Exhibit 10.45


 




 


 





SECURED CONVERTIBLE NOTE PURCHASE AGREEMENT


 


 


DATED AS OF DECEMBER 17, 2004


 


 


BY AND BETWEEN


 


 


LOWRY DIGITAL IMAGES, INC.


 


AND


 


DIGITAL THEATER SYSTEMS, INC.


 




 





 





















 


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


 


11





















 


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


 


12





















 


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.


 


13





















 


(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.


 


14





















 


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 sponsored, maintained or contributed to by
the Company or with respect to which the Company has an obligation to
contribute.  The Company has made
appropriate entries in its financial records and statements, to the extent
required under GAAP, for all obligations and liabilities under such Other
Benefit Obligations that have accrued but are not due.


 


(ii) The
Company, with respect to all of its Other Benefit Obligations is, and such
Other Benefit Obligation is, to the extent applicable, in compliance in all
material respects any applicable Legal Requirements.


 


(iii) The Company
has not engaged in any transaction in violation of ERISA §§404 or 406 or any
non-exempt “prohibited transaction,” as defined in IRC §4975(c)(1), or has
otherwise violated the provisions of Part 4 of Title I,
Subtitle B of ERISA.


 


(iv) Other
than claims for benefits submitted in the ordinary course by participants or
beneficiaries, no claim against, or legal proceeding involving, any Other
Benefit Obligation of the Company, is pending, or to the knowledge of the
Company, threatened.


 


(v) Except to
the extent required under ERISA §601 et seq. and
IRC §4980B, the Company does not provide health or welfare benefits for any
retired or former employee and is not obligated to provide health or welfare
benefits to any active employee following such employee’s retirement or other
termination of service.


 


(vi) The
Company has complied in all material respects with the provisions of ERISA §601 et seq. and IRC §4980B.


 


(vii) The
Company is not a party to any agreement, Contract, arrangement or plan that has
resulted or could reasonable be expected to result, separately or in the
aggregate,


 


15





















 


in the payment of any “excess parachute
payments” within the meaning of IRC §280G as a result of the transactions
contemplated by this Agreement.  No
payment that is owed or may become due to any director, officer, employee or
agent of the Company as a result of the transactions contemplated by this
Agreement will be non-deductible to the Company (or its successor) or subject to
Tax under IRC §280G or §4999; nor will the Company (or its successor) be
required to “gross up” or otherwise compensate any such Person because of the
imposition of any excise Tax on a payment to such Person as a result of the
transactions contemplated by this Agreement.


 


(viii) The
Company does not maintain, contribute to have any obligation to contribute to
any employee benefit plan, program, policy, arrangement or agreement with
respect to employees employed outside the United States.


 


4.12                        Compliance
with Legal Requirements.


 


(a)                                  The
Company is in compliance with all Legal Requirements applicable to the Company
or the conduct of the Business, except where failure to comply would not have a
Material Adverse Effect.


 


(b)                                 The
Company holds and is in compliance with, and Schedule 4.12(b) sets
forth, all material governmental qualifications, registrations, filings,
privileges, franchises, licenses, permits, approvals or authorizations
(collectively, the “Licenses”) necessary for the conduct and operation
of the Business.


 


4.13                        Absence
of Proceedings.


 


(a)                                  Except
as set forth in Schedule 4.13(a), there are no Proceedings:


 


(i) pending
or, to the Company’s knowledge, threatened by or against the Company or that
relate to the Business and there is no reasonable basis therefor; or


 


(ii) that
challenge, or that may have the effect of preventing, delaying, making illegal
or otherwise interfering with, the transactions contemplated hereby, and, to
the Company’s knowledge, no such Proceedings have been threatened.


 


(b)                                 The
Company is not subject to any Order.


 


4.14                        Absence
of Certain Changes and Events.  Except
as set forth in Schedule 4.14, as expressly contemplated by this
Agreement, or with respect to agreements with DTS, since the date of the
Balance Sheet there has not been any:


 


(a)                                  (i) change
in authorized or issued capital stock of the Company; (ii) grant of any
stock option or right to purchase shares of capital stock of the Company;
(iii) issuance of any security convertible into such capital stock;
(iv) grant of any registration rights; (v) purchase, redemption,
retirement or other acquisition by the Company of any shares of any such
capital stock; or (vi) declaration or payment of any dividend or other
distribution or payment in respect of such shares of capital stock;


 


(b)                                 amendment
to the Organizational Documents of the Company;


 


16





















 


(c)                                  increase
by the Company of any bonuses, salaries or other compensation (including
management or other similar fees) to any shareholder, director, officer or
entry into any employment, consulting agreement, severance or similar Contract
with any director, officer or employee;


 


(d)                                 adoption
of, or increase in the payments to or benefits under, any profit sharing,
bonus, deferred compensation, savings, insurance, pension, retirement,
severance or other employee benefit plan for or with any of the employees of
the Company or any increase in the payment to or benefits under any Plan or
Other Benefit Obligation for or with any employees of the Company, other than
increases provided under such Plan or Other Benefit Obligation in the Ordinary
Course of Business;


 


(e)                                  damage
to or destruction or loss of or unforeseen diminution in value of any material
asset or property owned or used by the Company, whether or not covered by
insurance;


 


(f)                                    entry
into, termination, non-renewal, or acceleration of, or receipt of notice of
termination or non-renewal by the Company of (i) any license,
manufacturing, supply, distributorship, dealer, sales representative, joint
venture, credit or similar agreement or (ii) any Contract or transaction
involving a Liability by or to the Company of at least $10,000;


 


(g)                                 sale
or license (other than sales or license in the Ordinary Course of Business),
lease or other disposition of any asset or property of the Company;


 


(h)                                 mortgage,
pledge or imposition of any Encumbrance or other Lien, except for Permitted
Liens, on any asset or property of the Company, including the sale, lease,
license out or other disposition or material diminution in value of any of its
Intellectual Property outside the Ordinary Course of Business;


 


(i)                                     failure
to repay when due any obligation, including without limitation, accounts
payable and accrued expenses;


 


(j)                                     accrual
of any material expenses, except for such accruals in the Ordinary Course of
Business;


 


(k)                                  capital
expenditures in excess of $10,000;


 


(l)                                     cancellation
or waiver of any claims or rights with a value to the Company in excess of
$10,000;


 


(m)                               payment,
discharge or satisfaction of any material Liability by the Company, other than
the payment, discharge or satisfaction of Liabilities in the Ordinary Course of
Business;


 


(n)                                 incurrence
of or increase in, any material Liability of the Company, except in the
Ordinary Course of Business, or any accelerated or deferred payment of or
failure to pay when due, any Liability;


 


17





















 


(o)                                 change
in the accounting methods used by the Company;


 


(p)                                 election
made or changed, agreement by the Company with respect to Tax allocation, Tax
sharing or Tax indemnity, waiver of a statute of limitations with respect to
Taxes of the Company or settlement or compromise any claim notice, audit
report, assessment or Liability for Taxes of the Company; or


 


(q)                                 agreement,
whether oral or written, by the Company with respect to or to do any of the
foregoing.


 


4.15                        Contracts;
No Defaults.


 


(a)                                  Except
as set forth in Schedule 4.15, the Company is not party to
any:  (i) agreement relating to any
business acquisition by or of the Company within the last two years,
(ii) collective bargaining agreement or Contract with any labor union,
(iii) bonus, pension, profit sharing, retirement or other form of deferred
compensation plan, written or oral, other than as described in Section 4.11
hereof or the schedules relating thereto, (iv) stock purchase, stock
option or similar plan, (v)  contract for the employment of any officer,
individual employee or other individual on a full time or consulting basis,
written or oral, (vi) agreement or indenture relating to the borrowing of
money or to mortgaging, pledging or otherwise placing a lien on any portion of
the Company’s assets, (vii) guaranty of any obligation for borrowed money
or other guaranty, (viii) lease or agreement under which it is lessee of,
or holds or operates any personal property owned by any other party, for which
the annual rental exceeds $10,000, (ix) lease or agreement under which it
is lessor of or permits any third party to hold or operate any property, real
or personal, for which the annual rental exceeds $10,000, (x) Contract or
group of related contracts with the same party for the purchase of products or
services, under which the undelivered balance of such products and services has
a selling price in excess of $10,000 (other than purchase orders entered into
in the Ordinary Course of Business), (xi) Contract or group of related
contracts with the same party for the sale of products or services under which
the undelivered balance of such products or services has a sales price in
excess of $10,000 (other than purchase orders entered into in the Ordinary
Course of Business), (xii) Contract which prohibits the Company from
freely engaging in business anywhere in the world, (xiii) Contract with a
remaining term of in excess of 12 months which Contract can not be terminated
by the Company without Liability on notice of 30 days or less, (xiv) agreement,
joint venture or other business arrangement with IMAX Corporation or any
Affiliate thereof, or (xv) agreement containing “most favored nations” or other
provisions requiring adjustment of cost, pricing, priority or other terms or
conditions of the contract, or performance obligations under such contract, in
relation to (A) the terms or conditions of other contracts of the Company or
(B) the price or other terms or conditions for the provisions of similar
services by a third party.


 


(b)                                 DTS
either has been supplied with, or has been given access to, a true and correct
copy of all written Contracts which are referred to on Schedule 4.15,
together with all material amendments, waivers or other changes thereto.


 


(c)                                  The
Company is not in default under any Contract listed on Schedule 4.15.


 


18





















 


(d)                                 The
products licensed, sold, leased and delivered and all services provided by the
Company and any Predecessor Entity have conformed in all material respects with
all applicable contractual commitments and all express and implied warranties,
and the Company has no liability (whether known or unknown, whether asserted or
unasserted, whether absolute or contingent, whether liquidated or
un-liquidated, and whether due or to become due) for replacement or
modification thereof or other damages in connection therewith other than in the
aggregate amount not exceeding $50,000.


 


(e)                                  No
rate reduction is required under Section 2(b)(1) of that certain Agreement for
Services-Restoration Services effective as of November 1, 2003, by and between
the Company and Walt Disney Pictures and Television (the “Disney Agreement”).  No notification has been delivered (or is
required to be delivered) by the Company pursuant to Section 2(b)(2) of the
Disney Agreement.


 


4.16                        Insurance.  Schedule 4.16 contains a
complete list of, and the Company has made available to DTS true and complete
copies of, all insurance policies covering the Company or any of its employees,
directors or officers.  There is no claim
by the Company pending under any of such policies as to which coverage has been
denied by the underwriters of such policies. The Company is in compliance in
all material respects with the terms and conditions of all such policies.


 


4.17                        Environmental
Matters.


 


(a)                                  To
the knowledge of the Company, the Company is in compliance with, and is not in
violation of or liable under, any Environmental Law.  The Company has not received, any written
notice (including but not limited to notices of violations, demands, citations,
directives, inquiries, Consent decrees, judgments, Orders or Liens) from
(i) any Governmental Body or third party or (ii) the current or prior
owner or operator of its Facilities, relating to any Hazardous Activity,
Hazardous Material, any actual or potential violation or failure to comply with
any Environmental Law, or any actual, potential or threatened obligation to
undertake or bear the cost of any Environmental, Health and Safety Liabilities
with respect to (A) any of the Facilities or any other properties or
assets (whether real, personal or mixed) in which the Company (or any
predecessor) has had an interest, or (B) with respect to any property or
Facility at, to or from which Hazardous Materials were generated, manufactured,
refined, transferred, imported, used, processed, transported, treated, stored,
handled, transferred, disposed, recycled or received by the Company (or any
predecessor) or any other Person for whose conduct the Company is responsible.


 


(b)                                 To
the knowledge of the Company, there are no presently existing claims,
Encumbrances or other restrictions of any nature (including but not limited to
notices of violations, demands, citations, directives, inquiries, consent
decrees, judgments, Orders or Liens), resulting from any Environmental, Health
and Safety Liabilities or arising under or pursuant to any Environmental Law,
with respect to or affecting any of the Facilities or any other properties and
assets (whether real, personal or mixed) in which the Company (or any
predecessor) has or had an interest.


 


19





















 


(c)                                  To
the knowledge of the Company, there are no Hazardous Materials present on or at
the Facilities including any Hazardous Materials contained in barrels, above or
underground storage tanks, landfills, land deposits, dumps, equipment (whether
moveable or fixed) or other containers, either temporary or permanent, and
deposited or located in land, water, dumps or any other part of the Facilities,
or incorporated into any structure therein or thereon in violation of
Environmental Law, except for such violations that would not have a Material
Adverse Effect.  To the knowledge of the
Company, the Company has not permitted or conducted, or is aware of, any
Hazardous Activity at its Facilities or any other properties or assets (whether
real, personal or mixed) in which the Company has or had an interest.


 


(d)                                 To
the knowledge of the Company, there has been no Release of any Hazardous
Materials at, to or from its Facilities in violation of Environmental Law or as
would give rise to liability under Environmental Law.


 


(e)                                  To
the knowledge of the Company, the Company and its Facilities have all
Environmental Permits required under any Environmental Law, except for such
Environmental Permits the failure to obtain would not have a Material Adverse
Effect, and the Company and each of its Facilities is in compliance with all
such Environmental Permits, except for such noncompliance that would not have a
Material Adverse Effect.


 


(f)                                    The
Company has delivered to DTS true, complete and correct copies and results of
any material environmental reports, studies, analyses, recommendations, audits,
assessments, tests or monitoring possessed or initiated by the Company
pertaining to the Environment, Hazardous Materials or Hazardous Activities in,
on or under its Facilities or concerning compliance by the Company, or any
other Person for whose conduct it is responsible, with Environmental Laws, to
the extent the foregoing are in the possession custody or control of the
Company.


 


20





















 


4.18                        Employee
Matters.  There has not been with
respect to the Company, and the Company has not been notified in writing of any
presently pending or existing, and, to the knowledge of the Company, there is
not threatened, (a) any strike, slowdown, picketing, work stoppage or
lock-out, (b) any material Proceeding against the Company relating to the
alleged violation of any Legal Requirement pertaining to labor relations or
employment matters, including any charge or complaint filed by an Employee or
union with the National Labor Relations Board, the Equal Employment Opportunity
Commission or any comparable Governmental Body, organizational activity or
other labor or employment dispute against the Company or (c) any
application for certification of a collective bargaining agent.  There is no lockout of any employees by the
Company, and no such action is currently contemplated by the Company.  The Company has complied with all material
Legal Requirements relating to employment, equal employment opportunity, nondiscrimination,
disability accommodation, immigration, wages, hours, benefits, collective
bargaining, the payment of social security and similar Taxes, occupational
safety and health, and plant closing.  To
the knowledge of the Company, no director, officer, or other key employee or
consultant of the Company intends to terminate his employment or engagement
with the Company.  Except as set forth in
Schedule 4.18, the Company has fully satisfied all of its payroll
obligations as and when due.


 


4.19                        Intellectual
Property.


 


(a)                                  The
Company owns all Intellectual Property necessary or required for the conduct of
its Business as currently conducted or as proposed to be conducted.  Schedule 4.19 sets forth a true
and complete list of all Intellectual Property owned by the Company, in which
the Company has any rights, or which is otherwise used by the Company in the
conduct of its Business (collectively, the “Company IP Rights”).


 


(b)                                 The
Company IP Rights are free and clear of all claims or Encumbrances, except as
may be specifically identified in Schedule 4.19.  The Company does not own any registrations of
its trademarks or service marks, nor has it ever filed any applications for
federal, foreign or state registration of its marks.  The Company does not own any domain names.


 


(c)                                  There
is no pending or threatened opposition, interference or cancellation proceeding
before any court or registration authority in any jurisdiction against any
Intellectual Property owned by the Company.


 


(d)                                 The
Company is not a party to any agreements pertaining to the use of, or granting
any right to use or practice any rights under, any Intellectual Property,
whether the Company is the licensee or licensor thereunder, and whether written
or oral, express or implied, nor is the Company a party to any written
settlements or Consents relating to any Intellectual Property or covenants not
to sue.  Except as may be set forth in Schedule 4.19,
there are no settlements, Consents, judgments, or orders or other agreements
which restrict any of the Company’s rights to use any Intellectual Property or
which permit third parties to use any Intellectual Property which would
otherwise infringe any of the Company IP Rights. The Company has never licensed
to any third party any Intellectual Property.


 


(e)                                  The
Company takes and has taken reasonable measures to protect the confidentiality
of its trade secrets, know-how or other confidential information material to
its


 


21





















 


business as
currently operated or planned to be operated (together, “Trade Secrets”).  To the best of the Company’s knowledge, no
material or significant Trade Secret has been disclosed or authorized to be
disclosed to any third party, including any employee, agent, contractor or
other person, other than pursuant to a written non-disclosure agreement (or
other written agreement or employment policy imposing non-disclosure
obligations) that adequately protects the Company’s proprietary interests in
and to such Trade Secrets.  To the best
of the Company’s knowledge, no party to any non-disclosure agreement relating
to any Trade Secrets is in breach thereof.


 


(f)                                    Except
as set forth in Schedule 4.19, the conduct of the Business of the
Company as currently conducted or planned to be conducted does not infringe
upon (either directly or indirectly) any Intellectual Property owned or
controlled by any third party.  There are
no claims or suits pending or, to the best of the Company’s knowledge,
threatened, and the Company has not received any notice from any third party
(i) alleging that any of the Company’s activities or the conduct of its
Business has infringed upon or constitutes the unauthorized use of the
Intellectual Property rights of any third party, or (ii) challenging the
ownership, use, validity or enforceability of any Company IP Rights.


 


(g)                                 To
the best of the Company’s knowledge, no third party is misappropriating,
infringing, diluting, or violating any of the Company IP Rights, and no such
claims are pending against a third party by the Company.


 


(h)                                 Schedule 4.19
lists all material computer programs and computer databases, other than
off-the-shelf applications, which are owned or otherwise used by the Company (“Company
Software”).  There is no Software
currently or previously, or contemplated to be, licensed, sublicensed or sold
to or by the Company.  “Software” means
any and all (i) computer programs, including any and all software
implementations of algorithms, models and methodologies, whether in source code
or object code, (ii) computer databases and computer compilations,
including any and all data and collections of data, whether machine readable or
otherwise, (iii) descriptions, flow-charts and other work product used to
design, plan, organize and develop any of the foregoing, (iv) any Domain
Names and the technology supporting and content contained on any Internet
site(s), and (v) all documentation, including user manuals and training
materials, relating to any of the foregoing.


 


(i)                                     Each
item of Software listed in Schedule 4.19 is either (i) owned
by the Company, or (ii) currently in the public domain or otherwise
available to the Company without the license, lease or Consent of any third
party.  Except as set forth in Schedule
4.19, to the best of the Company’s knowledge, the Company’s use of the
Software set forth in Schedule 4.19 does not violate the rights of
any third party.  With respect to the
Software set forth in Schedule 4.19 which the Company purports to
own, such Software was either developed by (x) employees of the Company
within the scope of their employment; or (y) independent contractors who
have assigned their rights to the Company and waived any moral rights in favor
of the Company pursuant to written agreements. 
The Company Software generally functions in the manner intended, free of
any significant bugs or programming errors.


 


(j)                                     The
Company has never distributed to any third party any of the Company Software,
and no such distribution is presently contemplated by the Company.  The Company has taken all actions customary
in the software industry to document the Company Software and


 


22





















 


its operation,
such that the Company Software, including the source code and documentation,
have been written in a clear and professional manner so that they may be
understood, modified and maintained in an efficient manner by reasonably
competent programmers.  To the best of
the Company’s knowledge, the Company has not exported or transmitted any
Company Software to any country to which such export or transmission is
restricted by any applicable U.S. or foreign regulation or statute, without
first having obtained all necessary and applicable U.S. or foreign government
licenses or permits.  To the best of the
Company’s knowledge, the components manufactured by the Company and used in the
Company’s products including any Company Software, are free of any undisclosed
program routine, device, or other feature, including, without limitation, a
time bomb, software lock, drop-dead device, or malicious logic or, as of the
time of each delivery, any virus, worm or trojan horse, that is designed to
delete, disable, deactivate, interfere with, or otherwise harm them (a “Disabling
Code”), and any virus or other intentionally created, undocumented
contaminant (a “Contaminant”), that may, or may be used to, access,
modify, delete, damage or disable any hardware, system or data or that may
result in damage thereto.  The components
obtained from third party suppliers are, to the best knowledge of the Company,
free of any Disabling Codes or Contaminants that may, or may be used to,
access, modify, delete, damage or disable any hardware, system or data or that
might result in damage thereto.  To the
best of the Company’s knowledge, the Company’s hardware, systems and data are
free from Disabling Codes and Contaminants. 
The Company Software does not contain any open source, copyleft or
community source code, including any libraries or code licensed under the
General Public License, Lesser General Public License or any other license
arrangement obliging the Company to make source code publicly available,
whether or not approved by the Open Source Initiative.


 


(k)                                  All
employees and consultants of the Company and any Predecessor Entity, whether
former or current, have entered into valid and binding agreements with the
Company sufficient to vest title in the Company of all rights in any
Intellectual Property created by such employee or consultant in the scope of
his or her services or employment for the Company or the Predecessor Entity, as
the case may be.


 


(l)                                     To
the extent that any Company IP Rights have been developed or created by a third
party for the Company or a Predecessor Entity, the Company has a written
agreement with such third party thereto and the Company thereby has obtained
ownership of and is the exclusive owner of all such third party’s rights in any
Intellectual Property related to the Company’s IP Rights by operation of
law or by valid assignment, to the fullest extent legally possible to do so.


 


23





















 


4.20                        Relationships
with Related Parties.   Except as
set forth in Schedule 4.20, neither the Company nor, to the Company’s
knowledge, any of its Affiliates owns (of record or as a beneficial owner) an
equity interest or any other financial or profit interest in, a Person that has
had business dealings or a financial interest in any transaction with the
Company, other than business dealings or transactions conducted in the Ordinary
Course of Business with the Company at substantially prevailing market prices
and on substantially prevailing market terms. Except as set forth in Schedule 4.20,
no Affiliate of the Company is a party to any Contract with, or has any claim
or right against, the Company.


 


4.21                        Customers
and Suppliers.  Schedule 4.21
contains a complete and accurate list of each sole source supplier and the ten
largest suppliers and ten largest customers of the Company (based upon dollars
billed by the Company), during the first 10 months of 2004, showing the
approximate total billings by the Company from each such customer during such
fiscal year.  Since the date of the
Balance Sheet, there has been no material adverse change in the business
relationship of the Company with any of its suppliers or customers named in Schedule 4.21
or required to be named therein.


 


4.22                        Brokers
and Finders.  The Company has not
incurred any obligation or Liability for brokerage or finders’ fees or agents’
commissions or other similar payment with respect to the transactions
contemplated by this Agreement.


 


4.23                        Restrictions
on Business Activities.  There is
no agreement (not to compete or otherwise), commitment, judgment, injunction,
order or decree to which the Company, any Predecessor Entity or any Stockholder
is a party relating to the Business or otherwise binding upon the Company or
the Business which has or may have the effect of prohibiting or impairing the
transactions contemplated by this Agreement, any business practice of the
Business, any acquisition of property (tangible or intangible) by the Business
or the conduct of the Business.  None of
the Company, any Stockholder or any Predecessor Entity has entered into any
agreement under which the operations of the Business are restricted or which
places any restrictions upon the Company with respect to selling or licensing
any of its products or providing services to customers or potential customers
or any class of customers, in any geographic area, during any period of time or
in any segment of the market.


 


4.24                        Assignment
of Interests.  Each Stockholder
and each Predecessor Entity has assigned any and all interests they may have in
any assets (tangible or intangible) relating to the Business to the Company.


 


4.25                        Full
Disclosure.  No representation or
warranty in this Article IV (as modified by the schedules hereto) or in
any document delivered by the Company or its Representatives pursuant to the
transactions contemplated by this Agreement, contains any untrue statement of a
material fact, or omits to state a material fact necessary to make the
statement herein or therein, in light of the circumstances under which they
were made, not misleading.


 


4.26                        Other
Agreements.  Each of the Security
Agreement and the Pledge Agreement remain in full force and effect, and neither
the Company nor John Lowry is in breach of any of the terms thereof.


 


24





















 


4.27                        Funded
Debt.  Schedule 4.26 lists
all Funded Debt of the Company outstanding as of the Closing Date.


 


ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE PURCHASER


 


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


 


5.1                               Authority.


 


The
Purchaser has full power and authority to enter into and to perform this
Agreement in accordance with its terms and to consummate the transactions
contemplated hereby.  This Agreement has
been executed and delivered by the Purchaser and constitutes the valid and
binding obligation of the Purchaser enforceable in accordance with its terms.  The execution and performance of the transactions
contemplated by this Agreement and the Note and compliance with their
provisions by the Purchaser: (i) to the Purchaser’s knowledge will not violate
any provision of Law applicable to the Purchaser; and (ii) will not conflict
with or result in any breach of any of the Material terms, conditions or
provisions of, or constitute a default under the Purchaser’s Certificate of
Incorporation, or any indenture, lease, agreement or other instrument to which
the Purchaser is a party or by which it or any of its properties is bound, or
any decree, judgment, order, statute, rule or regulation applicable to the
Purchaser.


 


5.2                               Experience.


 


The
Purchaser is an “accredited investor” within the meaning of Regulation D
promulgated by the Securities and Exchange Commission under the Securities Act
and, by virtue of its experience in evaluating and investing in private
placement transactions of securities in companies similar to the Company, the
Purchaser is capable of evaluating the merits and risks of its investment in
the Company and has the capacity to protect its own interests.


 


5.3                               Investment.


 


The
Purchaser has not been formed solely for the purpose of making this investment
and is acquiring the Note for investment for its own account, not as a nominee
or agent, and not with the view to, or for resale in connection with, any
distribution of any part thereof.  The
Purchaser understands that the Note and the Conversion Securities to be
acquired have not been registered under the Securities Act or applicable state
and other securities laws by reason of a specific exemption from the
registration provisions of the Securities Act and applicable state and other
securities laws, the availability of which depends upon, among other things,
the bona fide nature of the investment intent and the accuracy of the Purchaser’s
representations as expressed herein.


 


5.4                               Brokers
or Finders.


 


The
Purchaser has not retained any investment banker, broker or finder in
connection with the purchase of the Note. 
The Purchaser will indemnify and hold the Company harmless


 


25





















 


against any liability, settlement or expense arising
out of, or in connection with, any claim by any such investment banker, broker
or finder.


 


5.5                               Shares
Not Registered.


 


Any
shares acquired by the Purchaser upon the execution of the Purchaser’s right of
conversion set forth in the Note (“Shares”) will
not be registered under the Securities Act, by reason of a specific exemption
from the Securities Act, and all Shares must be held indefinitely, unless they
are subsequently registered under the Securities Act or the Purchaser satisfies
certain other requirements under the Securities Act.  The Purchaser understands that these restrictions
are in addition to the contractual restrictions on transfer of Shares set forth
in this Agreement.  The Purchaser is
aware of the adoption of Rule 144 by the Securities and Exchange Commission
under the Securities Act.  The Purchaser
understands that the conditions for resale set forth in Rule 144 have not been
satisfied and that the Company is under no obligation to satisfy these
conditions.


 


ARTICLE VI

ADDITIONAL AGREEMENTS


 


6.1                               Application
of Proceeds.


 


Upon
receipt of the proceeds of the Note, the Company will immediately apply such
proceeds as set forth on Schedule 2.3.


 


6.2                               Payment
of Amounts Due Under the Note.


 


The
Company will timely pay any principal and interest due as well as any other
amounts payable under the Note in accordance with its terms and conditions.


 


6.3                               Reservation
of Securities.


 


The
Company shall reserve, for the life of the Note, such securities as the
Purchaser is entitled to receive upon conversion of the Note.  Prior to the issuance of any equity
securities (or any instrument exercisable for or convertible into equity
securities) and whenever otherwise required, the Company will amend its
Articles of Incorporation and take any such other action as is necessary to
ensure that there is a sufficient quantity of such equity securities into which
the Note can be converted.  Such equity
securities shall, when issued and delivered in accordance with terms of the
Note, be duly and validly issued, fully paid and non-assessable.


 


6.4                               Survival
of Representations, Warranties and Agreements, Etc.


 


All
representations and warranties hereunder shall survive the Closing, and shall
terminate upon repayment or conversion of the Note.  Except as otherwise provided herein, all
agreements and/or covenants contained herein shall survive indefinitely until,
by their respective terms, they are no longer operative.


 


26





















 


6.5                               Legal
Fees and Expenses and Taxes.


 


Each
party shall pay all of its expenses in connection with the negotiation and
execution of this Agreement, the Note, and the consummation of the transactions
contemplated hereby and thereby.


 


6.6                               Filing
of a UCC-1 Financing Statement.


 


On the
day on which the Closing occurs, the Company shall file a UCC-1 financing
statement with the Secretary of State of the State of California in order to
perfect its lien on the collateral covered by the Security Agreement, in the
form approved by the Purchaser.


 


6.7                               Restrictions
on Transfer of Shares.


 


(a)                                  The
Purchaser shall not, directly or indirectly, sell, assign, make any short sale
of, loan, hypothecate, pledge, offer, grant or sell any option or other
contract for the purchase of, purchase any option or other contract for the
sale of, or otherwise dispose of or transfer, or agree to engage in any of the
foregoing, any Shares, nor shall any Shares be made subject to sale under
execution, attachment, levy or similar process or otherwise be transferred,
whether voluntarily or involuntarily or by operation of law or otherwise (each
of the foregoing being referred to as a “Transfer”).  Any Transfer of Shares shall be void, and the
Company shall not be required for any purpose whatsoever to recognize any
Transfer.  In the event of the
declaration of a stock dividend, the declaration of an extraordinary dividend
payable in a form other than stock, a recapitalization, a spin-off, a stock
split, an adjustment in conversion ratio, a recapitalization, a
reclassification or another similar event that affects the Company’s
outstanding securities without receipt of consideration, any new, substituted
or additional securities or other property (including money paid other than as
an ordinary cash dividend) that by reason of such event are distributed with
respect to any Shares or into which Shares as a result become convertible shall
immediately be subject to the restrictions set forth in this paragraph.


 


(b)                                 Notwithstanding
the immediately preceding paragraph, the Purchaser may sell Shares to a third
party if the Purchaser first offers the Company the right to purchase such
Shares in the manner required by this paragraph.  If the Purchaser wishes to sell Shares, the
Purchaser shall notify the Company in writing (a “Transfer
Notice”) describing the material terms of the proposed transfer,
including the number of Shares proposed to be transferred, the proposed
transfer price, and the name and address of the proposed transferee. The
Company shall have the right (the Company’s “Purchase
Right”) to purchase all, but not less than all, the Shares subject
to the Transfer Notice on the terms described in the Transfer Notice, by
delivering to the Purchaser, within 30 days after receiving the Transfer
Notice, notice of exercise of the Company’s Purchase Right.  The Company may assign its Purchase Rights to
any Person.  If the Company does not
exercise its Purchase Right within the aforementioned time period, the
Purchaser may, not later than 90 days after the Company receives the Transfer
Notice, consummate a sale of such Shares on the terms and conditions described
in the Transfer Notice.  To be valid,
however, (i) the sale shall not cause the violation of any federal or state
securities laws and, if required by the Company, the Purchaser shall provide
the Company with an opinion of counsel satisfactory to the Company to that
effect; and (ii) the transferee must agree, in a writing approved by the
Company, to be bound by all provisions of this Section 6.7 with respect


 


27





















 


to the Shares
transferred.  Any proposed sale on terms
and conditions materially different from those described in the Transfer
Notice, and any subsequent proposed sale by the Purchaser, shall again be
subject to the Company’s Purchase Right. 
If the Company exercises its Purchase Right, the Purchaser and the
Company shall consummate the sale of the Shares on the terms set forth in the
Transfer Notice within 60 days after the Company receives the Transfer Notice
(or within such longer period if specified in the Transfer Notice); provided,
however, that if the Transfer Notice provided that the payment for the Shares was
to be made in a form other than cash or cash equivalent paid at the time of
transfer, the Company shall have the option of paying for the Shares with cash
or cash equivalent equal to the present value of the consideration described in
the Transfer Notice.


 


(c)                                  Notwithstanding
the foregoing, the Purchaser may Transfer Shares to any of its Affiliates
without complying with any of the provisions of this Section 6.7, so
long as the transferee agrees in writing to be bound by all of the provisions
of this Section 6.7.


 


ARTICLE VII

EVENTS OF DEFAULT


 


If an
Event of Default (as defined below) occurs, the Purchaser may, by notice to the
Company, declare the Outstanding Balance on the Note, together with any accrued
but unpaid interest thereon and all other amounts payable thereon, to be
immediately due and payable.  The Company
will give the Purchaser written notice of the occurrence of an Event of Default
promptly (setting forth in reasonable detail all of the facts related thereto)
and in any event no later than five (5) Business Days after the Company has
knowledge of the occurrence of any such event.


 


For
purposes of this Agreement, an “Event of Default” is any of the
following occurrences:


 


(a)                                  The
Company shall fail to pay the Outstanding Balance and all accrued but unpaid
interest and all other amounts payable thereon on the Note on the Maturity
Date; or


 


(b)                                 As
of January 31, 2005, the Company and each of the Stockholders shall not have
entered into an agreement of merger with DTS on terms and conditions reasonably
satisfactory to DTS; or


 


(c)                                  If
the Company shall default (as principal or guarantor or other surety) in the
payment of any principal of or premium or interest on any Funded Debt which is
outstanding in a principal amount of at least Five Thousand Dollars ($5,000) in
the aggregate (other than the Note), or if any event shall occur or condition
shall exist in respect of any such Funded Debt or under any evidence of any
such Funded Debt or of any mortgage, indenture or other agreement relating
thereto which would permit or shall have caused the acceleration of the payment
of such Funded Debt, and such default, event or condition shall continue for
more than the period of grace, if any, specified therein and shall not have
been waived pursuant thereto (other than Funded Debt in default as of the
Closing Date as set forth on Schedule 8 hereto); or


 


(d)                                 The
Company shall be involved in financial difficulties, but solely as evidenced
(i) by its commencement of a voluntary case under Title 11 of the United States


 


28





















 


Bankruptcy Code as
from time to time in effect, or by its authorizing, by appropriate proceedings
of its Board or other pleading admitting or failing to deny the material
allegations of a petition filed against it commencing an involuntary case under
said Title 11, or seeking, consenting to or acquiescing in the relief therein
provided, or by its failing to controvert timely the material allegations of
any such petition, (ii) by the entry of an order for relief in any involuntary
case commenced under said Title 11, (iii) by its seeking relief as a debtor
under any applicable law, other than said Title 11, of any jurisdiction
relating to the liquidation or reorganization of debtors or to the modification
or alteration of the rights of creditors, or by its consenting to or
acquiescing in such relief, (iv) by the entry of an order by a court of
competent jurisdiction (A) finding it to be bankrupt or insolvent, (B) ordering
or approving its liquidation, reorganization or any modification or alteration
of the rights of its creditors, or (C) assuming custody of, or appointing a
receiver or other custodian for, all or a substantial part of its property, or
(v) by its making an assignment for the benefit of, or entering into a
composition with, its creditors, or appointing or consenting to the appointment
of a receiver or other custodian for all or a substantial part of its property;
or


 


(e)                                  If
there shall exist final judgments against the Company aggregating in excess of
$50,000 and if any one of such judgments or such judgments shall have been
outstanding for any period of forty-five (45) days or more from the date of its
entry and shall not have been discharged in full or stayed pending appeal; or


 


(f)                                    The
Company shall take any corporate action authorizing, or in furtherance of, any
of the foregoing; or


 


(g)                                 The
Company shall have breached any Material covenant in this Agreement, the
Security Agreement, or the Note (other than such as are referred to above in this
Article VII), and, with respect to any breach capable of being cured, such
breach shall not have been cured within thirty (30) days following notice of
such Material breach to the Company by the Purchaser; or


 


(h)                                 John
Lowry shall have breached any Material covenant in the Stock Pledge Agreement
and, with respect to any breach capable of being cured, such breach shall not
have been cured within thirty (30) days following notice of such Material
breach to Mr. Lowry by the Purchaser; or


 


(i)                                     Any
representation or warranty subject to a Materiality qualification made by the
Company herein or in the Note, the Security Agreement or the Pledge Agreement
shall prove to have been incorrect in any respect, or any representation or
warranty not subject to a Materiality qualification made by the Company herein
or in Note, the Security Agreement or the Pledge Agreement shall prove to have
been incorrect in any Material respect.


 


In
case any one or more Events of Default shall occur and be continuing, the
Purchaser may proceed to protect and enforce its rights by an action at law,
suit in equity or other appropriate proceeding, whether for the specific
performance of any agreement contained herein, in the Security Agreement, in
the Pledge Agreement or in the Note, or for an injunction against a violation
of any of the terms hereof or thereof, or in aid of the exercise of any power
granted hereby or thereby or by law or otherwise.  In case of a default in the payment of any
principal of


 


29





















 


or premium, if
any, or interest on the Note, the Company will pay to the Purchaser such
further amount as shall be sufficient to cover the cost and expenses of
collection, including, without limitation, reasonable attorneys’ fees, expenses
and disbursements.  No course of dealing
and no delay on the part of the Purchaser in exercising any right, power or
remedy shall operate as a waiver thereof or otherwise prejudice its rights,
powers or remedies.  No right, power or
remedy conferred by this Agreement, the Security Agreement, the Pledge
Agreement or by the Note upon the Purchaser shall be exclusive of any other
right, power or remedy referred to herein or therein or now or hereafter
available at law, in equity, by statute or otherwise.


 


In
addition to the foregoing, and notwithstanding any other provision herein or in
the Note to the contrary, in case of an Event of Default as a result of the
matter set forth in sub-clause (b) above, the Outstanding Balance on the Note
shall automatically be increased by and additional $200,000.


 


ARTICLE VIII

MISCELLANEOUS


 


8.1                               No
Third Party Beneficiaries.


 


Except
as expressly provided herein, this Agreement shall not confer any rights or
remedies upon any Person other than the parties and their respective successors
and permitted assigns, personal representatives, heirs and estates, as the case
may be.


 


8.2                               Entire
Agreement.


 


This
Agreement and the Note, together with the Security Agreement and the Pledge
Agreement, constitute the entire agreement among the parties hereto and
supersede any prior understandings, agreements or representations by or among
the parties hereto, written or oral, that may have related in any way to the
subject matter of any Document.


 


8.3                               Successors
and Assigns.


 


This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns.  The Company may not assign either this
Agreement or any of its rights, interests, or obligations hereunder without the
prior written approval of the Purchaser. 
The Purchaser may assign this Agreement and its any rights or interests
hereunder without any prior consent (subject to the provisions of Section
6.7 hereof).


 


8.4                               Counterparts.


 


This
Agreement may be executed in one or more counterparts, each of which shall be
deemed an original but all of which together shall constitute one and the same
instrument.  This Agreement may be
executed by facsimile.


 


8.5                               Notices.


 


All
notices, requests, demands, claims, and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered personally,
telecopied, sent by


 


30





















 


nationally recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to
the parties hereto at the following addresses (or at such other address for a
party as shall be specified by like notice):


 


	
  If to the Purchaser:

  	
  Digital Theater Systems, Inc.

  
	
   

  	
  5171 Clareton Drive

  
	
   

  	
  Agoura Hills, California

  
	
   

  	
  Telephone:

  	
  (818) 706-3525

  
	
   

  	
  Facsimile:

  	
  (818) 706-

  
	
   

  	
  Attention:

  	
  General Counsel

  
	
   

  	
   

  
	
  with a copy to (which shall not constitute notice):

  
	
   

  	
   

  
	
   

  	
  Troy & Gould Professional Corporation

  
	
   

  	
  1801 Century Park East

  
	
   

  	
  16th Floor

  
	
   

  	
  Los Angeles, CA 90067

  
	
   

  	
  Telephone:

  	
  (310) 553-4441

  
	
   

  	
  Facsimile:

  	
  (310) 201-4746

  
	
   

  	
  Attention:

  	
  Lawrence Schnapp, Esq.

  
	
   

  	
   

  
	
  If to the Company:

  	
  Lowry Digital Images, Inc.

  
	
   

  	
  2777 Ontario Street

  
	
   

  	
  Burbank, California 91504

  
	
   

  	
   

  
	
   

  	
  Telephone:

  	
  818.557.7333

  
	
   

  	
  Facsimile:

  	
  818.557.7513

  
	
   

  	
  Attention:

  	
  John D. Lowry

  
	
   

  	
   

  
	
  with a copy to (which shall not constitute notice):

  
	
   

  	
   

  
	
   

  	
  Wolf, Rifkin, Shapiro & Schulman, LLP

  
	
   

  	
  11400 W. Olympic Boulevard, Suite 900

  
	
   

  	
  Los Angeles, California 90064

  
	
   

  	
  Telephone:

  	
  310.478.4100

  
	
   

  	
  Facsimile:

  	
  310.479.1422

  
	
   

  	
  Attention:

  	
  Richard Grant, Esq.

  



 


All
such notices and other communications shall be deemed to have been given and
received (i) in the case of personal delivery, on the date of such delivery,
(ii) in the case of delivery by telecopy, on the date of such delivery, (iii)
in the case of delivery by nationally recognized overnight courier, on the
third business day following dispatch and (iv) in the case of mailing, on the
seventh business day following such mailing.


 


31





















 


8.6                               Governing
Law.


 


THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE SATE OF CALIFORNIA, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF THE
STATE OF CALIFORNIA, OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE LAWS OF
ANY JURISDICTION OTHER THAN THE STATE OF CALIFORNIA TO BE APPLIED.  IN FURTHERANCE OF THE FOREGOING, THE INTERNAL
LAW OF THE STATE OF CALIFORNIA WILL CONTROL THE INTERPRETATION AND CONSTRUCTION
OF THIS AGREEMENT, EVEN IF UNDER SUCH JURISDICTION’S CHOICE OF LAW OR CONFLICT
OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD
ORDINARILY APPLY.


 


8.7                               Amendments
and Waivers; Purchasers’ Consent.


 


No
amendment of any provision of this Agreement shall be valid unless the same
shall be in writing and signed by the Company and the Purchaser.  No waiver by any party hereto of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.


 


8.8                               Incorporation
of Exhibits.


 


The
Exhibits and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.


 


8.9                               Construction.


 


Where
specific language is used to clarify by example a general statement contained
herein, such specific language shall not be deemed to modify, limit or restrict
in any manner the construction of the general statement to which it
relates.  The language used in this
Agreement shall be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction shall be applied
against any party hereto.


 


8.10                        Interpretation.


 


Accounting
terms used but not otherwise defined herein shall have the meanings given to
them under GAAP.  As used in this
Agreement (including all Exhibits and amendments hereto), the masculine, feminine
and neuter gender and the singular or plural number shall be deemed to include
the others whenever the context so requires. 
References to Articles and Sections refer to articles and sections of
this Agreement.  Similarly, references to
Exhibits refer to exhibits attached to this Agreement.  Unless the content requires otherwise, words
such as “hereby,” “herein,” “hereinafter,” “hereof,” “hereto,” “hereunder” and
words of like import refer to this Agreement. 
The article and section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.


 


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8.11                        Remedies.


 


The
parties hereto shall each have and retain all other rights and remedies
existing in their favor at Law or equity, including, without limitation, any
actions for specific performance and/or injunctive or other equitable relief
(including, without limitation, the remedy of rescission) to enforce or prevent
any violations of the provisions of this Agreement.  Without limiting the generality of the
foregoing, the Company hereby agrees that in the event the Company fails to
convey the Note or any of the Conversion Securities to the Purchaser in
accordance with the provisions of this Agreement, the Purchaser’s remedy at law
may be inadequate.  In such event, the
Purchaser shall have the right, in addition to all other rights and remedies it
may have, to specific performance of the obligations of the Company to convey
such securities.


 


8.12                        Severability.


 


It is
the desire and intent of the parties hereto that the provisions of this
Agreement be enforced to the fullest extent permissible under the laws and
public policies applied in each jurisdiction in which enforcement is
sought.  Accordingly, if any particular
provision of this Agreement shall be adjudicated by a court of competent
jurisdiction to be invalid, prohibited or unenforceable for any reason, such
provision, as to such jurisdiction, shall be ineffective, without invalidating
the remaining provisions of this Agreement or affecting the validity or
enforceability of this Agreement or affecting the validity or enforceability of
such provision in any other jurisdiction. 
Notwithstanding the foregoing, if such provision could be more narrowly
drawn so as not to be invalid, prohibited or unenforceable in such
jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without
invalidating the remaining provisions of this Agreement or affecting the validity
or enforceability of such provision in any other jurisdiction.


 


8.13                        Waiver
of Jury Trial.


 


EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR ANY OTHER DOCUMENT.


 


[THIS SPACE INTENTIONALLY LEFT BLANK]


 


33





















 


IN
WITNESS WHEREOF, the parties hereto have executed this Secured Convertible Note
Purchase Agreement as of the date first above written.


 


	
   

  	
  THE COMPANY:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
     /s/ John Lowry, CEO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  THE PURCHASER:

  
	
   

  	
   

  
	
   

  	
  DIGITAL THEATER SYSTEMS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Jon E. Kirchner

  	
   

  
	
   

  	
  Name:

  	
     Jon E. Kirchner

  	
   

  
	
   

  	
  Its:

  	
     President and Chief Executive Officer

  
					



 


34





















 


Exhibit A


 


[Form of Note]


 





















 


NEITHER THIS NOTE, NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF,
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS.  THIS NOTE HAS BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY
NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH NOTE UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES STATUTE
OR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND
APPLICABLE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.


 


LOWRY DIGITAL IMAGES, INC.


 


SECURED CONVERTIBLE PROMISSORY NOTE


 


	
   

  	
   

  	
  Burbank, California

  
	
  U.S. $1,000,000

  	
   

  	
  December 17, 2004

  



 


This SECURED CONVERTIBLE PROMISSORY NOTE (this “Note”) is issued
pursuant to that certain Secured Convertible Note Purchase Agreement dated as
of the date hereof (the “Note Purchase Agreement”), by and between Lowry
Digital Images, Inc., a California corporation (the “Company”), and
Digital Theater Systems, Inc., a Delaware corporation (the “Lender”),
and is entitled to the benefits of the Note Purchase Agreement.  The payment of the principal sum of this
Note, including interest accrued thereon, is secured pursuant to the terms of
that certain Security Agreement dated as of June 2, 2004 (the “Security
Agreement”), by and between the Company and the Lender.  Capitalized terms used herein and not defined
shall have the meanings ascribed to them in the Note Purchase Agreement.


 


1.                                       Principal
and Interest.  The Company, for value
received, hereby promises to pay to the order of Digital Theater Systems, Inc.,
or holder (either, the “Holder”) in lawful money of the United States,
the principal amount of One Million Dollars ($1,000,000), together with
interest (computed on the basis of a 360 day year) accrued on the unpaid
principal of this Note at the rate of six percent (6.0%) per annum commencing
on the date hereof and compounding monthly. 
Accrued interest on this Note shall be payable in full in cash on the
Maturity Date (as defined below).  No
amount shall be due on this Note prior to the Maturity Date, except as provided
in Section 7 hereof.  The amount
outstanding on this Note is subject to increase as described in the last
sentence of Article VII of the Note Purchase Agreement.


 


Subject to Section 2 hereof, this Note is due and payable
(a) on December 17, 2005 (the “Maturity Date”); or (b) on
demand by written notice following the occurrence of an Event of Default.  Subject to Section 2 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 principal and all accrued and
unpaid interest on this Note (as well as any other amounts payable hereunder)
as of the Maturity Date or the Payment Date, as applicable.  All payments shall be applied first to
accrued interest and other amounts payable hereon, and the balance to
principal.


 





















 


2.                                       Optional
Conversion.  Upon the demand by
written notice made by the Lender (the date such notice is received being
referred to herein as the “Notice Date”), the Company shall, in lieu of
repaying this Note, convert this Note into that number of shares of the Company’s
common stock such that, following conversion, the number of shares so issued
represents 10.0% of the then-outstanding shares of the Company’s capital stock
(treating as outstanding all shares issuable upon exercise of options,
warrants, convertible notes (including other convertible notes held by the
Lender) and other convertible securities, including options authorized by a
stock option plan but not yet issued), at the time of conversion.  Such a notice may be sent by the Lender at
any time on or after January 31, 2005. 
Upon an acquisition of Shares pursuant to the exercise of such
conversion rights, the Lender shall be deemed to have again made in favor of
the Company the representations and warranties set forth in Section 5.5 of the
Note Purchase Agreement.  Notwithstanding
anything to the contrary in this Note, the right to conversion set forth in
this paragraph is personal to the Lender, and neither such right nor any
interest therein may be assigned or transferred by the Lender to any Person
other than to an Affiliate of the Lender.


 


3.                                       No
Usury.  This Note is 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 Holder
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 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 Holder hereof that all payments under
this Note are to be credited first to interest as permitted by law, but not in
excess of (i) the agreed rate of interest hereunder, or (ii) that
permitted by law, whichever is the lesser, and the balance toward the reduction
of principal.


 


4.                                       Attorneys’
Fees.  If the indebtedness
represented by this Note or any part hereof is collected in bankruptcy,
receivership or other judicial proceedings or if this Note is placed in the
hands of attorneys for collection after default, the Company agrees to pay, in
addition to the principal and interest payable hereunder, reasonable attorneys’
fees and costs incurred by the Holder, as well as any and all interest that has
accrued on the outstanding principal after the commencement of bankruptcy,
receivership or other judicial proceedings.


 


5.                                       Transfer.


 


(a)                                  Subject
to the last sentence of Section 2 above, the rights and obligations of the
Company and the Holder of this Note will be binding upon and inure to the
benefit of the successors, assigns, heirs, administrators and transferees of
the parties hereto.


 


(b)                                 Subject
to the last sentence of Section 2 above, the Holder may, prior to conversion
hereof, surrender this Note at the principal office of the Company for transfer
or exchange of all or any portion of this Note. 
Within a reasonable time after notice to the Company by the Holder of
its intention to make such exchange and without expense to the Holder, except
for any transfer or similar tax which may be imposed on the transfer or
exchange,


 


2





















 


the Company shall issue in exchange therefor another note or notes for
the same aggregate principal amount as the unpaid principal amount of the Note
so surrendered, having the same rate of interest, containing the same
provisions, and subject to the same terms and conditions as the Note so
surrendered, subject to the last sentence of Section 2 above.  Each such new Note shall be made payable to
such person or persons, or transferees, as the Holder of such surrendered Note
may designate in writing.  Notwithstanding anything in this Note to the
contrary, no opinion of counsel shall be required in connection with a transfer
under this Section 5(b) to any such transferee.


 


6.                                       Notices.  Any notice, other communication or payment
required or permitted hereunder shall be in writing and shall be deemed to have
been given if delivered as described in the Notices section of the Note
Purchase Agreement and to the appropriate addresses listed therein.


 


7.                                       Event
of Default.


 


(a)                                  General.  If an Event of Default occurs, the Holder
may, by notice to the Company, declare the principal amount then outstanding
of, and the accrued interest and all other amounts payable on this Note to be
immediately due and payable.  The Company
will give the Holder of this Note written notice of the occurrence of an Event
of Default promptly (setting forth in reasonable detail all facts related
thereto) and in any event no later than five (5) Business Days after the
Company has knowledge of the occurrence of any such event.


 


In case any one or more Events of Default shall occur and be
continuing, the Holder may proceed to protect and enforce its rights by an
action at law, suit in equity or other appropriate proceeding, whether for the
specific performance of any agreement contained herein or in the Note Purchase
Agreement, the Security Agreement or for an injunction against a violation of
any of the terms hereof or thereof, or in aid of the exercise of any power
granted hereby or thereby or by law or otherwise.  In case of a default in the payment of any
principal of or premium, if any, or interest on this Note, the Company will pay
to the Holder such further amount as shall be sufficient to cover the cost and
expenses of collection, including, without limitation, reasonable attorneys’ fees,
expenses and disbursements.  No course of
dealing and no delay on the part of the Holder in exercising any right, power
or remedy shall operate as a waiver thereof or otherwise prejudice the Holder’s
rights, powers or remedies.  No right,
power or remedy conferred by this Note, the Security Agreement or the Note
Purchase Agreement upon the Holder shall be exclusive of any other right, power
or remedy referred to herein or therein or now or hereafter available at law,
in equity, by statute or otherwise.


 


8.                                       Waivers
and Amendments.  The Company hereby
waives presentment, demand for performance, notice of non-performance, protest,
notice of protest and notice of dishonor. 
No delay on the part of the Holder in exercising any right hereunder
shall operate as a waiver of such right or any other right.  Any term of this Note or the Security
Agreement may be amended or waived only with the written consent of the Company
and the Holder.


 


9.                                       Governing
Law.  This Note is being delivered
in, and shall be governed by and construed in accordance with, the laws of the
State of California, without regard to conflicts of laws provisions thereof.


 


3





















 


10.                                 Prepayment.  If the Lender has not exercised its right to
conversion set forth in Section 2, the Company may prepay all (but not less
than all) of this Note five (5) days following delivery of a written notice of
prepayment, so long as such prepayment is accompanied by all interest accrued
hereunder as of the date of such prepayment.


 


11.                                 Jury
Waiver.  THE COMPANY
WAIVES ANY AND ALL RIGHTS THAT IT MAY NOW OR HEREAFTER HAVE UNDER THE LAWS OF
CALIFORNIA, OR ANY OTHER JURISDICTION, TO A TRIAL BY JURY OF ANY AND ALL ISSUES
ARISING EITHER DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING BETWEEN THE
COMPANY AND THE HOLDER OR ITS SUCCESSORS AND ASSIGNS, OUT OF OR IN ANY WAY
CONNECTED WITH THIS NOTE AND THE OTHER DOCUMENTS.  IT IS INTENDED THAT SAID WAIVER SHALL APPLY
TO ANY AND ALL DEFENSES, RIGHTS, AND/OR COUNTERCLAIMS IN ANY ACTION OR
PROCEEDINGS.  THIS SECTION IS A MATERIAL
INDUCEMENT TO THE HOLDER TO ENTER INTO THE TRANSACTIONS CONTEMPLATED BY THE
NOTE PURCHASE AGREEMENT.


 


12.                                 Covenant.  The Company covenants and agrees that, on or
before such time as this Note is converted into equity securities of the
Company in accordance with its terms, the Company will take all such corporate
action as is necessary for the creation and issuance of the equity securities
into which this Note is to be converted.


 


13.                                 Miscellaneous.  In the event any one or more of the
provisions of this Note shall for any reason be held to be invalid, illegal or
unenforceable, in whole or in part or in any respect, or in the event that any
one or more of the provisions of this Note operate or would prospectively operate
to invalidate this Note, then and in any such event, such provision(s) only
shall be deemed null and void and shall not affect any other provision of this
Note and the remaining provisions of this Note shall remain operative and in
full force and effect and in no way shall be affected, prejudiced, or disturbed
thereby.


 


 


	
   

  	
  LOWRY DIGITAL IMAGES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ John Lowry, CEO

  



 


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