EXHIBIT 10.1
STOCK PURCHASE AGREEMENT
between
FOUR MEDIA COMPANY and Shareholders
TABLE OF CONTENTS
Page(s)
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1. Certain Definitions 1
2. Purchase and Sale of Shares 8
2.1. Sale of Stock 8
2.2. Purchase Price and Payment for Stock 8
3. Representations and Warranties 9
3.1. Organization 9
3.2. Articles of Incorporation; Bylaws; Minutes 10
3.3. Capitalization 10
3.4. Ownership of Shares 10
3.5. Due Execution and Authority 10
3.6. Subsidiaries and Affiliates 11
3.7. Organization of Subsidiaries and Affiliates 11
3.8. No Violation 12
3.9. Financial Statements 12
3.10. Pro Forma Financial Statements 13
3.11. Absence of Certain Changes or Events 13
3.12. Absence of Undisclosed Liabilities 15
3.13. Broker's Fees 15
3.14. Assets 15
3.15. Intangible Personal Property 16
3.16. Real Property 17
3.17. Contracts 17
3.18. Litigation 17
3.19. Tax Matters 18
3.20. Compliance With Laws 18
3.21. Government Licenses and Permits 19
3.22. Environmental Matters 19
3.23. Insurance 20
3.24. Condition of Assets 21
3.25. Labor and Employment Agreements 21
3.26. Employee Benefit Plans; ERISA 23
3.27. Business Locations 23
3.28. Accounts Receivable 24
3.29. No Omissions or Untrue Statements 24
4. Representations and Warranties of 4MC 24
4.1. Organization 24
4.2. Due Execution and Authority 24
4.3. No Violation 24
5. Covenants and Agreements of Shareholders 25
5.1. Conduct of Business 25
5.2. Subsequent Events 25
5.3. Access by 4MC 26
5.4. Related Party Leases 27
6. Covenants Not to Compete 27
6.1. Covenants 27
6.2. Remedies 28
6.3. Severability 29
7. Additional Agreements 29
7.1. Deposit 29
7.2. Additional Consideration 30
7.3. Stock Options 31
7.4. Shareholder Guarantees 32
7.5. Cooperation; Best Efforts 32
8. Closing 32
8.1. Closing Date 32
8.2. Shareholders' Closing Deliveries 33
8.3. 4MC's Closing Deliveries 34
9. Conditions to Obligations of Shareholders 35
9.1. Compliance by 4MC 35
9.2. Accuracy of 4MC's Representations 35
9.3. Documents 35
9.4. Litigation 35
9.5. Employment/Consulting Agreements 35
10. Conditions to Obligations of 4MC 35
10.1. Compliance by Shareholders 35
10.2. Accuracy of Shareholder's Representations 36
10.3. Material Adverse Change 36
10.4. Litigation 36
10.5. Employment/Consulting Agreements 36
10.6. Required Consents 36
10.7. Financial Statements 36
10.8. Pro Forma Financial Statements 36
10.9. Indebtedness 37
11. Termination 37
11.1. Termination Prior to Closing; General 37
11.2. Termination Prior to Closing; Casualty 37
11.3. Consequences of Termination 38
12. Survival of Representations; Indemnification; Escrow 38
12.1. Survival 38
12.2. Indemnification by Kozlowski and Kramer 38
12.3. By Shareholder 39
12.4. Time for Claims 39
12.5. Claims for Indemnification 39
12.6. Threshold 39
12.7. Claims Procedure 39
12.8. Method of Enforcement 40
12.9. Limitation on Indemnity 43
12.10. Escrow 43
13. Miscellaneous 43
13.1. Expenses 43
13.2. Publicity. 43
13.3. Succession and Assignments; Third Party Beneficiaries. 43
13.4. Notices. 44
13.5. Construction 44
13.6. Dispute Resolution; Attorneys' Fees 45
13.7. Counterparts 46
13.8. No Implied Waiver; Remedies. 46
13.9. Entire Agreement 47
13.10. Amendments; Actual Waivers 47
13.11. Liquidated Damages 47
13.12. Headings 47
13.13. Severability. 47
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is made as of this 14th day of
November, 1997, by and among Four Media Company, a Delaware corporation ("4MC"),
and the persons listed on Exhibit A hereto who are all of the shareholders of
Visualize, a California corporation doing business under the fictitious firm
name POP ("POP") (the "Shareholders" collectively and each a "Shareholder"
individually), with reference to the following facts:
A. The Shareholders own all of the issued and outstanding shares of
capital stock of POP (the "Stock").
B. 4MC and POP are each engaged in various aspects of the post production
business.
C. 4MC desires to purchase from Shareholders and Shareholders desire to
sell to 4MC the Stock.
In consideration of the foregoing and the mutual agreements, covenants and
other provisions herein contained, the parties hereto agree as follows:
1. Certain Definitions
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As used in this Agreement, the following terms shall have the meaning set
forth below. All terms used in this Agreement that are not defined in this
Article 1 shall have the meanings set forth elsewhere in this Agreement.
1.1 "A. Kozlowski" shall mean Alan Kozlowski.
1.2 "Affiliate" shall mean, with respect to any specified Person, (a) any
other Person which, directly or indirectly, owns or controls, is under common
ownership or control with, or is owned or controlled by, such specified Person;
(b) any other Person which is a director, officer or partner or is, directly or
indirectly, the beneficial owner of ten percent (10%) or more of any class of
equity securities of the specified Person or a Person described in clause (a) of
this Section, (c) another Person of which the specified Person is a director,
officer or partner or is, directly or indirectly, the beneficial owner of ten
percent (10%) or more of any class of equity securities; (d) another Person in
which the specified Person has a substantial beneficial interest or as to which
the specified Person serves as trustee or in a similar capacity, (e) each
Subsidiary of such Persons; and/or (f) any relative or spouse of the specified
Person or any of the foregoing Persons, any relative of such spouse or any
spouse of such relative.
1.3 "Affiliated Group" shall mean affiliated group as defined in Section
1504(a) of the Code.
1.4 "Animation" shall mean POP Animation, Inc., a California corporation.
1.5 "Best Efforts" shall mean the efforts that a prudent Person desirous
of achieving a result would use in similar circumstances to ensure that such
result is achieved as expeditiously as possible; provided, however, that an
obligation to use Best Efforts under this Agreement does not require the Person
subject to that obligation to take actions that would result in a materially
adverse change in the benefits to such Person of this Agreement and the
Transactions.
1.6 "Capitalized Lease" shall mean a lease of real or personal property
which, in accordance with generally accepted accounting principles, has been or
should have been capitalized by the lessee.
1.7 "Closing" shall mean the closing of the transactions contemplated by
this Agreement on the Closing Date in accordance with Articles 3 and 7 hereof
and subject to all of the other terms and conditions hereof.
1.8 "Closing Date" shall mean the date of Closing.
1.9 "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.10 "Contract" shall mean any plan, program, arrangement, lease,
commitment, understanding, sales order, purchase order, agreement, indenture,
note, bond, right, warrant, instrument, permit or license, whether written or
oral, which is intended or purports to be binding and enforceable or which is
offered to any Person and acted upon or relied upon by such Person.
1.11 "Coverage Amount" is defined in Section 12.8.
1.12 "Deferred Note" is defined in Section 2.2(b)(iii).
1.13 "Deposit" is defined in Section 2.2(b)(i).
1.14 "DVD Center" means Cinram-POP DVD Center LLC, a California Limited
Liability Company.
1.15 "Environmental Law" shall mean any federal, state, local and foreign
laws, statutes, regulations having the force and effect of law, permits, court
decrees, judgments, injunctions and written orders concerning
(i) public health and safety relating to exposure of humans to toxic or
hazardous substances, or (ii) pollution or protection of the environment or
natural resources including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), the Hazardous
Materials Transportation Act, the Resource Conservation and Recovery Act
("RCRA"), the Clean Water Act of 1977, the Safe Drinking Water Act, the Toxic
Substances Control Act, the Superfund Amendments and Reauthorization Act of
1986, the Federal Water Pollution Control Act Amendments of 1972, any so called
"Super Lien" law, and any other similar federal, state or local statutes, in
each case including the regulations promulgated thereunder, each as supplemented
or amended from time to time.
1.16 "Environmental Permit" shall mean any permit, license, approval,
consent or other authorization required by or pursuant to any applicable
Environmental Law.
1.17 "EPA" shall mean the United States Environmental Protection Agency,
or any successor United States governmental agency.
1.18 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as the same may be amended from time to time.
1.19 "Escrow Agent" is defined in Section 12.10.
1.20 "Escrow Agreement" is defined in Section 12.10.
1.21 "Escrow Fund" is defined in Section 12.10.
1.22 "Financial Statements" is defined in Section 3.9.
1.23 "4MC Certificate" is defined in Section 12.8.
1.24 "GAAP" shall mean United States Generally Accepted Accounting
Principles as in effect at the time in question.
1.25 "Governmental Authority" shall mean the government of the United
States, any foreign country or any state or political subdivision thereof and
any entity, body or authority exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government, including
the Pension Benefit Guaranty Corporation and other quasi-governmental entities
established to perform such functions.
1.26 "Governmental Licenses and Permits" shall mean the licenses, permits
or other authorizations required by any law or Governmental Authority to be held
by a Person in order to operate the business of POP or Animation as it has been
operated historically.
1.27 "Indebtedness" shall mean at any date any of the following: (i) all
obligations, unconditional or contingent for borrowed money including, without
limitation, principal, interest, premium, penalties and costs (whether or not
the recourse of the lender is to the whole of the assets of the obligor or only
to a portion thereof, and including for this purpose all obligations incurred
under Capitalized Leases), or obligations evidenced by bonds, notes, debentures
or similar instruments (including, without limitation, obligations with respect
to letters of credit or bankers' acceptances); and (ii) all obligations to pay
the balance deferred and unpaid of the purchase price of any business, real
property, other assets or interest therein, except any such balance that
constitutes a trade payable arising in the ordinary course of business.
"Indebtedness" does not include obligations under automobile leases or other
operating leases.
1.28 "Indemnitee" is defined in Sections 12.2 and 12.3.
1.29 "Indemnitor" is defined in Sections 12.2 and 12.3.
1.30 "Intangible Personal Property" is defined in Section 3.15.
1.31 "J. Kramer" shall mean Jerry Kramer.
1.32 "Knowledge" shall mean with respect to a party's awareness of the
presence or absence of a fact, event, actual knowledge plus, if different, (b)
the knowledge that will be obtained if such party conducted itself faithfully
and exercised a sound discretion of the management of its own affairs.
1.33 "Knowledge of Shareholders" means the knowledge of any or all of the
Shareholders.
1.34 "Kozlowski" shall mean Alan Kozlowski and Sandra Hay, jointly and
severally.
1.35 "Kramer" shall mean Jerry Kramer and Rena Kramer, jointly and
severally.
1.36 "Law" shall mean any law, common law, statute, regulation, ordinance,
rule, order, decree, judgment, consent decree, permit, policy, guideline,
settlement agreement or requirement enacted, promulgated, entered into, agreed
or imposed by any Governmental Authority.
1.37 "Letter of Credit" is defined in Section 2.2(b)(iii).
1.38 "Liabilities" shall mean all (a) obligations at any date which are or
should be reflected and classified as liabilities on the balance sheet of POP,
its Subsidiaries or Affiliates; (b) all contingent liabilities (including,
without limitation, guarantees, endorsements or obligations to pay, assume or
purchase liabilities or any obligation to purchase, sell or otherwise furnish
assets, properties or services primarily for the purpose of enabling such other
Person to make payment of such liabilities or of assuring the owner of such
liabilities against loss with respect thereto); (c) amounts (calculated on an
actuarial basis) that could be payable pursuant to any contract, or other plan
or arrangement by which POP or its Subsidiaries or Affiliates are bound with
respect to or affecting its employees, officers, directors, representatives or
agents; (d) penalties, charges and assessments payable by POP or its
Subsidiaries or Affiliates to any other Person, including penalties, charges or
assessments that are triggered by virtue of the occurrence of a transaction or
event; and (e) liabilities secured by any Lien affecting any assets or
properties owned by POP or its Subsidiaries or Affiliates (whether or not any
such liability has been assumed by POP or its Subsidiaries or Affiliates, and
whether it arises under a conditional sale or other title retention agreement
given as a security device).
1.39 "Liens" shall mean all, with respect to any given property(ies),
encumbrances, defects of title, deeds of trust, mortgages, security agreements,
security interests, pledges, liens, conditional sales agreements, claims,
restrictions, charges, options, purchase rights, voting trusts, leases,
subleases, encroachments, covenants, easements and/or rights of third parties of
every kind and character arising or existing by operation of law, by judicial
decree or judgment or arbitral decision, by contract or otherwise, whether or
not accrued or fixed, absolute or contingent, known or unknown, determined or
determinable and whenever arising, including, but not limited to, those
evidenced by contracts, agreements, leases, indentures, deeds of trust and
security, conditional sale and other title retention agreements.
1.40 "Loss" or "Losses" are defined in Section 12.2.
1.41 "Material Adverse Change" or "Material Adverse Effect" shall mean,
with respect to a party, a change or an effect (or circumstance involving a
prospective effect) which would have a material adverse effect on the assets,
liabilities (whether absolute, accrued, contingent or otherwise), condition
(financial or otherwise), results of operations, business or prospects of such
party.
1.42 "Material Contract" is defined in Section 3.17.
1.43 "Net Tax Differential" is defined in Section 7.2(b).
1.44 "Net Tax Refund" is defined in Section 7.2(a).
1.45 "Other Agreements" is defined in Section 3.5.
1.46 "Person" shall mean an individual, a corporation, a limited liability
company, a partnership, an association, a trust or any other entity or
organization including, but not limited to, a Governmental Authority.
1.47 "Personal Property" shall mean all machinery, equipment, vehicles,
tools, furniture and other tangible personal property owned or leased by POP or
its Subsidiaries or Affiliates.
1.48 "Personal Property Leases" shall mean Personal Property lease
agreements, as amended, to which POP or its Subsidiaries or Affiliates is a
party (as lessor or lessee).
1.49 "Pro Forma Financial Statements" is defined in Section 3.10.
1.50 "Purchase Price" is defined in Section 2.2(a).
1.51 "Real Property" shall mean real property, including tenant
improvements and fixtures.
1.52 "Refund Notice" is defined in Section 7.1.
1.53 "Regulated Substance" shall mean any chemical or substance subject to
or regulated under any Environmental Law including, without limitation, any
"pollutant or contaminant" or "hazardous substance," as those terms are defined
in CERCLA, any "hazardous waste" as that term is defined in RCRA, and any other
hazardous or toxic wastes, substances or materials, petroleum (including crude
oil and refined and unrefined fractions thereof), polychlorinated biphenyls
("PCBs"), infectious waste, special waste, pesticides, fungicides, solvents,
herbicides, flammables, explosives, asbestos and asbestos-containing material,
and radioactive materials, whether injurious by themselves or in combination
with other materials.
1.54 "Related Party Leases" is defined in Section 3.14.
1.55 "Required Consent" shall mean all consents required to be obtained by
POP or its Subsidiaries or Affiliates or Shareholders to comply with or
eliminate the exceptions to Sections 3.8 or 3.14 of the Agreement and includes
the consent, if any, required by the Hart-Scott-Rodino Act.
1.56 "Returns" shall mean all returns (including, without limitation,
information returns) and other material information, reports and forms relating
to Taxes.
1.57 "SMF" shall mean Santa Monica Financial, a partnership.
1.58 "Schedule" shall mean any schedule, and the term Schedule shall mean
all schedules, attached hereto and incorporated herein.
1.59 "Stock Ownership Representations and Warranties" are defined in
Section 3.
1.60 "Subsidiary," with respect to a specified Person, shall mean a
corporation or other legal entity which such person beneficially owns, controls
or has the ability to control, directly or indirectly, (a) in excess of fifty
percent (50%) of the stock, the holders of which are ordinarily and generally,
in the absence of contingencies, entitled to vote for the election of a majority
of the directors or (b) in excess of fifty percent (50%) of the aggregate total
ownership thereof.
1.61 "Tax Claims" are defined in Section 12.1.
1.62 "Taxes" shall mean, with respect to any Person, (a) any net income,
gross income, alternative or add-on minimum, business, gross receipts, sales,
use, ad valorem, franchise, fuel, profits, license, withholding, payroll,
employment, excise, severance, stamp, transfer, occupation, premium, property or
windfall profit tax, custom duty or other tax, fee, assessment or charge of any
kind or nature whatsoever, together with any interest and any penalty thereon or
any other related addition to any such taxes, imposed by any Governmental
Authority on such Person or with respect to the assets or operations of such
Person, and (b) any liability of such Person for the payment of any amount of
the type described in the immediately preceding clause (a) as a result of such
Person's being a member of an affiliated or combined group.
1.63 "Ten Moons" shall mean Ten Moons at POP, a partnership.
1.64 "Transactions" shall mean, in respect of any party, all transactions
set forth in or contemplated by this Agreement that involve, relate to or affect
such party.
2. Purchase and Sale of Shares
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2.1 Sale of Stock. Subject to the terms and conditions herein, on the
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Closing Date, each Shareholder shall sell to 4MC and 4MC shall purchase from
each Shareholder the Stock, free and clear of all Liens.
2.2 Purchase Price and Payment for Stock
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2.2(a) Purchase Price. The Purchase Price for the Stock shall be
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Twenty-seven Million One Hundred Forty Thousand Dollars ($27,140,000) (the
"Purchase Price"), allocable Twenty-six Million Nine Hundred Forty Thousand
Dollars ($26,940,000) to the Stock and Two Hundred Thousand Dollars ($200,000)
to the restrictive covenants hereafter contained.
2.2(b) Payment of Purchase Price. The Purchase Price shall be paid
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by 4MC as follows:
2.2(b)(i) Upon execution of this Agreement, 4MC shall pay
to A. Kozlowski and J. Kramer by a joint cashiers check the sum of One Million
Dollars ($1,000,000), subject to refund as provided in Section 7.1 hereof (the
"Deposit").
2.2(b)(ii) At the Closing, 4MC shall pay to the Shareholders
the aggregate sum of Twenty-three Million Dollars ($23,000,000) in cash payable
in immediately available funds by wire transfer to an account designated by
Shareholders at least two (2) business days prior to the Closing Date (the
"Closing Cash Consideration"). The Closing Cash Consideration shall be paid to
each Shareholder as set forth on Exhibit A attached hereto.
2.2(b)(iii) At the Closing, 4MC shall pay to Shareholders the
aggregate sum of Two Million Dollars ($2,000,000) represented by a single
promissory note in such amount payable to the Shareholders severally (the
"Deferred Note") which shall be delivered to A. Kozlowski and J. Kramer for the
benefit of Shareholders. The Deferred Note shall be secured by a letter of
credit (the "Letter of Credit") which shall be deposited with the Escrow Agent
pursuant to the provisions of Sections 8.3 and 12.8 hereof. The Deferred Note
shall be in the form and substance of Exhibit B and the proceeds thereof shall
be paid to or distributable to the Shareholders in accordance with the
provisions of the Deferred Note, the Escrow Agreement attached hereto as Exhibit
C and Section 12.8(e) hereof.
2.2(b)(iv) At the Closing, 4MC shall deliver to A. Kozlowski
a promissory note in the principal amount of Eight Hundred Forty Thousand
Dollars ($840,000) in the form and substance of Exhibit D attached hereto.
2.2(b)(v) At the Closing, 4MC shall deliver to J. Kramer a
promissory note in the principal amount of Three Hundred Thousand Dollars
($300,000) in the form and substance of Exhibit E attached hereto.
2.2(b)(vi) 4MC shall pay Shareholders as additional
consideration for the Stock an amount equal to the Net Tax Refund if, as and
when received by POP, pursuant to the provisions of Section 7.2(a) hereof.
2.2(b)(vii) 4MC shall pay Shareholders as additional
consideration for the Stock an amount equal to the Net Tax Differential, at the
time, and pursuant to the provisions of Section 7.2(b) hereof.
3. Representations and Warranties
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Except as provided in the Schedules attached hereto, and except for claims,
events or facts which in the aggregate do not have a Material Adverse Effect,
Kozlowski and Kramer jointly and severally represent and warrant as to each and
all the following except for representations and warranties as to the ownership
of Stock, as to personal capacity and authority, as to Liens with respect to
Stock, and as to transfer and delivery of the Stock (collectively the "Stock
Ownership Representations and Warranties"), and each Shareholder severally makes
the Stock Ownership Representations and Warranties pertaining to his or her
Stock, capacity and authority, as follows:
3.1 Organization. POP is a corporation duly organized, validly existing
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and in good standing under the laws of the state of California, has all the
corporate power and authority to carry on its business as now being conducted
and to own or lease and operate its properties and assets. It is not licensed
or qualified as a foreign corporation in any other jurisdiction and it is not
required to be so licensed or so qualified. All of the officers (and their
respective titles) and directors of POP are set forth on Schedule 3.1. Each of
such officers and directors has been duly elected or appointed and qualify in
accordance with applicable law, Articles of Incorporation, Bylaws, agreements,
arrangements or understandings relating thereto.
3.2 Articles of Incorporation; Bylaws; Minutes. Shareholders have
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delivered to 4MC true and complete copies of the Articles of Incorporation,
Bylaws and Minutes of the Board of Directors and Shareholders of POP and of
Animation, as well as the Operating Agreement and all organizational documents
of DVD Center.
3.3 Capitalization. The entire authorized capital stock of POP consists
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of five thousand (5,000) shares of common stock, of which 388.84 shares are
issued and outstanding, and no shares are issued but not outstanding. The Stock
has been validly issued and is fully paid and non-assessable. There are no
outstanding options, warrants or other rights of any kind to acquire any
additional shares of capital stock of POP or securities convertible or
exchangeable for, or which otherwise confer on the holder thereof any right to
acquire, any such additional shares, nor is POP committed to issue any such
option, warrant, right or security, nor are there any outstanding stock
appreciation, phantom stock, profit participation or similar rights with respect
to POP, nor is POP committed to issue any such right.
3.4 Ownership of Shares. Each Shareholder is the lawful record and
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beneficial owner of that number of shares of Stock set forth by such Shareholder
on Exhibit A. The Stock is free and clear of all Liens. Upon delivery of the
Stock hereunder, 4MC will acquire the beneficial and legal, valid and
indefeasible title to such Stock, free and clear of all Liens. Ownership of the
Stock will result in 4MC owning, directly or indirectly, one hundred percent
(100%) of any interest of any Shareholder in the post production business
worldwide.
3.5 Due Execution and Authority. Each Shareholder has full capacity,
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power and authority to enter into this Agreement and all other agreements
contemplated hereby to which any of them is or is to be a party at Closing (the
"Other Agreements") and to consummate the transactions contemplated hereby and
thereby. This Agreement has been, and each of the Other Agreements will be when
delivered at the Closing, duly executed and delivered by the applicable
Shareholder who is a party thereto and this Agreement constitutes, and each of
the Other Agreements when executed and delivered will constitute, a valid and
binding obligation of the applicable Shareholder who is a party thereto,
enforceable in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally or by limitations upon the availability of equitable
remedies.
3.6 Subsidiaries and Affiliates. POP is not affiliated with, and does
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not own, directly or indirectly, any capital stock or other equity securities of
any corporation or other entity or have any direct or indirect equity or
ownership interest, including interests in partnerships, joint ventures or
limited liability companies, in any business. Schedule 3.6 sets forth for
Animation, which is POP's only Subsidiary, and for each Affiliate the following:
3.6(a) its name and the jurisdiction of its incorporation or
organization,
3.6(b) the number of shares of authorized capital stock of each class
of its capital stock, where applicable,
3.6(c) the issued and outstanding shares of each class of its capital
stock or a description of its membership, the names of the record holders
thereof, and the number of shares or percentage interest held by each such
record holder, and
3.6(d) the names and addresses of its current officers, directors or
managers.
3.7 Organization of Subsidiaries and Affiliates. Animation is a
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corporation, DVD Center is a limited liability company, and Ten Moons and SMF
are each partnerships, duly organized, validly existing and in good standing
under the laws of the state of California; each has all corporate or partnership
power and authority to carry on its business as now being conducted and to own
and operate its properties and assets. None of them is licensed or qualified to
do business as a foreign corporation, limited liability company or partnership
in any other jurisdiction and none of them is required to be so licensed or so
qualified. All of the issued and outstanding shares of capital stock of
Animation have been duly authorized and are validly issued, fully paid and non-
assessable. All of the membership interests in DVD Center or the partnership
interests in Ten Moons or SMF are properly created, valid and existing. There
are no options, warrants or other rights of any kind to acquire any additional
shares of capital stock of Animation, membership interests in DVD Center, or
partnership interests in Ten Moons or SMF, or securities convertible or
exchangeable for, or which otherwise confer on the holder thereof any right to
acquire, any additional shares or interests, nor is Animation, DVD Center, Ten
Moons or SMF committed to issue any such option, warrant, right or security, nor
are there any outstanding stock appreciation, phantom stock, profit
participation or similar rights with respect to Animation, DVD Center, Ten Moons
or SMF, nor are any of them committed to issue any such rights. All current
officers and directors of Animation, all current officers and managers of DVD
Center and all current managing partners of Ten Moons and SMF have been duly
elected or appointed and qualified in accordance with applicable law, their
Articles of Incorporation, Operating Agreement, Bylaws or Partnership
Agreements, and all applicable agreements, arrangements or understandings
relating thereto. If any other Affiliates are set forth in Schedule 3.6, the
representations and warranties contained in this Section 3.7 shall be applicable
to them, as appropriate.
3.8 No Violation. Schedule 3.8 sets forth all consents necessary to
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consummate the transactions contemplated by this Agreement consistent with the
representations and warranties contained in this Section 3.8 (the "Required
Consents"). Neither the execution nor delivery of this Agreement or the Other
Agreements, nor the consummation of the transactions contemplated hereby and
thereby, will (i) violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge or other restriction of any
government, Governmental Authority or court to which any of the Shareholders,
POP, Animation or Affiliate(s) is subject or any provision of the Articles of
Incorporation, Bylaws, Operating Agreement or other operational documents of
POP, Animation or Affiliate(s); or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify or cancel, or require any notice
under the Articles of Incorporation, Bylaws, Operating Agreement or other
organizational documents of POP, Animation or Affiliate(s), or any agreement,
contract, lease, license, instrument or other arrangement to which any
Shareholder, POP, Animation or Affiliate(s) is a party or by which such Person
is bound or to which any of its assets is subject (or result in the imposition
of any Lien upon any of its assets). None of the Shareholders nor POP nor
Animation nor Affiliate(s) is required to give any notice to, make any filing
with or obtain any authorization, consent or approval of, any government or
Governmental Authority in order for the parties to consummate the transactions
contemplated by this Agreement or the Other Agreements except to the extent that
a filing may be required under the provisions of the Hart-Scott-Rodino Act.
3.9 Financial Statements. Shareholders have previously delivered to 4MC
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consolidated balance sheets and statements of operations, stockholders' equity
and cash flows (and notes thereto) as of and for the fiscal years ended December
31, 1994 and December 31, 1995, consolidated balance sheets and statements of
operations as of and for the fiscal year ended December 31, 1996 and the six (6)
months ended June 30, 1997, and a consolidated statement of operations for the
twelve (12) months ended July 31, 1997 (collectively, the "Financial
Statements") for POP and Animation. The Financial Statements have been prepared
in accordance with GAAP applied on a consistent basis (except as indicated in
the notes thereto) throughout the periods covered thereby and present fairly the
financial position of POP and Animation at the dates thereof and the results of
their operations and
the changes in their financial position for the periods then ended, subject, in
the case of the December 31, 1996, June 30, 1997 and July 31, 1997 Financial
Statements, to normal year-end adjustments, to any other adjustments described
therein and to the absence of certain notes thereto. The books of account of POP
and Animation are in all material respects in accordance with sound business
practices and there have been no transactions that properly should have been set
forth therein in accordance with GAAP that have not been accurately so set
forth.
3.10 Pro Forma Financial Statements. Shareholders have previously
------------------------------
delivered to 4MC adjustments to the Financial Statements to reflect the
financial position of POP and Animation at the dates thereof and the results of
their operations for the periods then ended, as if the equipment leased by POP
from Ten Moons at POP and from Santa Monica Financial, and treated by POP as
operating leases had been leased directly by POP from the third party lessors
and thereby had been direct capital leases. The Financial Statements, as so
adjusted, are called the Pro Forma Financial Statements. The Pro Forma
Financial Statements have been prepared in accordance with GAAP applied on a
consistent basis (except as indicated in the notes thereto) throughout the
periods covered thereby and present fairly the financial position of POP and
Animation at the dates thereof and the results of their operations for the
periods then ended, based upon the assumption that the foregoing third party
leases were the direct capital leases of POP. Shareholders represent that, if
such leases had been the direct leases of POP, they would properly have been
treated as capital leases in accordance with GAAP.
3.11 Absence of Certain Changes or Events. Since December 31, 1996, there
------------------------------------
has not been (i) any declaration, setting aside or payment of any dividend or
other distribution (whether in cash, stock or property) with respect to the
capital stock of POP or any purchase by POP or Animation of any shares of
capital stock of POP; (ii) any increase (other than increases in accordance with
past custom and practice or in accordance with agreements in effect at December
31, 1996) in the compensation (including, without limitation, bonuses and
compensatory options) payable or to become payable by POP or Animation to any of
its shareholders or directors or to any of its officers or employees who
received or were entitled to receive compensation during the fiscal year ended
December 31, 1996 in excess of Seventy-five Thousand Dollars ($75,000); (iii)
any payment by POP or Animation of, or agreement by POP or Animation to pay, any
pension, retirement allowance or other employee benefit to any of its past or
present shareholders, directors, officers or employees, except as required by
previously existing plans, agreements or arrangements and in accordance with
past custom and practice; (iv) any establishment by POP or Animation of any
additional pension, profit sharing, bonus, incentive, deferred compensation,
group insurance, retirement or other employee benefit plan, or of any employment
or consulting agreement in excess of One Hundred Thousand Dollars ($100,000)
with or for the benefit of any Person; (v) any sale, assignment or transfer of
any of the property, assets or business of POP or Animation not in the ordinary
course of business; (vi) cancellation of any of the Claims of POP or Animation
in excess of One Hundred Thousand Dollars ($100,000) in the aggregate; (vii) any
change or amendment to the Articles of Incorporation or Bylaws (or similar
governing documents) of POP, Animation or Affiliate(s); (viii) any discharge or
satisfaction of any lien or payment of any material obligation or liability
(fixed or contingent) by POP or Animation not in the ordinary course of
business; (ix) any mortgaging, pledging or subjecting to any lien of any assets
or properties of POP or Animation not in the ordinary course of business; (x)
any new investment of a capital nature by POP or Animation in any Person other
than POP or Animation, either by purchase of stock or securities, contribution
to capital, property transfer, purchase of property or assets or otherwise, not
in the ordinary course of business or not reflected in the Financial Statements;
(xi) any waiver or release of any rights by POP or Animation not in the ordinary
course of business; (xii) any new loan to, or any new transaction of any other
nature with, any shareholder, director, officer or employee of POP or Animation
in excess of One Hundred Thousand Dollars ($100,000) in the aggregate; (xiii)
any entering into any written or oral contracts not in the ordinary course of
business that extend beyond the first anniversary hereof or have obligations
thereunder in excess of One Hundred Thousand Dollars ($100,000); (xiv) any
transaction whether or not covered by the foregoing not in the ordinary course
of business; or (xv) any commitment by POP or Animation to do any of the things
specified in clauses (i) through (xiv) above, inclusive; or (xvi) any Material
Adverse Change in the business, operations or condition (financial or other) of
POP or Animation. Notwithstanding the foregoing, POP may provide for the
employee bonuses described in Section 7.2(b) hereof.
3.12 Absence of Undisclosed Liabilities. To the Knowledge of each of the
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Shareholders, neither POP nor Animation has any obligation or Liabilities
(whether accrued, absolute, contingent, unliquidated or otherwise) other than
(i) Liabilities reflected in the Financial Statements, including the notes
thereto, and (ii) Liabilities and obligations which have arisen subsequent to
the Financial Statements in the ordinary course of business.
3.13 Broker's Fees. Neither any of the Shareholders, POP, Animation or
-------------
Affiliate(s) has any liability or obligation to pay any fees or commissions to
any broker, finder or agent with respect to the Transaction.
3.14 Assets. Except for assets and properties which are subject to
------
Licenses, as set forth on Schedule 3.15, POP or Animation has good and
marketable title to all of the assets and properties which they purport to own
as reflected on the Interim Financial Statements, or thereafter acquired. POP
or Animation has a valid leasehold interest in all material properties of which
it is the lessee including the Personal Property Leases set forth on Schedule
3.14 which constitute all of the leases (operating or capital) to which POP or
Animation is a party, including but not limited to leases from Ten Moons at POP
and Santa Monica Financial (the "Related Party Leases"). Each such lease is
legal, valid, binding, enforceable and in full force and effect in accordance
with its terms. Neither POP nor Animation has received notice of any breach or
default on the part of either of them with respect to such leases or has
breached any such leases. To the Knowledge of any Shareholder there are no
defaults or events or circumstances which, with the giving of notice, lapse of
time, or both, would constitute a default or breach thereunder. No material
portion of the assets of POP or Animation is subject to any Lien except as set
forth in Schedule 3.14. No material portion of the assets of POP or Animation
is subject to any governmental decree or order to be sold or is being condemned,
expropriated or otherwise taken by any public authority with or without payment
of compensation therefor nor, to the Knowledge of any Shareholder, has any such
condemnation expropriation or taking been proposed. None of the material assets
of POP or Animation are subject to any restriction which would prevent
continuation of the use currently made thereof or materially adversely affect
the value thereof. POP or Animation are, and on the Closing Date will be, the
rightful and lawful owner, licensee or lessee of all significant items of
Personal Property used by POP or Animation in the conduct of its business. All
of the Personal Property located at the business premises of POP or Animation is
owned or leased by POP or Animation and is not owned or leased by any other
Person.
3.15 Intangible Personal Property.
----------------------------
3.15(a) Schedule 3.15 sets forth (i) a complete and correct list of
each patent and patent application and each copyright, copyright application,
trademark, trademark application, service mark, service mark application (in any
such case, whether registered or to be registered in the United States of
America or elsewhere), process, invention, trade secret, trade name, computer
program, formula and customer list (collectively, the "Intangible Personal
Property") of POP or Animation, and (ii) a complete and correct list of all
material licenses or similar agreements ("Licenses") to which POP or Animation
is a party either as a licensee or licensor for each such item of Intangible
Personal Property.
3.15(b) There are no pending actions or other judicial or adversary
proceedings involving POP or Animation concerning any item of Intangible
Personal Property and, to the Knowledge of any Shareholder, no such action or
proceeding is threatened and no claim or other demand has been made or
threatened by any person relating to any item of Intangible Personal Property;
3.15(c) POP or Animation have the right and authority to use each
item of Intangible Personal Property in connection with the conduct of its
businesses in the manner presently conducted and to convey such right and
authority, and such use does not conflict with, infringe upon or violate any
patent, trademark, copyright or registration of any other person or entity;
3.15(d) There are no outstanding or, to the Knowledge of any
Shareholder, threatened disputes or disagreements with respect to any Licenses;
and 3.15(e) The conduct by POP and Animation of their business does not conflict
with the valid patents, trademarks, trade secrets, trade names or copyrights of
others.
3.16 Real Property. Neither POP nor Animation owns any Real Property,
-------------
except for leasehold improvements upon the real property leased to POP or
Animation. Schedule 3.16 lists all real property leased or subleased to or by
POP or Animation. Shareholders have delivered to 4MC true, complete and correct
copies of all such leases and subleases of real property. Each such lease and
sublease is legal, valid, binding, enforceable and in full force and effect in
accordance with its terms. Neither POP nor Animation has received notice of any
breach or default on the part of either of them with respect to such leases and
subleases or has breached any such lease or sublease and, to the Knowledge of
any Shareholder, there are no defaults or events or circumstances which, with
the giving of notice, lapse of time, or both, would constitute a default or
breach thereunder.
3.17 Contracts. Schedule 3.17 consists of a true and complete list of all
---------
Contracts to which POP or Animation is a party or by which it is bound except
for contracts covered by Section 3.25: (A) relating to the
provision of post production services; and (B) all other Contracts except those
(i) requiring payments or receipts less than Fifty Thousand Dollars ($50,000)
per year, and (ii) made in the ordinary course of business or terminable by POP
or Animation on notice of thirty (30) days or less without penalty or POP or
Animation being liable for damages. All such contracts are herein referred to as
"Material Contracts."
To the Knowledge of Shareholders, all of the Material Contracts are legal,
valid, binding, in full force and effect and enforceable in accordance with
their terms. Neither POP nor Animation nor, to the Knowledge of Shareholders,
any other party to any Material Contract has breached any material provision of,
and no event has occurred which, with the lapse of time or action by a third
party, could result in a material default under the terms thereof.
3.18 Litigation. Except as set forth on Schedule 3.18, there is no claim,
----------
action, proceeding or, to the Knowledge of Shareholders, investigation pending
against or affecting POP or Animation before any court, arbitrator or
Governmental Authority. To the Knowledge of Shareholders there is no claim,
action proceeding or investigation threatened against or threat which would
affect POP or Animation before or by any court, arbitrator or Governmental
Authority which could have a material adverse effect on POP or Animation, nor is
there any basis for any such claim, action, proceeding or investigation. There
are no decrees, injunctions or orders of any court, Governmental Authority or
arbitration outstanding against POP or Animation and, with respect to any action
or claim covered by insurance, POP or Animation have complied with all
requirements of any such policy which are conditions to the defense and
continued defense of such claim or action.
3.19 Tax Matters.
-----------
3.19(a) POP and Animation have duly prepared and timely filed all
Returns required to be filed by either of them and have paid all Taxes required
to be paid by either of them in connection with the periods covered by such
Returns. Adequate provision has been made on the books and records of POP and
Animation and in the Financial Statements for all Taxes required to be paid but
not yet paid or otherwise assessed or assessable against them or payable with
respect to their business or assets, through the date hereof.
3.19(b) None of the Returns of POP or Animation have been audited or
currently is the subject of an audit. POP has made available to 4MC a true,
complete and correct copy of POP's most recently filed annual and other periodic
Returns for it and Animation.
3.19(c) Neither POP nor Animation has waived any statute of
limitations with respect to Taxes or agreed to any extension of time with
respect to any Tax assessment or deficiency.
3.19(d) There are no tax liens upon the assets of POP or Animation.
3.19(e) To the Knowledge of Shareholders, there is no valid basis
for any assessment, deficiency notice, 30-day letter or similar intention to
assess any Tax to be issued to POP or Animation by any Governmental Authority.
3.19(f) Neither POP nor Animation is a party to any Tax allocation
or sharing agreement.
3.19(g) Neither POP nor Animation have been a member of an
Affiliated Group filing a consolidated United States federal income Tax Return.
3.20 Compliance With Laws. To the Knowledge of Shareholders, POP and
--------------------
Animation have complied and each is complying in all material respects with all
Laws applicable to the operation of their business in all jurisdictions where
their business is conducted or to which they are subject, including, without
limitation, all applicable federal and state securities laws, communications
laws, civil rights and equal opportunity employment laws and regulations, and
all antitrust, anti-monopoly and fair trade practice laws. Without limiting the
foregoing, no notice from any Governmental Authority has been received by POP or
Animation claiming any violation of any Law or requiring any work, construction
or expenditure. To the Knowledge of any Shareholder, no Person has asserted that
POP or Animation is in violation in material respect of any such Laws.
3.21 Government Licenses and Permits. POP and Animation are duly licensed
-------------------------------
with all Governmental Licenses and Permits required by applicable law for the
purpose of conducting their business or owning their properties or both, in each
jurisdiction in which they do business or own property or in which such
Governmental Licenses and Permits are otherwise required except where the
failure to be so qualified or authorized would not in the aggregate have a
material adverse effect on the assets, liabilities (whether absolute, contingent
or otherwise), results of operations, business or prospects of POP or Animation.
POP and Animation are in compliance in all material respects with all
Governmental Licenses and Permits. Schedule 3.21 sets forth a list of all such
Governmental Licenses and Permits and the expiration dates thereof. There are
no proceedings pending or, to the Knowledge of any Shareholder, threatened to
revoke or terminate any such Governmental Licenses and Permits.
3.22 Environmental Matters.
---------------------
3.22(a) POP and Animation have obtained all Environmental Permits
required for the proper management and operation of their business and all such
Environmental Permits are in good standing, and POP and Animation are in
compliance with the terms and conditions of such Environmental Permits;
3.22(b) To the Knowledge of Shareholders, POP and Animation are each
in all material respects in full compliance with all Environmental Laws;
3.22(c) To the Knowledge of Shareholders, no portion of any premises
leased by POP or Animation or any other property previously owned or leased by
POP or Animation has been designated, listed or identified in any manner by the
EPA or any other Governmental Authority or under and pursuant to any
Environmental Law as a hazardous waste or hazardous substance disposal or
removal site, Superfund or clean-up site; or candidate for clean-up,
investigation, removal or closure pursuant to any Environmental Law;
3.22(d) To the Knowledge of Shareholders, POP or Animation have not
received at any time prior to the date hereof a summons, citation, notice,
directive, letter or other communication, written or oral, from the EPA or any
other Governmental Authority, authorized pursuant to an Environmental Law,
concerning any intentional or unintentional action or omission by POP or
Animation constituting a violation or potential violation of any Environmental
Law including, without limitation, violations relating to the releasing,
spilling, leaking, pumping, pouring, emitting, emptying, dumping or otherwise
disposing of any Regulated Substance into the environment resulting in damage
thereto or to the wildlife, biota and other natural resources; and
3.22(e) POP or Animation have not received at any time prior to the
date hereof any summons, citation, notice, directive, letter or other
communication, written or oral, of any potential claim or liability under any
Environmental Law including, without limitation, any notification as a
potentially responsible party with respect to any Superfund or other clean-up
site.
3.23 Insurance. POP and Animation are covered by insurance policies, or
---------
renewals thereof, as identified and described in Schedule 3.23 which set forth
the carrier, premium, coverage, deductible amount and expiration date. There is
no liability under any insurance policy in the nature of a retroactive rate
adjustment or loss sharing or similar arrangement. Schedule 3.23 is a complete
and correct list of all insurance with respect to which the policy period has
expired, but for which certain of the coverage years are still subject to audit
or retrospective adjustment by the carrier, and accurately sets forth such
coverage years and the coverages, deductible amounts, carriers and expiration
dates thereof. There are no outstanding requirements of recommendations by any
insurance company that issued any policy of insurance to POP or Animation or by
any Board of Fire Underwriters or other similar body exercising similar
functions or by any Governmental Authority exercising similar functions that
require or recommend any changes in the conduct of the business of POP or
Animation or any action to be undertaken with respect to any of their assets.
No notice or other communication has been received by POP or Animation from any
insurance company within the two (2) years preceding the date hereof cancelling
or materially amending or materially increasing the annual or other premiums
payable under any of its insurance policies and, to the Knowledge of
Shareholders, no such cancellation, amendment or increase of premiums is
threatened. To the Knowledge of Shareholders, such policies are sufficient for
compliance with (i) all requirements of Law and (ii) all Contracts to which POP
or Animation is a party. Neither POP nor Animation have been refused any
insurance with respect to their assets or operations, and their coverage has not
been limited by any insurance carrier to which they have applied for any such
insurance or with which they have carried insurance, during the last three (3)
years. There are no pending or threatened claims under any insurance policy.
3.24 Condition of Assets. The equipment, fixtures and other tangible
-------------------
property of POP and Animation are free and clear of all Liens (other than
landlord's liens under presently existing leases), and, to the Knowledge of
Shareholders, are in good operating condition and repair (ordinary wear and tear
excepted) for the conduct of its business as presently being conducted.
3.25 Labor and Employment Agreements.
-------------------------------
3.25(a) Schedule 3.25 sets forth a complete and correct list of the
following, whether written or oral:
3.25(a)(i) each collective bargaining agreement, if any,
and other labor or employment agreement, if any, to which POP or Animation is a
party or by which either one is bound;
3.25(a)(ii) each profit sharing, deferred compensation,
bonus, severance, pension, change of control, retainer, consulting, retirement,
health, welfare or incentive plan or agreement to which POP or Animation is a
party or by which either one is or may be bound;
3.25(a)(iii) each plan or agreement under which "fringe
benefits" (including, without limitation, vacation plans or programs, sick leave
plans or programs, dental or medical plans or programs and related or similar
benefits) are afforded to employees of POP or Animation;
3.25(a)(iv) each informal arrangement or understanding for
the payment of post-retirement benefits; and
3.25(a)(v) the name and the terms of employment or
engagement of each employee or agent of or consultant to POP or Animation who
since January 1, 1996 was or is being paid Seventy-five Thousand Dollars
($75,000) or more per year or Six Thousand Dollars ($6,000) or more per month.
3.25(b) No organization effort, and no sex discrimination, racial
discrimination, age discrimination or other employment-related allegation,
claim, suit or proceeding, has been made or is pending with respect to the
employees of POP or Animation and to the Knowledge of any Shareholder, no such
effort, allegation, claim, suit or proceeding has been made, raised or brought
prior to the date of this Agreement and, to the Knowledge of any Shareholder,
there is no basis for any such claim.
3.25(c) All reasonably anticipated material obligations of POP or
Animation, whether arising by operation of law, contract, past custom or
otherwise, for unemployment compensation benefits, pension benefits, advances,
salaries, bonuses, vacation and holiday pay, sick leave and other forms of
compensation payable to the employees or agents of POP or Animation in respect
of the services rendered by any of them on or prior to the date of the Financial
Statements or the Interim Financial Statements, respectively, have been paid or
adequate accruals therefor have been made in the consolidated books and records
of POP or Animation and in the Financial Statements or the Interim Financial
Statements, as the case may be. All such material obligations in respect of
services rendered on or prior to the date hereof have been paid as of the date
hereof or adequate accruals therefor have been made. All accrued material
obligations of POP or Animation applicable to its employees, whether arising by
operation of Law, Contract, past custom or otherwise, for payments to trusts or
other funds or to any Governmental Authority with respect to unemployment
compensation benefits, social security benefits or any other benefits for
employees, with respect to employment of said employees through the date of the
Financial Statements or the Interim Financial Statements, respectively, have
been paid or adequate accruals therefor have been made on the consolidated books
and records of POP or Animation and in the Financial Statements or the Interim
Financial Statements, as the case may be. All such material obligations with
respect to employment of employees through the date hereof, have been paid as of
the date hereof or adequate accruals therefor have been made.
3.25(d) To the Knowledge of Shareholders, all employees of POP or
Animation are "at will" employees.
3.26 Employee Benefit Plans; ERISA. Schedule 3.26 lists each Employee
-----------------------------
Benefit Plan that POP or Animation maintains or to which POP or Animation
contributes. No such Employee Benefit Plan is a Multiemployer Plan.
3.26(a) To the Knowledge of Shareholders, each such Employee Benefit
Plan (and each related trust, insurance contract or fund) complies in form and
in operation in all respects with the applicable requirements of ERISA and the
Code.
3.26(b) All contributions (including all employer contributions and
employee salary reduction contributions) which are due have bee paid to each
such Employee Benefit Plan which is an Employee Pension Benefit Plan.
3.26(c) Each such Employee Benefit Plan which is an Employee Pension
Benefit Plan (if any) intended to meet the requirements of Code Section 401(a)
has received a determination letter from the Internal Revenue Service to the
effect that it meets such requirements.
3.26(d) Each such Employee Benefit Plan which is an Employee Pension
Benefit Plan is a defined contribution plan.
3.26(e) With respect to each such Employee Benefit Plan covering
United States employees, to the extent applicable, POP or Animation has
delivered to 4MC true, complete and correct copies of the plan documents and
summary plan descriptions, the most recent determination letter received from
the Internal Revenue
Service, the most recent Form 5500 Annual Report and all related trust
agreements, insurance contracts and other funding agreements which implement
such Employee Benefit Plan.
3.26(f) To the Knowledge of Shareholders, neither POP nor Animation
nor any fiduciary (as described in Section 3(21)(A) of ERISA) of any such
Employee Benefit Plan has engaged in any transaction that is a violation of any
provision of ERISA, the Code or other applicable law which could subject POP or
Animation or any such fiduciary to any tax, penalty or liability under any
provision of ERISA or the Code.
3.27 Business Locations. POP or Animation do not own or lease any Real or
------------------
Personal Property in any state or country other than California. POP or
Animation have no executive offices or places of business except as otherwise
set forth on Schedule 3.27.
3.28 Accounts Receivable. All accounts receivable reflected on the
-------------------
balance sheet as of June 30, 1997 included in the Interim Financial Statements
and all accounts receivable which have arisen since the date of such statements
arose from bona fide transactions in the ordinary course of business with
unaffiliated third parties and otherwise represent valid receivables in
accordance with GAAP. To the Knowledge of Shareholders, no such account
receivable is subject to any right of set-off.
3.29 No Omissions or Untrue Statements. To the Knowledge of Shareholders,
---------------------------------
no representation or warranty made by Shareholders to 4MC in this Agreement, in
the Schedules or in any certificate required to be delivered to 4MC pursuant to
the terms of this Agreement contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained herein or therein not misleading as of the date hereof
and as of the Closing Date.
4. Representations and Warranties of 4MC.
-------------------------------------
4MC represents, warrants to and agrees with Shareholders as follows:
4.1 Organization. 4MC is a corporation duly organized, validly existing
------------
and in good standing under the laws of the state of Delaware. 4MC has the
corporate power and authority to own and lease its properties and to carry on
its business as now being conducted.
4.2 Due Execution and Authority. This Agreement is duly authorized,
---------------------------
executed and delivered by 4MC and is a valid and legally binding agreement of
4MC enforceable in accordance with its terms, except as such enforceability may
be limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally or by limitations upon the availability of equitable
remedies.
4.3 No Violation. Neither the execution and delivery of this Agreement by
------------
4MC, nor the performance by 4MC of its obligations hereunder, constitutes or
will constitute a breach or violation of, or result in a default under, any law,
rule or regulation, or any order, ruling, decree, judgment, stipulation,
mortgage, indenture, loan, agreement or other agreement or instrument to which
4MC is a party, by which it is bound or to which any of its property is subject
or of the Certificate of Incorporation or Bylaws of 4MC.
5. Covenants and Agreements of Shareholders
----------------------------------------
5.1 Conduct of Business. Shareholders covenant and agree that between the
-------------------
date hereof and the Closing Date and except as otherwise contemplated or
permitted by this Agreement or as consented to by 4MC in writing:
5.1(a) The business of POP and Animation shall be conducted in the
ordinary and regular course.
5.1(b) POP and Animation will use their Best Efforts to preserve
intact their business organizations, the services of their present employees and
the good will of their suppliers, customers and others having business relations
with them.
5.1(c) POP's and Animation's material assets and material properties
will be in as good condition and repair on the Closing as they are at the date
hereof, subject only to ordinary wear; provided, however, that the provisions of
Section 11.2 shall apply to casualty losses and damages.
5.1(d) POP or Animation shall not do any of the things specified in
clauses (i) through (xv), inclusive, of Section 3.11 above; provided, however,
that POP or Animation may hire additional employees in the ordinary course of
business.
5.1(e) POP or Animation will use their Best Efforts not to materially
default under, or become materially in breach of, any term or provision of, or
suffer or permit to exist any condition or event which, after
notice or lapse of time or both, would constitute a material default under any
contract, agreement, lease, license, commitment, instrument or obligation.
5.1(f) Ten Moons and SMF will comply with each and all of the
provisions of Sections 5.1(a) through 5.1(e), to the extent applicable, unless
and until the Related Party Leases and the equipment subject to the Related
Party Leases have been transferred to POP.
5.2 Subsequent Events.
-----------------
5.2(a) Between the date of this Agreement and the Closing Date,
Shareholders shall not directly or indirectly enter into, or allow POP or
Animation to enter into, any transaction or take any action which would result
in any of the representations and warranties of Shareholders not being
materially true and correct at and as of (i) the time immediately following the
occurrence of such transaction or event, or (ii) the Closing Date. In addition,
Shareholders shall use their Best Efforts not to permit or suffer, by action or
inaction, an event to occur which would result in any of their representations
and warranties not being materially true and correct at and as of the times
specified in clauses (i) and (ii) above. Shareholders shall affirmatively use
their Best Efforts to operate the business of POP and Animation so that such
representations and warranties shall be true and correct at Closing.
Shareholders shall promptly give written notice to 4MC upon becoming aware of
(a) any event, fact or circumstance which, if known on the date hereof, would
have been required to be set forth or disclosed pursuant to this Agreement, and
(b) any fact, event or circumstance which constitutes an impending or threatened
rendering of any of the representations and warranties contained in this
Agreement not being true and correct as of the times specified in clauses (i)
and (ii) above.
5.2(b) In the event Shareholders comply with their obligations
pursuant to Section 5.2(a) and in the event the representations and warranties
were materially accurate when made, although 4MC would have the right to
terminate this Agreement if subsequent events, facts or circumstances rendered
any representations and warranties materially untrue at a later date,
Shareholders would not be liable to 4MC for any damages or claims arising out of
such event, fact or circumstance. Notwithstanding the foregoing, nothing herein
contained otherwise limits any liability of Shareholders arising out of or in
connection with any breaches of or under this Agreement.
5.3 Access by 4MC. Shareholders covenant that between the date hereof and
-------------
the Closing Date, POP, Animation and Affiliate(s) shall afford to 4MC and to
4MC's counsel, accountants and other representatives full access, during normal
business hours upon reasonable advance notice, throughout such period, (i) to
all of the books, contracts and records of POP, Animation and Affiliates and
shall furnish 4MC during such period with all information concerning POP,
Animation and Affiliates that 4MC may reasonably request and (ii) to the
properties of POP, Animation and Affiliates in order to conduct inspections at
4MC's expense to determine that POP, Animation and Affiliates are operating in
material compliance with all applicable federal, state and local and foreign
statutes, rules and regulations, and that POP and the assets of Animation and
Affiliates are substantially in the condition and of the capacities represented
and warranted in this Agreement. Any such investigation or inspection by 4MC
shall not be deemed a waiver of, or otherwise limit, the representations,
warranties and covenants contained herein. The investigations and inspections
will be conducted (i) so as not to unreasonably interfere with the conduct of
the business of POP, Animation and Affiliates, and (ii) using reasonable efforts
to maintain the confidentiality of this Agreement and the Transactions. The
parties and their employees, consultants, agents and others exposed to such
information will hold any such information which is nonpublic in strict
confidence until such time as such information otherwise becomes publicly
available through no wrongful act of either party or is required to be disclosed
pursuant to applicable law. In the event that this Agreement is terminated in
accordance with its terms, each party shall promptly return all nonpublic
documents provided by any other party and any copies, extracts or other
reproductions in whole or in part of such documents. In addition, in the event
of such termination, all documents, memoranda, notes and other writing
whatsoever prepared by each party based on the information in such material
shall be destroyed (and each party shall use its best efforts to cause its
advisors and their representatives to similarly destroy their respective
documents, memoranda and notes), and such destruction (and best efforts) shall
be certified in writing to the other party by an authorized officer supervising
such destruction; provided, however, that, with the exception of privileged
information, at the direction of the other party, such material shall be
delivered to the other party.
5.4 Related Party Leases. Shareholders agree that they will use their
--------------------
Best Efforts to cause the interest of Ten Moons and SMF in the Related Party
Leases to be transferred and assigned to POP prior to Closing, with the consent
of the third party lessors. 4MC shall cooperate in seeking such consent. The
representations and warranties
contained in Section 3.14 shall thereupon apply to such Related Party Leases and
the Personal Property subject to such leases. Such consents will be Required
Consents hereunder.
6. Covenants Not to Compete
------------------------
6.1 Covenants. Shareholders jointly and severally covenant that:
---------
6.1(a) From and after the Closing Date, they will not reveal, divulge
or make known to any person, firm or corporation (other than 4MC) any trade
secrets or confidential information relating to the business of POP, Animation
or Affiliate(s). As used herein, "Confidential Information" shall mean any and
all business or financial information, financial statements, cost and expense
information, employment contracts, pricing and discount information, production
data, trade secrets, secret or proprietary processes and formulae, technology,
marketing and customer data (including but not limited to identity of customers
and customer lists), and such other information as may be supplied, delivered or
disclosed, now, previously or hereafter, by 4MC, POP, Animation or Affiliate(s)
that has not been previously disclosed to the public and is not ascertainable
from public or published information or trade sources.
6.1(b) For so long as 4MC, its parent, subsidiary, affiliate or
related company or the successor(s) or assign(s) to any of them is engaged in
the business in which POP Animation or Affiliate(s) are now engaged, or for five
(5) years from Closing, whichever is shorter, Shareholders shall not, directly
or indirectly, for themselves or as agents of or on behalf of or in conjunction
with any person, corporation or other entity, or as partners of any partnership,
or as shareholders or members of any corporation or other entity, compete with
4MC, POP, Animation or DVD Center, or with any parent, subsidiary, affiliate or
related company of 4MC, or with any successor of 4MC (collectively, the "4MC
Group"), or engage in any aspect of such business, nor will they permit any
person or entity in which they are financially interested or have assisted
financially, or which the are owners or agents, so to compete or so to engage in
such business. The applicable business for purposes of this Section shall mean
the business presently operated by POP, by Animation or by DVD Center, including
any extensions thereof implemented by the 4MC Group to the extent that any such
extensions are within the post production business as that term is commonly
understood in the entertainment industry. The provisions of this Section 6.1(b)
shall not apply to James Fancher. Notwithstanding the foregoing, Shareholders
may make solely passive investments in any such applicable or competing business
which is publicly held and of which any Shareholder shall not own or control,
directly or indirectly, in the aggregate securities which constitute more than
two percent (2%) of the voting rights or equity ownership of such publicly held
business.
6.2 Remedies. Shareholders agree that the remedy at law for any breach or
--------
threatened breach of the covenants set forth in this Section 6 will be
inadequate and that any breach or attempted breach would cause such immediate
and permanent damage as would be irreparable and the exact amount of which would
be impossible to ascertain and, therefore, they agree and consent that in the
event of any breach or threatened breach of any of said covenants by them, in
addition to any and all other legal and equitable remedies which may be
available, 4MC and any successor or assign may obtain preliminary or permanent
injunctive relief without the necessity of proving actual damage by reason of
such breach and, to the extent permissible under the applicable statutes and
rules of procedure, a temporary restraining order may be granted immediately on
commencement of any such suit and without notice.
6.3 Severability. Each and every covenant, provision, term and clause
------------
contained in this Section 6 is severable from the others and each such covenant,
provision, term and clause shall be valid and effective notwithstanding the
invalidity or unenforceability of any other such covenant, provision, term or
clause. The parties expressly agree that the court or arbitrator shall modify
any such unenforceable or invalid provision in a manner that will preserve the
intent of this Section 6 to the greatest extent possible.
7. Additional Agreements
---------------------
7.1 Deposit. Upon execution of this Agreement, 4MC shall deliver the
-------
Deposit to Kozlowski and Kramer. The Deposit shall be treated as a credit
against the Purchase Price and shall be non-refundable unless the Transactions
fail to close (i) because the representations and warranties made by the
Shareholders contained in this Agreement were, as of the date of this Agreement,
either (A) intentionally incorrect, or (B) were unintentionally incorrect and as
a consequence, result in a Material Adverse Effect; (ii) because Coopers &
Lybrand LLC, 4MC's independent certified public accountants, is unable within
sixty (60) days from the date of this Agreement (or such
additional time not later than January 31, 1998 as Shareholders may grant) to
complete its audit of POP and Animation for such period(s) as may be required by
the Securities Act and the rules promulgated by the SEC for inclusion within
reports required to be filed by 4MC, to deliver audited financial statements
which do not materially differ from the Financial Statements, and to deliver an
unconditional opinion with respect to such audited financial statements; (iii)
because Coopers & Lybrand LLC is unable within sixty (60) days from the date of
this Agreement (or such additional time not later than January 31, 1998 as
Shareholders may grant) to advise 4MC that, based upon its review of the Pro
Forma Financial Statements, it is of the opinion that the representations and
warranties set forth in Section 3.10 are substantially true and correct; (iv)
because POP or Animation has failed to comply with the provisions of Section
5.1(a) through 5.1(e) hereof, which failure is either intentional or in the
aggregate has a Material Adverse Effect; (v) because the aggregate Indebtedness
of POP, Animation, Ten Moons and SMF, as well as any Indebtedness guaranteed by
POP or Animation, at the date scheduled for Closing exceeds Seventeen Million
Dollars ($17,000,000), unless Shareholders agree to reduce the Purchase Price by
an amount equal to any such excess; or (vi) because Shareholders are unable at
the date scheduled for Closing to deliver any of the items required by Section
8.2. Upon the occurrence of any of the foregoing events which provide for a
refund of the Deposit, if such event is curable, 4MC may give a notice of such
event to Shareholders, who shall have ten (10) business days to cure such event.
If Shareholders have not so cured such event within such period of time, or if
such event is not curable, then 4MC may give a notice (the "Refund Notice") to
Kozlowski and Kramer requesting repayment of the Deposit. The Refund Notice
shall constitute an election by 4MC to terminate this Agreement. In the event of
such Refund Notice, Kozlowski and Kramer will immediately refund to 4MC an
amount equal to the Deposit together with interest thereon from the first
business day after the Deposit at the yield for three-month U.S. Treasury Bills
at such date.
7.2 Additional Consideration.
------------------------
7.2(a) Net Tax Refund. Shareholders have advised 4MC that certain
--------------
deductions associated with leasehold improvements located at 625 Arizona Avenue,
Santa Monica, California to which POP is entitled, were not appropriately
classified on POP's Returns for prior year(s). POP intends to file such amended
Returns on or before December 31, 1997 in order to obtain refunds of state and
federal income taxes attributable to such deductions. In the event that POP
receives such refunds, 4MC shall pay to the Shareholders as additional
consideration for the purchase of the Stock an amount equal to such refund less
any cost incurred by 4MC or POP in obtaining such refund (the "Net Tax Refund").
Such additional consideration shall be paid within ten (10) business days after
receipt of such refund by POP.
7.2(b) Net Tax Differential. Shareholders have advised 4MC that POP
--------------------
intends to pay certain employees bonuses aggregating One Million Dollars
($1,000,000), to be accrued effective December 31, 1997 and to be paid prior to
March 15, 1998. 4MC shall pay as additional consideration for the purchase of
the Stock an amount equal to the difference between (i) the federal and state
income taxes actually payable by POP for its year ending December 31, 1997,
after deduction of such $1 million bonus, and (ii) the amount of federal and
state income taxes that would have been payable based upon the same tax returns
without the deduction of said $1 million (the "Net Tax Differential"). The tax
returns of POP for such calendar year and the pro forma tax returns for the
purpose of calculating the amount in clause (ii) above shall be subject to the
approval of Coopers & Lybrand LLC or such other accounting firm then regularly
employed by 4MC as its independent public accountants. No benefit from loss
carrybacks shall be considered in determining such Net Tax Differential. 4MC
shall pay such additional consideration to the Shareholders within ten (10)
business days after the state and federal income tax returns for POP's year
ending December 31, 1997 have been filed. 4MC agrees to use its Best Efforts to
cause such tax returns to be filed on a timely basis within appropriate
available extension periods. In the event of a challenge by the Internal Revenue
Service or the Franchise Tax Board of the aforesaid Returns as it pertains to
such One Million Dollar ($1,000,000) bonus, an amount equal to any reduction in
the Net Tax Differential as recalculated taking into account the results of any
such challenge shall immediately be repaid to 4MC by Shareholders. Kozlowski and
Kramer shall be jointly and severally responsible for payment of the entire
reduction and each other Shareholder shall be severally liable for payment of
his or her share of the reduction. In addition to 4MC's rights to proceed
against the Shareholders, such reduction shall be considered a Loss from a Tax
Claim for purposes of the provision of Article 12 hereof and 4MC shall be
entitled to invoke the indemnity provisions of such Article 12, without regard
to the limitations of Section 12.6.
7.3 Stock Options. At Closing, 4MC shall issue to existing POP or
-------------
Animation employees options to purchase seventy-five thousand (75,000) shares of
the Common Stock of 4MC pursuant to 4MC's 1997 Stock Option Plan. Such options
will be issued at an exercise price equal to the average of the closing bid and
asked prices for 4MC Common Stock on the Friday immediately preceding the
Closing and shall vest one-third annually, commencing on the first anniversary
of the Closing. The terms and conditions of such options shall be set forth in
stock option agreements in the form customarily utilized by 4MC for the grant of
options to its employees. Prior to Closing, A. Kozlowski and Robert T. Walston
shall jointly recommend to the 4MC Stock Option Committee the appropriate
allocation of such options among existing POP and Animation employees.
7.4 Shareholder Guarantees. 4MC agrees that it shall use its Best Efforts
----------------------
to remove Shareholders from any guarantees (i) of obligations or Indebtedness of
POP or Animation to unrelated third parties, and (ii) of Ten Moons' or SMF's
obligations to third party lessors with respect to the Related Party Leases.
4MC shall defend, indemnify and hold harmless each Shareholder from and against
any and all losses, costs, liabilities, damages and expenses (including
reasonable legal fees, expert fees and other expenses incident thereto) of every
kind, nature and description that result from or arise out of any claim upon or
liability under any such guarantee.
7.5 Cooperation; Best Efforts. Subject to the terms and conditions of
-------------------------
this Agreement, each of the parties hereto shall use his or its best efforts to
take, or cause to be taken, all actions to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including providing information and using reasonable efforts necessary or
appropriate to obtain waivers, consents and approvals to this Agreement and the
transactions contemplated hereby, to effect all necessary registrations and
filings, including filings under the Hart-Scott-Rodino Act, and to lift any
injunctions or other legal bar to the transactions contemplated hereby (and, in
each case, to proceed with the transactions as expeditiously as possible).
Without limiting the generality of the foregoing, (i) Shareholders shall use
their best efforts to cause this Indebtedness of POP, Animation, Ten Moons and
SMF (including guarantees by any of them of Indebtedness of others) at the date
scheduled for Closing not to exceed Seventeen Million Dollars ($17,000,000), and
(ii) 4MC will use its best efforts to cause Coopers & Lybrand LLC to complete in
a timely manner the audit and review contemplated by Sections 7.1(ii) and (iii).
8. Closing
-------
8.1 Closing Date. The closing of the transactions covered by this
------------
Agreement shall occur on January 9, 1998 at the offices of Greenberg Glusker
Fields Claman & Machtinger LLP, 1900 Avenue of the Stars, Suite 2200, Los
Angeles, California 90067 or at such other time and place as the parties may
agree (the "Closing Date"). 4MC may accelerate the Closing, but not earlier
than January 2, 1998, or may defer the Closing, but not later than January 31,
1998. The Purchase Price shall be decreased by Four Thousand Two Hundred
Seventy-four Dollars ($4,274) for each day prior to January 9, 1998 at which the
Closing occurs. The Purchase Price shall be increased Four Thousand Two Hundred
Seventy-four Dollars ($4,274) for each day after January 9, 1998 at which the
Closing occurs, until January 31, 1998. Thereafter, the Purchase Price shall be
increased Five Thousand Five Hundred Eighty-nine Dollars ($5,589) for each day
after January 31, 1998 at which the Closing occurs. 4MC may extend the Closing
Date to February 28, 1998 (the "Extended Closing Date") by delivering to
Shareholders on or before January 31, 1998 a cashier's check in the amount of
Five Hundred Thousand Dollars ($500,000) payable jointly to A. Kozlowski and J.
Kramer, together with reasonable assurances of the availability of sufficient
funds to Close on or before the Extended Closing Date. Such payment shall become
part of the Deposit and shall be credited against the Purchase Price at Closing,
but shall be refundable only under the conditions set forth in Section 7.1. Upon
delivery of such cashier's check and assurances, references in this Agreement to
the Closing Date shall thereafter mean the Extended Closing Date.
8.2 Shareholders' Closing Deliveries. At the Closing, Shareholders shall
--------------------------------
deliver or cause to be delivered to 4MC:
8.2(a) certificates representing all the Stock, duly endorsed;
8.2(b) a certificate, dated as of the Closing Date, executed by
Shareholders to the effect that representations and warranties contained in this
Agreement are true and correct in all respects at and as of the Closing Date;
8.2(c) an opinion of Shareholders' counsel satisfactory in form and
substance to 4MC and its counsel;
8.2(d) certificates of good standing for POP, Subsidiary and
Affiliate;
8.2(e) executed escrow instructions pursuant to Section 2.2(b)(ii)
above and Section 12.8 below;
8.2(f) evidence of existence of all Required Consents;
8.2(g) an employment agreement with A. Kozlowski;
8.2(h) a consulting agreement with J. Kramer;
8.2(i) a consulting agreement with S. Hay;
8.2(j) acknowledgement from Lewis Madeira that his convertible
debenture will not be converted or an indemnity from Kozlowski and Kramer
against Losses arising from any such conversion; and
8.2(k) such documents as 4MC or its counsel may reasonably require.
8.3 4MC's Closing Deliveries At the Closing, 4MC shall deliver or cause to
------------------------
be delivered to Shareholders:
8.3(a) a certificate, dated as of the Closing Date, of the Secretary
or an Assistant Secretary of 4MC evidencing all necessary or appropriate
corporate action to enable 4MC to comply with the terms of this Agreement;
8.3(b) a certificate, dated as of the Closing Date, executed by the
Chief Executive Officer of 4MC to the effect that representations and warranties
contained in this Agreement are true and correct in all material respects at and
as of the Closing Date and that 4MC has complied with or performed in all
material respects all terms, covenants and conditions to be complied with or
performed by 4MC on or prior to the Closing Date;
8.3(c) an opinion of 4MC's counsel satisfactory in form and substance
to Shareholders and their counsel;
8.3(d) the Closing Cash Consideration provided for in Section
2.2(b)(ii) above payable to the Shareholders;
8.3(e) the Deferred Note provided for in Section 2.2(b)(iii) (to be
delivered to A. Kozlowski and J. Kramer);
8.3(f) the Letter of Credit provided for in Section 2.2(b)(iii) (to
be delivered to the Escrow Agent);
8.3(g) the promissory note provided for in Section 2.2(b)(iv) above;
8.3(h) the promissory note provided for in Section 2.2(b)(v) above;
8.3(i) an employment agreement with A. Kozlowski;
8.3(j) a consulting agreement with J. Kramer;
8.3(k) a consulting agreement with Sandra Hay;
8.3(l) option agreements for seventy-five thousand (75,000) shares of
4MC common stock, as contemplated by Section 7.3 above; and
8.3(m) such other documents as Shareholders or their counsel may
reasonably require.
9. Conditions to Obligations of Shareholders
-----------------------------------------
The obligation of Shareholders to consummate the Transactions is subject to
the following conditions, any of which may be waived by them in their sole
discretion:
9.1 Compliance by 4MC. 4MC shall have performed and complied in all
-----------------
material respects with all agreements and conditions required by this Agreement
to be performed or complied with by 4MC prior to or on the Closing Date.
9.2 Accuracy of 4MC's Representations. 4MC's representations and
---------------------------------
warranties contained in this Agreement or any schedule, certificate or other
instrument delivered pursuant to the provisions hereof or in connection with the
transactions contemplated hereby shall be true and correct in all material
respects at and as of the Closing Date (except for such changes permitted by
this Agreement) and shall be deemed to be made again as of the Closing Date.
9.3 Documents. All documents and instruments required hereunder to be
---------
delivered by 4MC to Shareholders at the Closing shall be delivered in form and
substance reasonably satisfactory to Shareholders and their counsel.
9.4 Litigation. No litigation seeking to enjoin the transactions
----------
contemplated by this Agreement or to obtain damages on account hereof shall be
pending or threatened.
9.5 Employment/Consulting Agreements. 4MC shall have entered into a new
--------------------------------
employment agreement with A. Kozlowski in form and substance attached hereto as
Exhibit F, a consulting agreement with J. Kramer in form and substance attached
hereto as Exhibit G and a consulting agreement with Sandra Hay in form and
substance attached hereto as Exhibit H.
10. Conditions to Obligations of 4MC
--------------------------------
The obligation of 4MC to consummate the Transactions is subject to the
following conditions, any of which may be waived by it in its sole discretion:
10.1 Compliance by Shareholders. Shareholders shall have performed and
--------------------------
complied in all material respects with all agreements and conditions required by
this Agreement to be performed or complied with by Shareholders prior to or on
the Closing Date.
10.2 Accuracy of Shareholder's Representations. The representations and
-----------------------------------------
warranties of Shareholders contained in this Agreement or any schedule,
certificate or other instrument delivered pursuant to the provisions hereof or
in connection with the transactions contemplated hereby shall be true and
correct in all material respects at and as of the Closing Date (except for such
changes permitted by this Agreement) and shall be deemed to be made again as of
the Closing Date.
10.3 Material Adverse Change. No Material Adverse Change shall have
-----------------------
occurred subsequent to June 30, 1997 with respect to POP or Animation, nor shall
any event or circumstance have occurred which would result in a Material Adverse
Change with respect to POP or Animation.
10.4 Litigation. No litigation seeking to enjoin the transactions
----------
contemplated by this Agreement, to obtain damages on account hereof shall be
pending or threatened.
10.5 Employment/Consulting Agreements. 4MC shall have entered into a new
--------------------------------
employment agreement with Kozlowski in form and substance attached hereto as
Exhibit F, a consulting agreement with J. Kramer in form and substance attached
hereto as Exhibit G and a consulting agreement with Sandra Hay in form and
substance attached hereto as Exhibit H.
10.6 Required Consents. Shareholders shall have obtained the Required
-----------------
Consents in form and substance satisfactory to 4MC; provided, however, that the
consent of Wells Fargo Bank shall not be deemed to be a Required Consent for
purposes of this Section 10.6 or of Section 8.2(f).
10.7 Financial Statements. 4MC's independent accountants shall have
--------------------
completed an audit of the financial statements of POP and Animation for the
period(s) required for inclusion in the reports of 4MC required to be filed with
the SEC, shall have issued its unqualified opinion with respect thereto, and the
financial statements so audited shall not materially differ from the Financial
Statements.
10.8 Pro Forma Financial Statements. 4MC's independent accountants shall
------------------------------
have completed a review of the Pro Forma Financial Statements and shall have
advised 4MC that the representations and warranties with respect thereto set
forth in Section 3.10 are substantially true and correct.
10.9 Indebtedness. The Indebtedness of POP, Animation, Ten Moons and SMF
------------
(including guarantees by any of them of Indebtedness of others) at Closing does
not exceed Seventeen Million Dollars ($17,000,000) unless Shareholders agree to
a reduction of the Purchase Price by an amount equal to any such excess.
11. Termination
-----------
11.1 Termination Prior to Closing; General.
-------------------------------------
11.1(a) If the Closing has not occurred by January 31, 1998, or, if
applicable, by the Extended Closing Date, either Shareholders or 4MC may
terminate this Agreement at any time thereafter by giving written notice of
termination to the other; provided, however, that no party may terminate this
Agreement hereunder if such party has materially breached any of the terms and
conditions hereof.
11.1(b) Prior to January 31, 1998, or, if applicable, by the
Extended Closing Date, either Shareholders or 4MC may terminate this Agreement
following the insolvency or bankruptcy of the other, or if any one or more of
the conditions to Closing set forth in Articles 9 or 10 shall become incapable
of fulfillment or there shall have occurred a material breach of this Agreement
and either such condition or breach shall not have been waived by the party for
whose benefit the condition was established or cured within ten (10) business
days after notice, then either Shareholders (in the case of a condition in
Article 9 or a breach by 4MC) or 4MC (in the case of a condition specified in
Article 10 or a breach by Shareholders) may terminate this Agreement.
11.2 Termination Prior to Closing; Casualty. In the event of a casualty
--------------------------------------
loss or damage which is uninsured, or the cost of repair or replacement of which
exceeds insurance proceeds by not less than Fifty Thousand Dollars ($50,000),
4MC may terminate this Agreement. In the event of a casualty loss or damage
which is insured, and with respect to which the cost of repair or replacement
does not exceed insurance proceeds by more than Fifty Thousand Dollars
($50,000), if the existence of such casualty loss or damage would nevertheless
have a Material Adverse Effect, 4MC may terminate this Agreement. Unless, in
either of the above circumstances, 4MC waives its right to terminate this
Agreement within ten (10) business days after written notice from Shareholders
to 4MC advising 4MC of such circumstances and requesting a determination by 4MC
whether 4MC intends to terminate this Agreement or to waive its right to
terminate based upon such circumstances, Shareholders may thereafter terminate
this Agreement. Termination of this Agreement pursuant to this Section 11.2
shall not entitle 4MC to a refund of the Deposit, which may be retained by
Shareholders.
11.3 Consequences of Termination. Upon termination of this Agreement
---------------------------
pursuant to this Article 11 or any other express right of termination provided
elsewhere in this Agreement, the parties shall be relieved of any further
obligation to the others; provided, however, that no termination of this
Agreement, pursuant to this Article 11 or under any other express right of
termination provided elsewhere in this Agreement shall operate to release any
party from any liability to any other party incurred before the date of such
termination or from any liability resulting from any material misrepresentation
made in connection with this Agreement or material breach hereof.
12. Survival of Representations; Indemnification; Escrow
----------------------------------------------------
12.1 Survival. All statements contained in any certificate delivered by
--------
or on behalf of Shareholders or 4MC pursuant to Section 8 of this Agreement
shall be deemed representations, warranties and covenants by Shareholders or
4MC, as the case may be, hereunder. All representations, warranties and
covenants made by Shareholders or 4MC in this Agreement, or pursuant hereto,
shall survive the Closing, but shall terminate eighteen (18) months from the
Closing Date, except with respect to Losses constituting Tax Claims or with
respect to Losses governed by Section 12.3, for which the representations,
warranties and covenants shall survive for the applicable period of the statutes
of limitations. Tax Claims are obligations asserted by any Governmental
Authority which would constitute a breach of Section 3.19 hereof.
12.2 Indemnification by Kozlowski and Kramer. Kozlowski and Kramer,
---------------------------------------
jointly and severally ("Indemnitor"), shall indemnify, defend and hold 4MC
("Indemnitee") harmless from and against any and all losses, costs, liabilities,
damages and expenses (including reasonable legal fees, expert fees and other
expenses incident thereto) of every kind, nature, and description, including any
unassumed liabilities, and any undisclosed liabilities including liability for
taxes plus interest at the Bank of America Reference Rate until payment
(collectively "Losses" or "Loss"), that result from or arise out of (i) the
breach of any representation or warranty of Shareholders set forth in this
Agreement (including the exhibits hereto) or in any certificate, schedule, or
other instrument delivered to 4MC pursuant hereto; (ii) the breach of any of the
covenants of Shareholders contained in this Agreement; or (iii) any claims made
by any employees of POP or Animation arising out of or in connection with
commitments by POP or Animation to grant stock options to such employees.
Notwithstanding the generality of the foregoing, the provisions of this Section
12.2 shall not apply to the Stock Representations and Warranties.
12.3 By Shareholder. Each Shareholder, severally ("Indemnitor") shall
--------------
indemnify, defend and hold 4MC ("Indemnitee") harmless from any and all Losses
that result from or arise out of the breach of the Stock Ownership
Representations and Warranties.
12.4 Time for Claims. No Indemnitee shall be entitled to indemnification
---------------
pursuant to this Article 11 unless a written claim for indemnification is made
upon the Indemnitor within eighteen (18) months from the Closing Date with
respect to all claims other than Losses for Tax Claims or Losses governed by
Section 12.3 herein, for which such claims may be made during the applicable
period of the statute of limitations.
12.5 Claims for Indemnification. Whenever any claim shall arise for
--------------------------
indemnification hereunder, the Indemnitee shall promptly notify in writing the
Indemnitor of the claim and, when known, the facts constituting the basis for
such claims. In the event of any claim for indemnification hereunder resulting
from or in connection with any claim or legal proceedings by a third party, the
notice to the Indemnitor shall specify, if known, the amount or an estimate of
the amount of the liability arising therefrom.
12.6 Threshold. Kozlowski and Kramer shall not be liable to 4MC for any
---------
Losses (including Tax Claims) unless and until the aggregate amount of such
Losses exceeds One Hundred Thousand Dollars ($100,000),
in which event they shall be liable for all Losses in excess of One Hundred
Thousand Dollars ($100,000). Notwithstanding the foregoing, each Shareholder
shall be liable for all Losses without regard to any minimum amount for which
such Shareholder has indemnified 4MC pursuant to Section 12.3 hereof.
12.7 Claims Procedure. In connection with any claim giving rise to
----------------
indemnity hereunder resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, the Indemnitor at
its sole cost and expense and with counsel reasonably satisfactory to the
Indemnitee may, upon written notice to the Indemnitee, assume the defense of any
such claim or legal proceeding if (a) the Indemnitor acknowledges to the
Indemnitee in writing, within fifteen (15) days after receipt of notice from the
Indemnitor, its obligations to indemnify the Indemnitee with respect to all
elements of such claim, (b) the Indemnitor will have the financial resources to
defend against such third-party claim and fulfill its indemnification
obligations hereunder, (c) the third-party claim involves only money damages and
does not seek an injunction or other equitable relief, and (d) settlement or an
adverse judgment of the third-party claim is not, in the good faith judgment of
the Indemnitee, likely to establish a pattern or practice adverse to the
continuing business interests of the Indemnitee. The Indemnitee shall be
entitled to participate in (but not control) the defense of any such action,
with its counsel and at its own expense; provided, however, that if there are
one or more legal defenses available to the Indemnitee that conflict with those
available to the Indemnitor, or if the Indemnitor fails to take reasonable steps
necessary to defend diligently the claim after receiving notice from the
Indemnitee that it believes the Indemnitor has failed to do so, the Indemnitee
may assume the defense of such claim; in such event the Indemnitee may settle
such claim upon such basis as the Indemnitee deems reasonable. If the
Indemnitee assumes the defense of the claim, the Indemnitor shall reimburse the
Indemnitee for the reasonable fees and expenses of counsel retained by the
Indemnitee and the Indemnitor shall be entitled to participate in (but not
control) the defense of such claim, with its counsel at its own expense. The
parties agree to render, without compensation, to each other such assistance as
they may reasonably require of each other in order to insure the proper and
adequate defense of any action, suit or proceeding, whether or not subject to
indemnification hereunder.
12.8 Method of Enforcement. 4MC shall proceed first by offset against the
---------------------
Deferred Note and/or by demand against the Escrow Fund as distinguished from
proceeding against a Shareholder directly in respect of satisfaction of
indemnity claims. However, except for the provisions of Section 12.9, nothing
contained in this Agreement, in the Deferred Note or in the Escrow Agreement
shall limit the amount of the indemnity or the personal liability of the
Shareholders in respect of the indemnity. 4MC, in order to satisfy indemnity
claims, may offset against obligations under the Deferred Notes in the amount of
any Losses by application of the following procedures:
12.8(a) Upon delivery to A. Kozlowski and/or J. Kramer on or before
the maturity date of the Deferred Note of a certificate ("4MC Certificate")
signed by the Chief Executive Officer, the President or any Vice President of
4MC, (a) stating that 4MC and/or a subsidiary or affiliate of 4MC has paid or
properly accrued or reasonably anticipates that it may have to accrue Losses for
which 4MC or its Subsidiary or Affiliate is entitled to reimbursement pursuant
to this Agreement in an aggregate stated amount, and (b) specifying in
reasonable detail each individual item of Loss included in the aggregate amount
so stated, the date each item was paid or properly accrued or the basis for any
anticipated liability, the nature of the misrepresentation, a breach of warranty
or claim to which each item is related, and whether reimbursement or recovery is
claimed under Sections 12.2 or 12.3 of this Agreement, A. Kozlowski and J.
Kramer will, subject to the provisions of Section 12.8(b) of this Agreement,
credit the Deferred Note in the amount necessary to reimburse 4MC or its
Subsidiary or Affiliate for the stated amount of Losses. 4MC need not submit a
4MC Certificate with respect to any particular Loss at any particular time, but
may aggregate one or more Losses and submit one or more 4MC Certificates at any
time prior to the maturity of the Deferred Note. Offsets resulting from claims
for indemnification governed by Section 12.2 of this Agreement shall be charged
one-quarter each to A. Kozlowski, Sandra Hay, J. Kramer and Rena Kramer. Offsets
resulting from claims for indemnification governed by Section 12.3 of this
Agreement shall be charged against the interest of the individual Shareholder(s)
responsible for the Loss.
12.8(b) At the time of delivery of the 4MC Certificate to A.
Kozlowski and/or J. Kramer, a duplicate copy of the 4MC Certificate shall be
delivered to any affected Shareholder, and for a period of twenty (20) days
after delivery of the duplicate copy, A. Kozlowski and J. Kramer will make no
credit pursuant to Section 12.8(a) of this Agreement unless they have received
written authorization from the affected Shareholders to make the credit. After
expiration of the twenty (20)-day period, A. Kozlowski and J. Kramer shall
credit the Deferred
Note in accordance with Section 12.8(a) of this Agreement, provided no such
credit shall be made to which any affected Shareholder has objected in a written
statement delivered to A. Kozlowski and/or J. Kramer before the expiration of
such twenty (20)-day period.
12.8(c) A. Kozlowski and/or J. Kramer shall notify 4MC and Escrow
Agent in writing of the status and disposition of the credit for any claims made
by delivery of a 4MC Certificate within thirty (30) days of delivery of such 4MC
Certificate.
12.8(d) If Shareholders object in writing to the reimbursement of
4MC or its subsidiary or affiliates or any claim made in any 4MC Certificate,
Shareholders and 4MC will attempt in good faith to agree on the rights of the
respective parties regarding such disputed claim. If no such agreement can be
reached after good faith negotiation, either 4MC or Shareholders may demand
resolution of the matter by a Referee. In such event, resolution shall be
effected as provided for in Section 13.6 of this Agreement. The decision of the
Referee as to the validity of any claim in the 4MC Certificate will be binding
and conclusive on the parties to this Agreement. Payment of fees and costs shall
be governed by Sections 13.6(f) and 13.6(g) of this Agreement.
12.8(e) Upon maturity of the Deferred Note, 4MC shall pay the
principal and accrued but unpaid interest upon the Deferred Note, less any
offsets previously made pursuant to the provisions of Sections 12.8(b) and (d),
as follows:
12.8(e)(i) To the Escrow Agent, an amount equal to one and
one-half times the amount of claims then pending (including within such claims
any interest asserted thereon or attorneys' fees and court costs asserted
thereon) (the "Coverage Amount"). Claims then pending shall include any and all
amounts set forth in any 4MC Certificate which have not previously been offset
by agreement of the Shareholders or by a decision of a Referee.
12.8(e)(ii) To the Shareholders, in accordance with their
several interests in the Deferred Note, the balance.
12.8(f) As and when the Coverage Amount exceeds any remaining
obligation upon the Deferred Note to the Shareholder or Shareholders responsible
for indemnification or amounts then contained in the Escrow Fund for the benefit
of the Shareholder or Shareholders responsible for such indemnification, 4MC may
proceed directly against such Shareholder(s). In addition, nothing herein
contained shall relieve Shareholders of their obligations under this Section 12
and, without limiting the generality of the foregoing, of their obligations to
defend under Section 12.7.
12.9 Limitation on Indemnity. Except for claims governed by Section
-----------------------
12.3, Shareholders shall not be liable to 4MC for any Losses in excess of the
Purchase Price.
12.10 Escrow. Upon Closing, the parties will enter into an escrow
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to carry out the terms of this Agreement. The Letter of Credit shall be
deposited into such escrow. Certain payments in respect of the Deferred Note may
be made to the Escrow Agent. The Letter of Credit, any proceeds from the Letter
of Credit and any proceeds from the Deferred Note shall together constitute the
Escrow Fund. _________________________ will act as escrow holder ("Escrow
Agent") and will hold and dispose of the Escrow Fund in accordance with the
escrow agreement attached hereto as Exhibit C (the "Escrow Agreement"). The
terms of the Escrow Agreement, upon execution, will be incorporated as part of
this Agreement.
13. Miscellaneous
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13.1 Expenses. Except as otherwise provided herein, Shareholders and 4MC
--------
shall each pay their own expenses incident to the negotiation, preparation, and
carrying out of this Agreement, including all fees and expenses of its counsel
and accountants for all activities of such counsel and accountants undertaken
pursuant to this Agreement, irrespective of whether or not the transactions
contemplated hereby are consummated.
13.2 Publicity. 4MC and Shareholders shall not issue any press release or
---------
make any other public statement, in each case, relating to, in connection with
or arising out of this Agreement or the transactions contemplated hereby,
without obtaining the prior approval of the other, which shall not be
unreasonably withheld or delayed, except that prior approval shall not be
required if, in the reasonable judgment of 4MC, prior approval by Shareholders
would prevent the timely dissemination of such release or statement in violation
of applicable Federal securities laws, rules or regulations or policies of
NASDAQ.
13.3 Succession and Assignments; Third Party Beneficiaries. This Agreement
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may not be assigned (either voluntarily or involuntarily) by any party hereto
without the express written consent of the other party. Any
attempted assignment in violation of this Section shall be void and ineffective
for all purposes. In the event of an assignment permitted by this Section, this
Agreement shall be binding upon the heirs, successors and assigns of the parties
hereto. There shall be no third party beneficiaries of this Agreement.
13.4 Notices. All notices, requests, demands, or other communications with
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respect to this Agreement shall be in writing and shall be (i) personally
delivered, (ii) sent by facsimile transmission, (iii) sent by the United States
Postal Service, registered or certified mail, return receipt requested, or (iv)
delivered by a nationally recognized express overnight courier service, charges
prepaid, to the following addresses (or such other addresses as the parties may
specify from time to time in accordance with this Section):
To 4MC: Four Media Company
2813 West Alameda Avenue
Burbank, CA 91505-4455
Attn: Robert T. Walston
Fax No.: (818) 846-5197
With a copy to: Greenberg Glusker Fields
Claman & Machtinger LLP
1900 Avenue of the Stars, Suite 2100
Los Angeles, CA 90067
Attn: Bernard Shearer, Esq.
Fax No.: (310) 553-0687
To Shareholders: c/o POP
625 Arizona Avenue
Santa Monica, CA 90401
Attn: William E. Niles
Fax No.: (310) ______________
With copy to: ________________________________
________________________________
________________________________
________________________________
Fax No.:________________________
Any such notice shall, when sent in accordance with the preceding sentence, be
deemed to have been given and received on the earliest of (i) the day delivered
to such address, (ii) the day sent by facsimile transmission, (iii) the fifth
business day following the date deposited with the United States Postal Service,
or (iv) 24 hours after shipment by such courier service.
13.5 Construction. This Agreement shall be construed and enforced in
------------
accordance with the internal laws of the State of California without giving
effect to the principles of conflicts of law thereof.
13.6 Dispute Resolution; Attorneys' Fees.
-----------------------------------
13.6(a) Any controversy or claim arising out of or relating to this
Agreement, its enforcement or interpretation, or because of an alleged breach or
default or misrepresentation in connection with any of its provisions shall be
submitted to a retired judge (the "Referee") pursuant to California Code of
Civil Procedure, Section 638, et seq. The Referee will serve as an all purpose
judge and his or her determinations will include, but will not be limited to,
discovery and other law and motion matters and provisional remedies, as well as
the trial itself. In all respects, including, but not limited to, the right of
appeal and review, the proceedings will be governed by the Code of Civil
Procedure, as if the Referee were a sitting judge of the Superior Court. The
Referee will be selected by the following process:
13.6(b) Within ten (10) days after a party has notified the other
party, in writing, that such party elects to exercise such party's rights under
this Section 13, each party will serve on the other party a list of five (5)
nominees who are retired superior court or federal judges.
13.6(c) Within ten (10) days after the expiration of the 10-day
period referenced in Section 13.6(b) above, each party will serve on the other
party a copy of the entire list of all nominees with each nominee numbered in
the order of that party's preference, its first choice being number one, its
next choice, number two, etc.
13.6(d) The nominee with the lowest numerical total will then be
designated as the Referee, subject to being duly challenged by any of the
parties. Each party will have 1 peremptory challenge. A peremptory challenge
may only be exercised by filing it with the court (and serving it upon the
party's counsel of record) within five (5) business days after the parties have
designated the order of their preference. Peremptory challenges need not be in
any particular form and need only state that the challenging party peremptorily
challenges a particular nominee. If both parties exercise a peremptory
challenge against the same nominee each will be deemed to have exercised its 1
peremptory challenge. The exercise of the peremptory challenge described herein
does not affect or limit the right of any party to object to the appointment of
the Referee pursuant to Code of Civil Procedure Section 641.
13.6(e) If the designated Referee is duly challenged and
disqualified or becomes unwilling or unable to serve, the nominee with the next
lowest numerical total will be designated the Referee, subject, in turn to
challenge (in the manner specified in this Section 13.6) or unwillingness or
inability to serve; and this procedure will be repeated until a Referee is
selected. The trial will be held as expeditiously as practicable in light of law
and motion and discovery proceedings.
13.6(f) The Referee shall hear, try and determine all issues in the
case, whether fact or law, and issue a statement of decision, and a judgment. No
party shall seek, and the Referee shall not be authorized to award, any punitive
damages. The parties intend this general reference agreement to be specifically
enforceable. If the parties do not agree upon the fees to be paid to the
selected or appointed Referee, the fees shall be fixed and paid, as if the
reference to such Referee were involuntary, pursuant to California Code of Civil
Procedure Sections 645.1 and 1023. Any retrial of any issue shall be subject to
the provisions of this Section 13, in the same manner as specified hereinabove.
13.6(g) If any legal action or other proceeding is brought for the
enforcement of this Agreement, or because of any alleged dispute, breach,
default or misrepresentation in connection with any of the provisions of this
Agreement, the successful or prevailing party shall be entitled to recover
reasonable attorneys' fees and other costs incurred therein, in addition to any
other relief to which it or they may be entitled. The court or Referee shall
consider, in determining the prevailing party, (i) which party obtains relief
which most nearly reflects the remedy or relief which the parties sought, and
(ii) any settlement offers made prior to commencement of the trial in the
proceeding.
13.7 Counterparts. This Agreement may be executed in two or more
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counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same Agreement.
13.8 No Implied Waiver; Remedies. No failure or delay on the part of the
---------------------------
parties hereto to exercise any right, power, or privilege hereunder or under any
instrument executed pursuant hereto shall operate as a waiver nor shall any
single or partial exercise of any right, power, or privilege preclude any other
or further exercise thereof or the exercise of any other right, power, or
privilege. All rights, powers, and privileges granted herein shall be in
addition to other rights and remedies to which the parties may be entitled at
law or in equity.
13.9 Entire Agreement. This Agreement, including the Exhibits and
----------------
Schedules attached hereto, sets forth the entire understandings of the parties
with respect to the subject matter hereof, and it incorporates and merges any
and all previous communications, understandings, oral or written as to the
subject matter hereof.
13.10 Amendments; Actual Waivers. This Agreement may not be amended
--------------------------
except by an instrument in writing signed on behalf of each of the parties
hereto. At any time prior to the Closing, the parties hereto may, (a) extend
the time for the performance of any of the obligations or other acts or the
other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered by any of the other
parties pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein which are for the benefit of such party. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid if set forth in an instrument in writing signed on behalf of such party.
13.11 Liquidated Damages. 4MC acknowledges that, in the event the
------------------
Transactions fail to Close, and in the event 4MC would not be entitled to a
refund of the Deposit pursuant to the provisions of Section 7.1, then
Shareholders shall be entitled to retain the Deposit which shall be deemed to be
liquidated damages reasonably calculated to compensate Shareholders for their
execution and delivery of this Agreement.
13.12 Headings. The headings of the Sections of this Agreement, where
--------
employed, are for convenience only and do not form a part hereof and in no way
modify, interpret or construe the meanings of the parties.
13.13 Severability. Any provision of this Agreement which is invalid or
------------
unenforceable shall be ineffective only to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.
"4MC"
FOUR MEDIA COMPANY
By:_____________________________________
Robert T. Walston
Chairman and Chief Executive Officer
________________________________________
Alan Kozlowski
________________________________________
Sandra Hay
________________________________________
Jerry Kramer
________________________________________
Rena Kramer
________________________________________
Andrew Ungerleider
________________________________________
Joan Hay
________________________________________
James Fancher