SECURED CONVERTIBLE NOTE PURCHASE AGREEMENT

 

THIS SECURED CONVERTIBLE NOTE PURCHASE AGREEMENT (this “ Agreement ”), dated as of December 17, 2004, by and between LOWRY DIGITAL IMAGES, INC., a California corporation (the “ Company ”) and DIGITAL THEATER SYSTEMS, INC., a Delaware corporation (“ DTS ” or the “ Purchaser ”).

 

The Company desires to sell to the Purchaser, and the Purchaser desire to purchase from the Company, a secured convertible promissory note in the aggregate principal amount of One Million Dollars ($1,000,000).

 

In consideration of the mutual promises herein made and in consideration of the representations, warranties, and covenants herein contained, the parties agree as follows:

 

ARTICLE I DEFINITIONS

 

1.1                                Defined Terms .  As used herein, the terms below shall have the following meanings.  Any of such terms, unless the context otherwise requires, may be used in the singular or plural, depending upon the reference, unless the plural is defined otherwise.

 

“ Affiliate ” shall have the meaning set forth in the Exchange Act.  Without limiting the foregoing, all directors and officers of a Person that is a corporation and all managing members of a Person that is a limited liability company shall be deemed to be Affiliates of such Person for all purposes under this Agreement.

 

“ Board ” shall mean the Board of Directors of the Company.

 

“ Business ” shall mean all lines of business and all business activities of any kind currently or formerly conducted by the Company or any Predecessor Entity, including without limitation digital image processing.

 

“ Business Day ” means any day other than a Saturday, Sunday or legal holiday in the State of California.

 

“ CERCLA ” shall mean the United States Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq. , as amended.

 

“ Cleanup ” shall mean any investigation, cleanup, removal, containment or other remediation or response actions.

 

“ Consent ” shall mean any approval, consent, ratification, waiver, or other authorization (including, but not limited to, any Governmental Authorization and any approval, consent, ratification, waiver or other authorization required in order to properly transfer any real property interest held by the Company).

 

“ Contract ” shall mean any agreement, contract, obligation, promise, or undertaking (whether written or oral) that is legally binding.

 

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“ Encumbrance ” shall mean any charge, claim, community property interest, condition, equitable interest, joint or co-ownership interest, Lien, option, pledge, security interest, right of first refusal or restriction of any kind, including any restriction on use, voting, transfer, receipt of income or exercise of any other attribute of ownership, including but not limited to any covenant, condition, restriction, reservation, rights of way, easement or other title Encumbrance or title exception affecting any property or asset.

 

“ Environment ” shall mean soil, soil gas, land surface or subsurface strata, surface waters (including navigable waters, ocean waters, streams, ponds, drainage basins and wetlands), groundwater, drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life and any other environmental medium or natural resource.

 

“ Environmental, Health and Safety Liabilities ” shall mean any cost, damage, expense (including but not limited to attorneys’ and consultants’ fees), liability or obligation arising from or under any Environmental Law and consisting of or relating to:

 

(a)                                   any environmental, health or safety matters or conditions (including on-site or off-site contamination, occupational safety and health and regulation of chemical substances or products);

 

(b)                                  fines, penalties, judgments, awards, settlements, legal or administrative proceedings outcomes, damages, losses, claims, demands and response, investigative, remedial or inspection costs and expenses arising under any Environmental Law;

 

(c)                                   financial responsibility under any Environmental Law for Cleanup costs or corrective action, including any Cleanup required by applicable Environmental Law (whether or not such Cleanup has been required or requested by any Governmental Body or any other Person) and for any natural resource damages; or

 

(d)                                  any other compliance, corrective, investigative or remedial measures required under any Environmental Law.

 

(e)                                   The terms “removal,” “remedial” and “response action” include the types of activities covered by CERCLA.

 

“ Environmental Law ” shall mean all Legal Requirements, and all rules, regulations or guidelines promulgated thereunder, relating to pollution or protection of human health or the Environment, including, without limitation, (a) laws relating to the Release or threatened Release of Hazardous Materials or other substances into the Environment and (b) laws relating to the identification, generation, manufacture, processing, distribution, use, treatment, storage, disposal, recovery, transport, transfer, refinement, production, management or other handling of Hazardous Materials or other substances.  Environmental Laws shall include, without limitation, CERCLA, the Federal Water Pollution Control Act (33 U.S.C. § 1251 et seq. ), RCRA, the Safe Drinking Water Act (21 U.S.C. § 349, 42 U.S.C. §§ 201, 300f), the Toxic Substances Control Act (15 U.S.C. § 2601 et seq. ), the Clean Air Act (42 U.S.C. § 7401 et seq. ), the California Health and Safety Code (§ 25100 et seq. , § 39000 et seq. ) as enacted prior to the Closing Date and as in effect on the Closing Date.

 

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“ Environmental Permits ” shall mean all licenses, permits, approvals, authorizations, consents, qualifications, registrations, privileges, waivers, or orders of, or filings with, any Governmental Body, whether federal, state, municipal, local or foreign, required for the operation of the facilities under Environmental Laws.

 

“ ERISA ” shall mean the Employee Retirement Income Security Act of 1974, as amended, or any successor law, and the rules and regulations promulgated thereunder.

 

“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

“ Facilities ” shall mean any real property, leaseholds or other interests currently owned, held, occupied or operated by the Company and any buildings, plants, structures or equipment (including motor vehicles, tank cars and rolling stock) currently owned or operated by the Company.

 

“ Funded Debt ” shall mean, as of the Closing Date, (a) all indebtedness of the Company for borrowed money, including, without limitation, bank debt and amounts owed to DTS, (b) any other indebtedness of the Company whether or not evidenced by a note, bond, debenture or similar instrument, (c) all obligations of the Company under capital leases, (d) all obligations of the Company in respect of letters of credit or similar instruments issued or created for the account of the Company, (e)  all obligations of the Company with respect to delinquent Taxes, and (f) all accrued interest, any premiums payable or any other charges or penalties on any of the obligations set forth in clauses (a) through (e) above.  Funded Debt does not include amounts due under that certain lease, dated                    , between the Company and GE Capital.

 

“ GAAP ” shall mean United States generally accepted accounting principles, consistently applied.

 

“ Governmental Authorization ” shall mean any approval, Consent, license, permit, waiver or other authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement.

 

“ Governmental Body ” shall mean any:

 

(i)                                      nation, state, county, city, town, village, district or other jurisdiction of any nature;

 

(ii)                                   federal, state, local, municipal, foreign or other government;

 

(iii)                                governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official or entity and any court or other tribunal);

 

(iv)                               multi-national organization or body; or

 

(v)                                  body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature.

 

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“ Hazardous Activity ” shall mean the distribution, generation, handling, importing, management, manufacturing, processing, distribution, production, refinement, Release, storage, transfer, transportation, treatment, disposal, recycling or use (including any withdrawal or other use of groundwater) of Hazardous Materials in, on, under, about or from a Facility or any part thereof into the Environment.

 

“ Hazardous Materials ” shall mean any waste, chemical, material or other substance (whether solids, liquids or gases) that is listed, defined, designated or classified as, or otherwise determined to be, hazardous, radioactive, infectious, reactive, corrosive, ignitable, flammable, toxic, or harmful to human health or the Environment, or a pollutant or a contaminant subject to regulation, control or remediation under any Environmental Law, including any mixture or solution thereof, and specifically including petroleum, polychlorinated biphenyls, radon gas, urea formaldehyde and asbestos or asbestos-containing materials.

 

“ Intellectual Property ” shall mean any and all foreign and domestic (a) inventions (whether or not reduced to practice) and all improvements thereto, and all patents, patent applications and patent disclosures related thereto, together with all provisionals, reissuances, continuations, continuations-in-part, divisions, revisions, extensions and reexaminations thereof; (b) trademarks, service marks, trade dress, logos, brand names, trade names, corporate names, domain names and 1-800, 1-888, 1-877 or other “vanity” telephone numbers, in each case, whether or not registered, including in all cases, all goodwill associated therewith, and all applications, registrations and renewals in connection therewith; (c) works of authorship, all copyrights (including rights of authorship and moral rights and derivative works thereof), whether or not registered, any and all website content, together with all translations, adaptations, derivations and combinations thereof, and all applications, registrations and renewals in connection therewith; (d) trade secrets and confidential business information (including research and development, know-how, formulae, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, research records, records of inventions, test information, customer and supplier lists and identities, pricing and cost information, and business and marketing plans and proposals); (e) source code and object code versions of computer software (including data and related documentation); (f) copies and tangible embodiments of the items set forth in clauses (a) through (e) hereof (in whatever form or medium), and (g) claims or causes of actions arising out of or related to any infringement or misappropriation of any of the foregoing items set forth in clauses (a) through (e).

 

“ IRC ” shall mean the Internal Revenue Code of 1986, as amended, or any successor law, and the rules and regulations promulgated thereunder.

 

“ IRS ” shall mean the Internal Revenue Service, a division of the United States Treasury Department, or any successor agency.

 

“ Legal Requirement ” shall mean any federal, state, local, municipal, foreign, international, multinational or other administrative order, judicial order, court judgment, arbitration award, executive order, constitution, law, ordinance, policy, regulation, statute or treaty.

 

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“ Liability ” shall mean any direct or indirect liability, indebtedness, obligation, commitment, claim, deficiency, expense, deferred income, guaranty or endorsement of or by any Person of any type, whether known, unknown, accrued, absolute, contingent, matured or unmatured.

 

“ Lien ” shall mean any mortgage, deed of trust, pledge, hypothecation, security interest, lien or charge of any kind.

 

“ Material Adverse Effect ” or “ Material Adverse Change ” shall mean, with respect to any party hereto, any material adverse effect or change in the financial condition, results of operations, liabilities, operations, business or assets of such party and its Subsidiaries, taken as a whole, or on the ability of such party or its shareholders or stockholders, as the case may be, to consummate the transactions contemplated by this Agreement or the Note or any event or condition which would reasonably be expected to, with the passage of time, constitute a Material Adverse Effect or Material Adverse Change.

 

“ Order ” shall mean any award, decision, injunction, judgment, order, ruling, subpoena or verdict entered, issued, made or rendered by any court, administrative agency or other Governmental Body or by any arbitrator.

 

“ Ordinary Course of Business ” shall describe any action taken by a Person if such action is consistent with the past practices of such Person and is taken in the ordinary course of the normal day-to-day operations of such Person.

 

“ Organizational Documents ” shall mean, as applicable, (a) the articles or certificate of incorporation, all certificates of determination and designation, and the bylaws of a corporation; (b) the partnership agreement and any statement of partnership of a general partnership; (c) the limited partnership agreement and the certificate or articles of limited partnership of a limited partnership; (d) the operating agreement, limited liability company agreement and the certificate or articles of organization or formation of a limited liability company; (e) any charter or similar document adopted or filed in connection with the creation, formation or organization of a Person; and (f) any amendment to any of the foregoing.

 

“ Other Benefit Obligations ” shall mean all obligations, arrangements or customary practices to provide compensation or benefits, other than salary or wages, as compensation for services rendered, to present or former directors or employees, other than obligations, arrangements and practices that are Plans.  Other Benefit Obligations include, without limitation, employment agreements, consulting agreements under which the compensation paid does not depend upon the amount of service rendered, vacation policies, severance payment plans, arrangements or policies and fringe benefits within the meaning of IRC § 132.

 

“ Permitted Liens ” means (i) statutory liens for current Taxes or other governmental charges not yet due and payable as of the Closing Date or the amount or validity of which is being contested in good faith by appropriate proceedings by the Company and for which appropriate reserves have been established in accordance with GAAP; (ii) mechanics’, carriers’, workers’, repairers’ and similar statutory liens arising or incurred in the Ordinary Course of Business for amounts which are not delinquent as of the Closing Date and which are not,

 

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individually or in the aggregate, significant; (iii) zoning, entitlement, building and other land use regulations imposed by governmental agencies having jurisdiction over the real property subject to Leases which are not violated by the current use and operation of the real property subject to Leases; (iv) covenants, conditions, restrictions, easements and other similar matters of record affecting title to the real property subject to Leases or any other matter affecting title to the real property subject to Leases which does not, individually or in the aggregate, materially impair the ownership, occupancy or use of the real property subject to Leases for the purposes for which it is currently owned, used or proposed to be used in connection with the Company’s Business; (v) Encumbrances in favor of DTS or any of its Affiliates and (vi) Liens set forth on Schedule 2.1 hereto.

 

“ Person ” shall mean any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, or other entity or Governmental Body.

 

“ Plan ” shall have the meaning set forth in ERISA § 3(3).

 

“ Predecessor Entity ” shall mean any person or entity, other than the Company, through which the Business was operated, including, without limitation, a sole proprietorship, partnership, limited liability company or corporation.

 

“ Proceeding ” shall mean any action, arbitration, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative or investigative) commenced, brought, conducted by or against any Person or heard by or before, or otherwise involving, any Governmental Body or arbitrator.

 

“ RCRA ” shall mean the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq. , as amended.

 

“ Release ” shall mean and include any spilling, leaking, pumping, pouring, injecting, emitting, emptying, discharging, depositing, escaping, leaching, migrating (including passive migration), dumping, disposing or other releasing into the Environment or the workplace, whether intentional or unintentional and otherwise defined in any Environmental Law.

 

“ Representative ” shall mean any officer, director, principal, attorney, agent or other representative.

 

“ Securities Act ” shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

 

“ Subsidiary ” shall mean, with respect to any Person (for the purposes of this definition only, the “ Owner ”), any corporation or other Person of which securities or other interests having the power to elect a majority of that corporation’s or other Person’s board of directors or similar governing body, or otherwise having the power to direct the business and policies of that corporation or other Person (other than securities or other interests having such power only upon the happening of a contingency that has not occurred) are held by the Owner or one or more of its Subsidiaries.

 

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“ Tax ” shall mean any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security, unemployment, disability, real property, personal property, escheat, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not.

 

“ Tax Return ” means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

 

ARTICLE II
AUTHORIZATION AND SALE OF THE NOTE

 

2.1                                Authorization.

 

Subject to the terms and conditions hereof, the Company has authorized the issuance and sale of a secured convertible promissory note in the aggregate principal amount of One Million Dollars ($1,000,000), substantially in the form attached hereto as Exhibit A (the “ Note ”), to the Purchaser.

 

2.2                                The Closing of the Sale of the Note.

 

(a)                                   Simultaneously with the execution and delivery of this Agreement, the closing hereunder (the “ Closing ”) with respect to the issuance, sale and delivery of the Note shall take place (the date on which the Closing occurs, the “ Closing Date ”).

 

(b)                                  At the Closing, on the terms and subject to the conditions contained herein, (i) the Company shall issue, sell and deliver to the Purchaser, and the Purchaser shall purchase from the Company, the Note, and (ii) the Purchaser shall deliver to the Company, by wire transfer of immediately available funds to an account designated by the Company, the aggregate purchase price of One Million Dollars ($1,000,000) (the “ Purchase Price ”) for the Note.

 

2.3                                Use of Proceeds.

 

The Company will use the proceeds of the Note purchased by the Purchaser pursuant to this Agreement as set forth on Schedule 2.3 attached hereto.

 

2.4                                Security.

 

The Company’s obligations under the Note and this Agreement will be secured by all of the Collateral as described in that certain Security Agreement, dated as of June 2, 2004, between the Company and the Purchaser (the “ Security Agreement ”), and will be pledged by all of the shares of stock of the Company owned by John Lowry pursuant to that certain Stock Pledge Agreement dated as of June 2, 2004 by John Lowry in favor of the Purchaser (the “ Stock Pledge

 

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Agreement ”).  The Purchaser agrees and acknowledges that the consummation of the transactions contemplated hereby shall not in and of themselves be deemed to be a breach of the Stock Pledge Agreement or the Security Agreement.

 

2.5                                Interest.

 

Interest shall accrue on the unpaid principal balance of the Note (such unpaid principal balance is referred to as the “ Outstanding Balance ”) at the rate of six percent (6%) per annum, commencing on the date of issuance of the Note and compounding monthly.  Subject to the provisions of Section 2.9 hereof, accrued interest shall be due and payable in cash at the time the Company pays the Outstanding Balance of the Note.  The Outstanding Balance shall be subject to increase as set forth in the last sentence of Article VII hereof.

 

2.6                                Term.

 

Subject to Section 2.9 hereof, the Note is due and payable (a) on December 16, 2005 (the “ Maturity Date ”); or (b) on demand by written notice following the occurrence of an Event of Default (as defined in Article VII ).  Subject to the provisions of Section 2.9 hereof, the Company shall, on the Maturity Date or, if earlier, within one (1) Business Day of receipt of the written notice referred to in the immediately preceding sentence (the “ Payment Date ”), pay the Outstanding Balance, together with all accrued and unpaid interest on the Note as of the Maturity Date or the Payment Date, as applicable, as well as all other amounts payable thereon.  All payments shall be applied first to accrued interest and other amounts payable thereon, and thereafter to principal.

 

2.7                                Method of Payment.

 

All payments hereunder shall be made to the Purchaser at its address as set forth in Section 8.5 hereof, or at such other place as the Purchaser shall designate to the Company in writing.  If any payment of principal or interest on the Note is due on a day which is not a Business Day, such payment shall be due on the next succeeding Business Day.

 

2.8                                No Usury.

 

The Company represents and warrants that this Agreement and the Note are hereby expressly limited so that in no event whatsoever, whether by reason of deferment or advancement of loan proceeds, acceleration of maturity of the loan evidenced hereby, or otherwise, shall the amount paid or agreed to be paid to the Purchaser hereunder for the loan, use, forbearance or detention of money exceed the maximum interest rate permitted by the laws of the State of California.  If at any time the performance of any provision hereof or the Note involves a payment exceeding the limit of the price that may be validly charged for the loan, use, forbearance or detention of money under applicable law, then automatically and retroactively, ipso facto, the obligation to be performed shall be reduced to such limit, it being the specific intent of the Company and the Purchaser hereof that all payments under this Agreement or the Note are to be credited first to interest as permitted by law, but not in excess of (i) the agreed rate of interest set forth in the Note, or (ii) that permitted by law, whichever is the lesser, and the balance toward the reduction of principal.  The provisions of this Section 2.8 shall never be superseded or waived and shall control every other provision of this Agreement and the Note.

 

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2.9                                Conversion .

 

The Outstanding Balance and all unpaid interest accrued on the Note shall be subject to conversion as set forth in the Note.  The Company shall not be obligated to issue certificates evidencing the shares issuable upon conversion of the Note unless the Note is either delivered to the Company or the Purchaser notifies the Company that the Note has been lost, stolen or destroyed and executes an agreement reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with the Note.  The right to conversion set forth in the Note shall be personal to Purchaser, and neither such right nor any interest therein may be assigned or transferred by Purchaser, except for transfer or assignments to Purchaser’s Affiliates.

 

ARTICLE III
THE CLOSING

 

3.1                                Deliveries at the Closing.

 

(a)                                   At the Closing, the Company shall deliver to the Purchaser:

 

(i)                                      the Note, duly executed by the Company and representing the aggregate principal amount of One Million Dollars ($1,000,000);

 

(ii)                                   a certificate of the Secretary of the Company dated as of the Closing Date, certifying: (A) the Company’s Articles of Incorporation and Bylaws, as in effect on the date hereof, as true and complete and attaching certified copies of same; (B) as to the incumbency and genuineness of the specimen signatures of each officer of the Company executing this Agreement and the Note; (C) the resolutions of the Board authorizing the execution, delivery and performance of this Agreement and the Note and the consummation of the transactions contemplated thereby and thereby, as true and complete and attaching copies of same (including but not limited to the issuance of the Note); and (D) that all consents, approvals and other actions of, and notices and filings with, all entities and persons as may be necessary or required with respect to the execution by the parties of the transactions contemplated hereby, have been obtained or made; and

 

(iii)                                a good standing certificate, as of a date not more than five (5) days prior to the Closing Date, issued by the Secretary of State of the State of California.

 

(b)                                  At the Closing, the Purchaser shall deliver to the Company the Purchase Price for the Note.

 

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

As a material inducement to the Purchaser to enter into and perform its obligations under this Agreement, the Company makes the following representations and warranties to the Purchaser, which representations and warranties shall be true, correct and complete in all respects as of each of the date hereof and the Closing Date:

 

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4.1                                Organization and Good Standing .  The Company is duly organized, validly existing, and in good standing under the laws of the State of California, with full corporate power and authority to own, license, operate or lease its assets and conduct its Business.  The Company is not required to be qualified to do business as a foreign corporation under the laws of any other jurisdiction.  The copies of the Company’s articles of incorporation and bylaws which have been delivered to DTS are accurate, correct and complete as of the date hereof.

 

4.2                                Authorization; Power; Valid and Binding Agreement; No Breach.

 

(a)                                   Each of this Agreement and the Note has been duly authorized, executed and delivered by the Company.

 

(b)                                  The Company has all requisite power and authority to execute and deliver this Agreement and the Note and to perform its obligations under this Agreement and the Note and the transactions contemplated herein and therein.

 

(c)                                   Each of this Agreement and the Note constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy laws, other similar laws affecting creditors’ rights and general principles of equity affecting the availability of specific performance and other equitable remedies.

 

(d)                                  The authorization, issuance (or reservation for issuance), sale and delivery of the Note and any equity securities issuable upon conversion of the Note (the “ Conversion Securities ”), has been authorized by all requisite action of both the Board and the stockholders of the Company (the “ Stockholders ”).  The Conversion Securities issuable upon conversion of the Note, when issued in accordance with the Note, will be validly issued and outstanding, fully paid and nonassessable, free and clear of any Liens whatsoever and with no restrictions on the voting rights thereof and other incidents of record and beneficial ownership pertaining thereto, except as set forth in this Agreement.

 

(e)                                   The execution, delivery and performance of this Agreement and the Note by the Company and the consummation of the transactions contemplated hereby and thereby do not conflict with or result in any material breach of, constitute a material default under, result in a material violation of, result in the creation of any material lien, security interest, charge or encumbrance upon any material assets of the Company, or require any material authorization, consent, approval, exemption or other action by or notice to any court, other governmental body or third party, under the provisions of the Company’s articles of incorporation or bylaws or any material indenture, mortgage, lease, loan agreement or other material agreement or instrument to which the Company is bound, or any law, statute, rule or regulation or order, judgment or decree to which the Company is subject, including but not limited to the breach of any usury or similar law or regulation relating to interest charges (without giving effect to the application of Section 2.8 or 8.12 ).

 

4.3                                Capitalization.

 

(a)                                   Ownership .  The authorized capital of the Company consists solely of 10,000,000 shares of common stock, without par value, of which 2,526,526 shares are issued and

 

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outstanding.  All of the outstanding shares of Company Stock are owned by the Stockholders and are duly authorized, validly issued, fully paid and non-assessable.  Except as set forth in Schedule 4.3(a)-1 , other than this Agreement, there are no Contracts relating to the issuance, sale or transfer of any shares of capital stock or other securities of the Company.  Other than this Agreement, there are no outstanding subscriptions, calls, commitments, warrants or options for the purchase of shares of any capital stock or other securities of the Company or any securities convertible into or exchangeable for shares of capital stock or other securities issued by the Company, or any other commitments of any kind for the issuance of additional shares of capital stock or other securities issued by the Company.  There are no outstanding or authorized stock appreciation, phantom stock, profit participation, or similar rights with respect to the Company.  Schedule 4.3(a)-2 sets forth a true and complete list of the Stockholders and their respective ownership of the issued and outstanding shares of common stock, no par value, of the Company (the “ Company Stock ”).  All of the outstanding shares of capital stock of the Company have been offered, issued and sold by the Company in compliance with applicable federal and state securities laws.

 

(b)                                  No Subsidiaries .  The Company does not own or have any direct or indirect stock or other equity or ownership interest (whether controlling or not), or any Contract to acquire any such interest, in any corporation, association, partnership, joint venture or other entity.

 

4.4                                Financial Statements .  The Company has delivered to DTS:

 

(a)                                   unaudited balance sheets of the Company as of each of December 31, 2003 and March 31, June 30 and September 30, 2004 and the respective related unaudited statements of income for each of the three-month periods then ended; and

 

(b)                                  an unaudited balance sheet of the Company as of November 30, 2004 (the “ Balance Sheet ”), and the related unaudited statement of income for the eleven (11) month period then ended (collectively, with the materials described in clause (a), the “ Financial Statements ”).  The Financial Statements fairly and accurately present the financial condition and the results of operations, income, expenses, assets and liabilities of the Company in all material respects as of the respective dates of, and for the periods referred to in, the Financial Statements, all in accordance with GAAP consistent with the past practices of the Company, subject to matters set forth in the notes thereto and in the case of interim statements to normal year-end adjustments, which adjustments, individually or in the aggregate, are not material.  No financial statements of any Person other than the Company are required by GAAP to be included in the Financial Statements.

 

4.5                                Books and Records.  The books of account, minute books, stock record books, and other records of the Company, all of which have been made available to DTS, are complete and correct in all material respects, and, with respect to the books of account, fairly and accurately reflect the income, expenses, assets and liabilities of the Company in all material respects.

 

4.6                                Title to Properties; Encumbrances.  The Company owns all the properties and assets that it purports to own free and clear of Encumbrances, except for Permitted Liens and

 

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such Encumbrances and landlord liens which arise in the Ordinary Course of Business and do not materially impair the Company’s ownership or use of such property or assets.  The Company does not own any real property.  Schedule 4.6 contains a complete and accurate list of all real property leases, subleases, use and occupancy agreements to which the Company is a party to or which are used by the Company in the operation of its Business (collectively, “Leases”).  All such Leases are legal, valid and binding obligations of the Company and in full force and effect, subject to proper authorization and execution of such Leases by the other party thereto and the application of any bankruptcy or other creditor’s rights laws.  The Company is in compliance with all of the material terms and conditions of such Leases, and to the knowledge of the Company, there are no material disputes, defaults, oral agreements or forbearances in effect as to any such Leases.  The assets of the Company set forth in the Balance Sheet and the properties owned, licensed or leased by the Company as of the date hereof and disclosed to DTS are all the assets and properties required to conduct the Business of the Company.

 

4.7                                Condition and Sufficiency of Assets .  The equipment of the Company is in such operating condition and repair as is required to operate the Business of the Company in the manner in which the Business is being operated as of the Closing.  The building, plants, structures and equipment of the Company are adequate for the uses to which they are being put, and none of such buildings, plants, structures and equipment of the Company is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost.  The buildings, plants, structures, and equipment of the Company are sufficient for the continued conduct of the Business of the Company after the Closing in substantially the same manner as conducted prior to the Closing. 

 

4.8                                No Undisclosed Liabilities .  Except as set forth in Schedule 4.8 , the Company has no liabilities or obligations of any kind, whether absolute, accrued, contingent or otherwise, except for liabilities or obligations reflected in the Balance Sheet and current liabilities in the Ordinary Course of Business since the date of the Balance Sheet.

 

4.9                                Taxes.   Except as set forth in Schedule 4.9 :

 

(a)                                   The Company and each Predecessor Entity has duly and timely filed or will duly and timely file (or caused or will cause to be filed) with the appropriate taxing authorities all Tax Returns required to be filed (without regard to extensions of time to file) on or before the Closing Date.  All such Tax Returns are or will be complete and accurate in all respects as filed.  No claim has ever been made in writing or otherwise to the knowledge of the Company or any Predecessor Entity by a Tax authority in a jurisdiction where the Company or a Predecessor Entity, as the case may be, does not pay tax or file Tax Returns that it is subject to taxation by that jurisdiction or required to file returns in that jurisdiction.  Neither the Company nor any Predecessor Entity has requested or been granted any extension of time for the filing of any Tax Return.

 

(b)                                  All Taxes owed by the Company or any Predecessor Entity or for which the Company or a Predecessor Entity may be held liable (whether or not shown on any Tax Return) which were or will be due on or prior to the Closing Date have been or will be paid in full.  The unpaid Taxes of the Company and any Predecessor Entity as of the date of the Financial Statements do not exceed the reserve for Tax Liability (excluding any reserve for

 

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deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the Balance Sheet (rather than in any notes thereto).  Since the date of the Balance Sheet, neither the Company nor any Predecessor Entity has incurred any material Liability for Taxes outside the Ordinary Course of Business and consistent with prior reporting practices.  There are no outstanding refund claims with respect to any Tax or Tax Return of the Company or any Predecessor Entity.

 

(c)                                   No material deficiencies for Taxes have been claimed, proposed or assessed by any taxing or other governmental authority against the Company or any Predecessor Entity.  There are no pending audits, investigations, disputes or claims or other actions for or relating to any Liability of the Company or any Predecessor Entity for Taxes, nor is the Company or its officers or directors aware of any information which has caused or should cause them to believe that an audit by any Tax authority may be forthcoming.  The Company has delivered to DTS complete and accurate copies of federal, state and local Tax Returns of the Company and any predecessors for all tax periods ended December 31, 2003 (the “ Delivered Tax Returns ”), and has delivered or made available to DTS all relevant documents and information with respect thereto, including without limitation work papers, records, examination reports, and statements of deficiencies proposed, assessed against or agreed to by the Company.  The Company has delivered to DTS complete and accurate copies of all examination reports and statements of deficiencies assessed against or agreed to by the Company or any Predecessor Entity since December 31, 1998.  Neither the Company nor any of its predecessors has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.  No power of attorney granted by the Company with respect to any Taxes is currently in force.  All elections with respect to Taxes affecting the Company that were not made in the Delivered Tax Returns are described in Schedule 4.9 .

 

(d)                                  Set forth in Schedule 4.9 are the net operating loss, net capital loss, credit, minimum Tax, charitable contribution, and other Tax carryforwards (by type of carryforward and expiration date, if any) of the Company.

 

(e)                                   The Company and each Predecessor Entity has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party.

 

(f)                                     To the Company’s knowledge, all persons who have purchased shares of the Company’s stock that at the time of such purchase were subject to a substantial risk of forfeiture under Section 83 of the IRC have timely filed elections under Section 83(b) of the IRC and any analogous provisions of applicable state and local Tax Laws.

 

(g)                                  There are no Encumbrances for Taxes (other than for current Taxes not yet due and payable) on any of the assets of the Company or any of the Company’s capital stock.

 

(h)                                  The Company is not and has never been an S corporation for federal or any state income tax purposes.

 

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(i)                                      The Company has not consented at any time under former IRC §341(f)(1) (or comparable provisions of state, local or foreign law) to have the provisions of former IRC §341(f)(2) apply to any disposition of any of its assets.

 

(j)                                      The Company has not agreed and will not be required to make any adjustment under IRC §481(a) (or comparable provisions of state, local or foreign law) by reason of a change in accounting method or otherwise occurring prior to the Closing Date for any period ending on or after the Closing Date.

 

(k)                                   The Company is not obligated to make any payments, and is not a party to any agreement that under certain circumstances could obligate it to make any payments that will not be deductible under IRC §162 or §280G.

 

(l)                                      The Company is not and has never been a United States real property holding corporation within the meaning of IRC §897(c)(2).

 

(m)                                The Company does not have a permanent establishment in any country with which the United States of America has a relevant Tax treaty, as defined in such relevant Tax treaty, and does not otherwise operate or conduct business through any branch in any country other than the United States.

 

(n)                                  The Company is not and has not at any time, been a member of an affiliated group of corporations within the meaning of IRC §1504 or any group that has filed a combined, consolidated or unitary Tax Return.  The Company has no Liability for the Taxes of any Person (other than the Company) (i) under Treasury Regulations §1.1502-6 (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract, or (iv) otherwise.

 

(o)                                  There is not and has never been a party to any agreement for the sharing of Tax Liabilities or similar arrangements (including indemnity arrangements) with respect to or involving the Company or any of its assets or Business.

 

(p)                                  To the knowledge of the Company, other than Ian Caven, none of the Stockholders is a “foreign person” as defined in IRC §1445(f)(3).  The Company has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party.

 

(q)                                  The Company has not entered into any transaction identified as a “listed transaction” for purposes of Treasury Regulations §§1.6011-4(b)(2) or 301.6111-2(b)(2).

 

(r)                                     The Company has not distributed the stock of any corporation in a transaction satisfying the requirements of IRC §355, and the stock of the Company has not been distributed in a transaction satisfying the requirements of IRC §355.

 

(s)                                   Except as set forth on Schedule 4.9 , the Company is not currently and will not become in the future, liable for tax liability in any jurisdiction based on the operation of any Predecessor Entity.

 

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4.10                         No Material Adverse Change.  Since the date of the Balance Sheet, there has not been, individually or in the aggregate, any Material Adverse Change of the Company.

 

4.11                         Employee Benefits.

 

(a)                                   Schedule 4.11(a) contains a complete and accurate list of all Other Benefit Obligations of the Company.  The Company does not currently have, nor has it ever had in place, any Plans.

 

(b)                                  The Company has delivered or made available to DTS.

 

(i) all material summaries and descriptions furnished to participants and beneficiaries regarding the Other Benefit Obligations of the Company for which a plan description or summary plan description is not required; and

 

(ii) all employee handbooks of the Company.

 

(c)

 

(i) The Company has performed in all material respects all of its obligations under the Other Benefit Obligations currently spons