYGLASS. Upon SPYGLASS' written request, BAM shall execute and deliver or cause to be executed and delivered to SPYGLASS a customary quitclaim or such other instruments, documents or agreements as SPYGLASS may reasonably deem necessary to effectuate such quitclaim. d. Submission by BAM. In addition to SPYGLASS' submissions hereunder, BAM shall have the right, but not the obligation, to submit to SPYGLASS, at any time, theatrical motion picture projects for which BAM is willing to exploit the Interactive Entertainment Rights. None of such projects shall be deemed a SPYGLASS Picture hereunder unless and until SPYGLASS enters into a binding written agreement to acquire the rights to cause such project to be produced, acquired or otherwise released in accordance with the definition of a SPYGLASS Picture hereunder. 4. EQUITY INTEREST: 3 4 a. BAM Common Stock. SPYGLASS shall be entitled to receive from BAM a warrant in the form attached hereto as Exhibit A to purchase up to 100,000 shares of BAM common stock (the "Equity Interest"). (The shares issued upon exercise of the Warrant shall be referred to as the "Shares"). b. Rights of First Refusal. From the date hereof until the earliest to occur of (i) the sale or transfer of greater than 50% of the aggregate equity interests in BAM held by Raymond Musci and Anthony Williams as of the date of this Agreement, (ii) such time as Raymond Musci and Anthony Williams no longer serve as officers of BAM, or (iii) an initial public offering of the equity of BAM. SPYGLASS and BAM agree: (i) Offer of Sale; Notice of Proposed Sale. If at any time SPYGLASS desires to sell, transfer or otherwise dispose of the Shares, SPYGLASS shall deliver written notice of its desire to do so (the "Sale Notice") to BAM, which Sale Notice must be accompanied a summary of the terms of a bona fide offer to purchase SPYGLASS shares (the "Sale Offer"), which Sale Offer shall be expressly subject to SPYGLASS' complying with the provisions of this Agreement, including this Paragraph 4, with a bona fide purchaser reasonably capable of completing such purchase (the "Proposed Transferee"). The Sale Notice and Sale Offer shall specify (i) the name and address of the Proposed Transferee(s), (ii) the number of Shares SPYGLASS proposes to sell, transfer or otherwise dispose of (referred to herein as "Offered Shares"), (iii) the consideration per Offered Share to be delivered to SPYGLASS for the proposed sale, transfer or disposition and (iv) all other material terms and conditions of the proposed transaction. (ii) Option to Purchase. BAM shall have the option to purchase all or any portion of the Offered Shares for the consideration per share and on the terms and conditions set forth in the Sale Notice and Binding Agreement. The Company may only exercise such option by delivery of written notice to SPYGLASS prior to the date fifteen (15) business days after the date of delivery of the Sale Notice. If BAM delivers written notice of its intent to purchase all or any portion of the Offered Shares, then the closing of the purchase of the Offered Shares shall take place at the offices of BAM no later than ten (10) business days after the expiration of the fifteen (15) day period specified above. (iii) Sale to Proposed Transferee. To the extent BAM fails (i) to deliver written notice or notices of intent to purchase any of the Offered Shares within the fifteen (15) day period specified in Paragraph 4.b.(ii) or (ii) to close the purchase of the Offered Shares within the applicable period specified in Paragraph 4.b.(ii), then SPYGLASS may sell, transfer or otherwise dispose of the remaining Offered Shares to the Proposed Transferee at any time within one hundred twenty (120) days after the date of the delivery of the Sale Notice on terms not less favorable than terms set forth in the Sale Notice and Sale Offer. Any Offered Shares not sold, transferred or otherwise disposed of within the applicable one hundred twenty (120) day period shall continue to be subject to all of the requirements of this Paragraph 4 as if there had been no prior offer or Sale Notice. Notwithstanding the above, the Offered Shares shall not be sold, transferred or otherwise disposed of unless such purchaser or acquirer is bound or agrees in writing to be bound by the provisions of this Paragraph 4, and any such sale, transfer or disposition where such purchaser or acquirer is not bound or does not so agree to be bound shall be void. 4 5 c. Lock-up Agreement. In consideration for BAM agreeing to its obligations under this Agreement, SPYGLASS agrees, in connection with the first qualified public offering of BAM securities, upon request of BAM or the underwriters managing such offering, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of BAM (other than those included in the registration) without the prior written consent of BAM or such underwriters, as the case may be, for such period of time (not to exceed one hundred eighty (180) days) from the effective date of such registration as BAM or the underwriters may specify. SPYGLASS agrees that BAM may instruct its transfer agent to place stop transfer notations in its records to enforce the provisions of this Paragraph 4. d. Effect of Not Following Procedures. Any sale, transfer or other disposition of any Shares not in accordance with the foregoing procedures of this Paragraph 4 shall be null and void and of no force and effect. Notwithstanding anything to the contrary contained herein, nothing shall prevent SPYGLASS from pledging or otherwise encumbering its Shares; provided, however, that the pledgee or holder of such encumbrance shall not be entitled to acquire such Shares upon default or otherwise unless the provisions of this Paragraph 4 are first complied with. e. Tag Along Provisions. (i) General. Prior to a Qualified IPO, if Raymond Musci ("Principal Stockholder") proposes to offer shares of BAM ("Offered Securities") to any Person (individually, a "Third Party" and collectively, "Third Parties") in any one transaction or any series of related transactions, directly or indirectly, such sale or other disposition shall not be permitted unless Principal Stockholder shall offer (or cause the Third Party to offer) to SPYGLASS in writing (the "Tag-Along Notice") the right to elect to include, at the sole option SPYGLASS, in the sale or other disposition to the Third Party such number of shares of Offered Securities owned by SPYGLASS as shall be determined in accordance with paragraph (iii) below (the "Tag-Along Shares"). The Tag-Along Notice shall state: (1) the Principal Stockholder's bona fide intention to sell such Offered Securities; (2) the number of shares of such Offered Securities to be offered for sale; and (3) the price and terms upon which the Principal Stockholder proposes to offer such Offered Securities. (ii) At any time within fifteen (15) days after the giving of the Tag-Along Notice, SPYGLASS may make an election to include the Tag-Along Shares in such a sale and deliver to the Company a stock certificate or certificates representing the Tag-Along Shares, together with a limited power-of-attorney authorizing the Principal Stockholder to sell or otherwise dispose of such Tag-Along Shares pursuant to the terms of such Third Party's offer. (iii) SPYGLASS shall have the right to sell or include in the Third Party's offer, that percentage (the "Tag-Along Percentage") of the number of Offered Securities to be sold to the Third Party equal to the ratio (expressed as a percentage) of (1) the Shares purchased by SPYGLASS, as compared with (2) the aggregate number of shares owned by all stockholders. (iv) The purchase from SPYGLASS pursuant to this Section shall be on the same terms and conditions, including the price per share, the form of consideration and the date of sale or 5 6 other disposition, as are received by the Principal Stockholder and shall be no less favorable to the sellers than as stated in the Tag-Along Notice. (v) Promptly (but in no event later than fifteen (15) days after treating all securities, or rights which are convertible into securities as having been exercised and converted into shares of common stock, consummation of the sale or other disposition of shares of Offered Securities of the Principal Stockholder and SPYGLASS to the Third Party pursuant to the Third Party's offer, the Principal Stockholder shall (1) notify such other SPYGLASS of the completion thereof, (2) cause to be remitted to SPYGLASS the total sales price attributable to the Offered Securities which SPYGLASS sold or otherwise disposed of pursuant thereto, and (3) furnish SPYGLASS evidence of the completion and time of completion of such sale or other disposition and the terms thereof as may be reasonably requested by SPYGLASS. (vi) If within fifteen (15) days after the Tag-Along Notice is given, SPYGLASS has not accepted the offer to make an inclusion election, such SPYGLASS will be deemed to have waived any and all of its rights with respect to the sale or other disposition of the Offered Securities described in the Tag-Along Notice. The Principal Stockholder shall have one hundred twenty (120) days after such 30-day period in which to sell or otherwise dispose of the Offered Securities of the Offering Stockholder to the Third Party or any other Person at a price and on terms not more favorable in the aggregate to the Principal Stockholder than were set forth in the Tag-Along Notice. (vii) If, at the end of such 120-day period, the Principal Stockholder has not completed the sale of shares of Offered Securities in accordance with the terms of the Third Party's offer, all the restrictions on sale contained in this Agreement with respect to Offered Securities owned by the Offering Stockholders shall again be in effect (unless such 120-day period is extended with the consent of each of the other Stockholders). (viii) Notwithstanding the terms and provisions of paragraph 43(i) hereof, the Tag-Along Right provided for in this Section 4 shall not be applicable to (i) any repurchase by the Company of equity securities from an employee upon termination, (ii) any redemption or conversion of any Preferred Stock in accordance with its terms, (iii) any transfer solely by one or more stockholders, in a single transaction or series of related transactions, of Shares constituting less than five percent (5%) of the fully diluted Stock; (iv) any transfer for estate purposes, (v) any transfer to a family member, Robert Holmes or Anthony Williams. 5. ROYALTY PAYMENTS: a. Royalties. Royalties shall be payable in accordance with the schedule set forth on Schedule NS. Any royalties payable pursuant to this Agreement shall be paid on a quarterly basis for the first two years subsequent to the date hereof, on a semi-annual basis for the following three years, and, thereafter on an annual basis, provided that in each such case, each payment hereunder shall be accompanied by a royalty statement. 6 7 b. Limitations on Royalties. No royalties will be payable on returns that are accepted and credited by BAM or an affiliate of BAM, or on units of the Products distributed exclusively for demonstration or promotional purposes, or for replacements. BAM shall have the right to retain a reasonable reserve from royalties for returned Products (provided that such reserve will be reviewed and, if appropriate, liquidated in good faith on a quarterly basis). To the extent that the actual returns to BAM or affiliates of BAM in any given quarter are greater than the expected returns based on which BAM has adjusted any royalty payments, such difference will be withheld by or payable to BAM, as the case may be. No royalties will be payable on sales or other transactions between BAM and any affiliates of BAM. If BAM makes a royalty payment to SPYGLASS where BAM is subsequently required to refund or reduce all or any part of the Net Sales collected by it, BAM shall have the right to a refund of overpayments of royalties made to SPYGLASS. c. Books and Records Relating to Sales. BAM will maintain sufficient and accurate books and records relating to all transactions relevant to sales of the Products or in respect of which BAM is required to provide information in a royalty statement. d. Inspection. BAM will permit a chartered accountant reasonably acceptable to BAM and appointed by SPYGLASS (the "SPYGLASS Accountant") to inspect the books and records maintained by BAM after thirty (30) days notice at any reasonable time during normal business hours at SPYGLASS' expense and in such manner as not to interfere with the business of BAM for the purpose of verifying the correctness of the royalty statements and the payments made by BAM to SPYGLASS by way of royalty pursuant to this Paragraph 8. SPYGLASS shall not be entitled to make such inspections more frequently than on one occasion in each period of twelve (12) calendar months unless it can demonstrate that there are exceptional circumstances requiring such additional inspections. In the event that the SPYGLASS Accountant discovers an error of greater than [*] in favor of SPYGLASS, SPYGLASS shall be entitled to reimbursement by BAM for the costs of such a review plus interest at 10 percent (10%) per annum. e. No Disclosure. SPYGLASS shall not and shall cause the SPYGLASS Accountant not to disclose any information acquired as a result of any such examination or inspection to any person, firm or corporation other than its employees, authorized representatives and as otherwise strictly necessary to enforce its rights hereunder. * Confidential Portion Omitted and Filed Separately with the Commission. 7 8 6. CONSULTATION AND APPROVAL RIGHTS: a. SPYGLASS. SPYGLASS shall meaningfully consult with BAM in good faith during the Output Term with respect to (a) SPYGLASS' development/acquisition slate for SPYGLASS Pictures and (b) all key creative elements of the Included Pictures. SPYGLASS shall advise BAM as to the status of pre-production, production and post-production of each Included Picture on no less than a quarterly basis. Without limiting the generality of the foregoing, SPYGLASS agrees to provide BAM with regular production status reports during the period of principal photography and post-production of each Included Picture. b. BAM. The parties shall mutually agree upon a milestone schedule of tasks to be completed for the development, production, marketing and distribution of each Product and the relevant requirements therefor (the "Milestone(s)"). SPYGLASS shall evaluate each relevant Milestone to determine whether the Milestone complies with the requirements established for each such Milestone. Once approved by SPYGLASS, such approval of the Milestone is not revocable. 7. BOOKS AND RECORDS: SPYGLASS shall at all times maintain customary production books and records (including copies of third party agreements and chain-of-title documentation) for each Included Picture and shall, upon BAM's request, for a period of up to two (2) years after initial United States theatrical release of the applicable Included Picture, provide BAM with reasonable access to review and copy the same during reasonable business hours. 8. DELIVERY: The term "Delivery" shall mean BAM's receipt and approval of all of the items listed in Schedule DS attached hereto (the "Delivery Items") and incorporated herein by reference relating to each Included Picture, by a date no later than two (2) weeks following delivery of each Included Picture to its domestic distributor ("Delivery Date"); provided, however, with respect to SPYGLASS' acquisition of Included Pictures in completed form, in lieu of the foregoing, the Delivery Date shall be no later than thirty (30) days following delivery to SPYGLASS of such Included Picture. Notwithstanding the foregoing, SPYGLASS agrees to use its best efforts to provide any Delivery Items to BAM as soon as is practicable during the course of production. SPYGLASS agrees further to provide BAM reasonable access to the set during production of an Included Picture, on a non-interference basis with production, to enable BAM to photograph the set and to conduct motion capture sessions as BAM may arrange with cast members. SPYGLASS agrees herein that the Delivery Items shall be fully paid for by SPYGLASS provided that BAM shall be responsible for any duplication costs and delivery costs. It is understood and agreed by BAM and SPYGLASS that any Delivery Items delivered to BAM hereunder shall become the sole and exclusive property of BAM; provided, however, in no event shall BAM's ownership of such materials be deemed to give BAM any greater rights in the Included Picture than the Granted Rights. 9. PUBLICITY MATERIALS: SPYGLASS agrees herein to provide BAM with free access to all publicity and advertising materials which have been prepared (and cleared by SPYGLASS) in connection with the theatrical release of each Included Picture (provided, that any costs associated with duplication of such materials shall be borne by BAM and recoupable by BAM hereunder). The Parties agree that BAM may use such publicity and advertising materials to promote, advertise and 8 9 market all Products developed in connection with the applicable Included Picture, subject to the contractual restrictions imposed by third parties. Subject to the prior approval of SPYGLASS, BAM agrees to use SPYGLASS logos in connection with all Products developed in connection with the applicable Included Picture. 10. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SPYGLASS: SPYGLASS hereby represents, warrants and covenants to BAM as follows: a. Power. SPYGLASS is a partnership duly formed and validly existing in good standing under the laws of the State of Delaware and has the requisite power and authority to enter into this Agreement and to perform its obligations hereunder. b. Duly Authorized. The execution and delivery of this Agreement by SPYGLASS and the consummation by SPYGLASS of the transactions contemplated hereby have been duly authorized and no other corporate or partnership proceeding or consent on the part of SPYGLASS is necessary to authorize this Agreement and the transactions contemplated hereby. c. Liens. Schedule 10c sets forth a listing of all claims, liens, charges or encumbrances which materially impair or materially and adversely affect the Granted Rights. SPYGLASS hereby agrees to provide BAM with written notice upon the creation of any additional claim, lien, charge or encumbrance, or any amendments or other modifications to any of the charges, liens, claims or encumbrances set forth on Schedule 10c which in either case, would materially impair or have a material and adverse effect on the Granted Rights. Such written notice will be sent in a timely manner and shall include a brief description of such claim, lien, charge or encumbrance. Except as set forth on Schedule 10c, the Granted Rights licensed to BAM hereunder, as of the date of this agreement and hereafter shall continue to be, free and clear of any and all claims, liens, charges, encumbrances, restrictions, agreements, commitments, and arrangements whatsoever which materially impair or materially and adversely affect BAM's rights hereunder to exploit the Granted Rights, provided, however that for any breach of the representation and warranty set forth in this subparagraph regarding the liens set forth on Schedule 10c hereto, BAM's sole remedy is termination of this Agreement. d. No Infringement. With respect to each SPYGLASS Picture and the advertising and publicity materials in connection therewith provided to BAM hereunder and so long as such advertising and publicity materials are used in compliance with any restrictions on such materials specified by SPYGLASS to BAM: (i) to the best of SPYGLASS' knowledge, the foregoing does not and will not contain any language or material which is libelous, slanderous, or defamatory; and (ii) to the best of SPYGLASS' knowledge, the foregoing will not, when used by BAM (or its permitted licensees and assigns) as authorized hereunder, violate, infringe upon or give rise to any adverse claim with respect to, any common-law or other right (including, without limitation, any copyright, trademark, service mark, literary, dramatic or musical right, or right of privacy or publicity) of any person, or violate any applicable law in a fashion which would adversely affect BAM's ability to exercise the Granted Rights hereunder. 9 10 e. Music. With respect to each musical composition included in a SPYGLASS Picture, SPYGLASS shall assign such rights to BAM to use under the terms of this Agreement to the extent SPYGLASS has the right to assign such rights to BAM. f. No Payment Obligations. BAM will not be obligated to make any payments to any third party, unless otherwise expressly specified in this Agreement or consented to in writing by BAM, in connection with the exercise by BAM or its licensees of the Granted Rights including, but not limited to: (i) any guild re-run, reuse, pension or residual payments of any kind, nature or description; or (ii) any other payments (whether characterized as a deferment, participation, or otherwise) required to be made to any third party participant including without limitation investors in and/or financiers of any SPYGLASS Picture. g. Copyrighted Material. Except with respect to incidental public domain elements, and subject to the applicable provisions of applicable copyright law as of the date hereof and as it may change in the future, the copyright(s) in each SPYGLASS Picture and in the literary, dramatic and musical material upon which it is based or which is contained therein will be valid and subsisting during the Output Term for each SPYGLASS Picture and SPYGLASS has not done or permitted and will not do or permit any act or omission which would impair or diminish the validity or duration of such copyright. h. No Conflicting Grant. With respect to its projects, properties and films, SPYGLASS has not granted and will not grant to any third person (i) any of the Granted Rights granted to BAM hereunder nor (ii) any other rights which conflict with the Granted Rights exclusively granted to BAM hereunder, and has not entered and shall not hereafter enter into any agreement, which would violate or conflict with the Granted Rights granted to BAM or the restrictions imposed upon SPYGLASS hereunder. i. Advertising. BAM may use, subject only to contractual restrictions contained in applicable talent agreements, which SPYGLASS has notified BAM of in writing prior to submission, the names and likenesses of all talent rendering services in connection with the SPYGLASS Picture in any and all advertising and publicity materials and BAM will not be restricted in any way from using any of the talent's names and likenesses in connection with such advertising and publicity materials. j. Investment Experience. SPYGLASS represents that it is experienced in evaluating and investing in companies in a similar stage of development as BAM and acknowledges that it is able to fend for itself in the transactions contemplated by this Agreement and has the ability to bear the economic risks of its investment pursuant to this Agreement. SPYGLASS is capable of evaluating the merits and risks of the investment in the Shares and can bear the risk of the loss of the entire Equity Interest. SPYGLASS has not been organized for the purpose of acquiring the Shares. SPYGLASS is an "Accredited Investor" as defined in the Securities Act of 1933, as amended. k. Investment for Own Account. The Shares will be acquired for SPYGLASS' own account, not as a nominee or agent, and not with a view to or in connection with the sale or 10 11 distribution of any part thereof. There is no contract or arrangement with any person to sell, transfer or grant participations to any third person with respect to the Shares. 11. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BAM: BAM hereby represents, warrants and covenants to SPYGLASS as follows: a. Power. BAM is a corporation duly formed and validly existing in good standing under the laws of the State of Delaware and has the requisite power and authority to enter into this Agreement and to perform its obligations hereunder. b. Duly Authorized. The execution and delivery of this Agreement by BAM and the consummation by BAM of the transactions contemplated hereby have been duly authorized and no other corporate or partnership proceeding or consent on the part of BAM is necessary to authorize this Agreement and the transactions contemplated hereby. c. Capitalization. As of the date hereof, there are 312,760 shares of common stock and 976,220 shares of Series A Preferred Stock issued and outstanding. Each share issued has been issued in conformity with applicable law. d. No Infringement. With respect to each BAM Product (but specifically excluding each SPYGLASS Picture and the advertising and publicity materials provided by SPYGLASS to BAM in connection therewith pursuant to this Agreement, so long as BAM complies with any restrictions of which BAM is notified regarding such materials): (i) to the best of BAM's knowledge, the foregoing does not and will not contain any language or material which is libelous, slanderous, or defamatory; and (ii) to the best of BAM's knowledge, the foregoing will not violate, infringe upon or give rise to any adverse claim with respect to, any common-law or other right (including, without limitation, any copyright, trademark, service mark, literary, dramatic or musical right, or right of privacy or publicity) of any person, or violate any applicable law. 12. INDEMNITY/INSURANCE: a. SPYGLASS. SPYGLASS hereby agrees to indemnify, defend and hold harmless BAM, its parent, subsidiaries and related companies, its licensees, subdistributors and affiliates, and their respective officers, directors, agents, and employees from any and all third party claims, actions or proceedings of any kind and from any and all damages, liabilities, costs and expenses (including reasonable legal fees and costs) relating to or arising out of any breach of any of the warranties, representations or agreements of SPYGLASS hereunder or any error or omission in any of the material or information furnished to BAM in accordance with this Agreement (except to the extent such claims, actions or proceedings give rise to BAM's indemnification obligations under this Agreement). b. BAM. BAM hereby agrees to indemnify, defend and hold harmless SPYGLASS, its parent, subsidiaries and related companies and affiliates, and their respective officers, directors, agents, and employees from any and all third party claims, actions or proceedings of any kind and from any and all damages, liabilities, costs and expenses (including reasonable legal fees and costs) 11 12 relating to or arising out of any breach of any of the warranties, representations or agreements of BAM hereunder or otherwise in connection with the Products (except to the extent such claims, actions or proceedings give rise to SPYGLASS' indemnification obligations under this Agreement). c. INSURANCE. BAM shall name SPYGLASS as an additional named insured under its E&O and product liability insurance as appropriate. 13. REMEDIES: a. SPYGLASS' Remedies. No action or omission by BAM shall constitute a breach of this Agreement unless SPYGLASS first notifies BAM in writing setting forth the alleged breach or default and BAM does not cure the same within thirty (30) days of being notified of such breach, with the exception of a breach of a payment obligation which cure period shall be limited to five (5) days of being notified of such breach. If BAM breaches its obligations hereunder, the damage, if any, caused SPYGLASS shall not be irreparable or sufficient to entitle SPYGLASS to injunctive or other equitable relief. Consequently, SPYGLASS' rights and remedies shall be limited to the right, if any, to obtain damages at law and SPYGLASS shall not have any right in such event to terminate or rescind this Agreement or any of the rights granted to BAM hereunder or to enjoin or restrain the advertising, promotion, distribution, exhibition or exploitation of the SPYGLASS Pictures and/or any of BAM's rights hereunder. BAM's payment of any compensation or performance of any obligation hereunder shall not constitute a waiver by BAM of any breach by SPYGLASS of any rights or remedies which BAM may have as a result of such breach, provided, however, that if such a breach by SPYGLASS (i) is inadvertent and non-recurring (i.e., not intentional or repeated) and is by its nature reasonably curable and (ii) allowing SPYGLASS to cure such a breach will not result in additional expense to BAM, then SPYGLASS shall have a period of five (5) business days from the date of notice from BAM of such breach within which to cure such breach. b. Remedies Cumulative. Except as set forth in Paragraph 13.a. above, all remedies accorded herein or otherwise available to either Party hereto shall be cumulative, and no one such remedy shall be exclusive of, nor shall it be considered a waiver of, any other. c. Rights Unique. SPYGLASS acknowledges that the rights herein granted are of a special, unique, unusual, extraordinary and intellectual character giving them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law, and that a breach by SPYGLASS will cause BAM irreparable injury and damage. BAM shall be entitled to injunctive and other equitable relief to prevent any breach by SPYGLASS. 14. NOTICES: All notices shall be in writing and shall be delivered to the address(es) for notice set forth below or hereafter supplied by a Party to the other. Notices shall be effective on the date received, if delivered by hand or by facsimile, on the next business day following delivery thereof to an air courier for overnight delivery, and on the third business day after deposit into the United States mail, postage prepaid. 12 13 (a) If to BAM: (b) If to SPYGLASS: Bay Area Multimedia, Inc. Spyglass Entertainment Group, L.P. 333 W. Santa Clara Street 500 S. Buena Vista St. Suite 930 Burbank, CA 91521-1855 San Jose, CA 95113 Attn: Gary Barber Attn: Ray Musci Fax No. (818) 566-8599 Fax No. (408) 298-9600 With a copy to: Doty Sundheim & Gilmore 260 Sheridan Avenue Suite 200 Palo Alto, CA 94306 Attn: George Sundheim Fax No. (650) 327-0101 15. SUBSEQUENT PRODUCTIONS: Without regard to the expiration of the Output Term, BAM shall have a continuing rolling right of first negotiation/first refusal to exploit the Granted Rights with respect to sequels, prequels and/or remakes (as such terms are customarily defined in the United States entertainment industry, each a "Subsequent Production") of an Included Picture hereunder provided that BAM's right to exploit the Granted Rights in a Subsequent Production to an Included Picture on a rolling basis shall be conditioned on BAM having exploited the rights in the immediately prior Subsequent Production to such Included Picture. 16. KEY EXECUTIVES: If at any time during the Output Term, both of Roger Birnbaum and Gary Barber (or their BAM approved replacement; if applicable) are no longer rendering substantial in person services to SPYGLASS as employees thereof, then BAM shall have the option, to be exercised in its sole discretion, to terminate the Output Term at any time thereafter upon 5 business days' notice (such termination shall not affect any Included Picture prior to the date of such termination), except that if SPYGLASS finds replacements for Roger Birnbaum and Gary Barber which are of comparable stature and which are acceptable to BAM (which acceptance shall not be unreasonably withheld), then BAM shall not have the right to terminate this Agreement pursuant to this Paragraph 16. 17. CONFIDENTIALITY: The Parties shall hold in confidence the terms of this Agreement and any negotiations relating thereto. Neither Party shall disclose, without the other Party's prior consent to any third party (other than its respective employees, directors, officers, attorneys and agents engaged in this transaction, in their capacity as such, on a need-to-know basis), any information with respect to the terms and provisions of this Agreement except: (a) to the extent necessary to comply with law or the valid order of a court of competent jurisdiction, in which event the party making such disclosure shall so notify the other party as promptly as practicable (if possible, prior to making such disclosure) and shall seek confidential treatment of such information; (b) as part of its normal reporting or review procedure to its parent company, banks, auditors, 13 14 investment bankers, underwriters, third party participants, and/or attorneys (collectively, "Reporting Parties"), provided that such Reporting Parties agree to be bound by the provisions of this Paragraph 21; (c) in order to enforce its rights pursuant to this Agreement; and (d) when such information is otherwise publicly available. 18. INITIAL PRESS ANNOUNCEMENT: The Parties agree that the timing and content of the initial announcement (if any) relating to the completion of this Agreement will be mutually coordinated and agreed upon before being issued by BAM, SPYGLASS, or any third party. 19. ASSIGNMENT: SPYGLASS may not assign, transfer, sell, mortgage, pledge or hypothecate this Agreement or any interest herein or rights hereunder, in whole or in part, either voluntary or by operation of law (including without limitation by merger or consolidation or otherwise), without the prior written consent of BAM, except that SPYGLASS may freely assign this Agreement to its successor or assigns, to any of its associated, affiliated and subsidiary companies or to an entity which acquires all or substantially all of its assets on the condition that assignee assumes all of SPYGLASS' obligations hereunder in writing; and, provided, further, SPYGLASS shall be entitled to assign from time to time its right to receive payments hereunder, without BAM's consent, if such assignment is made pursuant to a signed, written payment direction. 20. FURTHER INSTRUMENTS: Each Party hereto shall duly execute and deliver to the other Party, any and all agreements, documents and instruments reasonably required by the other Party to carry out and effectuate the purposes and intent of this Agreement. 21. GOVERNING LAW/DISPUTE RESOLUTION: a. Governing Law. The substantive laws (as distinguished from the choice of law rules) of the State of California and The United States of America applicable to contracts made and performed entirely in California shall govern (i) the validity and interpretation of this Agreement, (ii) the performance by the Parties of their respective obligations hereunder, and (iii) all other causes of action (whether sounding in contract or in tort) arising out of or relating to this Agreement or the termination of this Agreement. b. Dispute Resolution. The Parties hereto agree that any dispute or controversy relating to this Agreement shall be decided by a Rent-A-Judge, mutually selected by the Parties (or, if they cannot agree, by the Presiding Judge of the Los Angeles Superior Court) appointed in accordance with California Code of Civil Procedure Section 638, sitting without a jury, in Los Angeles County California, and the Parties hereby submit to the jurisdiction of such court. The prevailing Party shall be entitled to collect from the other Party all of its legal expenses incurred in said matter including, without limitation, reasonable attorneys' fees and costs. 14 15 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be signed the day and year first written above. BAY AREA MULTIMEDIA, INC. SPYGLASS ENTERTAINMENT GROUP, L.P. By: /s/ RAYMOND C. MUSCI By: /s/ GARY BARBER -------------------------------- -------------------------------- Its: President Its: Co-Chairman/CEO ------------------------------- ------------------------------- 15 16 SCHEDULE NS NET SALES DEFINITION Royalty Rate(s): "Open" Systems as defined in Section 2(a)(i). [*]% of Net Sales of each product (SKU) for units [*] [*]% of Net Sales of each product (SKU) for units [*] [*]% of Net Sales of each product (SKU) for units [*] "Closed" systems as defined in Section 2(a)(ii) [*]% of Net Sales of each product (SKU) for units [*] [*]% of Net Sales of each product (SKU) for units [*] [*]% of Net Sales of each product (SKU) for units [*] "Net Sales" means the gross revenue (including advances) earned and actually received by or credited to BAM or any affiliated or related entity or any affiliate or related entity from the sale, lease, license, distribution or other exploitation of the Product less the following (all of which shall collectively be known as the "Cost of Goods"): (a) actual, direct, third party out-of pocket charges or expenses incurred by BAM or any affiliate or related entity thereof in connection with transportation, handling, carriage, delivery, insurance, taxes (including withholding taxes and Value Added Tax), duties, tariffs, assessments, levies and other governmental and "pass-through" charges on or after sale of units of the Product; and (b) any rebates or allowances (including allowances credited to resellers or distributors in respect of marketing and promotional costs) paid by BAM in connection with the sale or distribution of the Product. If BAM earns revenue from distribution of a Product in combination or bundle with one or more other BAM products, such revenue will be allocated between that Product and such other products on a fair and reasonable basis taking into consideration the current or most recent wholesale prices of components of such compilation or bundle. * Confidential Portion Omitted and Filed Separately with the Commission. i 17 SCHEDULE DS DELIVERY SCHEDULE [Further specification to be provided by BAM.] 1. Soundtrack (if created). 2. Access to computer graphics imaging (CGI) and models (if created). 3. Still frame photographs of major sets and/or set pieces (if created). 4. Access to physical models used in principal photography (if created). 1 18 SCHEDULE 10.C. 2 EX-10.43 52 v72115orex10-43.txt EXHIBIT 10.43 1 Exhibit 10.43 BASIC LEASE PROVISIONS
Section ------- Date: November 15, 1999 Landlord: Macanan Investments, a California limited partnership Address of Landlord for Notices: Macanan Investments, a California limited partnership, Suite #280, 333 W. Santa Clara, San Jose, California 95113 Telephone: (408) 280-6300 Tenant: Bay Area Multimedia, Inc. Address of Tenant for Notices: 333 W. Santa Clara Street, Suite 930 San Jose, CA 95113 Premises: Suite 930 1.5 Gross Leasable Area of Premises: 2,118 sq. ft. 1.5 Net Leasable Area of Premises: 1,937 sq. ft. 1.5 Tenant's Allocated Share: 1.00% 1.6 Lease Term: 3 years 1.2 Commencement Date: January 1, 2000 1.1 Termination Date: December 31, 2003 1.2 Base Rent Per Month: $5,825.00 3.1 Consumer Price Index Base Date: N/A 3.2 Operating Expense Base Year: 2000 1.11 Real Property Base Tax Year: 1999/2000 1.12 Security Deposit: $5,825.00 1.8 Minimum Liability Insurance: $1,000,000.00 1.10
2 OFFICE SPACE LEASE Table of Contents
Page ---- ARTICLE 1 DEFINITIONS 1.1 Rent Commencement Date............................. 1 1.2 Lease Term......................................... 1 1.3 Property........................................... 1 1.4 Building........................................... 2 1.5 Leased Premises.................................... 2 1.6 Tenant's Allocated Share........................... 2 1.7 Prepaid Rent....................................... 2 1.8 Security Deposit................................... 2 1.9 Permitted Use...................................... 2 1.10 Tenant's Minimum Liability Insurance Coverage...... 2 1.11 Operating Expense Base Year........................ 3 1.12 Real Property Base Tax Year........................ 3 1.13 Additional Definitions............................. 3 ARTICLE 2 DEMISE, TERM, AND POSSESSION 2.1 Demise of Leased Premises.......................... 3 2.2 "As Is" Condition.................................. 4 2.3 Delivery and Acceptance of Possession.............. 4 2.4 Early Occupancy.................................... 4 ARTICLE 3 RENT 3.1 Base Monthly Rent.................................. 5 3.2 Additional Rent.................................... 5 3.3 Payment of Rent.................................... 5 3.4 Late Charge and Interest on Rent in Default........ 6 3.5 Prepayment of Rent................................. 6 3.6 Security Deposit................................... 7 ARTICLE 4 USE OF LEASED PREMISES 4.1 Limitation on Type................................. 7 4.2 Compliance with Laws and Private Restrictions...... 8
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Page ---- 4.3 Insurance Requirements............................. 8 4.4 Rules and Regulations.............................. 9 4.5 Parking............................................ 9 4.6 Window Coverings................................... 10 ARTICLE 5 TRADE FIXTURES AND LEASEHOLD IMPROVEMENTS 5.1 Trade Fixtures..................................... 10 5.2 Leasehold Improvements............................. 10 5.3 Alterations Required by Law........................ 12 5.4 Landlord's Improvements............................ 12 5.5 Liens.............................................. 12 ARTICLE 6 REPAIR AND MAINTENANCE 6.1 Landlord's Obligation to Maintain.................. 12 6.2 Tenant's Obligation to Maintain.................... 13 6.3 Hazardous Materials................................ 13 6.4 Tenant's Obligation to Reimburse................... 14 6.5 Operating Expenses Defined......................... 15 6.6 Control of Common Area............................. 17 6.7 Tenant's Negligence................................ 18 ARTICLE 7 SERVICES AND UTILITIES 7.1 Landlord's Obligations............................. 18 7.2 Tenant's Obligations............................... 19 7.3 Compliance With Governmental Regulations........... 20 ARTICLE 8 REAL PROPERTY TAXES 8.1 Real Property Taxes Defined........................ 21 8.2 Tenant's Obligation to Reimburse................... 22 8.3 Taxes on Tenant's Property......................... 23 ARTICLE 9 INSURANCE 9.1 Tenant's Insurance................................. 23 9.2 Landlord's Insurance............................... 25 9.3 Tenant's Obligation to Reimburse................... 26 9.4 Release and Waiver of Subrogation.................. 27 ARTICLE 10 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY 10.1 Limitation on Landlord's Liability................. 28 10.2 Limitation on Tenant's Recourse.................... 28 10.3 Indemnification of Landlord........................ 29
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Page ---- ARTICLE 11 DAMAGE TO LEASED PREMISES 11.1 Landlord's Duty to Restore........................ 29 11.2 Landlord's Right to Terminate..................... 30 11.3 Tenant's Right to Terminate....................... 31 11.4 Abatement of Rent................................. 31 ARTICLE 12 CONDEMNATION 12.1 Landlord's Right to Terminate..................... 32 12.2 Tenant's Right to Terminate....................... 32 12.3 Temporary Taking.................................. 32 12.4 Restoration and Abatement of Rent................. 33 12.5 Division of Condemnation Award.................... 33 ARTICLE 13 DEFAULT AND REMEDIES 13.1 Events of Tenant's Default........................ 34 13.2 Landlord's Remedies............................... 35 13.3 Landlord's Default and Tenant's Remedies.......... 38 13.4 Waiver............................................ 39 ARTICLE 14 ASSIGNMENT AND SUBLETTING 14.1 By Tenant......................................... 39 14.2 By Landlord....................................... 42 ARTICLE 15 GENERAL PROVISIONS 15.1 Landlord's Right to Enter......................... 43 15.2 Surrender of the Leased Premises.................. 44 15.3 Holding Over...................................... 44 15.4 Subordination..................................... 45 15.5 Tenant's Attornment............................... 46 15.6 Mortgagee Protection.............................. 46 15.7 Estoppel Certificates............................. 46 15.8 Force Majeure..................................... 47 15.9 Notices........................................... 47 15.10 Attorneys Fees.................................... 48 15.11 Corporate Authority............................... 48 15.12 Additional Definitions............................ 48 15.13 Miscellaneous..................................... 50 15.14 Termination by Exercise of Option................. 51 15.15 Brokerage Commissions............................. 51 15.16 Arbitration....................................... 51 15.17 Entire Agreement.................................. 53
5 EXHIBITS A. Property Plan B. Floor Plan C. Rules and Regulations D. "Left out Intentionally" E. Tenant Estoppel F. Standard Janitorial Services G. Net Rentable Measurement Definition H. Lease Guaranty 6 OFFICE SPACE LEASE THIS LEASE, dated November 15, 1999 for reference purposes only, is made by and between Macanan Investments, a California limited partnership ("Landlord"), whose address is Suite #280, 333 W. Santa Clara, San Jose, California 95113, and Bay Area Multimedia, Inc. ("Tenant"), whose present address is 1072 Cross Springs Court, San Jose, CA 95120, but from and after the Rent Commencement Date shall be Suite 930, 333 W. Santa Clara, San Jose, California 95113, the address of the Leased Premises. ARTICLE 1 DEFINITIONS 1.1 Rent Commencement Date: The term "Rent Commencement Date" shall mean January 1, 2000, or if Landlord is unable to deliver possession of the Leased Premises on or before such date, then, subject to the provisions of paragraph 2.4 below, the first (1st) day after whichever of the following dates first occurs: A. The date Tenant takes possession of the Leased Premises. 1.2 Lease Term: The term "Lease Term" shall mean the term of this Lease, which shall commence on the Rent Commencement Date and continue for a period of Thirty-six (36) full calendar months (plus the partial month, if any, immediately following the Rent Commencement Date), unless this Lease is sooner terminated according to its terms or by mutual written agreement. 1.3 Property: The term "Property" shall mean that real property with all improvements now or hereafter located thereon commonly known as 333 W. Santa Clara, San Jose, California as shown as Exhibit "A". -1- 7 1.4 Building: The term "Building" shall mean the building (including the parking structure) located on the Property in which the Leased Premises are located, including all parking space. The Building contains approximately two hundred thirteen thousand five hundred (213,500) square feet of "gross leasable area" (the "Building Gross Leasable Area"). Building Gross Leasable Area does not include any parking space. 1.5 Leased Premises: The term "Leased Premises" shall mean those certain premises which are a portion of, and located within the Building and as shown by the floor plan attached hereto as Exhibit "B", containing approximately two thousand, one hundred eighteen (2,118) square feet of gross leasable area ("Tenant's Gross Leasable Area") including approximately one thousand, nine hundred thirty-seven (1,937) square feet of net leasable area ("Tenant's Net Leasable Area"). 1.6 Tenant's Allocated Share: The term "Tenant's Allocated Share" shall mean the percentage obtained by dividing Tenant's Gross Leasable Area by the Building Gross Leasable Area, which as of the Effective Date hereof is agreed to be one percent (1.00%). 1.7 Prepaid Rent: The term "Prepaid Rent" shall mean the sum of Five thousand, eight hundred twenty-five and 00/100 Dollars ($5,825.00). 1.8 Security Deposit: The term "Security Deposit" shall mean the sum of Five thousand, eight hundred twenty-five and 00/100 Dollars ($5,825.00). 1.9 Permitted Use: The term "Permitted Use" shall mean General Office Use. 1.10 Tenant's Minimum Liability Insurance Coverage: The term "Tenant's Minimum Liability Insurance Coverage" shall mean One Million Dollars ($1,000,000.00). -2- 8 1.11 Operating Expense Base Year: The term "Operating Expense Base Year" shall mean, 2000. 1.12 Real Property Base Tax Year: The term "Real Property Tax Base Year" shall mean the real property tax year 1999/2000. 1.13 Additional Definitions: As used in this Lease or any addendum or amendment hereto, the following terms shall have the meanings set forth in paragraph 15.12: "Common Area", "Consumer Price Index", "Effective Date", "Law", "Leasehold Improvements", "Lender", "Private Restrictions", and "Trade Fixtures". ARTICLE 2 DEMISE, TERM, AND POSSESSION 2.1 Demise of Leased Premises: Landlord hereby leases to Tenant, and Tenant leases from Landlord, for the Lease Term upon the terms and conditions of this Lease, the Leased Premises together with the non-exclusive right to the parking spaces described in paragraph 4.5 infra, and the non-exclusive right to use the Common Area for ingress to and egress from the Leased Premises and the parking spaces above mentioned reserving and excepting to Landlord the use of exterior walls, the roof and the area beneath the Leased Premises, together with the right to install, maintain, use, and replace ducts, wires, conduits and pipes leading through the Leased Premises in locations which will not materially interfere with Tenant's use of the Leased Premises. Tenant's lease of the Leased Premises shall be subject to (i) all Laws, (ii) all existing Private Restrictions, easements, and other matters of public record, and (iii) the reasonable rules and regulations from time to time promulgated by Landlord and now more particularly set forth in Exhibit C attached hereto and incorporated herein by this reference. -3- 9 2.2 "As Is" Condition: Tenant accepts premises in an "as is" condition. Prior tenant will leave certain built in furniture in place, which shall be considered henceforth as fixtures owned by Landlord. 2.3 Delivery and Acceptance of Possession: Following removal of the prior tenant, which may occur on or before, December 20, 1999. Landlord shall permit Tenant and its contractors to enter the Leased Premises for the purpose of commencing and completing such construction work that Tenant has elected. Landlord shall deliver the Premises to tenant in a condition which is in compliance with California Title 24, and any requirements by the City of San Jose. 2.4 Early Occupancy: If Tenant enters or permits its contractors to enter the Leased Premises prior to the Rent Commencement Date with the written permission of Landlord, it shall do so upon all of the terms of this Lease (including its This area left blank intentionally, paragraph 2.4 continues on page 5. -4- 10 obligations regarding indemnity and insurance) except those regarding the obligation to pay rent, which shall commence on the Rent Commencement Date. ARTICLE 3 RENT 3.1 Base Monthly Rent: Commencing on the Rent Commencement Date and continuing throughout the Lease Term, Tenant shall pay to Landlord a monthly rent (the "Base Monthly Rent"), which shall be the sum of the following: (a) Base Rent; $5,825.00 (b) Initial Parking Charge; $ 0.00 Base Monthly Rent: $5,825.00 3.2 Additional Rent: Commencing on the Rent Commencement Date and continuing throughout the Lease Term, Tenant shall pay, as additional rent (the "Additional Rent"), (i) Tenant's share of increases in Operating Expenses as required by paragraph 6.4, (ii) Tenant's share of increases in Real Property Taxes as required by paragraph 8.2, (iii) Landlord's share of the consideration received by Tenant upon certain assignments and sublettings as required by paragraph 14.1, (iv) any late charges or interest due Landlord pursuant to paragraph 3.5, (v) any legal fees and costs pursuant to paragraph 15.10, and (vi) any other charges due Landlord pursuant to this Lease. 3.3 Payment of Rent: All rent required to be paid in monthly installments shall be paid in advance on the first day of each calendar month during the Lease Term. All rent shall be paid in lawful money of the United States, without any abatement, deduction or offset for any reason whatsoever, and without any prior demand therefor, to Landlord at its address set forth above or at such other place as Landlord may designate from time to time. Tenant's obligation to pay Base -5- 11 Monthly Rent and all Additional Rent shall be prorated at the commencement and expiration of the Lease Term. 3.4 Late Charge and Interest on Rent in Default: Tenant acknowledges that the late payment by Tenant of any monthly installment of Base Monthly Rent or any Additional Rent will cause Landlord to incur certain costs and expenses not contemplated under this Lease, the exact amount of which are extremely difficult or impractical to fix. Such costs and expenses will include, without limitation, administration and collection costs and processing and accounting expenses. Therefore, if any such Base Monthly or Additional Rent is not received by Landlord from Tenant within ten (10) days after the same becomes due, Tenant shall immediately pay to Landlord a late charge equal to ten percent (10%) of such delinquent rent. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for its loss suffered by Tenant's failure to make timely payment. In no event shall this provision for a late charge be deemed to grant to Tenant a grace period or extension of time within which to pay any rental installment or prevent Landlord from exercising any right or remedy available to Landlord upon Tenant's failure to pay each rental installment due under this Lease in a timely fashion, including the right to terminate this Lease. If any rent remains delinquent for a period in excess of thirty (30) days then, in addition to such late charge, Tenant shall pay to Landlord interest on any rent that is not paid when due at the maximum applicable rate permitted by Law, but in no event higher than the prime interest rate charged by Bank of America, from the thirtieth (30th) day following the date such amount became due until paid. 3.5 Prepayment of Rent: Tenant has paid to Landlord the amount set forth in paragraph 1.7 as prepayment of rent for credit against the first installment(s) of Base Monthly -6- 12 Rent due hereunder. 3.6 Security Deposit: Tenant has deposited with Landlord the amount set forth in paragraph 1.8 (the "Security Deposit") as security for the performance by Tenant of the terms of this Lease to be performed by Tenant, and not as prepayment of rent. Landlord may apply such portion or portions of the Security Deposit as are reasonably necessary for the following purposes: (i) to remedy any default by Tenant in the payment of Base Monthly Rent or Additional Rent; (ii) to repair damage to the Leased Premises caused by Tenant; and (iii) to remedy any other default of Tenant to the extent permitted by Law, and in this regard, Tenant hereby waives any restriction on the uses to which the Security Deposit may be put contained in Section 1950.7(c) of the California Civil Code. In the event the Security Deposit or any portion thereof is so used, Tenant shall pay to Landlord promptly upon demand an amount in cash sufficient to restore the Security Deposit to the full original sum. Landlord shall not be deemed a trustee of the Security Deposit. Landlord may use the Security Deposit in Landlord's ordinary business and shall not be required to segregate it from its general accounts. Tenant shall not be entitled to any interest on the Security Deposit. If Landlord transfers the Leased Premises during the Lease Term, Landlord may pay the Security Deposit to any subsequent owner in conformity with the provisions of Section 1950.7 of the California Civil Code and/or any successor statute, in which event the transferring Landlord shall be released from all liability for the return of the Security Deposit. ARTICLE 4 USE OF LEASED PREMISES 4.1 Limitation on Type: Tenant shall use the Leased Premises solely for the Permitted Use (as described in paragraph 1.9). Tenant shall continuously and without interruption use the Leased Premises for such purpose for the entire Lease Term. Tenant shall not do or permit -7- 13 anything to be done in or about the Leased Premises which will (i) interfere with the rights of other occupants of the Property, (ii) cause structural injury to the Property, or (iii) cause damage to any part of the Property. Tenant shall not operate any equipment within the Leased Premises which will (i) injure, vibrate or shake the Leased Premises or the Building, (ii) overload existing electrical systems or other utilities or equipment servicing the Leased Premises or Building, or (iii) impair the efficient operation of the sprinkler system (if any) or the heating, ventilating and air conditioning ("HVAC") equipment within or servicing the Leased Premises or the Building. All noise or odors generated by Tenant's use of the Leased Premises shall be muffled or contained so that they do not interfere with the businesses of other tenants of the Property. Tenant shall not change the exterior of the Building or install any equipment or antennas on or make any penetrations of the exterior or roof of the Building. Tenant shall not commit nor permit to be committed any waste in or about the Leased Premises, and Tenant shall keep the Leased Premises in a neat, clean, attractive and orderly condition, free of any objectionable noises, odors, dust or nuisances which may disturb the quiet enjoyment of other tenants or occupants of the Building. 4.2 Compliance with Laws and Private Restrictions: Tenant shall not use or permit any person to use the Leased Premises in any manner which violates any Laws or Private Restrictions. Tenant shall abide by and promptly observe and comply with all Laws relating to its use of premises and its activities therein; and Private Restrictions and shall indemnify and hold Landlord harmless from any liability resulting from Tenant's failure to do so. 4.3 Insurance Requirements: Tenant shall not use or permit any person to use the Leased Premises in any manner which will cause the existing rate of insurance upon the Building or any of its contents to be increased or cause a cancellation of any insurance policy covering the Building. Tenant shall not keep or use anything in or about the Leased Premises which may be -8- 14 prohibited by the standard form of life insurance policy. Tenant shall comply with all requirements of any insurance company, insurance underwriter, or Board of Fire Underwriters which are necessary to maintain, at standard rates, the insurance coverage carried by either Landlord or Tenant pursuant to this Lease. 4.4 Rules and Regulations: Tenant shall observe and comply with the rules and regulations attached hereto as Exhibit "C". Landlord shall have the right from time to time to promulgate reasonable amendments and reasonable additional rules and regulations for the care and orderly management of the Property, and for the safety of its tenants and invitees. Upon delivery of a copy of such amendments and additional rules and regulations to Tenant, Tenant shall comply with the rules and regulations. A violation by Tenant of any of such rules and regulations shall constitute a default by Tenant under this Lease. If there is a conflict between the rules and regulations and any of the provisions of this Lease, the provisions of this Lease shall prevail. Landlord shall not be responsible for the violation by any other tenant of the Property of any such rules and regulations. 4.5 Parking: Parking in the Building garage will be available up to 6 spaces on month-to-month leases at the initial rates of $90.00 per space per month for unreserved covered parking and when available $60.00 per space per month for unreserved uncovered parking (available on the fourth (4th) floor of the parking garage only). Landlord may adjust parking rates to market during lease term or any extension thereof. If Tenant elects to lease parking spaces on the fourth (4th) floor of the parking garage, Tenant will be issued a parking card for each space leased which will permit the user to enter and exit the fourth (4th) floor in addition to the ground floor entrance and exit of the parking garage. If, after electing to lease parking spaces on the fourth (4th) floor of the parking garage, Tenant or its employees park on any floor other than the -9- 15 fourth (4th) floor, Tenant's parking card will be automatically cancelled and Tenant will be required to contact the Building Manager to reactivate the cancelled parking card. Tenant will be charged an additional $30.00 per month for each card that must be reactivated due to improper use. Tenant shall not at any time use or permit its employees or invitees to use more parking spaces than the number so allocated to Tenant. Except as may be herein provided, Tenant shall not have the exclusive right to use any specific parking space. In the event Landlord elects or is required by any Law to limit or control parking in the Property, whether by validation of parking tickets or any other method, Tenant, subject to its right to the non-exclusive use of the number of parking spaces above specified, agrees to participate in such validation or other program under such reasonable rules and regulations as are from time to time established by Landlord. 4.6 Window Coverings: Landlord has designated to Tenant a standard window covering which will be used throughout the Building. Tenant shall use this standard window covering to cover all windows in the Leased Premises. ARTICLE 5 TRADE FIXTURES AND LEASEHOLD IMPROVEMENTS 5.1 Trade Fixtures: Throughout the Lease Term, Tenant shall provide, install, and maintain in good condition all Trade Fixtures required in the conduct of its business in the Leased Premises. All Trade Fixtures shall remain Tenant's property. 5.2 Leasehold Improvements: Tenant shall not construct any Leasehold Improvements or otherwise alter the Leased Premises without Landlord's prior written approval if the cost or value thereof exceeds One thousand and 00/100 Dollars ($1,000.00) and not until Landlord shall have first approved in writing the plans and specifications therefor, which -10- 16 approvals shall not be unreasonably withheld. In no event shall Tenant make any alterations to the Leased Premises which could affect the structural integrity or design of the Building. All such approved Leasehold Improvements shall be installed by Tenant at Tenant's expense using a licensed contractor first approved by Landlord and in substantial compliance with the approved plans and specifications therefor. All construction undertaken by Tenant shall be done in accordance with all Laws and in a good and workmanlike manner using new materials of good quality. Tenant shall not commence construction of any Leasehold Improvements until (i) all required governmental approvals and permits shall have been obtained, (ii) all requirements regarding insurance imposed by this Lease have been satisfied, (iii) Tenant shall have given Landlord at least five (5) days prior written notice of its intention to commence such construction, (iv) Tenant shall have notified Landlord by telephone of the commencement of construction on the day it commences, and (v) if requested by Landlord, Tenant shall have obtained contingent liability and broad form builder's risk insurance in an amount satisfactory to Landlord if there are any perils relating to the proposed construction not covered by insurance carried pursuant to Article 9. All Leasehold Improvements shall remain the property of Tenant during the Lease Term but shall not be damaged, altered, or removed from the Leased Premises. At the expiration or sooner termination of the Lease Term, all Leasehold Improvements shall be surrendered to Landlord as a part of the realty and shall then become Landlord's property, and Landlord shall have no obligation to reimburse Tenant for all or any portion of the value or cost thereof; provided, however, that if Landlord requires Tenant to remove any Leasehold Improvements in accordance with the provisions of paragraph 15.2, then Tenant shall so remove such Leasehold Improvements prior to the expiration or sooner termination of the Lease Term and restore said Leased Premises to their original condition save and except reasonable wear and tear. -11- 17 5.3 Alterations Required by Law: Tenant shall, at Tenant's sole expense and upon Landlord's consent, make any alteration, addition or change of any sort, whether structural or otherwise, to the Leased Premises that is required by any Law because of (i) Tenant's use or change of use of the Leased Premises, (ii) Tenant's application for any permit or governmental approval, or (iii) Tenant's construction or installation of any Leasehold Improvements or Trade Fixtures. 5.4 Landlord's Improvements: All fixtures, improvements or equipment which are installed or constructed on or attached to the Property by Landlord at its expense shall become a part of the realty and belong to Landlord. 5.5 Liens: Tenant shall keep the Leased Premises and the Property free from any liens and shall pay when due all bills arising out of any work performed, materials furnished, or obligations incurred by Tenant, its agents, employees or contractors relating to the Leased Premises. If any claim of lien is recorded, Tenant shall bond against or discharge the same within ten (10) days after the same has been recorded against the Leased Premises and/or the Property. Should any lien be filed against the Leased Premises or any action commenced affecting title to the Leased Premises, the party receiving notice of such lien or action shall immediately give the other party written notice thereof. ARTICLE 6 REPAIR AND MAINTENANCE 6.1 Landlord's Obligation to Maintain: Landlord shall repair and maintain, in reasonably good condition except as provided in paragraph 6.6 (Tenant's Negligence), the following: (i) the structural parts of the Building (including foundation, load-bearing and exterior walls, subflooring and roof), (ii) the Common Area of the Building, including all parking -12- 18 structures, (iii) the electrical, utility, plumbing, sewage and HVAC equipment servicing the Building, installed or furnished by Landlord, and (iv) interior demising walls and partitions (but not wall or partition coverings), windows, ceiling light fixtures, drop ceiling and doors. It is an express condition precedent to Landlord's obligation to repair and maintain that Tenant shall have first notified Landlord in writing of the need for such repairs and maintenance. 6.2 Tenant's Obligation to Maintain: Tenant shall, at all times during the Lease Term, maintain the Leased Premises in good order, condition and repair, except as otherwise provided in Article 11 regarding the restoration of damage caused by fire and other perils. Tenant shall be responsible for the maintenance, repair and replacement, when necessary, of wall, window and floor coverings. 6.3 Hazardous Materials: Tenant shall not use or store any Hazardous Materials in, on or about the Premises or the Property except in compliance with all applicable laws, and the highest standards prevailing in the industry for the storage and use of any such Hazardous Materials, nor allow any Hazardous Materials to be brought into the Building except to use in the ordinary course of Tenant's Business, and then only after written notice to Landlord of the Hazardous Materials to be used by Tenant. Tenant shall not cause or permit the escape, release or disposal of any Hazardous Materials in the Premises. If any Lender or governmental agency requires any testing of the Premises or the Building to ascertain whether there has been any release of Hazardous Materials in, on or about the Premises or the Building, Tenant shall reimburse Landlord, as additional rent, for the cost of any such testing or inspection if such testing or inspection, together with any other evidence obtained by Landlord, shows that the presence of such Hazardous Materials in the Premises and/or the Building was caused by Tenant, its agents, employees, contractors, invitees or subtenants. In addition, Tenant shall at Landlord's request -13- 19 execute affidavits, representations or other documents concerning Tenant's best knowledge and belief regarding the presence of Hazardous Materials on the Premises. Tenant shall indemnify, defend and hold Landlord harmless from and against any liability, penalties, losses, damages, costs or expenses (including reasonable attorneys' fees), causes of action, claims and/or judgments arising from the use, storage, release or disposal of any Hazardous Materials in, or about the Premises or the Building by Tenant, its agents, employees, contractors, invitees or subtenants. For the purposes of this Lease, the term "Hazardous Materials" shall mean any substance or material which has been designated hazardous or toxic by any federal, state, county, municipal, or other governmental agency or determined by such agency to be capable of endangering or posing a risk of injury to, or adverse effect on, the health or safety of persons, the environment or property, including without limitation those substances or materials described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, U.S.C. Section 9601 et seq. The within covenants shall survive the expiration or earlier termination of this Lease. 6.4 Tenant's Obligation to Reimburse: As additional rent, Tenant shall pay Tenant's Allocated Share of all increases in "Operating Expenses" (as defined below) over those paid during the Operating Expense Base Year (as defined in paragraph 1.11). Payment shall be made by whichever of the following methods is from time to time designated by Landlord, and Landlord may change the method of payment at any time. Tenant shall pay such share of increases in the actual Operating Expenses incurred or paid by Landlord but not theretofore billed to Tenant, within (10) days after receipt of a written bill therefor from Landlord, on such periodic basis as Landlord shall designate, but in no event more frequently than once a month. Alternatively, (i) Landlord shall deliver to Tenant Landlord's reasonable estimate of increases in the Operating -14- 20 Expenses it anticipates will be paid or incurred for the calendar year in question, (ii) during such calendar year, Tenant shall pay such share of the estimated increases in Operating Expenses in advance in equal monthly installments due with the installments of Base Monthly Rent, and (iii) within ninety (90) days after the end of such calendar year, Landlord shall furnish to Tenant a statement in reasonable detail of the actual increases in Operating Expenses paid or incurred by Landlord in accordance with this Article during the just ending calendar year and thereupon there shall be an adjustment between Landlord and Tenant, with payment to Landlord or credit by Landlord against the next installment of Base Monthly Rent, as the case may require, within ten (10) days after delivery by Landlord to Tenant of said statement, to the end that Landlord shall receive the entire amount of Tenant's share of increases in Operating Expenses for such calendar year and no more. If this Lease terminates or expires on any date other than the last day of a calendar year, the amount of increase in Operating Expenses payable by Tenant shall be prorated on the basis which the number of days from the commencement of said calendar year to and including the date on which this Lease terminates or expires bears to 365. Such amount shall be due and payable when rendered notwithstanding the termination or expiration of this Lease. Tenant shall have the right, exercisable upon reasonable prior written notice to Landlord, to inspect Landlord's books and records at Landlord's office during normal office hours as they relate to Operating Expenses. Such inspection must be within thirty (30) days of receipt of any annual statement for the same, and is limited to verification of the charges contained in such statement. Tenant may not withhold payment pending completion of such inspection. 6.5 Operating Expenses Defined: The term "Operating Expenses" shall mean the sum of the following: A. All costs and expenses paid or incurred by Landlord relating to the -15- 21 following (including payments to independent contractors providing services related to the performance of the following): (i) maintaining, cleaning, repairing and resurfacing the roof and the exterior surfaces (including painting and window washing) of the Building; (ii) maintenance and repair of the structural parts of the Building; (iii) maintenance of the liability, fire and property damage insurance covering the Property carried by Landlord pursuant to paragraph 9.2 (including the payment of "deductibles" of up to $5,000.00 per occurrence and the pre-payment of premiums for coverage of up to one year); (iv) maintaining, repairing, operating, and replacing when necessary (in which event such replacement costs shall be amortized over the useful life of the item) electrical, plumbing, sewage, HVAC equipment, utility facilities, elevators, escalators, and other Building service equipment; (v) providing services and utilities to the Building and Common Area (including the services and utilities specified in paragraph 7.1); (vi) complying with all applicable Laws and Private Restrictions; (vii) cleaning, repairing and replacing floor, window and wall coverings in the Common Area; (viii) resurfacing, repairing, re-striping and maintaining the parking garage; (ix) replacement or installation of lighting fixtures, directional or other signs, gates and signals, irrigation systems and all landscaping in the Common Area; (x) repairing damage to the Building caused by earthquake (said total cost for all tenants shall not exceed $500,000 during the term of the lease) where the cost of such repair is not covered by any insurance maintained by Landlord; (xi) obtaining and maintaining material, supplies and tools used in maintaining, repairing and cleaning the Building; (xii) depreciation on maintenance and operating machinery and equipment (if owned) and rental paid for such machinery and equipment (if rented); (xiii) providing, maintaining and servicing such Building fire protection and security measures as are reasonably required including, without limitation, security personnel, equipment and alarms; and (xiv) accounting services provided by certified public accountants and legal -16- 22 services with respect to the ownership and operation of the Property. B. That portion of all compensation (including benefits and premiums for worker's compensation and other insurance) paid to or for the benefit of employees of Landlord involved in the performance of the work described by subparagraphs A and B above that is fairly allocable to the Property; and C. Property management fees, not to exceed however an annual fee greater than three percent (3%) of Gross Receipts. Provided however, that during any period of time that Landlord shall retain an independent contractor to manage the parking upon the Property, the management fee shall not exceed three percent (3%) of Gross Receipts excluding the Parking Charge hereinbefore provided at paragraph 3.1. 6.6 Control of Common Area: Landlord shall at all times have exclusive control of the Common Area. Landlord shall have the right, without the same constituting an actual or constructive eviction and without entitling Tenant to any abatement of rent, to: (i) close any part of the Common Area to whatever extent required in the opinion of Landlord's counsel to prevent a dedication thereof or the accrual of any prescriptive rights therein; (ii) temporarily close the Common Area to perform maintenance or for any other reason deemed sufficient by Landlord; (iii) reasonable changes to the shape, size, location, and extent of improvements on the Common Area; (iv) eliminate or add any improvements; (v) reasonably select a person to maintain and operate any of the Common Area at any time Landlord determines that the best interests of the Property will be served by having the Common Area maintained and operated by that person; (vi) make reasonable changes to the Common Area including, for example changes in the location of driveways, entrances, passageways, doors and doorways, elevators, stairs, restrooms, exits, parking spaces, parking areas, sidewalks, the direction of the flow of traffic and the site of the -17- 23 Common Area but in no event decrease the number of parking spaces allocated to Tenant; and/or (vii) change the name or, if required by any governmental authority, the address of the Building. The use of the Common Area shall be subject to such reasonable regulations and changes therein as Landlord shall make from time to time. Tenant shall keep the Common Area free and clear of all obstructions created or permitted by Tenant. If in the opinion of Landlord unauthorized persons are using any of the Common Area by reason of the presence of Tenant in the Building, Tenant, upon demand of Landlord, shall restrain such unauthorized use by appropriate proceedings. Nothing herein shall affect the right of Landlord at any time to remove such unauthorized person from the Common Area nor to prohibit the use of the Common Area by unauthorized persons. In exercising any such rights regarding the Common Area, Landlord shall make a reasonable effort to minimize any disruption to Tenant's business. 6.7 Tenant's Negligence: Anything in this Article to the contrary notwithstanding, Tenant shall pay for all damage to the Leased Premises or the Property caused by the negligent act or omission of Tenant, its agents, employees, contractors, or invitees or by the failure of Tenant to promptly discharge its obligations under this Lease or comply with the terms of this Lease, but only to the extent such damage is not covered by insurance proceeds actually recovered by Landlord. Tenant shall make payment therefor on demand by Landlord. ARTICLE 7 SERVICES AND UTILITIES 7.1 Landlord's Obligations: Provided Tenant is not then in default hereunder, and subject to the rules and regulations for the Building, Landlord agrees to furnish to the Leased Premises during ordinary business hours of generally recognized business days as specified in Exhibit C, page 8, to be determined by Landlord in its sole discretion (but exclusive, in any event, -18- 24 of Saturdays after 12:00 noon, Sundays and legal holidays), the following services: (i) water, gas, and electricity suitable for the intended use of the Leased Premises; (ii) HVAC services required in Landlord's judgment for the comfortable use and occupation of the Leased Premises; (iii) janitorial and window washing services as described in Exhibit "F" attached hereto and incorporated herein by reference; and (iv) security services during the times and in the manner such services are, in Landlord's judgment, customarily furnished in comparable office buildings in the immediate market area; and (v) elevator service. Landlord shall also maintain and keep lighted the common stairs, entries and rest rooms in the Building. If Tenant makes use of HVAC services after hours or in amounts greater than provided for under subparagraph (ii) above Tenant shall pay to Landlord a reasonable charge for such services as determined by Landlord. Whenever heat generating machines, excess lighting or equipment are used in the Leased Premises which affect the temperature otherwise maintained by the HVAC system, Landlord may install supplementary air conditioning units in the Leased Premises, and the cost thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord within ten (10) days after being billed for the same by Landlord. 7.2 Tenant's Obligations: Tenant shall pay for, prior to delinquency, all telephone and all other materials and services not expressly required to be paid by Landlord, which may be furnished to or used in or about the Leased Premises during the Lease Term. Tenant may not use any apparatus or device in the Leased Premises which will in any way increase the amount of electricity or water usually supplied for the use of the Leased Premises as general office space, including, without limitation, machines using excess lighting or using current in excess of 220 volts. Tenant shall not connect to any electric current or water pipes, except through existing outlets in the Leased Premises any apparatus or device for the purposes of using electrical current -19- 25 or water. If Tenant shall require water or electric current or any other resource in excess of that usually furnished or supplied for the use of the Leased Premises as general office space, Tenant may do so by use of the master light switch in the Leased Premises. If Landlord determines that Tenant is using a disproportionate amount of any utility service not separately metered, then Landlord at its election may (i) periodically charge Tenant, as additional rent, a sum equal to Landlord's estimate of the cost of Tenant's excess use of such utility service, or (ii) install a separate meter or computer to measure the utility service supplied to the Leased Premises, the cost of any such meters or computers and of installation, maintenance and repair thereof shall be paid by Tenant. Tenant agrees to pay Landlord promptly upon demand therefor by Landlord for all such water, electric current or other resource consumed, as shown by said meters or computers, at the rates charged by the local public utility, furnishing the same, plus any additional expense incurred in keeping account of the water, electric current or other resource so consumed. 7.3 Compliance With Governmental Regulations: Landlord and Tenant shall comply with all rules, regulations and requirements promulgated by national, state or local governmental agencies or utility suppliers concerning the use of utility services, including any rationing, limitation or other control. Landlord may voluntarily cooperate in a reasonable manner with the efforts of all governmental agencies or utility suppliers in reducing energy or other resources consumption. Tenant shall not be entitled to terminate this Lease nor to any abatement in rent by reason of such compliance or cooperation. Tenant agrees at all time to cooperate fully with Landlord and to abide by all rules and regulations and requirements which Landlord may prescribe in order to maximize the efficient operation of the HVAC system and all other utility systems. Tenant shall keep and cause to be kept closed all window coverings when necessary because of the sun's position in order to reduce unnecessary energy consumption. -20- 26 ARTICLE 8 REAL PROPERTY TAXES 8.1 Real Property Taxes Defined: The term "Real Property Taxes" as used herein shall mean (i) all taxes, assessments, levies, and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership or new construction) now or hereafter imposed by any governmental or quasi- governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against or with respect to, the value, occupancy or use of all or any portion of the Property (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord's interest therein, the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located on the Property, the gross receipts, income, or rentals from the Property, (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Property; and (iii) all costs and fees (including attorneys' fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If at any time during the Lease Term the taxation or assessment of the Property prevailing as of the Effective Date shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate, substitute, or additional tax or charge (i) on the value, use or occupancy of the Property or Landlord's interest therein or, (ii) on or measured by the -21- 27 gross receipts, income, or rentals from the Property or on Landlord's business of leasing the Property, or (iii) computed in any manner with respect to the operation of the Property, then any such tax, or charge, however designated, shall be included with the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Property, then only that part of such Real Property Tax that is fairly allocable to the Property shall be included within the meaning of the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, transfer, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord's income from all sources. 8.2 Tenant's Obligation to Reimburse: Landlord shall use the 1999/2000 Santa Clara County Tax Assessments on the property as the base figure for all determinations of real property tax increase reimbursements hereunder so that as additional rent, Tenant shall pay Tenant's allocated share of all increases in real property taxes over those so estimated for the Real Property Tax Base Year. Tenant shall pay its share of increases in Real Property Taxes (i) within ten (10) days after being billed for the same by Landlord, or (ii) no later than ten (10) days before such Real Property Taxes become delinquent, whichever last occurs. If requested by Tenant in writing within thirty (30) days of receipt of a bill for Tenant's Allocated Share of Real Property Taxes, Landlord shall furnish Tenant with such evidence as is reasonably available to Landlord with respect to the amount of any Real Property Tax which is part of such bill. Tenant may not withhold payment of such bill pending receipt and/or review of such evidence. If any Lender requires Landlord to impound Real Property Taxes on a periodic basis during the Lease Term, then Tenant, on notice from Landlord indicating this requirement, shall pay a sum of money -22- 28 toward its liability under this Article to Landlord on the same periodic basis in accordance with the Lender's requirements. Landlord shall impound the Real Property Tax payments received from Tenant in accordance with the requirements of the Lender. If any assessments are levied against the Property, Landlord may elect to either pay the assessment in full or allow the assessment to go to bond. If Landlord pays the assessment in full, Tenant shall pay to Landlord each time payment of Real Property Taxes is made a sum equal to that which would have been payable (as both principal and interest) had Landlord allowed the assessment to go to bond. 8.3 Taxes on Tenant's Property: Tenant shall pay before delinquency any and all taxes, assessments, license fees, and public charges levied, assessed, or imposed against Tenant or Tenant's estate in this Lease or the property of Tenant situated within the Leased Premises which become due during the Lease Term. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. ARTICLE 9 INSURANCE 9.1 Tenant's Insurance: Tenant shall maintain insurance complying with all of the following: A. Tenant shall procure, pay for and keep in full force and effect the following: (1) Comprehensive general liability insurance, including property damage, against liability for personal injury, bodily injury, death and damage to property occurring in or about, or resulting from an occurrence in or about, the Leased Premises with combined single limit coverage of not less than the amount of Tenant's Minimum Liability Insurance Coverage set forth in paragraph 1.10, which insurance shall contain "fire legal" endorsement -23- 29 coverage and a "contractual liability" endorsement insuring Tenant's performance of Tenant's obligation to indemnify Landlord contained in paragraph 10.3; (2) Fire and property damage insurance against loss caused by fire, extended coverage perils including boiler insurance, if applicable, vandalism, malicious mischief, fire sprinkler damage and such other additional perils as now are or hereafter may be included in a standard extended coverage endorsement from time to time in general use in the county in which the leased premises are located, insuring Tenant's personal property, inventory, Trade Fixtures, and Leasehold Improvements within the Leased Premises for the full actual replacement cost thereof; (3) Worker's compensation coverage and any other employee benefit insurance sufficient to comply with all Laws; (4) With respect to construction, alterations, improvements, or the like undertaken by Tenant, contingent liability and builder's risk insurance, in an amount satisfactory to Landlord; B. Each policy of insurance required to be carried by Tenant pursuant to this paragraph (i) shall, to the extent that Landlord has an insurable interest, name Landlord and such other parties in interest as Landlord designates as additional insureds; (ii) shall be primary insurance which provides that the insurer shall be liable for the full amount of the loss up to and including the total amount of liability set forth in the declarations without the right of contribution from any other insurance coverage of Landlord; (iii) shall be in a form satisfactory to Landlord; (iv) shall be carried with companies reasonably acceptable to Landlord; (v) shall provide that such policy shall not be subject to cancellation, lapse or change except after at least thirty (30) days prior written notice to Landlord; (vi) shall not have a "deductible" in excess of Five Thousand -24- 30 Dollars ($5,000.00) per occurrence; (vii) shall contain a cross liability endorsement; (viii) shall contain a waiver by the insurer of any right to subrogation against Landlord, its agents, employees and contractors which might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its agents, employees or contractors; and (ix) shall contain a "severability" clause. C. A copy of each paid-up policy evidencing the insurance required to be carried by Tenant pursuant to this paragraph (appropriately authenticated by the insurer) or a certificate of the insurer, certifying that such policy has been issued, providing the coverage required by this paragraph, and containing the provisions specified herein, shall be delivered to Landlord prior to the time Tenant or any of its contractors enters the Leased Premises and upon renewal of such policies, but not less than thirty (30) days prior to the expiration of the term of such coverage. Landlord may, at any time, and from time to time, inspect and/or copy any and all insurance policies required to be procured by Tenant pursuant to this paragraph. If Landlord's lender, insurance adviser or counsel reasonably determines at any time that the amount and/or type of coverage required for any policy of insurance Tenant is to obtain pursuant to this paragraph is not adequate, then Tenant shall adjust such coverage for such insurance in such manner as Landlord's lender, insurance advisor or counsel reasonably deems adequate, not to exceed the level of coverage commonly carried by comparable businesses similarly situated for such insurance. 9.2 Landlord's Insurance: A. Landlord shall maintain, as the minimum coverage required of it by this Lease, a policy or policies of fire and property damage insurance in so-called "fire and extended coverage" form insuring Landlord (and such others as Landlord may designate) against loss of -25- 31 rents for a period of not less than twelve (12) months and from physical damage to the Building with coverage for not less than one hundred percent (100%) of the full replacement cost thereof. The foregoing notwithstanding, such fire and property damage insurance, at Landlord's election, (i) may be written in so-called "all risk" form to include such perils as are commonly covered by such form of coverage, (ii) may provide coverage for physical damage to the improvements so insured up to the then full replacement cost thereof, (iii) may be endorsed to cover loss caused by such additional perils against which Landlord may elect to insure, including earthquake and/or flood, (iv) may provide coverage for loss of rents for a period of up to twelve (12) months, (v) may contain "deductibles" not exceeding Five Thousand Dollars ($5,000.00) per occurrence, and (vi) may include plateglass insurance, at actual replacement cost. Landlord shall not be required to cause such insurance to cover any Trade Fixtures, Leasehold Improvements, or any inventory or other personal property of Tenant. B. Landlord shall maintain a policy or policies of comprehensive general liability insurance insuring Landlord (and such others as are designated by Landlord) against liability for personal injury, bodily injury, death, and damage to property occurring or resulting from an occurrence in, on or about the Property, with combined single limit coverage of Two Million Dollars ($2,000,000.00), or such greater coverage as Landlord may from time to time determine is reasonably necessary for its protection. 9.3 Tenant's Obligation to Reimburse: The cost of the insurance carried by Landlord pursuant to paragraph 9.2 and any "deductible" amount not exceeding Five Thousand Dollars ($5,000.00) per occurrence paid by Landlord and excluded from the coverage of such insurance shall be an Operating Expense and Tenant shall pay its share thereof as provided in paragraph 6.3. However, if Landlord's insurance rates for the Building are increased at any time during the Lease -26- 32 Term as a result of the nature of Tenant's use and occupancy of the Leased Premises and Landlord does not elect to terminate the Lease, Tenant shall reimburse Landlord for the full amount of such increase immediately upon receipt of a bill from Landlord therefor. 9.4 Release and Waiver of Subrogation: The parties hereto release each other, and their respective agents, employees, and contractors, from any liability for injury to any person or damage to property that is caused by or results from any risk insured against under any valid and collectible insurance policy carried by either of the parties which contains a waiver of subrogation by the insurer and is in force at the time of such injury or damage; provided, however, that any such person or entity shall not be released from such liability to the extent any damages resulting from such injury or damage is not covered by the recovery obtained by the insured from such insurance, but only if the insurance in question permits such partial release in connection with obtaining a waiver of subrogation from the insurer. This release shall be in effect only so long as the applicable insurance policy contains a clause to the effect that this release shall not affect the right of the insured to recover under such policy. Each party shall use its best efforts to cause each insurance policy obtained by it to provide that the insurer waives all right of recovery by way of subrogation in connection with any injury or damage covered by such policy. However except as required in paragraph 9.1B above, if any insurance policy cannot be obtained with such a waiver of subrogation, or if such waiver of subrogation is only available at additional cost and the party for whose benefit the waiver is to be obtained does not pay such additional cost, then the party obtaining such insurance shall notify the other party of that fact and thereupon shall be relieved of the obligation to obtain such waiver of subrogation rights from the insurer with respect to the particular insurance involved. ARTICLE 10 -27- 33 ARTICLE 10 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY 10.1 Limitation on Landlord's Liability: Landlord shall not be liable to Tenant, nor shall Tenant be entitled to terminate this Lease or to any abatement of rent, for any injury to Tenant, its agents, employees, contractors, or invitees, damage to Tenant's property, or loss to Tenant's business resulting from any cause, including without limitation any (i) failure, interruption or installation of any HVAC or other utility system or service, (ii) failure to furnish or to delay in furnishing any utilities or services "When such failure or delay is caused by Acts of God or the elements, labor disturbances of any character, any other accidents or other conditions beyond the reasonable control of Landlord, or by the making of repairs or improvements to the Leased Premises or to the Building, (iii) maintenance, repairs or improvements to the Leased Premises or the Building, (iv) limitation, curtailment, rationing or restriction on use of water or electricity, gas or any other form of energy or any other service or utility serving the Leased Premises or the Building, (vi) vandalism or forcible entry by unauthorized persons, or (vii) penetration of water into or onto any portion of the Leased Premises or the Common Area through roof leaks or otherwise. Notwithstanding the foregoing, Landlord shall be liable for any such injury, damage or loss which is proximately caused by Landlord's active negligence or willful misconduct. 10.2 Limitation on Tenant's Resource: If Landlord is a corporation, trust, partnership, joint venture, unincorporated association, and/or other form of business entity, (i) the obligations of Landlord shall not constitute personal obligations of the officers, directors, trustees, partners, joint venturers, members, owners, stockholders, or other principals or representatives of such business entity, and (ii) Tenant shall have recourse only to the assets of such business entity for the satisfaction of such obligations and not against the assets of such officers, directors, trustees, -28- 34 partners, joint venturers, members, owners, stockholders, principals, or representatives, other than to the extent of their interest in the assets owned by such business entity. 10.3 Indemnification of Landlord: Tenant shall hold harmless, indemnify and defend Landlord and its employees, agents, and contractors, with competent counsel reasonably satisfactory to Landlord, from all liability, penalties, losses, damages, costs, expenses, causes of action, claims and/or judgments arising by reason of any death, bodily injury, personal injury or property damage (i) resulting from any cause or causes whatsoever (other than the active negligence or wilful misconduct of Landlord) occurring in or about or resulting from an occurrence in or about the Leased Premises, (ii) resulting from the negligence or wilful misconduct of Tenant, its agents, employees and contractors, wherever the same may occur, or (iii) resulting from a breach of Tenant's obligations under this lease. The provisions of this paragraph shall survive the expiration or sooner termination of this Lease with respect to any claims or liability occurring prior to such expiration or sooner termination. ARTICLE 11 DAMAGE TO LEASED PREMISES 11.1 Landlord's Duty to Restore: If the Leased Premises or Building, including the parking space, are damaged by any peril after the Effective Date of this Lease, Landlord shall restore the Leased Premises as well as the parking space unless the Lease is terminated by Landlord pursuant to paragraph 11.2 or by Tenant pursuant to paragraph 11.3. All insurance proceeds available from the fire and property damage insurance carried by Landlord pursuant to paragraph 9.2 shall be paid to and become the property of Landlord. If this lease is terminated pursuant to either paragraph 11.2 or 11.3, then all insurance proceeds available from insurance carried by Tenant which covers loss to property that is Landlord's property or would become -29- 35 Landlord's property on termination of this Lease shall be paid to and become the property of Landlord. If this Lease is not so terminated, then upon receipt of the insurance proceeds (if the loss is covered by insurance and the issuance of all necessary governmental permits, Landlord shall commence and diligently prosecute to completion the restoration of the Leased Premises, to the extent then allowed by Law, to substantially the same condition in which the Leased Premises were immediately prior to such damage. Landlord's obligation to restore shall be limited to the Leased Premises and interior improvements constructed by Landlord as they existed as of the Rent Commencement Date, excluding any Leasehold Improvements, Trade Fixtures and/or personal property constructed or installed by Tenant in the leased Premises. Tenant shall forthwith replace or fully repair all Leasehold Improvements and Trade Fixtures installed by Tenant and existing at the time of such damage or destruction. 11.2 Landlord's Right to Terminate: Landlord shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised only by delivery to Tenant of a written notice of election to terminate Within thirty (30) days after the date of such damage: A. The Building or the Leased Premises are damaged by any peril to such an extent that the necessary repairs can not, in Landlord's opinion, be made Within sixty (60) days of such damage; or B. The Building is damaged by any peril and, because of the Laws then in force, (i) may not be restored at reasonable cost to substantially the same condition in which it was prior to such damage, or (ii) may not be used for the same use being made thereof before such damage whether or not restored as required by this Article. C. The Building or the Leased Premises are damaged by a peril not insured -30- 36 against pursuant to the terms of this lease and Landlord does not elect, within sixty (60) days of such damage, to nevertheless restore. 11.3 Tenant's Right to Terminate: If the Leased Premises are damaged by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to paragraph 11.2, then as soon as reasonably practicable, Landlord shall furnish Tenant with the written opinion of Landlord's architect or construction consultant as to when the restoration work required of Landlord may be completed. Tenant shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised only by delivery to Landlord of a written notice of election to terminate within ten (10) days after Tenant receives from Landlord the estimate of the time needed to complete such restoration: A. The Leased Premises are damaged by any peril and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of the Leased Premises cannot be substantially completed within one hundred eighty (180) days after commencement of the work of restoration; or B. The Leased premises are damaged by any peril within one hundred eighty (180) days of the last day of the Lease Term, and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of the Leased Premises cannot be substantially completed within sixty (60) days after the date of such damage. 11.4 Abatement of Rent: In the event of damage to the Leased Premises which does not result in the termination of this Lease, the Base Monthly Rent (but not any Additional Rent) shall be temporarily abated during the period of restoration in proportion to the degree to which Tenant's use of the Leased Premises is impaired by such damage. Tenant shall not be entitled to any compensation or damages from Landlord for loss of Tenant's business or property or for any -31- 37 inconvenience or annoyance caused by such damage or restoration. Tenant hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code, and the provisions of any similar law hereinafter enacted. ARTICLE 12 CONDEMNATION 12.1 Landlord's Right to Terminate: Landlord shall have the option to terminate this Lease if, as a result of a taking by means of the exercise of the power of eminent domain (including a voluntary sale or transfer by Landlord to a condemnor under threat of condemnation) all or any material portion of the Building is so taken. Any such option to terminate by Landlord must be exercisable within a reasonable period of time, to be effective as of the date possession is taken by the condemnor. 12.2 Tenant's Right to Terminate: Tenant shall have the option to terminate this Lease if, as a result of any taking by means of the exercise of the power of eminent domain (including any voluntary sale or transfer by Landlord to any condemnor under threat of condemnation), (i) all or any material portion of the Leased Building is so taken, or (ii) such portion of the Leased Premises is so taken that the part of the Leased premises that remains cannot be constructed within a reasonable period of time to be made reasonably suitable for the continued operation of the Tenant's business. Tenant must exercise such option within thirty (30) days of notice of such taking. Such exercise by Tenant shall be effective on the date that possession of that portion of the Common Area or the Leased Premises that is condemned is taken by the condemnor. 12.3 Temporary Taking: If any portion of the Leased Premises is temporarily taken for ninety days or less, this Lease shall remain in effect. If twenty-five percent (25%) or more of the Leased Premises is temporarily taken by condemnation for a period which either exceeds ninety -32- 38 (90) days or which extends beyond what would have been the expiration of the Lease Term without such taking, then Landlord and Tenant shall each independently have the option to terminate this Lease, effective on the date possession is taken by the condemnor. 12.4 Restoration and Abatement of Rent: If any part of the Building or Leased premises is taken by condemnation and this Lease is not terminated, then Landlord shall restore the Leased premises and interior improvements constructed by Landlord as they existed as of the Rent Commencement Date, excluding any Leasehold Improvements, Trade Fixtures and/or personal property constructed or installed by Tenant. Thereafter, except in the case of a temporary taking, as of the date possession is taken the Rent shall be reduced in the same proportion that the floor area of that part of the Leased Premises so taken (less any addition thereto by reason of any reconstruction) bears to the original floor area of the Leased Premises. 12.5 Division of Condemnation Award: Any award made for any condemnation of the property or Leased Premises shall belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any such award provided, however, that Tenant shall be entitled to receive any condemnation award that is made directly to Tenant (i) for the taking of personal property or Trade Fixtures belonging to Tenant, (ii) for the interruption of Tenant's business or its moving costs, or (iii) for any temporary taking where this Lease is not terminated as a result of such taking (subject to the requirements of subparagraph 14.18G), Tenant shall receive any relocated fees that maybe awarded. The rights of Landlord and Tenant regarding any condemnation shall be determined as provided in this Article, and each party hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure, and the provisions of any similar law hereinafter enacted, allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Leased Premises. -33- 39 ARTICLE 13 DEFAULT AND REMEDIES 13.1 Events of Tenant's Default: Tent shall be in default of its obligations under this Lease if any of the following events occurs: A. Tenant shall have failed to pay Base Monthly Rent or any Additional Rent when due; or B. Tenant shall have failed to perform any term, covenant, or condition of this Lease except those requiring the payment of Base Monthly Rent or Additional Rent, and Tenant shall have failed to cure such breach within ten (10) days after written notice from Landlord specifying the nature of such breach; or C. Tenant shall have made a general assignment of its assets for the benefit of its creditors; or D. Tenant shall have sublet the Leased Premises or assigned its interest in the Lease in violation of the provisions contained in Article 14, whether voluntarily or by operation of law; or E. Tenant shall have permitted the sequestration or attachment of, or execution on, or the appointment of a custodian or receiver with respect to, all or any substantial part of the property of Tenant or any property essential to the conduct of Tenant's business and Tenant shall have failed to obtain a return or release of such property within thirty (30) days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; or F. Tenant shall have abandoned the Leased Premises or left the Leased Premises vacant for more than fourteen (14) days in any sixty (60) day period; or -34- 40 G. A court shall have made or entered any decree or order with respect to Tenant or Tenant shall have submitted to or sought a decree or order (or a petition or pleading shall have been filed in connection therewith) which: (i) grants or constitutes (or seeks) an order for relief, appointment of a trustee, or confirmation of a reorganization plan under the bankruptcy laws of the United States; (ii) approves as properly filed (or seeks such approval of) a petition seeking liquidation or reorganization under said bankruptcy laws or any other debtor's relief law or statute of the United States or any state thereof; or (iii) otherwise directs (or seeks) the winding up or liquidation of Tenant; and such petition, decree or order shall have continued in effect for a period of thirty (30) or more days. 13.2 Landlord's Remedies: In the event of any default by Tenant, Landlord shall have the following remedies, in addition to all other rights and remedies provided by any Law or otherwise provided in this Lease, to which Landlord may resort cumulatively, or in the alternative: A. Landlord may, at Landlord's election, keep this Lease in effect and enforce by an action at law or in equity all of its rights and remedies under the Lease, including (i) the right to recover the rent and other sums as they become due by appropriate legal action, (ii) the right to make payments required of Tenant or perform Tenant's obligations and be reimbursed by Tenant for the cost thereof with interest at the maximum applicable rate permitted by Law, but in no event higher than the prime interest rate charged by Bank of America, from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of injunctive relief and specific performance to compel Tenant to perform its obligations under this Lease. B. Landlord may, at Landlord's election, terminate this Lease by giving Tenant written notice of termination, in which event this Lease shall terminate on the date set forth for termination in such notice. Any termination under this subparagraph shall not relieve Tenant from -35- 41 its obligation to pay any sums then due Landlord or from any claim against Tenant for damages or Base Monthly Rent or any Additional Rent previously accrued or then accruing. In no event shall any one or more of the following actions by Landlord, in the absence of a written election by Landlord to terminate this Lease, constitute a termination of this Lease: (1) Appointment of a receiver or keeper in order to protect Landlord's interest hereunder; (2) Consent to any subletting of the Leased Premises or assignment of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise; or (3) Any other action by Landlord or Landlord's agents intended to mitigate the adverse effects of any breach of this Lease by Tenant, including without limitation any action taken to maintain and preserve the Leased Premises or any action taken to relet the Leased Premises or any portions thereof, for the account of Tenant and in the name of Tenant. C. In the event Tenant breaches this Lease and abandons the Leased Premises, this Lease shall not terminate unless Landlord gives Tenant written notice of its election to so terminate this Lease. No act by or on behalf of Landlord intended to mitigate the adverse effect of such breach, including those described by subparagraphs B(1), (2) and (3) immediately preceding, shall constitute a termination of Tenant's right to possession unless Landlord gives Tenant written notice of termination. Should Landlord not terminate this Lease by giving Tenant written notice, Landlord may enforce all its rights and remedies under this Lease, including the right to recover the rent as it becomes due under the Lease as provided in California Civil Code Section 1951.4, as in effect on the Effective Date of this Lease. D. In the event Landlord terminates this Lease, Landlord shall be entitled, at Landlord's election, to damages in an amount as set forth in California Civil Code Section 1951.2 -36- 42 as in effect on the Effective Date of this Lease. For purposes of computing damages pursuant to said Section 1951.2, an interest rate of the maximum applicable rate permitted by Law, but in no event higher than the prime interest rate charged by Bank of America, shall be used where permitted. Such damages shall include without limitation: (1) 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 Tenant proves could be reasonably avoided, 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%); and (2) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom, including, without limitation, the following: (i) expenses for cleaning, repairing or restoring the Leased Premises; (ii) expenses for altering, remodeling or otherwise improving the Leased Premises for the purpose of reletting, including installation of leasehold improvements (whether such installation be funded by a reduction of rent, direct payment or allowance to a new tenant, or otherwise); (iii) broker's fees, advertising costs and other expenses of reletting the Leased Premises; (iv) costs of carrying the Leased Premises, such as taxes, insurance premiums, utilities, and security precautions; (v) expenses in retaking possession of the Leased Premises; and (vi) attorneys' fees and court costs incurred by Landlord in retaking possession of the Leased Premises and in releasing the Leased Premises or otherwise incurred as a result of Tenant's default. (3) For purposes of this Article, if it becomes necessary to determine the amount of Additional Rent that would have become due had Tenant not breached its -37- 43 obligations under this Lease, all such Additional Rent shall be computed on the basis of the average monthly amount thereof accruing during the immediately preceding sixty (60) month period, except that if it becomes necessary to compute such Additional Rent before such a sixty (60) month period has occurred, then such rent shall be computed on the basis of the average monthly amount thereof accruing during such shorter period. E. Nothing in this paragraph shall limit Landlord's right to indemnification from Tenant as provided in paragraph 10.3. 13.3 LANDLORD'S DEFAULT AND TENANT'S REMEDIES: In the event Landlord fails to perform any of its obligations under this Lease and fails to cure such default within thirty (30) days after written notice from Tenant specifying the nature of such default where such default could reasonably be cured within said thirty (30) day period, or fails to commence such cure within said thirty (30) day period and thereafter continuously with due diligence prosecute such cure to completion where such default could not reasonably be cured within said thirty (30) day period, then Tenant shall have the following remedies only: A. Tenant may proceed in equity or at law to compel Landlord to perform its obligations and/or to recover damages proximately caused by such failure to perform (except to the extent Tenant has waived its right to damages resulting from injury to person or damage to property as provided herein). B. Tenant, at its option, may cure any default of Landlord at Landlord's cost. If Tenant at any time by reason of Landlord's default reasonably pays any sum or does any act that requires the payment of any sum, the sum paid by Tenant shall be immediately due from Landlord to Tenant at the time the sum is paid, and shall bear interest at the maximum applicable rate permitted by Law, but in no event higher than the prime interest rate charged by Bank of America, -38- 44 from the date the sum is paid by Tenant until Tenant is reimbursed by Landlord. C. Tenant waives the provisions of Sections 1932(l), 1941 and 1942 of the California Civil Code and/or any similar or successor law regarding Tenant's right to terminate this Lease or to make repairs and deduct the expenses of such repairs from the rent due under the Lease. Tenant hereby waives any right of redemption or relief from forfeiture under the laws of the State of California, or under any other present or future law, in the event Tenant is evicted or Landlord takes possession of the Leased Premises by reason of any default by Tenant. 13.4 Waiver: One party's consent to or approval of any act by the other party requiring the first party's consent or approval shall not be deemed to waive or render unnecessary the first party's consent to or approval of any subsequent similar act by the other party. The receipt by Landlord of any rent or payment with or without knowledge of the breach of any other provision hereof shall not be deemed a waiver of any such breach unless such waiver is in writing and signed by Landlord. No delay or omission in the exercise of any right or remedy accruing to either party upon any breach by the other party under this Lease shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by either party of any breach of any provision of this Lease shall not be deemed to be a waiver of any subsequent breach of the same or any other provisions herein contained. ARTICLE 14 ASSIGNMENT AND SUBLETTING 14.1 By Tenant: Tenant shall not sublet the Leased Premises or assign or encumber its interest in this Lease, whether voluntarily or by operation of law, without Landlord's prior written consent, which consent shall not be unreasonably withheld. In this regard: A. Any attempted subletting, assignment or encumbrance without Landlord's -39- 45 prior consent shall be voidable and, at Landlord's election, shall constitute a default. B. Tenant shall, by written notice, advise Landlord of its desire from and after a stated date (which shall not be less than thirty (30) days nor more than one hundred eighty (180) days after the date of Tenant's notice), to sublet the Leased Premises or any portion thereof for any part of the term hereof, and in such event Landlord shall have the right to be exercised by giving written notice to Tenant thirty (30) days after receipt of Tenant's notice, to terminate this Lease as to the portion of the Leased Premises described in Tenant's notice and such notice shall, if given, terminate this Lease with respect to the portion of the Leased Premises therein described as of the date stated in Tenant's notice. Said notice by Tenant shall state the name and address of the proposed subtenant, and Tenant shall deliver to Landlord a true and complete copy of the proposed sublease with said notice. If said notice shall specify all of the Leased Premises and Landlord shall give said termination notice with respect thereto, this Lease shall terminate on the date stated in Tenant's notice. If, however, this Lease shall terminate pursuant to the foregoing with respect to less than all the Leased Premises, the Base Monthly Rent, as defined in paragraph 3.1 and adjusted pursuant to paragraph 3.2, shall be adjusted on a pro rata basis to the number of square feet retained by Tenant, and this Lease as so amended shall continue thereafter in full force and effect. C. Tenant agrees to reimburse Landlord all reasonable costs and attorneys' fees incurred by Landlord in conjunction with the processing and documentation of any such requested subletting, assignment or encumbrance. Such sublease, assignment or encumbrance shall not be effective until (i) Tenant shall have paid such costs and fees, (ii) each such sublessee, assignee or transferee shall have agreed in writing for the benefit of Landlord to assume, to be bound by, and to perform the obligations of this Lease to be performed by Tenant, and (iii) an -40- 46 executed copy of such sublease, assignment or encumbrance shall have been delivered to Landlord. D. Consent by Landlord to one or more assignments or encumbrances of this Lease or to one or more sublettings of the Leased Premises shall not be deemed to be a consent to any subsequent assignment, encumbrance, or subletting. E. No subletting or assignment, even with the consent of Landlord, shall relieve Tenant of its personal and primary obligation to pay the rent and to perform all of the other obligations to be performed by Tenant hereunder. The acceptance of rent by Landlord from any person shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any assignment or subletting. F. If Tenant is a corporation, any dissolution, merger, consolidation, or other reorganization of Tenant, or the sale or other transfer in the aggregate over the Lease Term of a controlling percentage of the capital stock of Tenant, shall be deemed a voluntary assignment of Tenant's interest in this Lease. The phrase "controlling percentage" means the ownership of and the right to vote stock possessing more than fifty percent (50%) of the total combined voting power of all classes of Tenant's capital stock issued, outstanding and entitled to vote for the election of directors. If Tenant is a partnership, a withdrawal or change, voluntary, involuntary or by operation of law, of any general partner, or the dissolution of the partnership, shall be deemed a voluntary assignment. G. It is the intent of the parties hereto that this Lease shall confer upon Tenant only the right to use and occupy the Premises, and to exercise such other rights as are conferred upon Tenant by this Lease. The parties agree that this Lease is not intended to have a bonus value, nor to serve as a vehicle whereby Tenant may profit by a future Transfer of this Lease or -41- 47 the right to use or occupy the Premises as a result of any favorable terms contained herein or any future changes in the market for leased space. It is the intent of the parties that any such bonus value that may attach to this Lease shall be and remain the exclusive property of Landlord. In order to carry out this intent, if Tenant assigns its interest in this Lease in accordance with this Article, then Tenant shall pay to Landlord all of the net consideration if any received by Tenant as a result of such assignment as and when received by Tenant. If Tenant sublets all or part of the Leased Premises in accordance with this Article, then Tenant shall pay to Landlord all the positive difference, if any, between (i) all rent and other consideration paid by the subtenant to Tenant less (ii) all costs incurred by Tenant incident to the sublease agreement (including an amount equal to the resulting product of the rent payable hereunder to Landlord by Tenant during the time period covered by such payments by the subtenant times a fraction whose numerator is the leasable area of that portion of the Leased Premises so sublet and whose denominator is Tenant's Gross Leasable Area). Said consideration shall be payable to Landlord on the same basis, whether periodic or in lump sums, that such consideration is paid to Tenant by its subtenant. In calculating Landlord's right to any periodic payments, all costs incurred by Tenant incident to the sublease agreement shall be amortized over the term of the sublease. At the time Tenant makes any payment to Landlord required by this subparagraph, Tenant shall deliver an itemized statement of the method by which the amount due Landlord was calculated, certified by Tenant as true and correct. Landlord shall have the right to inspect Tenant's books and records relating to the payments due pursuant to this subparagraph. 14.2 By Landlord: Landlord and its successors in interest shall have the right to transfer their interest in the Leased Premises and the Property at any time and to any person or entity. In the event of any such transfer, the Landlord originally named herein (and in the case of any -42- 48 subsequent transfer, the transferor), from the date of such transfer, (i) shall be automatically relieved, without any further act by any person or entity, of all liability for the performance of the obligations of the landlord hereunder which may accrue after the date of such transfer, and (ii) shall be relieved of all liability for the performance of the obligations of the landlord hereunder which have accrued before the date of transfer if its transferee agrees to assume and perform all such obligations of the landlord hereunder. After the date of any such transfer, the term "Landlord" as used herein shall mean the transferee of such interest in the Leased Promises and the Property. ARTICLE 15 GENERAL PROVISIONS 15.1 Landlord's Right to Enter: Landlord and its agents shall have the right to enter the Leased Premises at all reasonable times for the purpose of (i) inspecting the same; (ii) posting notices of non-responsibility; (iii) supplying janitorial service or any other service to be provided by Landlord to Tenant; (iv) showing the Leased Premises to prospective purchasers, mortgagees or tenants; (v) making necessary alterations, additions, or repairs; (vi) performing Tenant's obligation when Tenant has failed to do so after written notice from Landlord; (vii) placing upon the Leased Premises ordinary "for lease" signs, and/or (viii) in the case of an emergency. For each of the aforesaid purposes, Landlord may enter the Leased Premises by means of a master key, and Landlord shall have the right to use any and all means Landlord may deem necessary and proper to open the doors of the Leased Premises in an emergency. Any entry to the Leased Premises or portions thereof obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Leased Premises, or an eviction, actual or constructive, of Tenant from the Leased Premises or -43- 49 any portion thereof. 15.2 Surrender of the Leased Premises: Immediately prior to the expiration or upon the sooner termination of this Lease, Tenant shall remove all Tenant's Trade Fixtures and other personal property and vacate and surrender the Leased Premises to Landlord in the same condition as existed at the Rent Commencement Date, reasonable wear and tear excepted, all HVAC equipment within the Leased Premises, if any, installed by Tenant in operating order and in good repair, and all floors cleaned, all to the reasonable satisfaction of Landlord. Landlord may, at Tenant's expense, hire independent contractors to inspect any HVAC system serving the Leased Premises installed by Tenant or electrical system within the Leased Premises installed by Tenant for the purpose of determining whether they have been properly maintained by Tenant, and Tenant shall pay the cost thereof within ten (10) days after receipt of a statement therefore from Landlord. Upon request by Landlord, Tenant shall, prior to the expiration or sooner termination of this Lease, remove Tenant's Leasehold Improvements designated by Landlord and repair all damage caused by such removal. If the Leased Premises are not so surrendered at the termination of this Lease, Tenant shall be liable to Landlord for all costs incurred by Landlord in returning the Leased Premises to the required condition, plus interest on all costs incurred at the maximum applicable rate permitted by Law, but in no event higher than the prime interest rate charged by Bank of America. Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Leased Premises, including, without limitation, any claims made by any succeeding tenant or losses to Landlord due to lost opportunities to lease to succeeding tenants. 15.3 Holding Over: This Lease shall terminate without further notice at the expiration of the Lease Term. Any holding over by Tenant after expiration of the Lease Term shall not -44- 50 constitute a renewal or extension of the Lease or give Tenant any rights in or to the Leased Premises except as expressly provided in this Lease. Any holding over after such expiration with the consent of Landlord shall be construed to be a tenancy from month to month on the same terms and conditions herein specified insofar as applicable except that Base Monthly Rent shall be increased to an amount equal to one hundred twenty-five percent (125%) of the Base Monthly Rent required during the last month of the Lease Term. 15.4 Subordination: This Lease is subject and subordinate to all underlying ground leases, mortgages and deeds of trust which affect the Property and are of public record as of the Effective Date of this Lease, and to all renewals, modifications, consolidations, replacements and extensions thereof. However, if the Landlord under any such lease or any Lender holding such mortgage or deed of trust shall advise Landlord that it desires or requires this Lease to be prior and superior thereto, then, upon written request of Landlord to Tenant, Tenant shall promptly execute, acknowledge and deliver any and all documents or instruments which Landlord or such lessor or Lender deems necessary or desirable to make this Lease prior thereto; At Landlord's election, this Lease shall become and thereafter remain subject and subordinate to any and all future ground leases, first mortgages or first deeds of trust affecting the Property which may hereafter be executed and placed of public record after the Effective Date of this Lease, or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, so long as the Landlord of such ground lease or the Lender holding the mortgage or deed of trust to which this Lease is to be subordinated agrees that it will recognize Tenant's rights under this Lease and not disturb its quiet possession of the Leased Premises so long as Tenant is not in default hereunder. Tenant agrees, within ten (10) days after Landlord's written request -45- 51 therefor to execute, acknowledge and deliver upon request of Landlord any and all documents or instruments requested by Landlord or such lessor or mortgage holder(s) as may be necessary or proper to assure the subordination of this Lease to any such ground lease, mortgage or deed of trust. 15.5 Tenant's Attornment: Tenant shall attorn (i) to any purchaser of the Building or Property at any foreclosure sale or private sale conducted pursuant to any security instrument encumbering the Building or the Property, (ii) to any grantee or transferee designated in any deed given in lieu of foreclosure, or (iii) to the lessor under any underlying ground lease should such ground lease be terminated. In no event shall any Lender, purchaser, grantee, transferee or ground lessor have any liability as to any Security Deposit under this Lease unless such party shall have actually received the same. 15.6 Mortgagee Protection: In the event of any default on the part of Landlord, Tenant will give notice by registered mail to any Lender or lessor under any underlying ground lease whose name has been provided to Tenant and shall offer such Lender or lessor a reasonable opportunity to cure the default, including time to obtain possession of the Leased Premises by power of sale or judicial foreclosure or other appropriate legal proceedings, if such should prove necessary to effect a cure. 15.7 Estoppel Certificates: At all times during the Lease Term, Tenant agrees, following any request by Landlord, to promptly execute and deliver to Landlord an estoppel certificate (i) certifying that this Lease is unmodified and in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect, (ii) stating the date to which the rent and other charges are paid in advance, if -46- 52 any, (iii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed, and (iv) certifying such other information about the Lease as may be reasonably required by Landlord. Tenant's failure to deliver an estoppel certificate within ten (10) days after delivery of Landlord's request therefore shall be a conclusive admission by Tenant that, as of the date of the request for such statement, except as otherwise set forth in such request (i) this Lease is unmodified and is in full force and effect, (ii) there are no uncured defaults in Landlord's performance, and (iii) no rent has been paid in advance. Landlord and Tenant intend that any statement delivered pursuant to this paragraph may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or any interest therein. 15.8 Force Majeure: Any prevention, delay, or stoppage due to strikes, lockouts, inclement weather, labor disputes, inability to obtain labor, materials, fuels or reasonable substitutes therefor, governmental restrictions, regulations, controls, action or inaction, civil commotion, fire or other acts of God, and other causes beyond the reasonable control of the party obligated to perform (except financial inability) shall excuse the performance, for a period equal to the period of any said prevention, delay, or stoppage, of any obligation hereunder except the obligation of Tenant to pay rent or any other sums due hereunder. 15.9 Notices: Any notice required or desired to be given regarding this Lease shall be in writing and shall be personally served, or in lieu of personal service may be given by certified mail. If served by mail, such notice shall be deemed to have been given (i) on the third business day after mailing if such notice was deposited in the United States mail, certified and postage prepaid, addressed to the party to be served at its address first above set forth and (ii) in all other cases when actually received. Either party may change its address by giving notice of same in -47- 53 accordance with this paragraph. 15.10 Attorneys' Fees: In the event Landlord shall bring any action or legal proceeding for an alleged breach of any provision of this Lease, to recover rent, to terminate this Lease or to otherwise enforce, protect or establish any term or covenant of this Lease the prevailing party shall be entitled to recover as a part of such action or proceedings, or in a separate action brought for that purpose, reasonable attorneys' fees and court costs as may be fixed by the court. 15.11 Corporate Authority: If Tenant is a corporation (or a partnership), each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with the by-laws of said corporation (or partnership in accordance with the partnership agreement of said partnership) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, each of the persons executing this Lease on behalf of Tenant does hereby covenant and warrant that Tenant is a duly authorized and existing corporation, that Tenant has and is qualified to do business in California, and that the corporation has full right and authority to enter into this Lease. If Tenant is a corporation Tenant shall, within thirty (30) days after execution of this Lease, deliver to Landlord a certified copy of the resolution of the board of directors of said corporation authorizing or ratifying the execution of this Lease. 15.12 Additional Definitions: Any term that is given a special meaning by any provision in this Lease shall have such meaning when used in this Lease or any addendum or amendment hereto. As used herein, the following terms shall have the following meanings: A. Common Area: The term "Common Area" shall mean all areas and facilities within the Property that are provided and designated by Landlord from time to time for -48- 54 general use and convenience of the lessees and occupants of all or any part of the Property, including the lobbies, stairs, elevators, escalators, corridors, rest rooms, parking areas and facilities, access and perimeter roads, pedestrian sidewalks, landscaped areas and the like. B. Effective Date: The term "Effective Date" shall mean the date the last signatory to this Lease whose execution is required to make it binding on the parties hereto shall have executed this Lease. C. Law: The term "Law" shall mean any judicial decision, statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any municipal, county, state, federal, or other government agency or authority having jurisdiction over the parties to this Lease or the Leased Premises or both, in effect either at the Effective Date of this Lease or any time during the Lease Term, including, without limitation, any regulation, order, or policy of any quasi-official entity or body (e.g., board of fire examiners, public utility or special district). D. Leasehold Improvements: The term "Leasehold Improvements" shall mean all improvements, additions, alterations, and fixtures installed in the Leased Premises by Tenant at its expense which are not Trade Fixtures. E. Lender: The term "Lender" shall mean any beneficiary, mortgagee, secured party, or other holder of any deed of trust, mortgage or other written security device or agreement affecting the Property, and the note or other obligations secured by it. F. Private Restrictions: The term "Private Restrictions" shall mean all recorded covenants, conditions and restrictions, private agreements, reciprocal easement agreements and any other recorded instruments affecting the use of the Property, as they may now exist and as they maybe reasonably changed, altered and modified from time to time. -49- 55 G. Trade Fixtures: The term "Trade Fixtures" shall mean anything affixed to the Leased Premises by Tenant at its expense for purposes of trade, manufacture, ornament, or domestic use (except replacement of similar work or material originally installed by Landlord) which can be removed without injury to the Leased Premises unless such thing has, by the manner in which it is affixed, become an integral part of the Leased Premises; provided, however, that all of Tenant's signs shall be Trade Fixtures regardless of how affixed to the Leased Premises. 15.13 Miscellaneous: Should any provision of this Lease prove to be invalid or illegal, such invalidity or illegality shall in no way affect, impair or invalidate any other provision hereof, and such remaining provisions shall remain in full force and effect. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. Any executed copy of this Lease shall be deemed an original for all purposes. This Lease shall, subject to the provisions regarding assignment, apply to and bind the respective heirs, successors, executors, administrators and assigns of Landlord and Tenant. "Party" shall mean Landlord or Tenant as the context implies. If Tenant consists of more than one person or entity, then all members of Tenant shall be jointly and severally liable hereunder. This Lease shall be construed and enforced in accordance with the laws of the State of California. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning, and not strictly for or against either Landlord or Tenant. The captions used in this Lease are for convenience only and shall not be considered in the construction or interpretation of any provision hereof. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. The terms "shall", "will", and "agree" are mandatory. The term "may" is permissive. When a party is required to do something by this Lease, it shall do so at its sole cost and expense without right of -50- 56 reimbursement from the other party unless specific provision is made therefor. All measurements of gross leasable area shall be made as provided in Exhibit G, attached hereto and incorporated herein by reference. Where Tenant is obligated not to perform any act, Tenant is also obligated to restrain any others within its control from performing said act, including agents, invitees, contractors, subcontractors and employees. Landlord shall not become or be deemed a partner or a joint venturer with Tenant by reason of the provisions of this Lease. 15.14 Termination By Exercise of Option: If this Lease is terminated pursuant to its terms by the proper exercise of an option to terminate specifically granted to Landlord or Tenant by this Lease, then this Lease shall terminate thirty (30) days after the date the option to terminate is properly exercised (unless another date is specified in that part of the Lease creating the option, in which event the date so specified for termination shall prevail), the rent and all other charges due hereunder shall be prorated as of the date of termination, and neither Landlord nor Tenant shall have any further rights or obligations under this Lease except for those that have accrued prior to the date of termination. This paragraph does not apply to a termination of this Lease by Landlord as a result of a default by Tenant. 15.15 Brokerage Commissions: Tenant warrants and represents that it has negotiated this Lease directly with Macanan Marketing, Inc. and has not authorized or employed, or acted by implication to authorize or to employ, any other real estate broker or salesman to act for Tenant in connection with this Lease. Tenant shall indemnify and defend Landlord against and hold Landlord harmless from any and all claims by any real estate broker or salesman claims through tenant and other than those specified in this Article 15 for a commission or finder's fee as a result of Tenant's entering into this Lease. 15.16 Arbitration: Any question, dispute or controversy arising under this Lease or any -51- 57 Exhibit or Addendum thereto which is specifically made subject to arbitration by the terms hereof shall be determined by arbitration as provided below. Any such arbitration shall in no way delay or affect the commencement of the term of the Lease and/or Tenant's obligation to pay rent. Neither Landlord or Tenant shall have the right, and hereby waive such right, to request or require arbitration of any question, dispute or controversy arising under the Lease, or any Exhibit or Addendum thereto, other than those specifically made subject to arbitration by the terms hereof. Arbitratable questions, disputes or controversies shall be arbitrated according to the following procedure. Either Landlord or Tenant may initiate arbitration by giving written notice to the other stating an intention to arbitrate, the issue to be arbitrated, and the relief sought. Such arbitration shall be conducted pursuant to the provisions of the laws of the State of California then in force and the procedural rules of the American Arbitration Association or its successor insofar as said rules of procedure do not conflict with said laws or this Paragraph. Once notice to arbitrate has been given, Landlord and Tenant shall within ten (10) days select one joint arbitrator, or if they cannot agree on one joint arbitrator then each shall select an arbitrator within fifteen (15) days of delivery of said notice and notify the other party of its selection. The two arbitrators selected shall designate the third arbitrator forthwith. The three arbitrators shall convene in San Jose, California and offer Landlord and Tenant the opportunity to present their cases. If any party fails to appear, participate or produce evidence in an arbitration proceeding, the arbitrators may make their award and decision based solely on the evidence actually presented. The arbitrators shall, by majority vote, make such award and decision as is appropriate and in accord with the terms of this Lease, and such award and decision shall be binding upon Landlord and Tenant and enforceable in a court of law. Said award and decision shall include an award to the prevailing party of reasonable attorneys' fees and expenses and costs of arbitration. In the event either party -52- 58 fails to appoint an arbitrator or the two arbitrators fail to select a third arbitrator within the time required by this paragraph, upon application of either party the missing arbitrator shall be appointed by the American Arbitration Association, or if there be no American Arbitration Association or it shall refuse to perform this function, then by the then Presiding Judge of the Superior Court of the State of California for Santa Clara County. 15.17 Entire Agreement: The Lease, Exhibits "A" (Property Plan), "B" (Floor Plan), "C" (Rules and Regulations), "D" (Left out Intentionally), "E" (Tenant Estoppel), "F" (Janitorial Services), "G" (Net Rentable Measurement), "H" (Lease Guaranty), which are executed by Landlord and Tenant concurrently with this Lease and are attached hereto (and by this reference incorporated herein), constitute the entire agreement between the parties, and there are no binding agreements or representations between the parties except as expressed herein. Tenant acknowledges that neither Landlord nor Landlord's agent(s) has made any representation or warranty as to the suitability of the Leased Premises or the Common Area for the conduct of Tenant's business or the condition of any improvements located thereon. Tenant expressly waives all claims for damage by reason of any statement, representation, warranty, promise, or other agreement of Landlord or Landlord's agent(s), if any, not contained in this Lease or in any addendum or amendment hereto. No subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto. -53- 59 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease with the intent to be legally bound thereby, to be effective as of the Effective Date of this Lease. AS LANDLORD: MACANAN INVESTMENTS, a California limited partnership By: MACANAN FINANCIAL CORPORATION a California corporation, Its general partner Dated: 11/22/99 By /s/ DONALD H. MACMILLAN ---------- ---------------------------------- Donald H. MacMillan President By /s/ W. JOHN BUCHANAN ---------------------------------- W. John Buchanan Secretary AS TENANT: BAY AREA MULTIMEDIA, INC. Dated: 11/22/99 By /s/ [SIGNATURE ILLEGIBLE] ---------- ---------------------------------- Title Pres. & CEO ---------------------------------- By ---------------------------------- Title ---------------------------- -54- 60 SECOND FLOOR [SITE PLAN] SITE PLAN, FIRST FLOOR, FIRST FLOOR PARKING [SITE PLAN] EXHIBIT "A" A-1 61 FOURTH FLOOR [SITE PLAN] THIRD FLOOR [SITE PLAN] A-2 62 9th Floor [SITE PLAN] A-3 63 DIMENSION PLAN [FLOOR PLAN] EXHIBIT B 64 EXHIBIT C COMERICA BANK BUILDING RULES AND REGULATIONS 1. Sidewalks, halls, passages, exits, entrances, parking aisles, elevators, and stairways shall not be obstructed by Tenants or used by them for any purpose other than for ingress to and egress from their respective premises. The halls, passages, exits, entrances, elevators, and stairways are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence, in the judgment of Landlord, shall be prejudicial to the safety, character, reputation, and interests of the Building and its Tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom any Tenant normally deals in the ordinary course of such Tenant's business unless such persons are engaged in illegal activities. No Tenant, and no employees or invitees of any Tenant, shall go upon the roof of the building, except as authorized by Landlord. 2. No sign, placard, picture, name, advertisement, or notice, visible from the exterior of the leased premises shall be inscribed, painted, affixed, installed, or otherwise displayed by any Tenant either on its premises or any part of the building without the prior written consent of Landlord, and Landlord shall have the right to remove any such sign, placard, picture, name, advertisement, or notice without notice to and at the expense of the Tenant. If Landlord shall have given such consent to any Tenant at any time, whether before or after the execution of the lease, such consent shall in no way operate as a waiver or release of any of the provisions hereof or of such lease, and shall be deemed to relate only to the particular sign, placard, picture, name, advertisement, or notice so consented to by Landlord and shall not be construed as dispensing with the necessity of obtaining the specific written consent of Landlord with respect to any other such sign, placard, picture, name, advertisement, or notice. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of the Tenant by a person approved by Landlord 3. The bulletin board or directory of the Building will be provided exclusively for the display of the name and location of Tenants only and Landlord reserves the right to exclude any other names therefrom. C-1 65 4. No curtains, exterior draperies, blinds, shutters, shades, screens, or other coverings, awnings hangings, or decorations shall be attached to, hung or placed in, or used in connection with, any window or door on any premises without the prior written consent of Landlord. In any event with the prior written consent of Landlord, all such items shall be installed inboard of Landlord's standard window covering and shall in no way be visible from the exterior of the Building. No articles shall be placed or kept on the window sills so as to be visible from the exterior of the Building. No articles shall be placed against glass partitions or doors which might appear unsightly from outside Tenant's Premises. 5. Landlord reserves the right to exclude from the Building between the hours of 6 pm. and 8 am. and at all hours on Saturdays, Sundays, and holidays all persons who are not Tenants or their accompanied guests in the Building. Each Tenant shall be responsible for all persons for whom it allows to enter the Building and shall be liable to Landlord for all acts of such persons. Landlord shall in no case be liable for damages for error with regard to the admission to or exclusion from the Building of any person. During the continuance of any invasion, mob, riot, public excitement, or other circumstance rendering such action advisable in Landlord's opinion, Landlord reserves the right to prevent access to the Building by closing the doors, or otherwise, for the safety of Tenants and protection of the Building and property in the Building. 6. No Tenant shall employ any person or persons other than the janitor of Landlord for the purpose of cleaning Premises unless otherwise agreed to by Landlord in writing. Except with the written consent of Landlord no person or persons other than those approved by Landlord shall be permitted to enter the Building for the purpose of cleaning the same. No Tenant shall cause any unnecessary labor by reason of such Tenant's carelessness or indifference in the preservation of good order and cleanliness of the Premises. Landlord shall in no way be responsible to any Tenant for any loss of property on the Premises, however occurring, or for any damage done to the effects of any Tenant by the janitor or any other employee or any other person. 7. No Tenant shall obtain for use upon its Premises ice, drinking water, food, beverage, towel, or other similar services except through facilities provided by Landlord (and maintained by Tenant) and under regulations fixed by Landlord, or accept barbering or bootblacking services in its Premises except from persons authorized by Landlord. C-2 66 8. Each Tenant shall see that all doors of its Premises are closed and securely locked and must observe strict care and caution that all water faucets or water apparatus are entirely shut off before the Tenant or its employees leave such Premises, and that all utilities shall likewise be carefully shut off, so as to prevent waste or damage, and for any default or carelessness the Tenant shall make good all injuries sustained by other Tenants or occupants of the Building or Landlord. On multiple-tenancy floors, all Tenants shall keep the door or doors to the Building corridors closed at all times except for ingress and egress. 9. As more specifically provided in the Tenant's Lease of the Premises, Tenant shall not waste electricity, water, or air-conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air-conditioning, and shall refrain from attempting to adjust any controls other than room thermostats installed for Tenant's use. 10. No Tenant shall alter any lock or access device or install a new or additional lock or access device or any bolt on any door of its Premises without the prior written consent of Landlord. If Landlord shall give its consent, the Tenant shall in each case furnish Landlord with a key for any such lock. 11. No Tenant shall make or have made additional copies of any keys or access devices provided by Landlord. Each Tenant, upon the termination of the Tenancy, shall deliver to Landlord all the keys or access devices for the Building, offices, rooms, and toilet rooms which shall have been furnished the Tenant or which the Tenant shall have had made. In the event the loss of any keys or access devices so furnished by Landlord, Tenant shall pay Landlord therefor. 12. The toilet rooms, toilets, urinals, wash bowls, and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose employees or invitees, shall have caused it. 13. No Tenant shall use or keep in its premises or the Building any kerosene, gasoline, or inflammable or combustible fluid or material other than limited quantities necessary for the operation or maintenance of office or office equipment. No Tenant shall use any method of heating or air-conditioning other than that supplied by Landlord. C-3 67 14. No Tenant shall use, keep or permit to be used or kept in its Premises any foul or noxious gas or substance or permit or suffer such premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors and/or vibrations or interfere in any way with other Tenants or those having business therein, nor shall any animals or birds be brought or kept in or about any Premises of the Building. 15. No cooking shall be done or permitted by any Tenant on its Premises (except that use by the Tenant of Underwriters' Laboratory approved equipment including microwave, refrigerator, and icemaker for the preparation of coffee, tea, hot chocolate, and similar beverages for Tenants and their employees shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state, and city laws, codes, ordinances, rules, and regulations), nor shall Premises be used for lodging. 16. Except with the prior written consent of Landlord, no Tenant shall sell, or permit the sale, at retail, of newspapers, magazines, periodicals, theater tickets, or any other goods or merchandise in or on any Premises, nor shall Tenant carry on, or permit or allow any employee or other person to carry on, the business of stenography, typewriting, or any similar business in or from any premises for the service of accommodation of occupants of any other portion of the Building, nor shall the Premises of any Tenant be used for the storage of merchandise or for the manufacturing of any kind, or the business of a public barber shop, beauty parlor, nor shall the Premises of any Tenant be used for any improper, immoral, or objectionable purpose, or any business or activity other than that specifically provided for in such Tenant's lease. 17. If Tenant requires telegraphic, telephonic, burglar alarm, or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation. 18. Landlord will direct electricians as to where and how telephone, telegraph, and electrical wires are to be introduced or installed. No boring or cutting for wires will be allowed without the prior written consent of Landlord. The location of burglar alarms, telephone, call boxes, and other office equipment affixed to all Premises shall be subject to the written approval of Landlord. 19. No Tenant shall install any radio or television antenna, loud-speaker, or any other device on the exterior walls or the roof of the Building without Landlord's approval. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. C-4 68 20. No Tenant shall lay linoleum, tile, carpet, or any floor covering so that the same shall be affixed to the floor of its Premises in any manner except as approved in writing by Landlord. The expense of repairing any damage resulting from a violation of this rule or the removal of any floor covering shall be borne by the Tenant by whom, or by whose contractors, employees, or invitees, the damage shall have been caused. 21. No furniture, freight, equipment, materials, supplies, packages, merchandise, or other property will be received in the Building or carried up or down the elevators except between such hours and in such elevators as shall be designated by Landlord. Landlord shall have the right to prescribe the weight, size and position of all safes, furniture, or other heavy equipment brought into the Building. Safes or other heavy objects shall, if considered necessary by Landlord, stand on wood strips of such thickness as determined by Landlord to be necessary to properly distribute the weight thereof. Landlord will not be responsible for loss of or damage to any such safe, equipment, or property from any cause, and all damage done to the Building by moving or maintaining any such safe, equipment, or other property shall be repaired at the expense of Tenant. Business machines and mechanical equipment belonging to Tenant which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any Tenants in the Building shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Building must be acceptable to Landlord. 22. No Tenant shall place a load upon any floor of the premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. No Tenant shall mark, or drive nails, screw or drill into, the partitions, woodwork, or plaster or in any way deface such Premises or any part thereof. 23. No Tenant shall install, maintain, or operate upon the Premises any vending machine without the written consent of Landlord. 24. There shall not be used in any space, or in the public areas of the Building, either by any Tenant or others, any hand trucks except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. No other vehicles of any kind shall be brought by any Tenant into or kept in or about the Premises. C-5 69 25. Each Tenant shall store all its trash and garbage within the interior of its Premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the city without violation of any law or ordinance governing such disposal. All trash, garbage, and refuse disposal shall be made only through entryways and elevators provided for such purposes and at such times as Landlord shall designate. 26. Canvassing, soliciting, distribution of handbills, or any other written material, and peddling in the Building are prohibited and each Tenant shall cooperate to prevent the same. No Tenant shall make room-to-room solicitation of business from other Tenants in the Building. 27. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the rules and regulations of the Building. 28. Without the prior written consent of Landlord, Tenant shall not use the name of the Building or a photograph or any other form of representation of the Building in connection with or in promoting or advertising the business of Tenant except as a portion of Tenant's address. 29. Tenant shall comply with all safety, fire protection, and evacuation procedures and regulations established by Landlord or any governmental agency. 30. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery, and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 31. The requirements of Tenants will be attended to only upon application at the office of the Building by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employees will admit any person (Tenant or otherwise) to any office without specific instructions from Landlord. 32. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular Tenant or Tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other Tenant or Tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all Tenants of the Building. C-6 70 33. Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time be needed for safety and security, for care and cleanliness of the Building and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations herein above stated and any additional Rules and Regulations which are adopted. 34. Tenant agrees to abide by any special Parking Rules and Regulations imposed by the Landlord such as, but not limited to, the following: a. Landlord reserves the right to designate the use of the parking spaces on the Premises, subject to the lease provisions. b. Tenant or Tenant's guests shall park between designated parking lines only, and shall not occupy two spaces with one car. Vehicles in violation of the above shall be subject to tow-away, at vehicle owner's expense. c. Vehicles parked on Premises overnight without prior written consent of the Landlord shall be deemed abandoned and shall be subject to tow-away at vehicle owner's expense. 35. Tenant shall use carpet protector under all desk chairs. 36. Tenant shall be responsible for the observance of all of the foregoing Rules and Regulations by Tenant's employees, clients, customers, invitees, and guests. 37. Tenant agrees to move in and/or move out of the building only on weekends unless Landlord has specifically approved other arrangements. Tenant shall request such moving approval in writing at least five (5) days in advance. 38. Any light bulbs or tubes other than those fluorescent tubes used in building standard ceiling fixtures shall be changed and paid for by Landlord, but the cost of the lamps or bulbs shall be back charged to Tenant and paid for by Tenant. Desk lights or free standing lamps will not be changed by Landlord nor will Landlord stock light bulbs for them. 39. These Rules and Regulations are in addition to, and shall not be construed to in any way modify, alter, or amend, in whole or in part, the terms, covenants, agreements, and conditions of any Lease of Premises in the Building. The word "Building" as used herein is defined in the above mentioned Lease and is commonly referred to as the Comerica Bank Building, of which the Premises are part. C-7 71 COMERICA BANK BUILDING HOURS 1. BUILDING HOURS (Doors Open) M - F - 5:00 a.m. - 7:00 p.m. Sat. - 7:00 a.m. - 12:00 noon Sun. - Closed Building is accessible after normal operating hours by a check in and out procedure with the security guard. 2. HVAC HOURS M - F - 7:00 a.m. - 7:00 p.m. Sat. - 7:00 a.m. - 12:00 noon Sun. - None Note - Circulation 24 hours per day Computer controlled system permits HVAC use at election of and cost to the tenant by use of manual override switch in suites. 3. SECURITY HOURS (Building is open to Tenants and Tenants' guests at all times during security hours, provided rules are properly followed.) M - F - 5:00 p.m. - 7:00 a.m. Sat. - 24 hours Sun. - 24 hours Holidays - 24 hours 4. ELEVATOR HOURS M - F - 6:00 a.m. - 7:00 p.m. Sat. - 7:00 a.m. - 12:00 noon Sun. and other hours - Elevators to all floors with return to 1st floor guard station for entry and exit. 5. VISITOR PARKING ATTENDANT HOURS Short Term: M - F - 7:00 a.m. - 7:00 p.m. Sat. - 7:00 a.m. - 12:00 noon Long Term: M - F - 7:00 a.m. - 7:00 p.m. Sat. - Closed All after hour incoming parking must use short term parking area. 6. LONG TERM PARKING - DOOR OPEN M - F - 5:00 a.m.- 7:00 p.m. Sat. - Closed Sun. - Closed Any tenant using long term parking after hours can exit by inserting parking card in card reader which will activate the roll up gate to permit exit. C-8 72 TENANT ESTOPPEL CERTIFICATE This Certificate is given to GMAC Commercial Mortgage Corporation, its successors and/or assigns (collectively the "Lender"), by Bay Area Multimedia, Inc. ("Tenant"), with the understanding that Lender and its counsel will rely on this Certificate in connection with a proposed mortgage loan (the "Loan") on the Comerica Bank Building, 333 W. Santa Clara Street, San Jose, Santa Clara County, California (the "Property"). Tenant hereby certifies as follows: 1. The undersigned is the Tenant under that certain lease dated November 15. 1999 (the "Lease") executed by Macanan Investments ("Landlord"), as landlord and Tenant as tenant. 2. Pursuant to the Lease, Tenant has leased space in the Property consisting of approximately Two thousand, one hundred eighteen leasable square feet (the "Premises"); the commencement date of the term of the Lease is January 1, 2000; the expiration date of the term of the Lease is December 31, 2003; the fixed annual minimum rent is $69,900.00, payable monthly in advance on the first day of each calendar month; the next rental payment in the amount of $5,825.00 is due on February 1, 2000; no rent has been prepaid except for the current month, and Tenant agrees not to pay rent more than one month is advance at any time; and Tenant has paid a security deposit of $5,825.00 in connection with the Lease. 3. Tenant does not have any right or option to renew or extend the term of the Lease or to expand into any additional space or to terminate the Lease in whole or in part prior to the expiration of the term except as set forth below in this paragraph. NONE 4. The Lease has been duly executed and delivered by, and is a binding obligation of, Tenant, and the Lease is in full force and effect. The Lease is the entire agreement between Landlord (or any affiliated party) and Tenant (or any affiliated patty) pertaining to the Premises. Except as set forth below in this paragraph, there are no amendments, modifications, supplements, arrangements, side letters or understandings, oral or written, of any sort, modifying, amending, altering, supplementing or changing the terms of the Lease. NONE 5. Tenant has unconditionally accepted the Premises and is satisfied with all the work done by and required of Landlord; Tenant has taken possession of the Premises and is in occupancy thereof; rent payments have commenced, and all tenant improvements in the Premises have been completed by Landlord in accordance with plans and specifications approved by Tenant; and as of the date hereof Tenant is not aware of any defect in the Premises. 6. Except as set forth in this paragraph, Landlord has satisfied all commitments made to induce Tenant to enter into the Lease; there are no offsets or credits against rentals payable under the Lease; no free periods of rent, tenant improvements, contributions or other concessions have been granted to Tenant; Landlord is not reimbursing Tenant or paying Tenant's rent obligations under any other lease; and Tenant has not advanced any funds for or on behalf of Landlord for which Tenant has the right to deduct from future rent payments. 7. All obligations of Landlord under the Lease have been performed, and no event has occurred and no condition exists that, with the giving of notice or lapse of time or both, would constitute a default by Landlord under the Lease. There are no offsets or defenses that Tenant has against the full enforcement of the Lease by Landlord E-1 73 8. Tenant is not in any respect in default under the Lease and has not assigned, transferred or hypothecated the Lease or any interest therein or subleased all or any portion of the Premises. Tenant is not insolvent and is able to pay its debts as they mature. Tenant has not declared bankruptcy or filed a petition seeking to take advantage of any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts, Tenant has no present intentions of doing so, and no such proceeding has been commenced against Tenant seeking such relief, and Tenant has no knowledge that any such proceeding is threatened. 9. Tenant does not have any right or option to purchase all or any part of the real property of which the Premises constitute a part. 10. Tenant agrees that no future modifications or amendment of the Lease will be enforceable unless the modification or amendment has been consented to in writing by the Lender. 11. Tenant has no notice of any assignment of the Lease by the Landlord, or any assignment, hypothecation or pledge of rents accruing under the Lease by the Landlord. 12. Tenant further agrees that, from and after the date hereof until Tenant has received notice to pay rent directly to the Lender, the Tenant will not pay any rent under the Lease more than 30 days in advance of its due date and will not assign or sublet its interest in the Premises or any portion thereof or make or cause to be made any additions, alterations or improvements to the Premises except as expressly permitted under the Lease without the prior written consent of the Landlord and Lender. The undersigned will not surrender or consent to the modification of any of the terms of the Lease by the Lessor without the prior written consent of the Lender. The Tenant will not seek to exercise any right it may have under the Lease to terminate the Lease or withhold rent or other payments due under the Lease by reason of any act or omission of the Landlord until a reasonable period of time shall have elapsed following the giving of such notice, during which period Lender shall have the right, but shall not be under any obligation to remedy such act or omission. 13. Tenant acknowledges that Lender intends to fund a loan (the "Loan") to Landlord relating to the Premises. Tenant hereby acknowledges and agrees that Tenant's rights under the Lease, at Lender's sole option, shall be subject and subordinate to Lender's rights under any mortgage, deed of trust or similar agreement given Landlord in connection with the Loan, subject however to the agreement of Lender by performance of any other terms of the Lease. Tenant's occupancy of the Leased Premises will not be disturbed by Lender in the event of foreclosure of such lien. Tenant, at Lender's sole option, shall attorn to and accept performance by Lender of any covenant, agreement or obligation of Landlord contained in the Lease with the same force and effect as if performed by Landlord. 14. Tenant agrees to provide copies of all notices given Landlord under the Lease or this instrument to Lender at the following address: GMAC Commercial Mortgage P.O. Box 1015 Horsham, PA 19044-8015 Attention: Doug Gray Or such other address as Lender shall designate in writing; and all such notices shall be in writing and shall be considered as properly given if (i) mailed to the addressee by first class United States mail, postage prepaid, registered or certified with return receipt requested, (ii) by delivering same in person to the addressee, or (iii) by delivery to a third party commercial delivery service for same day or next day delivery to the office of the address with proof of delivery; any notice so given shall be effective, as applicable, upon (a) the third (3rd) day following the day such notice is deposited with the United States mail, (b) delivery to the addressee, or (c) upon delivery to such third party delivery service; and any notice given in any other manner shall be effective only if and when received by the addressee. 15. The person executing this Tenant Estoppel Certificate is authorized by Tenant to do so and execution hereof is the binding act of Tenant enforceable against Tenant. E-2 74 Dated: Nov. 22, 1999 TENANT: Bay Area Multimedia, Inc. By: /s/ RAYMOND MUSCI ------------------------------- Name: Raymond Musci Title: President & CEO E-3 75 Exhibit F COMERICA DANK BUILDING STANDARD JANITORIAL SERVICES Nightly (Monday-Friday) 1. Empty and wipe clean all ashtrays and wastepaper baskets and any other trash receptacles. 2. Dust tops of cabinets, desks, credenzas, conference room tables, all chairs, office equipment, and telephones. 3. Vacuum all carpeted areas. Simple spot cleaning. 4. Sweep and/or dry mop all hard surface floor areas. Simple spot cleaning. 5. Clean and polish all drinking fountains and coolers. Empty waste water. 6. Sweep and dust all private stairways, 7. Clean all restrooms, sanitize all fixtures, replenish all sanitary supplies (sanitary supplies in private, tenant restrooms will be charged back to tenant). 8. Main lobby, all elevator lobbies, and all elevators are to be kept in a neat and orderly fashion. All ceramic tile, granite, and terrazzo flooring to be wet mopped. Weekly 1. Detail vacuuming of all carpeted areas. 2. Spot clean furniture tops (entire desk to be cleaned if all items are removed). 3. Dust all window sills, picture frames, and miscellaneous items such as chalk rails, etc. Monthly Dust all door jams, high partitions, and ledges. Quarterly 1. Vacuum all fabric furniture. 2. Dust return air vents and light diffusers. 3. Wash partition glass (not obstructed). As Needed 1. Steam clean all soiled carpeted areas. 2. Machine scrub and polish all hard surface floor areas. 3. Clean all interior butted glass, including TVS glass (main lobby). Window cleaning 1. Tower windows inside and out - spring, summer, and fall. 2. 1st and 2nd floor windows inside and out - once every other month. Janitorial Follow-up Procedures Special request forms for janitorial (also for mechanical, electrical, plumbing, etc.) problems may be obtained from building management office. Janitorial Hours Building janitors shall have access to leased premises between the hours of 6:00 pm. and 2:00 am. (Any special janitorial hours requested by tenant other than noted will be at extra cost to tenant.) F-1 76 EXHIBIT G Net Rentable Measurement Definition Outside walls - Measure to inside of outside wall at floor level. Corridor walls - Measure to corridor side of corridor wall. All other walls - Center to center measurement. Full floor tenant - Measure per above, subtract elevators, air conditioning ducts, stairways. Partial floor tenant - Measure per full floor tenant minus rest-rooms, corridor, and electrical/janitorial rooms. G-1 77 LEASE GUARANTY This Lease Guaranty ("Guaranty") is executed this 15 day of November, 1999 by Ray Musci ("Guarantor") in favor of Macanan Investments, a California general partnership ("Lessor"). RECITALS A. Lessor bas entered into a lease (the "Lease") with Bay Area Multimedia, Inc. ("Lessee"), dated November 15, 1999 whereby Lessee has leased from Lessor approximately the real property located at 333 W. Santa Clara Street, Suite 930, San Jose, CA 95113 more particularly described in the Lease (the "Premises"). B. Pursuant to the terms, conditions and provisions of the Lease, Lessee is and will be subject to certain obligations, agreements, duties and covenants (collectively "Lessee's obligations"). C. Lessor has requested that Guarantor guarantee to Lessor the punctual and full performance and observance of all of Lessee's Obligations and, but for Guarantor's agreement to so guarantee Lessee's Obligations, Lessor would not enter into the Lease. D. It is the intent of Guarantor that Guarantor shall be subject at all times to this Guaranty and be and remain liable to Lessor to the same extent as if it were jointly and severally liable with Lessee to Lessor for the full performance of all the terms, conditions and provisions of the Lease. NOW, THEREFORE, for good and valuable consideration, the receipt of which is acknowledged, and as a material inducement to and in consideration of Lessor entering into the Lease with Lessee, Guarantor hereby covenants and agrees as follows: ARTICLE 1 CONTINUING GUARANTY Guarantor absolutely and unconditionally guarantees to Lessor, its successors and assigns, the full and prompt performance of all of Lessee's Obligations including but not limited to the payment when due of all rents, charges of additional sums coming due under the Lease, and the performance of all covenants and agreements of the Lessee contained in the Lease. Guarantor further unconditionally guarantees the full and prompt payment of all damages that may arise or be incurred by Lessor, its successors and assigns as the consequence of Lessee's failure to perform any of Lessee's Obligations. Guarantor unconditionally further agrees to pay all expenses, including attorneys' fees and legal expenses, paid or incurred by Lessor in endeavoring to collect or enforce Lessee's Obligations or any part thereof. Such payment and performance is to be made or performed by Guarantor forthwith upon a default by Lessee. Guarantor agrees that this Guaranty arises out of the conduct of a trade, business or profession. H-1 78 In the event of the dissolution, bankruptcy or insolvency of Lessee, or the inability of Lessee to pay debts as they mature, or an assignment by Lessee for the benefit of creditors, or the institution of any bankruptcy or other proceedings by or against Lessee alleging that Lessee is insolvent or unable to pay debts as they mature, or Lessee's default under the Lease, and if such event shall occur at a time when any of Lessee's Obligations may not then be due and payable, Guarantor agrees to pay to Lessor upon demand, the full amount which would be payable hereunder by Guarantor if all Lessee's Obligations were then due and payable. This Guaranty shall be an absolute and unconditional guaranty and shall remain in full force and effect as to Guarantor for the full term of the Lease any extensions thereof. Notwithstanding termination of the Lease, Guarantor shall continue to be liable for all Lessee's Obligations which have accrued up to and including the date of termination. Guarantor covenants and agrees that it shall not be released from the obligations of this Guaranty, nor shall such obligations be diminished or otherwise affected by (a) any extension of time or other indulgence granted to Lessee or other guarantors, or by a waiver with respect to Lessee's Obligations or any of them, (b) any assignment of the Lease or any subletting of the all or any portion of the Premises, (c) any amendment or modification of the Lease (except to the extent such amendment or modification affects Lessee's Obligations) or (d) any other act or omission of Lessor other than a written waiver. ARTICLE 2 LESSOR'S RIGHT TO ADDITIONAL SECURITY Lessor may, from time to time, without notice to Guarantor and without the necessity of Guarantor consenting thereto: (a) retain or obtain the primary or secondary liability of any third party or parties, in addition to Guarantor, with respect to any of Lessee's Obligations, (b) retain or obtain security interests in any property owned by any third parties to secure any of Lessee's Obligations, (c) extend or renew for any period (whether or not longer than the original period), alter or exchange the Lease or any of Lessee's Obligations, (d) release, waive or compromise any liability of Guarantor or any liability of any other party or parties primarily or secondarily liable on any of Lessee's Obligations, (e) release or impair any security interest or lien, if any, in all or any property securing any of Lessee's Obligations or any obligation of Guarantor and permit any substitution or exchange for any such property, and (f) resort to Guarantor for payment of any of Lessee's obligations, whether or not Lessor shall have resorted to any property securing any of Lessee's Obligations or any obligation of Guarantor or shall have proceeded against Lessee or any other party primarily or secondarily liable on any of Lessee's Obligations. No such action or failure to act by Lessor shall affect Guarantor's liability hereunder in any manner whatsoever. Any amount received by Lessor from any source and applied by Lessor toward the payment of Lessee's Obligations shall be applied in such order of application as Lessor may from time to time elect. H-2 79 ARTICLE 3 WAIVER BY GUARANTOR Guarantor hereby expressly waives: (a) notice of the acceptance of this Guaranty, (b) notice of the existence, creation, amount, modification, amendment, alteration or extension of the Lease or all or any of Lessee's Obligations, whether or not such notice is required to be given to Lessee under the terms of the Lease, (c) presentment, demand, notice of dishonor, protest, and all other notices whatsoever, (d) the benefit of any statute of limitations available to Lessee or Guarantor to the fullest extent such waiver is available by law, (e) any benefit of valuation, appraisement, homestead or other exemption law, now or hereafter in effect in any jurisdiction in which enforcement of this Guaranty is sought, and (f) all diligence in collection, perfection or protection of or realization upon any of Lessee's Obligations any obligation of Guarantor hereunder, or any security for any of the foregoing. ARTICLE 4 NONWAIVER BY LESSOR No delay on the part of Lessor in the exercise of any right or remedy either as to Lessee or as to Guarantor shall operate as a waiver thereof, and no final or partial exercise by Lessor of any right or remedy shall preclude other or further exercises thereof or the exercises of any other right or remedy. The validity of this Guaranty and the obligations of Guarantor hereunder shall not be terminated, affected or impaired by reason of any action which Lessor may take or fail to take against Lessee or other guarantors nor by reason of any waiver of, or failure to enforce any of the rights or remedies reserved to Lessor in the Lease, or otherwise, nor by reason of the bankruptcy, insolvency or inability to pay debts as they mature of Lessee and whether or not the term of the Lease shall terminate by reason of such bankruptcy, insolvency or inability to pay debts as they mature. ARTICLE 5 NOTICES Guarantor agrees that any notice or demand upon it shall be deemed sufficiently given or served if in writing and either personally delivered or mailed by overnight mail or by United States Mail, certified or registered, return receipt requested, addressed to Guarantor at: ARTICLE 6 GENERAL PROVISIONS 6.1 Binding on Successors. This Guaranty shall be binding upon Guarantor, its successors and assigns. 6.2 Choice of Law and Choice of Forum. This Guaranty shall be governed by the laws of the State of California. Guarantor consents to the jurisdiction of the courts of the State of California and agrees that any action arising from this Guaranty shall be brought in Santa Clara County, California or in the United States District Court which has jurisdiction of Santa Clara County, California. H-3 80 6.3 Attorneys' Fees. In the event of any controversy, claim, dispute or action to this Guaranty, the prevailing party shall be entitled to recover reasonable attorneys' fees an expenses in addition to all other available remedies. "Prevailing party" shall mean the party which obtains substantially the relief sought by it in the controversy, claim, dispute or action. 6.4 Amendment. This Guaranty may by amended only by written agreement signed by Lessor and Guarantor. 6.5 All previous negotiations and agreements by and between the parties and their agents with respects to this transaction are merged into this Guaranty which completely sets forth the obligations of the parties. 6.6 Interpretation. The captions and headings in this Guaranty are for reference and convenience only and shall not limit or expand the meaning of the provisions of this Guaranty. 6.7 Severability. If any provision of this Guaranty or of any document contemplated hereby shall be invalid, such invalid provision shall be severable, and such invalidity shall not impair the validity of any other provision of this Guaranty or of any document contemplated hereby. 6.8 Joint and Several. If this Guaranty is executed on behalf of Guarantor by more than one person or entity, each person or entity executing this Guaranty shall be jointly and severally liable, and Lessor shall have the right to join one or all of them in any proceeding or to proceed against them in any order, and to settle or compromise any of Lessor's rights as against any Guarantor. GUARANTOR: By: /s/ RAYMOND MUSCI ------------------------------------ Title: President & CEO - Bay Area Multimedia, Inc. By: ------------------------------------ Title: ------------------------------------ H-4 EX-10.44 53 v72115orex10-44.txt EXHIBIT 10.44 1 EXHIBIT 10.44 EXECUTIVE EMPLOYMENT AGREEMENT This Agreement, dated as of October 1,1999 (the "Effective Date"), is between BAM! Entertainment, Inc., a Delaware corporation, (the "Company") and Raymond C. Musci, an individual ("Employee"). 1. Term a. Basic Term: The Company shall employ Employee for the period commencing on the Effective Date and ending upon the earlier of (i) two (2) year(s) from the Effective Date (the "Term Date"), as extended under Section 1(b); or (ii) the date upon which the employment is terminated in accordance with Section 4 or 5. b. Renewal: Employee's employment will be renewed automatically for an additional one (1) year period (without any action by either party) on the Term Date and on each anniversary thereof, unless one party gives to the other written notice sixty (60) days in advance of the beginning of any one-year renewal period that the employment is to be terminated. Either party may elect not to renew this Agreement with or without cause, in which case Employee shall not be entitled to any Severance. Nothing stated in this Agreement or represented orally or in writing to either party shall create an obligation to renew this Agreement. 2. Position and Responsibilities a. Position: Employee is employed by the Company to render services to the Company in the position of President & Chief Operating Officer. Employee shall perform such duties and responsibilities as are normally related to such position in accordance with the standards of the industry and any additional duties now or hereafter assigned to Employee by the Board of Directors. Employee shall abide by the Company's rules, regulations, and practices as they may from time-to-time be adopted or modified. b. Other Activities: Except upon the prior written consent of the Company, Employee will not, during the term of this Agreement, (i) accept any other employment, or (ii) engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary advantage) that might interfere with Employee's duties and responsibilities hereunder or create a conflict of interest with the Company. c. No Conflict. Employee represents and warrants that Employee's execution of this Agreement, his or her employment with the Company, and the performance of his or her proposed duties under this Agreement shall not violate any obligations Employee may have to any other employer, person or entity, including any obligations with respect to proprietary or confidential information of any other person or entity. 3. Compensation and Benefits a. Base Salary: In consideration of the services to be rendered under this Agreement, the Company shall pay Employee a salary at the rate of $225,000 Dollars per year ("Base Salary"). The Base Salary shall be paid in accordance with the Company's regularly 1 2 established payroll practices. Employee's Base Salary will be reviewed at least annually in accordance with the Company's established procedures for adjusting salaries for similarly situated employees and may be increased in the sole discretion of the Company's Compensation Committee. The Base Salary may not be decreased, except upon a mutual written agreement between the parties. b. Bonus. Employee shall be eligible for any bonus program or plan that is established by the Company for similarly situated employees. The Company's Compensation Committee, in its sole discretion, may establish a bonus program or plan for Employee. c. Stock and Stock Options: Employee currently owns Common Stock and/or Preferred Stock in the Company. The Company's Compensation Committee, in its sole discretion, may grant Employee one or more stock options or other equity rights. d. Benefits: The Company will provide Employee with medical, dental, eye-care, disability and life insurance benefits in accordance with the benefit plans established by the Company for similarly-situated executives (as may be amended from time to time in the Company's sole discretion) and will pay all premiums for coverage of Employee and his family. The Company shall also provide Employee with at least five weeks of paid vacation leave annually, which shall accrue monthly (i.e., 2 1/12th days shall accrue each month) and shall be governed by the Company's regular policies and practices regarding vacation leave (as may be amended from time to time in the Company's sole discretion). Employee shall also be eligible to participate in any additional benefits made generally available by the Company to similarly-situated employees, in accordance with the benefit plans established by the Company, which may be amended or terminated at any time in the Company's sole discretion. e. Expenses: The Company shall reimburse Employee for all reasonable business expenses incurred in the performance of his or her duties hereunder in accordance with the Company's expense reimbursement guidelines. f. Indemnification. The Company agrees to defend and indemnify Employee against any liability that Employee incurs within the scope of his employment with the Company to fullest extent permitted by the Company's articles and by-laws and Delaware corporation's law. The Company agrees to defend and indemnify Employee and hold Employee harmless against any liability caused by all personal guarantees or other personal obligations that Employee made during his employment with respect to any debts of the Company. 4. Terminations By Company a. At-Will Termination By Company. The Company may terminate Employee's employment with the Company at any time, without any advance notice, for any reason, including no reason at all, notwithstanding anything to the contrary contained in or arising from any statements, policies, or practices of the Company relating to the employment, discipline, or termination of its employees, subject to any severance payment required by Section 4(b). Thereafter, all obligations of the Company under this Agreement shall cease, except as provided in Section 6. 2 3 b. Severance: Except in situations where Employee's employment is terminated For Cause or By Disability (as defined below), in the event that the Company terminates Employee's employment at any time, Employee will be eligible to receive the following: (i) an amount equal to twenty-four (24) months of Employee's then-current Base Salary ("Severance") payable as follows: 50% of the Severance shall be paid as a lump sum within a reasonable period following the termination date (but not more than sixty (60) days unless agreed by Employee) and 50% of the Severance will be paid as salary continuation for twelve (12) months following the termination date; and (ii) reimbursement for any COBRA payments made by Employee for COBRA coverage during the twelve (12) months following the termination date. Employee shall not be entitled to any severance payments or benefit continuation if Employee's employment is terminated For Cause or By Disability (as defined in below) of if Employee's employment is terminated by Employee for any reason (except as provided in Section 5 below). c. Termination For Cause: For purposes of this Agreement, "Cause" shall mean: (i) Employee commits a crime involving dishonesty, breach of trust, or physical harm to any person; (ii) Employee willfully engages in conduct that is in bad faith and materially injurious to the Company, including but not limited to, misappropriation of trade secrets, fraud or embezzlement; (iii) Employee commits a material breach of this Agreement, which breach is not cured within twenty (20) days after written notice to Employee from the Company; (iv) Employee willfully fails to implement or follow a reasonable and lawful policy or directive of the Company, which breach is not cured within twenty (20) days after written notice to Employee from the Company; or (v) Employee engages in a pattern of failure to perform job duties diligently and professionally, which pattern is not cured within twenty (20) days after written notice to Employee from the Company. Prior to the date of any termination for Cause, the Company's Board of Directors shall meet and the Employee shall have an opportunity to present to the Board any information relevant to the event constituting Cause, unless waived by Employee. The Company may terminate Employee's employment For Cause at any time, without any advance notice. The Company shall pay to Employee all compensation to which Employee is entitled up through the date of termination, and thereafter, all of the Company's obligations under this Agreement shall cease, except as provided in Section 6. d. By Disability: If Employee becomes eligible for the Company's long term disability benefits or if, in the reasonable opinion of the Company's Board of Directors, Employee shall be unable to carry out the responsibilities and functions of the position held by Employee by reason of any physical or mental impairment for more than ninety (90) consecutive days or more than one hundred and twenty (120) days in any twelve-month period, then, to the extent permitted by law, the Company may terminate Employee's employment. The Company shall pay to Employee all compensation to which Employee is entitled up through the date of termination, and thereafter, all of the Company's obligations under this Agreement shall cease, except as provided in Section 6. Nothing in this Section shall affect Employee's rights under any disability plan in which he or she is a participant. 5. Termination By Employee a. At-Will Termination By Employee. Employee may terminate his/her employment with the Company at any time for any reason, including no reason at all, upon sixty 3 4 (60) days advance written notice. The Company shall have the option, in its sole discretion, to make Employee's termination effective at any time prior to the end of such notice period as long as the Company provides Employee with all compensation to which he is entitled up through the last day of the sixty (60) day notice period. Thereafter, all obligations of the Company under this Agreement shall cease, except as provided in Section 6. b. By Death: Employee's employment shall terminate automatically upon his or her death. The Company shall pay to Employee's beneficiaries or estate, as appropriate, any compensation then due and owing. Thereafter, all obligations of the Company under this Agreement shall cease, except as provided in Section 6. Nothing in this Section shall affect any entitlement of Employee's heirs to the benefits of any life insurance plan or other applicable benefits. c. Termination for Good Reason. Employee's termination shall be for "Good Reason" if Employee provides written notice to the Company of the Good Reason within six (6) months of the event constituting Good Reason and provides the Company with a period of twenty (20) days to cure the Good Reason and the Company fails to cure the Good Reason within that period. For purposes of this Agreement, "Good Reason" shall mean any of the following events if the event is effected by the Company without Employee's consent : (i) a change in Employee's position with employer which materially reduces Executive's level of responsibility, except for any reduction for Cause (as defined above) or any reduction following a Change in Control (as defined below) caused by the transition of the Company into a new company or a division of a new company; (ii) a material reduction in Employee's Base Salary, except for reductions that are comparable to reductions generally applicable to senior executives of the Company; or (iii) a relocation of Employee's principal place of employment by more than fifty (50) miles. Employee may terminate his/her employment at any time for Good Reason, in which case Employee will be eligible to receive the Severance and benefit continuation provided by Section 4(b) above. Thereafter, all obligations of the Company under this Agreement shall cease, except as provided in Section 6. d. Change in Control. For purposes of this Agreement, "Change of Control" shall mean a change in ownership or control of the Company effected through a merger, consolidation or acquisition by any person or related group of persons (other than an acquisition by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities. 6. Termination Obligations a. Employee agrees that all property, including, without limitation, all equipment, tangible proprietary information, documents, records, notes, contracts, and computer-generated materials provided to or prepared by Employee incident to his or her employment belong to the Company and shall be promptly returned to the Company upon termination of Employee's employment. 4 5 b. Upon termination of Employee's employment, Employee shall be deemed to have resigned from all offices and directorships then held with the Company. Following any termination of employment, Employee shall cooperate with the Company in the winding up or transferring to other employees of any pending work and shall also cooperate with the Company in the defense of any action brought by any third party against the Company that relates to Employee's employment by the Company. c. Employee agrees that following termination of his or her employment, Employee shall not access or use any of the Company's computer systems, e-mail systems, voicemail systems, intranet system or other system, except as authorized by the Company in writing. d. The Company agrees that immediately following termination of Employee's employment, the Company will take all steps reasonably necessary to release Employee from all personal guarantees or other personal obligations that Employee made with respect to any debts of the Company. e. The Company and Employee agree that their obligations under this Section as well as Sections 3(f), 7 (including Exhibit A) and 8 shall survive the termination of employment and the expiration of this Agreement. 7. Inventions and Proprietary Information a. Employee agrees to execute and be bound by the terms of the Company's Proprietary Information and Inventions Agreement, which is attached as Exhibit A. b. Employee acknowledges that because of his/her position in the Company, Employee will have access intellectual property and confidential information. During the term of his or her employment (plus any period in which the Company is paying the Employee Severance) and for one (1) year thereafter, Employee shall not, for Employee or any third party, directly or indirectly, (i) interfere with any business of any kind in which the Company (or any affiliate) is engaged, including, without limitation, diverting or attempting to divert any of its suppliers or customers, or (ii) solicit, induce, recruit or encourage any person employed by the Company to leave their employment. 8. Dispute Resolution a. The parties agree that any suit, action, or proceeding between Employee (and his or her attorneys, successors, and assigns) and the Company (and its affiliates, shareholders, directors, officers, employees, members, agents, successors, attorneys, and assigns) relating in any manner whatsoever to Employee's employment or termination that employment shall be brought in either the United States District Court for the Northern District of California or in a California state court in the County of Santa Clara and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding 5 6 brought in such court. If any one or more provisions of this Section shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable. b. Employee acknowledges that he/she is obligated under this Agreement to render services of a special, unique, unusual, extraordinary and intellectual character, thereby giving this Agreement peculiar value so that the loss thereof cannot be reasonably or adequately compensated in damages in an action at law. Accordingly, in addition to other remedies provided by law, the Company shall have the right during the term of this Agreement to compel specific performance by the Employee. 9. Entire Agreement This Agreement is intended to be the final, complete, and exclusive statement of the terms of Employee's employment by the Company and may not be contradicted by evidence of any prior or contemporaneous statements or agreements, except for agreements specifically referenced herein (including the Company's Proprietary Information and Inventions Agreement, attached as Exhibit A, and any agreements related to the stock currently held by Employee). 10. Amendments; Waivers This Agreement may not be amended except by a writing signed by Employee and by a duly authorized representative of the Company other than Employee. Failure to exercise any right under this Agreement shall not constitute a waiver of such right. 11. Assignment Employee agrees that Employee will not assign any rights or obligations under this Agreement. Nothing in this Agreement shall prevent the consolidation, merger or sale of the Company or a sale of all or substantially all of its assets. 12. Severability If any provision of this Agreement shall be held by a court or arbitrator to be invalid, unenforceable, or void, such provision shall be enforced to fullest extent permitted by law, and the remainder of this Agreement shall remain in full force and effect. In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law. 13. Taxes All amounts paid under this Agreement (including, without limitation, Base Salary and Severance) shall be paid less all applicable state and federal tax withholdings. To the extent Employee is or may be subject to one or more foreign tax obligations, the Company agrees to reasonably cooperate with Employee to maximize Employee's after tax income. 6 7 14. Governing Law This Agreement shall be governed by and construed in accordance with the laws of the State of California. 15. Interpretation This Agreement shall be construed as a whole, according to its fair meaning, and not in favor of or against any party. Captions are used for reference purposes only and should be ignored in the interpretation of the Agreement. 16. Binding Agreement Each party represents and warrants to the other that the person(s) signing this Agreement below has authority to bind the party to this Agreement and that this Agreement will legally bind both the Company and Employee. This Agreement will be binding upon and benefit the parties and their heirs, administrators, executors, successors and permitted assigns. To the extent that the practices, policies, or procedures of the Company, now or in the future, are inconsistent with the terms of this Agreement, the provisions of this Agreement shall control. Any subsequent change in Employee's duties or compensation will not affect the validity or scope of the remainder of this Agreement. 17. Employee Acknowledgment Employee acknowledges Employee has had the opportunity to consult legal counsel concerning this Agreement, that Employee has read and understands the Agreement, that Employee is fully aware of its legal effect, and that Employee has entered into it freely based on his or her own judgment and not on any representations or promises other than those contained in this Agreement. 18. Date of Agreement The parties have duly executed this Agreement as of the date first written above. BAM! Entertainment, Inc., a Delaware corporation: EMPLOYEE: By: /s/ RAYMOND C. MUSCI /s/ RAYMOND C. MUSCI --------------------------------- -------------------------------- Name: Raymond C. Musci Raymond C. Musci Title: President 7 EX-10.46 54 v72115orex10-46.txt EXHIBIT 10.46 1 EXHIBIT 10.46 EXECUTIVE EMPLOYMENT AGREEMENT This Agreement, dated as of July 1, 2000 (the "Effective Date"), is between BAM! Entertainment, Inc., a Delaware corporation, (the "Company") and Anthony Williams, an individual ("Employee"). 1. Term a. Basic Term: The Company shall employ Employee for the period commencing on the Effective Date and ending upon the earlier of (i) two (2) year(s) from the Effective Date (the "Term Date"), as extended under Section 1(b); or (ii) the date upon which the employment is terminated in accordance with Section 4 or 5. b. Renewal: Employee's employment will be renewed automatically for an additional one (1) year period (without any action by either party) on the Term Date and on each anniversary thereof, unless one party gives to the other written notice sixty (60) days in advance of the beginning of any one-year renewal period that the employment is to be terminated. Either party may elect not to renew this Agreement with or without cause, in which case Employee shall not be entitled to any Severance. Nothing stated in this Agreement or represented orally or in writing to either party shall create an obligation to renew this Agreement. 2. Position and Responsibilities a. Position: Employee is employed by the Company to render services to the Company in the position of Chief Executive Officer. Employee shall perform such duties and responsibilities as are normally related to such position in accordance with the standards of the industry and any additional duties now or hereafter assigned to Employee by the Board of Directors. Employee shall abide by the Company's rules, regulations, and practices as they may from time-to-time be adopted or modified. b. Other Activities: Except upon the prior written consent of the Company, Employee will not, during the term of this Agreement, (i) accept any other employment, or (ii) engage, directly or indirectly, in any other business activity (whether or not pursued for pecuniary advantage) that might interfere with Employee's duties and responsibilities hereunder or create a conflict of interest with the Company. c. No Conflict. Employee represents and warrants that Employee's execution of this Agreement, his or her employment with the Company, and the performance of his or her proposed duties under this Agreement shall not violate any obligations Employee may have to any other employer, person or entity, including any obligations with respect to proprietary or confidential information of any other person or entity. 3. Compensation and Benefits a. Base Salary: In consideration of the services to be rendered under this Agreement, the Company shall pay Employee a salary at the rate of $225,000 Dollars per year ("Base Salary"). The Base Salary shall be paid in accordance with the Company's regularly 1 2 established payroll practices. Employee's Base Salary will be reviewed at least annually in accordance with the Company's established procedures for adjusting salaries for similarly situated employees and may be increased in the sole discretion of the Company's Compensation Committee. The Base Salary may not be decreased, except upon a mutual written agreement between the parties. b. Bonus. Employee shall be eligible for any bonus program or plan that is established by the Company for similarly situated employees. The Company's Compensation Committee, in its sole discretion, may establish a bonus program or plan for Employee. c. Stock and Stock Options: Employee currently owns Common Stock and/or Preferred Stock in the Company. The Company's Compensation Committee, in its sole discretion, may grant Employee one or more stock options or other equity rights. d. Benefits: The Company will provide Employee with medical, dental, eye-care, disability and life insurance benefits through one or more private benefit policies established by the Company for Employee, which shall be reasonably priced and shall provide competitive terms and benefits (and which may be amended from time to time in the Company's sole discretion) and will pay all premiums for coverage of Employee and his family. The Company shall also provide Employee with at least five weeks of paid vacation leave annually, which shall accrue monthly (i.e., 2 1/12th days shall accrue each month) and shall be governed by the Company's regular policies and practices regarding vacation leave (as may be amended from time to time in the Company's sole discretion). Employee shall also be eligible to participate in any additional benefits made generally available by the Company to similarly-situated employees, in accordance with the benefit plans established by the Company, which may be amended or terminated at any time in the Company's sole discretion. e. Expenses: The Company shall reimburse Employee for all reasonable business expenses incurred in the performance of his or her duties hereunder in accordance with the Company's expense reimbursement guidelines. f. Indemnification. The Company agrees to defend and indemnify Employee against any liability that Employee incurs within the scope of his employment with the Company to fullest extent permitted by the Company's articles and by-laws and Delaware corporation's law. The Company agrees to defend and indemnify Employee and hold Employee harmless against any liability caused by all personal guarantees or other personal obligations that Employee made during his employment with respect to any debts of the Company. 4. Terminations By Company a. At-Will Termination By Company. The Company may terminate Employee's employment with the Company at any time, without any advance notice, for any reason, including no reason at all, notwithstanding anything to the contrary contained in or arising from any statements, policies, or practices of the Company relating to the employment, discipline, or termination of its employees, subject to any severance payment required by Section 4(b). Thereafter, all obligations of the Company under this Agreement shall cease, except as provided in Section 6. 2 3 b. Severance: Except in situations where Employee's employment is terminated For Cause or By Disability (as defined below), in the event that the Company terminates Employee's employment at any time, Employee will be eligible to receive the following: (i) an amount equal to twenty-four (24) months of Employee's then-current Base Salary ("Severance") payable as follows: 50% of the Severance shall be paid as a lump sum within a reasonable period following the termination date (but not more than sixty (60) days unless agreed by Employee) and 50% of the Severance will be paid as salary continuation for twelve (12) months following the termination date; and (ii) continuation of Employee's health care benefits for twelve (12) months following the termination date. Employee shall not be entitled to any severance payments or benefit continuation if Employee's employment is terminated For Cause or By Disability (as defined in below) of if Employee's employment is terminated by Employee for any reason (except as provided in Section 5 below). c. Termination For Cause: For purposes of this Agreement, "Cause" shall mean: (i) Employee commits a crime involving dishonesty, breach of trust, or physical harm to any person; (ii) Employee willfully engages in conduct that is in bad faith and materially injurious to the Company, including but not limited to, misappropriation of trade secrets, fraud or embezzlement; (iii) Employee commits a material breach of this Agreement, which breach is not cured within twenty (20) days after written notice to Employee from the Company; (iv) Employee willfully fails to implement or follow a reasonable and lawful policy or directive of the Company, which breach is not cured within twenty (20) days after written notice to Employee from the Company; or (v) Employee engages in a pattern of failure to perform job duties diligently and professionally, which pattern is not cured within twenty (20) days after written notice to Employee from the Company. Prior to the date of any termination for Cause, the Company's Board of Directors shall meet and the Employee shall have an opportunity to present to the Board any information relevant to the event constituting Cause, unless waived by Employee. The Company may terminate Employee's employment For Cause at any time, without any advance notice. The Company shall pay to Employee all compensation to which Employee is entitled up through the date of termination, and thereafter, all of the Company's obligations under this Agreement shall cease, except as provided in Section 6. d. By Disability: If Employee becomes eligible for the Company's long term disability benefits or if, in the reasonable opinion of the Company's Board of Directors, Employee shall be unable to carry out the responsibilities and functions of the position held by Employee by reason of any physical or mental impairment for more than ninety (90) consecutive days or more than one hundred and twenty (120) days in any twelve-month period, then, to the extent permitted by law, the Company may terminate Employee's employment. The Company shall pay to Employee all compensation to which Employee is entitled up through the date of termination, and thereafter, all of the Company's obligations under this Agreement shall cease, except as provided in Section 6. Nothing in this Section shall affect Employee's rights under any disability plan in which he or she is a participant. 5. Termination By Employee a. At-Will Termination By Employee. Employee may terminate his/her employment with the Company at any time for any reason, including no reason at all, upon sixty (60) days advance written notice. The Company shall have the option, in its sole discretion, to 3 4 make Employee's termination effective at any time prior to the end of such notice period as long as the Company provides Employee with all compensation to which he is entitled up through the last day of the sixty (60) day notice period. Thereafter, all obligations of the Company under this Agreement shall cease, except as provided in Section 6. b. By Death: Employee's employment shall terminate automatically upon his or her death. The Company shall pay to Employee's beneficiaries or estate, as appropriate, any compensation then due and owing. Thereafter, all obligations of the Company under this Agreement shall cease, except as provided in Section 6. Nothing in this Section shall affect any entitlement of Employee's heirs to the benefits of any life insurance plan or other applicable benefits. c. Termination for Good Reason. Employee's termination shall be for "Good Reason" if Employee provides written notice to the Company of the Good Reason within six (6) months of the event constituting Good Reason and provides the Company with a period of twenty (20) days to cure the Good Reason and the Company fails to cure the Good Reason within that period. For purposes of this Agreement, "Good Reason" shall mean any of the following events if the event is effected by the Company without Employee's consent : (i) a change in Employee's position with employer which materially reduces Executive's level of responsibility, except for any reduction for Cause (as defined above) or any reduction following a Change in Control (as defined below) caused by the transition of the Company into a new company or a division of a new company; (ii) a material reduction in Employee's Base Salary, except for reductions that are comparable to reductions generally applicable to senior executives of the Company; or (iii) a relocation of Employee's principal place of employment by more than fifty (50) miles. Employee may terminate his/her employment at any time for Good Reason, in which case Employee will be eligible to receive the Severance and benefit continuation provided by Section 4(b) above. Thereafter, all obligations of the Company under this Agreement shall cease, except as provided in Section 6. d. Change in Control. For purposes of this Agreement, "Change of Control" shall mean a change in ownership or control of the Company effected through a merger, consolidation or acquisition by any person or related group of persons (other than an acquisition by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities. 6. Termination Obligations a. Employee agrees that all property, including, without limitation, all equipment, tangible proprietary information, documents, records, notes, contracts, and computer-generated materials provided to or prepared by Employee incident to his or her employment belong to the Company and shall be promptly returned to the Company upon termination of Employee's employment. 4 5 b. Upon termination of Employee's employment, Employee shall be deemed to have resigned from all offices and directorships then held with the Company. Following any termination of employment, Employee shall cooperate with the Company in the winding up or transferring to other employees of any pending work and shall also cooperate with the Company in the defense of any action brought by any third party against the Company that relates to Employee's employment by the Company. c. Employee agrees that following termination of his or her employment, Employee shall not access or use any of the Company's computer systems, e-mail systems, voicemail systems, intranet system or other system, except as authorized by the Company in writing. d. The Company agrees that immediately following termination of Employee's employment, the Company will take all steps reasonably necessary to release Employee from all personal guarantees or other personal obligations that Employee made with respect to any debts of the Company. e. The Company and Employee agree that their obligations under this Section as well as Sections 3(f), 7 (including Exhibit A) and 8 shall survive the termination of employment and the expiration of this Agreement. 7. Inventions and Proprietary Information a. Employee agrees to execute and be bound by the terms of the Company's Proprietary Information and Inventions Agreement, which is attached as Exhibit A. b. Employee acknowledges that because of his/her position in the Company, Employee will have access intellectual property and confidential information. During the term of his or her employment (plus any period in which the Company is paying the Employee Severance) and for one (1) year thereafter, Employee shall not, for Employee or any third party, directly or indirectly, (i) interfere with any business of any kind in which the Company (or any affiliate) is engaged, including, without limitation, diverting or attempting to divert any of its suppliers or customers, or (ii) solicit, induce, recruit or encourage any person employed by the Company to leave their employment. 8. Dispute Resolution a. The parties agree that any suit, action, or proceeding between Employee (and his or her attorneys, successors, and assigns) and the Company (and its affiliates, shareholders, directors, officers, employees, members, agents, successors, attorneys, and assigns) relating in any manner whatsoever to Employee's employment or termination that employment shall be brought in either the United States District Court for the Northern District of California or in a California state court in the County of Santa Clara and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding 5 6 brought in such court. If any one or more provisions of this Section shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable. b. Employee acknowledges that he/she is obligated under this Agreement to render services of a special, unique, unusual, extraordinary and intellectual character, thereby giving this Agreement peculiar value so that the loss thereof cannot be reasonably or adequately compensated in damages in an action at law. Accordingly, in addition to other remedies provided by law, the Company shall have the right during the term of this Agreement to compel specific performance by the Employee. 9. Entire Agreement This Agreement is intended to be the final, complete, and exclusive statement of the terms of Employee's employment by the Company and may not be contradicted by evidence of any prior or contemporaneous statements or agreements, except for agreements specifically referenced herein (including the Company's Proprietary Information and Inventions Agreement, attached as Exhibit A, and any agreements related to the stock currently held by Employee). 10. Amendments; Waivers This Agreement may not be amended except by a writing signed by Employee and by a duly authorized representative of the Company other than Employee. Failure to exercise any right under this Agreement shall not constitute a waiver of such right. 11. Assignment Employee agrees that Employee will not assign any rights or obligations under this Agreement. Nothing in this Agreement shall prevent the consolidation, merger or sale of the Company or a sale of all or substantially all of its assets. 12. Severability If any provision of this Agreement shall be held by a court or arbitrator to be invalid, unenforceable, or void, such provision shall be enforced to fullest extent permitted by law, and the remainder of this Agreement shall remain in full force and effect. In the event that the time period or scope of any provision is declared by a court or arbitrator of competent jurisdiction to exceed the maximum time period or scope that such court or arbitrator deems enforceable, then such court or arbitrator shall reduce the time period or scope to the maximum time period or scope permitted by law. 13. Taxes All amounts paid under this Agreement (including, without limitation, Base Salary and Severance) shall be paid less all applicable state and federal tax withholdings. To the extent Employee is or may be subject to one or more foreign tax obligations, the Company agrees to reasonably cooperate with Employee to maximize Employee's after tax income. 6 7 14. Governing Law This Agreement shall be governed by and construed in accordance with the laws of the State of California. 15. Interpretation This Agreement shall be construed as a whole, according to its fair meaning, and not in favor of or against any party. Captions are used for reference purposes only and should be ignored in the interpretation of the Agreement. 16. Binding Agreement Each party represents and warrants to the other that the person(s) signing this Agreement below has authority to bind the party to this Agreement and that this Agreement will legally bind both the Company and Employee. This Agreement will be binding upon and benefit the parties and their heirs, administrators, executors, successors and permitted assigns. To the extent that the practices, policies, or procedures of the Company, now or in the future, are inconsistent with the terms of this Agreement, the provisions of this Agreement shall control. Any subsequent change in Employee's duties or compensation will not affect the validity or scope of the remainder of this Agreement. 17. Employee Acknowledgment Employee acknowledges Employee has had the opportunity to consult legal counsel concerning this Agreement, that Employee has read and understands the Agreement, that Employee is fully aware of its legal effect, and that Employee has entered into it freely based on his or her own judgment and not on any representations or promises other than those contained in this Agreement. 18. Date of Agreement The parties have duly executed this Agreement as of the date first written above. BAM! Entertainment, Inc., a Delaware corporation: EMPLOYEE: /s/ RAYMOND C. MUSCI /s/ ANTHONY WILLIAMS By:________________________________ _________________________________ Name: Raymond C. Musci Anthony Williams Title: Co-chairman 7 EX-23.1 55 v72115orex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders of BAM! Entertainment, Inc. We consent to the use in this Registration Statement of BAM! Entertainment, Inc. on Form S-1 of our report dated June 1, 2001, appearing in the Prospectus, which is a part of this Registration Statement, and of our report dated June 1, 2001 relating to the consolidated financial statement schedule appearing elsewhere in this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP San Jose, California June 6, 2001 -----END PRIVACY-ENHANCED MESSAGE-----