Document:

EXHIBIT 10.2

 

 

THE SECURITIES REPRESENTING MEMBERSHIP INTERESTS UNDER
THIS LLC OPERATING AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY
NOT BE TRANSFERRED WITHOUT REGISTRATION UNDER SUCH LAWS OR THE AVAILABILITY OF
AN EXEMPTION FROM REGISTRATION UNDER SUCH LAWS.

 

 

OPERATING
AGREEMENT

 

FOR

 

CHS/SRS,
LLC

 

A
CALIFORNIA LIMITED LIABILITY COMPANY

 

 

September
23, 2004

 

 

 

THE SECURITIES REPRESENTED BY THIS OPERATING AGREEMENT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED OR THE
LAWS OF ANY STATE.  THESE SECURITIES MAY
NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE, TRANSFERRED, PLEDGED,
HYPOTHECATED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR AN OPINION OF COUNSEL, WHICH OPINION IS SATISFACTORY IN FORM AND
SUBSTANCE TO THE COMPANY AND CONCURRED IN BY THE COMPANY’S COUNSEL, TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR THE LAWS OF ANY
STATE OR SUCH TRANSACTION COMPLIES WITH RULES PROMULGATED BY THE SECURITIES AND
EXCHANGE COMMISSION UNDER SAID ACT AND APPLICABLE STATE LAW.

 

CHS/SRS,
LLC

OPERATING AGREEMENT

 

This Operating Agreement (“Agreement”) is entered into
effective as of September 23, 2004, by and among COMING HOME STUDIOS, LLC
(“CHS”) and SRS LABS, INC. (“SRS”) and any other parties who may from time to
time execute this Agreement (collectively referred to as the “Members” or
individually as an “Member”).

 

R E C
I T A L S :

 

A.                                   WHEREAS,
SRS is engaged, inter alia, in the development and provision of audio
technology;

 

B.                                     WHEREAS
CHS is engaged, inter alia, in the business of producing and exploiting the
rights to the live taping of concerts, and, in connection therewith, has
entered into the following agreements (the “Designated Contracts”) to produce,
exploit and receive economic benefits from concert videos using SRS technology:

 

1.                                       Artist
agreement between CHS and Duran Duran Ltd. dated March 1, 2004;

 

2.                                       Operating
agreement between CHS and Duran Duran L & I dated as of May 8, 2004
relating to DD/CHS, LLC;

 

3.                                       Artist
agreement between CHS and Godsmack Partnership dated March 18, 2004;

 

4.                                       Artist
agreement between CHS and Gray Cat Records, Inc. dated as of April 11,
2003 and executed August 18, 2003;

 

5.                                       Operating
Agreement dated as of June 4, 2003, between CHS and the Class B members of BS
Concert Video LLC; and

 

6.                                       Unexecuted
Distribution Agreement between CHS and Ideal Entertainment dated May 21,
2004 (collectively, the concert videos to be produced pursuant to the
Designated Contracts and any related agreements will be referred to herein as
the “Shows”).

 

 

C.                                     WHEREAS,
CHS and SRS wish to enter into a strategic alliance to exploit ongoing
co-promotional opportunities for their respective brands and products (the
“Strategic Alliance”);

 

D.                                    WHEREAS,
pursuant to an oral partnership agreement entered into between CHS and SRS (the
“Initial Partnership”) in contemplation of establishing the Strategic Alliance
and completing and distributing the Shows, SRS made a capital contribution to
the Initial Partnership in the amount of $700,000 on July 9, 2004 (the “Initial
SRS Contribution”);

 

E.                                      WHEREAS,
in connection with the Strategic Alliance and the Initial Partnership, CHS and
SRS wish to form a limited liability company (“CHS/SRS, LLC” or the “Company”)
to complete and promote the Shows;

 

F.                                      WHEREAS,
in addition to the Initial SRS Contribution, SRS wishes to contribute $1,100,000
in cash to the capital of CHS/SRS, LLC, and CHS wishes to contribute the
Designated Contracts and all assets created in respect thereof or derived
therefrom, including without limitation the Shows and the Proceeds (provided,
however that CHS will retain legal title to the copyrights and masters in
respect of the Shows), to the capital of CHS/SRS, LLC;

 

G.                                     WHEREAS,
on June 18, 2004, CHS/SRS, LLC was formed as a limited liability company by the
filing of Articles of Organization (the “Articles”) with the California
Secretary of State; and

 

H.                                    WHEREAS,
CHS and SRS wish to enter into this Agreement to convert the Initial
Partnership into CHS/SRS, LLC and to govern the operations of the Company and
document the rights and obligations of each Member with respect to the Company
and the other Members.

 

NOW, THEREFORE, in consideration of the premises and
the mutual covenants and conditions contained herein, the parties agree as
follows:

 

A G R
E E M E N T :

 

ARTICLE
I

ORGANIZATIONAL
MATTERS

 

1.1                                 Definitions;
Formation and Purpose.  Unless
otherwise defined herein, capitalized terms shall have the meanings set forth
in Section 11.1 hereof.  The Members
have formed a California limited liability company by filing the Articles with
the California Secretary of State and have entered into this Agreement to
define the rights and liabilities of the Members.  The purpose of the Company is to Complete and distribute the
Shows, to receive and distribute the Proceeds and to engage in any such other
lawful business as the Members deem appropriate or advisable.

 

1.2                                 Name
and Term.  The name of the Company
shall be “CHS/SRS, LLC”.  The business
of the Company may be conducted under that name or, upon compliance with
applicable laws, any other name that the Members deem appropriate or
advisable.  The term of this Agreement
shall be coterminous with the existence (including any winding up activities)
of the Company.

 

3

 

1.3                                 Office;
Agent.  The Company shall maintain
an office and registered agent in California, and may locate its principal
office where the Manager (as defined in Section 4.1) may determine.  Other offices may also be established as
needed within and without California. 
The registered agent shall be as stated in the Articles or as otherwise
determined by the Manager.

 

1.4                                 Continuation
After Certain Events.  The Company
shall not dissolve upon death, Disability, bankruptcy, retirement, resignation,
expulsion or dissolution of any Member; by executing this Agreement, the
Members agree that the business of the Company shall continue in any of such
events.

 

ARTICLE
II

CAPITAL
CONTRIBUTIONS; USE OF PROCEEDS

 

2.1                                 Capital
Contributions.  Each Member shall
contribute the amount set forth on Exhibit A and the respective schedules
thereto as such Member’s initial Capital Contribution.  The initial Capital Contributions shall be
used to Complete the Shows pursuant to a Production Services Agreement to be
entered between the Company and CHS on or about the date hereof. No Member shall
be required to make any additional Capital Contributions, but additional
Capital Contributions may be made upon written approval of the Members or as
otherwise provided herein.  All Capital
Contributions and Units, as set forth on Exhibit A and the respective schedules
thereto, shall be adjusted as necessary and appropriate.

 

2.2                                 Cost
to Complete the Shows.  If any
additional capital (an “Additional Advance”) in excess of the SRS Capital
Contribution is required by CHS to Complete the Shows, then the Manager will be
responsible for contributing the additional capital needed or for arranging
financing which is acceptable to both Members; provided, however, that (i) SRS
will have the right (but not the obligation) to contribute one-half of any
Additional Advance; and (ii) no Member’s ownership interest will be diluted in
connection with any Additional Advance. If CHS is unable or unwilling to
contribute its share of any Additional Advance, then SRS will also have the
right (but not the obligation) to contribute all or any part of the needed
Additional Advance. If the amount of the Additional Advance contributed by SRS
exceeds the amount of the Additional Advance contributed by CHS, then SRS will
be entitled to receive, from the first distributions of cash as provided in
Section 7.4 below, an amount equal to 130% of the amount by which the
cumulative Additional Advances made by SRS exceed the cumulative Additional
Advances made by CHS.

 

2.3                                 Capital
Accounts.  The Company shall
establish and maintain in accordance with the Regulations, a capital account
(the “Capital Account”) for each Member, which shall carry over to such
Member’s transferee if transferred in accordance with this Agreement.  Interest shall not be payable on any Capital
Account except as provided herein.

 

ARTICLE
III

CLASSES
OF MEMBERS, VOTING RIGHTS AND PUT RIGHTS

 

3.1                                 Members.  The names, addresses, and the number of
Units of the Members are set forth on Exhibit A, attached hereto and made a
part hereof.  Each Member, by executing
this 

 

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Operating Agreement, represents that such Member is
acquiring such Member’s Units for such Member’s own account and not with a view
to or for sale in connection with any distribution of such Units.

 

3.2                                 Class
of Membership Unit.  There shall
initially be one class of membership interest: 
Class A.

 

3.3                                 Units
of Interest in the Company.  The
Company shall issue one (1) unit of Class A membership interests to each of CHS
and SRS.

 

3.4                                 Voting
Rights of Classes.  Holders of Class
A Units shall have one (1) vote for each Unit.

 

3.5                                 Additional
Units.  The Company shall have the
right to authorize and issue additional Units and warrants to purchase
additional Units from time to time subject to the restrictions set forth in
this Agreement.

 

3.6                                 Limited
Liability.  Except as required under
the Act or this Agreement, no Member shall be personally liable for any debt,
obligation, or liability of the Company, whether that liability or obligation
arises in contract, tort, or otherwise.

 

3.7                                 Withdrawals.  The death, Disability, expulsion, bankruptcy
or dissolution of a Member or the voluntary withdrawal or resignation by such
Member from the Company shall be a “Withdrawal.”  Upon the Withdrawal of a Member, such Member shall become a
holder of an Economic Interest only and shall thereafter be entitled only to
the rights of a holder of an Economic Interest hereunder.  Upon the Withdrawal of a Member, the Company
shall have the right to redeem such withdrawn Member’s Economic Interest for an
amount equal to the fair market value of such withdrawn Member’s Interest.

 

3.8                                 Transactions
With the Company.  Unless otherwise
prohibited herein, a Member may lend money to and transact other business with
the Company.  Each such Member shall
have, in such capacity, the same rights and obligations with respect thereto as
a Person who is not a Member.

 

3.9                                 Voting
Rights.  The Company may take any of
the following actions, but only upon the unanimous written approval of the
Members:

 

(a)                                  Amend
the Articles of Organization or this Agreement;

 

(b)                                 Select
or remove a Manager, provided, however, that the Manager may be removed and a
new Manager may be appointed without unanimous approval pursuant to Section 4.1
hereof;

 

(c)                                  Make
any distribution of cash or other assets of the Company to any Member other
than in accordance with this Agreement;

 

(d)                                 Make
or modify any material decision or determination regarding accounting and tax
matters;

 

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(e)                                  Approve
additional capital contributions, provided, however, that this section shall
not require any vote to approve an Additional Advance by CHS or SRS pursuant to
Section 2.2 hereof;

 

(f)                                    Admit
a new Member;

 

(g)                                 Establish
additional classes of Members;

 

(h)                                 Compromise
an obligation of a Member or return money or property paid or distributed in
violation of the Act;

 

(i)                                     Commit
any act which would make it impossible to carry on the ordinary business of the
Company;

 

(j)                                     Confess
to any judgment against the Company;

 

(k)                                  Sell
all or substantially all of the assets of the Company (unless pursuant to the
Company’s duly authorized dissolution);

 

(l)                                     Merge
the Company with another limited liability company, limited partnership,
corporation, general partnership or other Person; provided, however, that no
Member shall be subjected to an economic risk of loss in excess of its Capital
Contribution, in any merger without its express written consent or unless each
Member is granted dissenter’s rights as described in the Act;

 

(m)                               Modify
or change the business of the Company from that set forth in Section 1.1;

 

(n)                                 Dissolve
the Company; or

 

(o)                                 Undertake
a reorganization of the Company as defined in California Corporations Code
Section 17600.

 

3.10                           Meetings
of Members.  Meetings of Members may
be held at any date, time and place within or without California.  Meetings shall be held not less frequently
than monthly.  At each such meeting, the
Manager shall present a summary of the Company’s activities during the
preceding month, including without limitation project status for the Completion
and distribution of each Show.  Unless
prohibited by the Act or the Articles, special meetings of the Members may be
called by any Member owning more than fifteen percent (15%) of the Class A
Units for the purpose of addressing any matters on which the Members may vote
or any matters relevant to the financial condition or performance of the
Company or the Shows.

 

3.11                           Percentage
Interests.  The Percentage Interests
of the Members shall be as stated on Exhibit A hereto.

 

6

 

ARTICLE
IV

MANAGEMENT
AND CONTROL OF THE COMPANY

 

4.1                                 Management
of the Company by Manager; Removal.

 

(a)                                  Management
of the Company by Manager.  Subject
to the limitations set forth in this Agreement or the Act, the business and
affairs of the Company shall be managed by or under the authority of the
Manager, which shall initially be CHS. 
The Manager shall have all of the rights and powers which may be
possessed by a “manager” under the Act, and such rights and powers as are
otherwise conferred by law or by this Agreement or are necessary to the
management of the business and affairs of the Company.

 

(b)                                 Removal
of Manager.  The Manager may be
removed as provided in Section 3.9(b) and may be unilaterally and immediately
removed by any Member for fraud, embezzlement, misappropriation of Company
assets and for failure to make timely distributions to Members in accordance
with Article VII of this Agreement. 
Provided, however, that prior to removing the Manager for failure to
make timely distributions to Members pursuant to Section 7.4 hereof, a Member
must deliver written notice (the “Notice”) of such failure to the Manager at
the address set forth in Section 11.16 below. 
If the Manager does not cure such failure within forty-eight (48) hours
of delivery of the Notice, the Manager shall be removed without further action
by the Members and a replacement Manager may be appointed by the Member giving
the Notice.

 

4.2                                 Performance
of Duties.

 

(a)                                  The
Manager shall perform its duties consistent with its obligations as set forth
in Section 17153 of the Act.

 

(b)                                 The
Manager will use its best efforts to, or will cause CHS to:

 

(i)                                     Complete
the Shows;

 

(ii)                                  Deliver
the Shows for distribution upon Completion and cause the Shows to be
distributed;

 

(iii)                               Receive and account for
Proceeds and make distributions to the Members in accordance with this
Agreement;

 

(iv)                              Include
SRS and CHS promotional materials, including without limitation logos and ad
slicks, to be included in the packaging materials distributed with the Shows;

 

(v)                                 Maintain
complete, timely and accurate accounting records and financial statements;

 

(vi)                              Ensure
that all of CHS’s obligations under the Designated Contracts are performed; and

 

(vii)                           Maintain adequate insurance
on all assets of the Company.

 

7

 

(c)                                  The
Manager shall perform its managerial duties in good faith and in the best
interests of the Company, and with such care including reasonable inquiry, as
an ordinarily prudent person in a like position would use under similar
circumstances.  If the Manager so
performs, the Manager shall not be liable to the Company or to any Member for
any loss or damage sustained by the Company or any Member, unless the loss or
damage shall have been the result of fraud, deceit, gross negligence, reckless
or intentional misconduct or a knowing violation of law by the Manager.

 

4.3                                 Additional
Obligations of CHS.

 

(a)                                  Transfer
of Assets.  CHS will transfer to the
Company the Designated Contracts and all of its rights and interests
thereunder, including without limitation the right to receive all
Proceeds.  Such transfer shall not
affect the rights of the respective counterparties under the Designated
Contracts.  CHS will retain legal title
to the copyrights to the Shows and the masters of the Shows (collectively, the
“Retained Assets”) but will account for and contribute all Proceeds in respect
thereof to the Company.  Notwithstanding
the foregoing, nothing in this paragraph will require CHS to contribute to the
Company any non-refundable cash advances received from distributors in respect
of the Shows prior to the formation of the Company.

 

(b)                                 Proceeds.  CHS will contribute all gross Proceeds received
by CHS to the Company not later than 30 days following CHS’s receipt
thereof.  CHS will keep up-to-date
accounting records in respect of the Proceeds, including without limitation
distribution, accounting, inventory control and receivables.  Such accounting systems and records shall be
made available for the Members or their professional advisors to review at any
time.

 

(c)                                  Production
Services Agreement.  CHS will enter
into a Production Services Agreement (the “Production Services Agreement”)
dated the date hereof with the Company to Complete, distribute and exploit the
Shows and other assets in respect of the Designated Contracts.

 

(d)                                 Warrant.  On the date hereof, CHS and SRS will enter
into a warrant purchase agreement (the “Warrant Agreement”) pursuant to which
CHS will sell SRS a warrant to acquire ten percent (10%) of the equity of CHS
on the terms and conditions set forth therein.

 

(e)                                  UCC
Filings.  CHS hereby authorizes SRS
to file on its behalf any authorized amendments to the applicable UCC-1 Financing
Statement pursuant to that certain Amendment to Security Agreement dated on or
about the date hereof among CHS, SBI Advisors, LLC and the other parties
thereto.  

 

4.4                                 Fees.

 

(a)                                  Management
Fees.  As consideration for services
provided to the Company, Manager shall be entitled to a management fee of 5% of
all net revenues received from the exploitation of the Shows (the “Management
Fee”); provided, however, that no Management Fee will accrue or be payable
until all Additional Advances, if any, are repaid in full.  For purposes of calculating the Management
Fee, net revenues shall be determined by 

 

8

 

deducting from gross revenues:  (i) any contracted sales management
fees properly chargeable by third parties in connection with the Designated
Contracts, provided that such fees were contracted prior to the formation of
the Company; (ii) any participations paid or payable to the artists under
the Designated Contracts or any agreement ancillary thereto (“Artists’
Participations”); (iii) all Company expenses, debt payments, capital
improvements, replacements and contingencies; and (iv) any reserves
established for any of the foregoing. 
Management Fees payable hereunder shall accrue and be paid quarterly.

 

ARTICLE
V

REPRESENTATIONS
AND WARRANTIES

 

5.1                                 Representations
and Warranties of CHS.  CHS hereby
represents and warrants to SRS that:

 

(a)                                  CHS
(i) is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization, (ii) has the power and
authority, and the legal right, to conduct the business in which it is
currently engaged, (iii) is duly qualified as a foreign corporation and in
good standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such
qualification, and (d) is in compliance with all requirements of law
applicable to the conduct of its business.

 

(b)                                 The
description of the Designated Contracts and related assets set forth on
Schedule 1 to Exhibit A hereto completely and accurately describes the
Designated Contracts and all of CHS’s right, title and interest in and to the
Designated Contracts and any related agreements, rights and understandings with
respect thereto.

 

(c)                                  CHS
is the owner of the assets set forth on Schedule 1 to Exhibit A and has
contributed to the Company as the CHS Capital Contribution the Designated
Contracts and all of its rights and interests thereunder, including without
limitation the right to receive all Proceeds, free and clear of all
liabilities, liens, security interests and encumbrances, and CHS has no
additional rights or economic interests arising from or relating to the
Designated Contracts or the Shows other than the Retained Assets.

 

(d)                                 CHS
has the requisite legal capacity to own its assets, to borrow money, to execute
and deliver this Agreement and all other documents, certificates and
instruments related thereto, and to effect and carry out the transactions
contemplated herein and therein.  This
Agreement and each Designated Contract has been duly authorized and, when
executed and delivered, will be a valid and legally binding instrument
enforceable against CHS and/or the Company, as applicable, in accordance with
its terms.  The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
(a) will not (immediately or with the passage of time, or the giving of
notice) violate (i) any law, order, rule or regulation or determination of
an arbitrator, a court, or other governmental agency, applicable or binding
upon CHS or any of the CHS’s property or as to which CHS or any of its property
is subject; or (ii) any provision of any agreement, instrument, or
undertaking to which CHS is a party or by which CHS or any of CHS’s property is
bound and (b) will not result in the creation or imposition of any lien
upon any of the property of CHS, other than those in favor of SRS.

 

9

 

(e)                                  No
consents, approvals or other authorizations or notices, other than those which
have been obtained and are in full force and effect, are required by any state
or federal regulatory authority or other person or entity in connection with
the execution, delivery and performance of this Agreement and the performance
of any obligations contemplated hereby.

 

(f)                                    CHS
is not subject to any contractual obligation restricting or limiting the
ability of CHS to enter into and perform this Agreement.

 

(g)                                 All
representations and warranties of CHS set forth in the Warrant Agreement and
the Production Services Agreement are true and correct.

 

5.2                                 Representations
and Warranties of SRS.  SRS hereby
represents and warrants to SRS that:

 

(a)                                  SRS
(i) is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization, (ii) has the power and
authority, and the legal right, to conduct the business in which it is
currently engaged, (iii) is duly qualified as a foreign corporation and in
good standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such
qualification, and (d) is in compliance with all requirements of law
applicable to the conduct of its business.

 

(b)                                 SRS
has the requisite legal capacity to own its assets, to borrow money, to
execute, deliver and this Agreement and all other documents, certificates and
instruments related thereto, and to effect and carry out the transactions
contemplated herein and therein.  This
Agreement has been duly authorized and, when executed and delivered, will be a
valid and legally binding instrument enforceable against SRS in accordance with
its terms.  The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
(a) will not (immediately or with the passage of time, or the giving of
notice) violate (i) any law, order, rule or regulation or determination of
an arbitrator, a court, or other governmental agency, applicable or binding
upon SRS or any of the SRS’s property or as to which SRS or any of its property
is subject; or (ii) any provision of any agreement, instrument, or
undertaking to which SRS is a party or by which SRS or any of SRS’s property is
bound and (b) will not result in the creation or imposition of any lien
upon any of the property of SRS, other than those in favor of SRS.

 

(c)                                  No
consents, approvals or other authorizations or notices, other than those which
have been obtained and are in full force and effect, are required by any state
or federal regulatory authority or other person or entity in connection with
the execution, delivery and performance of this Agreement and the performance
of any obligations contemplated hereby.

 

(d)                                 SRS
is not subject to any contractual obligation restricting or limiting the
ability of SRS to enter into and perform this Agreement.

 

10

 

ARTICLE
VI

ACCOUNTING,
RECORDS, REPORTING BY MEMBERS

 

6.1                                 Books
and Records.

 

(a)                                  The
Company will keep up-to-date accounting records, and the books and records of
the Company shall reflect all Company transactions and shall be kept in
accordance with generally accepted accounting principles.  In addition, the Manager
shall maintain, keep current at all times, and reconcile on a monthly basis the
Company’s general ledger, revenue accounting, royalty and distribution
accounting, inventory control, receivables and payables ledgers and other
supporting systems, ledgers and computations (including, but not limited to
production cost amortization) supporting the financial statements, and shall
properly maintain all underlying transaction documentation. Such accounting
systems and records shall be made available for SRS and outside auditors to
review at any time. All costs of such accounting reviews shall be borne
by the Company.

 

(b)                                 The
Company shall maintain all of the following: 
a current list of the full name and last known business or residence
address of each Member and owner of Economic Interest who is not a Member (an
“Economic Interest Owner”), together with the Capital Contributions, Capital
Account and number of Units of each Member and Economic Interest Owner; a copy
of the Articles and any and all amendments thereto together with executed
copies of any powers of attorney pursuant to which the Articles or any
amendments thereto have been executed; copies of the Company’s federal, state,
and local income/sales/use tax or information returns and reports, if any, for
the three (3) most recent taxable years; a copy of this Agreement and any and
all amendments thereto together with executed copies of any powers of attorney
pursuant to which this Agreement or any amendments thereto have been
executed;  copies of the financial
statements of the Company for the three (3) most recent Fiscal Years and such
interim statements as the Company shall prepare from time to time for the stub
period; and the Company’s books and records as they relate to the internal
affairs of the Company for at least the current and past three (3) Fiscal
Years.

 

6.2                                 Delivery
to Members and Inspection.  Each
Member and Economic Interest Owner has the right, upon reasonable request for
purposes reasonably related to the interest of the Person as Member or Economic
Interest Owner, to inspect and copy during normal business hours any of the
Company records described in Section 6.1 and to obtain from the Company,
promptly after their becoming available, a copy of the Company’s interim or
audited annual financial statement and federal, state, and local income tax or
information returns for each Fiscal Year.

 

6.3                                 Bank
Accounts.  The Manager shall
maintain the funds of the Company in one or more separate bank accounts in the
name of the Company, and shall not permit the funds of the Company to be
commingled in any fashion with the funds of any other Person, provided,
however, that subject to the other terms and conditions of this Agreement,
nothing in this paragraph shall prohibit the Company from paying such expenses
as the Manager deems necessary or appropriate to Complete the Shows.

 

11

 

6.4                                 Accounting
and Tax Matters.  All decisions as
to accounting and tax matters shall be made by unanimous consent of the
Members.  The Manager shall select a
person to serve as the “Tax Matters Partner,” as defined in Code Section 6231,
who shall represent the Company at the Company’s expense in connection with all
examinations of the Company’s affairs by tax authorities, including resulting
judicial and administrative proceedings, and shall expend the Company funds for
professional services and costs associated therewith.  The Tax Matters Partner shall oversee the Company tax affairs in
the overall best interests of the Company. 
If for any reason the Tax Matters Partner can no longer serve in that
capacity, the Manager shall designate another person to be Tax Matters Partner.

 

ARTICLE
VII

ALLOCATIONS
AND DISTRIBUTIONS

 

7.1                                 Allocations
of Net Profits.  After the special
allocations set forth in Exhibit B have been given effect, Net Profits for any
Fiscal Year shall be allocated as follows:

 

(a)                                  First,
to each Member with a negative Capital Account, in accordance with such
negative Capital Accounts until no Member has a negative Capital Account;

 

(b)                                 Second,
to SRS in an amount necessary to cause its Capital Account to have a positive
balance equal to its Unpaid Additional Advance;

 

(c)                                  Third,
to each Member with Unreturned Target in excess of its Capital Account, in
accordance with such excess until there are no such excesses (for purposes of
this Section 7.1(c), the Capital Account of SRS shall be deemed to have been
reduced by an amount equal to the Unpaid Additional Advance);

 

(d)                                 Fourth,
when (i) CHS has a Capital Account at least equal to its Unreturned Target, and
(ii) SRS has a Capital Account at least equal to the sum of its Unreturned
Target and Unpaid Additional Advance, to the Members in order to make the
excess of the Capital Account of CHS over the Unreturned Target of CHS equal to
nine times the excess of the Capital Account of SRS over the sum of the Unpaid
Additional Advance and the Unreturned Target of SRS; and

 

(e)                                  Thereafter,
90% to CHS and 10% to SRS.

 

7.2                                 Allocations
of Net Losses.  After the special
allocations set forth in Exhibit B have been given effect, Net Losses for any
Fiscal Year shall be allocated to the Members as follows:

 

(a)                                  First,
when each Member has a Capital Account at least equal to its Unreturned Target,
to the Members in order to make the excess of the Capital Account of CHS over
the Unreturned Target of CHS equal to nine times the excess of the Capital
Account of SRS over the Unreturned Target of SRS (for purposes of this Section
7.2(a), the Capital Account of SRS shall be deemed to have been reduced by an
amount equal to the Unpaid Additional Advance);

 

12

 

(b)                                 Second,
to each Member with a Capital Account in excess of its Unreturned Target, in
accordance with such excesses until there are no such excesses (for purposes of
this Section 7.2(b), the Capital Account of SRS shall be deemed to have been
reduced by an amount equal to the Unpaid Additional Advance);

 

(c)                                  Third,
to the Members with positive Capital Accounts, in accordance with such positive
Capital Accounts until no Member has a positive Capital Account (for purposes
of this Section 7.2(c), the Capital Account of SRS shall be deemed to have been
reduced by an amount equal to the Unpaid Additional Advance); and

 

(d)                                 Fourth,
to SRS until the Capital Account of SRS is reduced to zero; and

 

(e)                                  Thereafter,
to the Members in accordance with their Percentage Interests.

 

7.3                                 Additional
Allocation Provisions.  The
provisions of Exhibit B are hereby incorporated by reference.

 

7.4                                 Distributions.  Subject to applicable law and this
Agreement, the Company shall make distributions of Net Cash to the Members not
later than 15 days after the end of each fiscal quarter in the following order
and priority:  (a) 100% to SRS to the
extent of any Unpaid Additional Advances; (b) in accordance with their
Percentage Interests until the Members have received cash distributions equal
to 175% of their respective capital contributions (the “Repayment Amount”); and
(c) 90% to CHS and 10% to SRS.

 

7.5                                 Restriction
on Distributions.  No distribution
shall be made if, (i) after giving effect to the distribution, the Company
would not be able to pay its debts as they become due in the usual course of
business or if the Company’s total assets would be less than the sum of its
total liabilities or (ii) to the extent the distribution would result in a
Member having a negative Capital Account immediately thereafter (unless such
Member first executes a Capital Account deficit restoration agreement).  Distributions shall be made only to the
Persons who are the holders of record of the Economic Interests on the actual
date of distribution.  Neither the
Company nor the Members shall incur any liability for making distributions in
accordance with this Section 7.  A
Member, regardless of the nature of the Member’s Capital Contribution, has no
right to demand and receive any distribution from the Company in any form other
than money.  No Member may be compelled
to accept from the Company a distribution of any asset in kind in lieu of a
proportionate distribution of money being made to other Members.  Except upon a dissolution and the winding up
of the Company, no Member may be compelled to accept a distribution of any
asset in kind.  Except for distributions
made in violation of the Act or this Agreement, no Member or Economic Interest
Owner shall be obligated to return any distribution to the Company or pay the
amount of any distribution for the account of the Company or to any creditor of
the Company.  The amount of any
distribution returned to the Company by a Member or Economic Interest Owner or
paid by a Member or Economic Interest Owner for the account of the Company or
to a creditor of the Company shall be added to the account or accounts from
which it was subtracted when it was distributed to the Member or Economic
Interest Owner.

 

13

 

ARTICLE
VIII

TRANSFER
AND ASSIGNMENT OF INTERESTS

8.1                                 General.

 

(1)                                  Transfer.

 

(a)                                  As
used in this Section 8, the term “Transfer” shall refer to any transfer, sale,
assignment, exchange, hypothecation, encumbrance, alienation, or other
disposition of any Membership Interest or Economic Interest and may be used
herein as a noun or a verb.

 

(b)                                 No
Membership Interest or Economic Interest may be Transferred except as provided
in this Agreement.  Transfers in
violation of this Section 8 shall only be effective to the extent set forth in
Section 8.3.  Any Membership Interest or
Economic Interest (or portion thereof) Transferred shall continue to be subject
to the terms and provisions of this Agreement.

 

(c)                                  Furthermore,
and in addition to other restrictions contained herein, no Member or Economic
Interest Owner shall Transfer all or any part of its Membership Interest or
Economic Interest without first complying with all applicable state and federal
securities laws, or if the Membership Interest or Economic Interest to be
Transferred, when added to the total of all other Membership Interests and
Economic Interests Transferred in the preceding twelve (12) consecutive months
prior thereto, would cause the termination of the Company under the Code.

 

(d)                                 Any
permitted Transfer of all or any portion of a Membership Interest shall be
effective as of the date immediately following the date upon which the
requirements of this Agreement have been met.

 

(2)                                  Substitution
of Members.  A transferee of a
Membership Interest shall have the right to become a substitute Member only if
the requirements of this Section 8 are met, the admission of such Person as a
substitute Member is unanimously approved by the Members, such Person agrees to
be bound by the terms of this Agreement, and such Person pays any reasonable
expenses in connection with its admission as a substitute Member.  The admission of a substitute Member shall
not result in the release of the Member who assigned the Membership Interest from
any liability that such Member may have to the Company.

 

(a)                                  No
Effect to Transfers in Violation of Agreement.  Transfers in violation of Section 8 shall be null and void and
the purported transferee shall not become either a Member or an Economic Interest
Owner.  Upon any other Transfer of a
Membership Interest in violation of this Section 8, the transferee shall have
no rights to vote or participate in the management of the business, property
and affairs of the Company or to exercise any rights of a Member.  Such transferee shall only be entitled to
become an Economic Interest Owner and thereafter shall only receive the share
of the Company’s Net Profits, Net Losses and distributions of the Company’s
assets to which the transferor of such Economic Interest would otherwise be
entitled.  Upon any Transfer (whether
arising out of an attempted charge upon that Member’s Economic Interest by
judicial process, a foreclosure by a creditor of the Member or otherwise) of a
Member’s Economic Interest which does not at the same time Transfer the balance
of the rights associated with the Membership Interest Transferred by the Member
(including, without limitation, the rights of the Member to vote or participate
in the management of the business,

 

14

 

property and affairs of the Company), the Company
shall purchase from the Member, and the Member shall sell to the company for a
purchase price of $200, all remaining rights and interests retained by the
Member that immediately before the transfer, assignment, conveyance or sale
were associated with the transferred Economic Interest.  Such purchase and sale shall not, however,
result in the release of the Member from any liability to the Company as a
Member.

 

(b)                                 Transferring
Member’s Representations.  In the
case of a Transfer of a Membership Interest, the Transferring Member or such
Member’s duly authorized legal representative shall represent and warrant to
the transferee(s) that (i) such Member owns the Membership Interest being
Transferred beneficially, free and clear of all liens, charges, claims,
equities, restrictions and encumbrances, and (ii) such Member has the full
right, power and authority to sell, transfer and deliver to the transferee(s)
such Membership Interest free and clear of all liens, charges, claims,
equities, restrictions and encumbrances.

 

8.2                                 Assumption
of Membership Obligations.  Upon the
Transfer of all of the Membership Interest held by a Member in accordance with
this Section 8, the remaining Members shall assume all of such Member’s
Membership obligations and shall protect and indemnify such Member from any
such obligations except as to those liabilities incurred as a result of such
Member’s acting outside the scope of the Company activity.

 

8.3                                 Restriction
on Transfer.  No Member shall
Transfer, or otherwise dispose of any of this Membership Interest or any right
or interest therein without obtaining the prior written consent of the Company
and of all other Members.

 

Notwithstanding any
provisions in this Agreement to the contrary, any Member may transfer his
Membership Interest subject to this Agreement to any other Member of the
Company.  Such transferee(s) shall hold
the Membership Interest subject to all of the provisions of this Agreement.

 

ARTICLE
IX.

DISSOLUTION
AND WINDING UP

 

9.1                                 Dissolution.  The Company shall be dissolved, its assets
shall be disposed of, and its affairs wound up on the first to occur of the
following:

 

(1)                                  Upon
the happening of any event of dissolution specified in the Articles;

 

(2)                                  Upon
the entry of a decree of judicial dissolution pursuant to Section 17351 of the
California Corporations Code;

 

(3)                                  Upon
the vote of the Members holding a majority of the Units; or

 

(4)                                  The
sale of all or substantially all of the assets of the Company.

 

As soon as possible
following the occurrence of any of the foregoing events, the Manager (the
“Responsible Party”), shall execute a Certificate of Dissolution in such form
as shall be prescribed by the California Secretary of State and file the
Certificate as required by the Act.

 

15

 

9.2                                 Winding
Up.  Upon the occurrence of any
event specified in Section 9.1, the Company shall continue solely for the
purpose of winding up its affairs in an orderly manner, liquidating its assets,
and satisfying the claims of its creditors. 
The responsible Party shall be responsible for overseeing the winding up
the affairs and liquidation of the Company, shall take full account of the
liabilities and assets of the Company, shall cause its assets to be sold to the
extent necessary to satisfy the claims and creditors and shall distribute the
remaining assets to the Members as provided below.  If assets are sold, they shall be sold as promptly as is
consistent with obtaining the fair market value thereof and their proceeds
applied and distributed as provided in this Section 9.  The Responsible Party shall give written
notice of the commencement of winding up by mail to all known creditors and
claimants whose addresses appear on the records of the Company.  The Responsible Party shall be entitled to
reasonable compensation for such services.

 

9.3                                 Order
of Payment of Liabilities Upon Dissolution.  The payment of a debt or liability, whether the whereabouts of
the creditor is known or unknown, has been adequately provided for if the
payment has been provided for by either the assumption or guarantee thereof in
good faith by one or more financially responsible Persons or the United States
government or any agency thereof, and the provision, including the financial
responsibility of the Person, was determined in good faith and with reasonable
care by the Manager to be adequate at the time of any distribution of the
assets pursuant to this Section; or deposit of the amount of the debt or
liability as provided in Section 2008 of the California Corporation Code.  This Section 9.3 shall not prescribe the
exclusive means of making adequate provision for debts and liabilities.

 

9.4                                 Distribution
to Members.  After the determination
that all known debts and liabilities of the Company in the process of winding
up, including, without limitation, debts and liabilities to Members who are
creditors of the Company, have been paid or adequately provided for, the
remaining assets shall be distributed to the Members in accordance with the
positive balances of the respective Capital Accounts of the Members.

 

9.5                                 Limitations
on Payments Made in Dissolution. 
Except as otherwise specifically provided in this Agreement, each Member
shall only be entitled to look solely at the assets of the Company for the
distributions provided herein and shall have no recourse for its Capital
Contribution and/or share of Net Profits (upon dissolution or otherwise)
against any other Member except as provided in this Section 9.

 

9.6                                 Certificate
of Cancellation.  The Manager shall
cause to be filed in the office of, and on a form prescribed by, the California
Secretary of State, a Certificate of Cancellation of the Articles upon the
completion of the winding up of the affairs of the Company.

 

ARTICLE
X.  INDEMNIFICATION AND INSURANCE

 

10.1                           Indemnification
of Agents.  The Company shall
indemnify any Person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding by reason of
the fact that such Person is or was a Member, Manager, officer, employee or
other agent of the Company or that, being or having been such a Member,
Manager, officer, employee or agent, such Person is or was serving at the
request of the Company as a 

 

16

 

Manager, director, officer, employee or other agent of
another limited liability company, Company, partnership, joint venture, trust
or other enterprise (all such persons being referred to hereinafter as an
“agent”), to the fullest extent permitted by applicable law in effect on the
date hereof and to such greater extent as applicable law may hereafter from
time to time permit.  The Manager shall
be authorized, on behalf of the Company, to enter into indemnity agreements
with any Person entitled to be indemnified by the Company hereunder, upon such
terms and conditions as the Manager deems prudent.

 

10.2                           Insurance.  The Company shall have the power to purchase
and maintain insurance on behalf on any Person who is or was an agent of the
Company against any liability asserted against such Person and incurred by such
Person in any such capacity, or arising out of such Person’s status as an
agent, whether or not the Company would have the power to indemnify such Person
against such liability under the provisions of Section 10.1 or under applicable
law.  The Company shall at all times
maintain adequate insurance in accordance with Section 4.2 of this Agreement.

 

ARTICLE
XI.  DEFINITIONS; MISCELLANEOUS

 

11.1                           Definitions.  When used in this Agreement, the following
terms shall have the meanings set forth below. 
Terms not defined in this Section 11.1 shall have the meanings set forth
elsewhere in this Agreement.

 

(1)                                  “Act”
shall mean the Beverly Killea Limited Liability Company Act, codified in the
California Corporations Code, Section 17000 et seq., as the same may be amended
from time to time.

 

(2)                                  “Affiliate”
shall mean any individual, partnership, corporation, trust or other entity or
association, directly or indirectly, through one or more intermediaries,
controlling, in the immediately preceding sentence, means with respect to a
corporation or limited liability company the right to exercise, directly or
indirectly, more than fifty percent (50%) of the voting rights attributable to
the controlled corporation or limited liability company, and, with respect to
any individual, partnership, trust, other entity or association, the
possession, directly or indirectly, of the power to direct or cause the direction
of the management or policies of the controlled entity.

 

(3)                                  “Bankruptcy”
shall mean: (a) the filing of an application by a Member for, or its consent
to, the appointment of a trustee, receiver, or custodian of its other assets;
(b) the entry of an order for relief with respect to a Member in proceedings
under the United States Bankruptcy Code, as amended or superseded from time to
time; (c) the making by a Member of a general assignment for the benefit of
creditors; (d) the entry of an order, judgment, or decree by any court of
competent jurisdiction appointing a trustee, receiver, or custodian of the
assets of a Member unless the proceedings and the person appointed are
dismissed within ninety (90) days; or (e) the failure by a Member generally to
pay its debts as the debts become due within the meaning of Section 303(h)(1)
of the United States Bankruptcy Code, as determined by the Bankruptcy Court, or
the admission in writing of its inability to pay its debts as they become due.

 

17

 

(4)                                  “Capital
Contribution” shall mean the aggregate fair market value of the cash and
property (including promissory notes but less any liabilities secured by such
contributed property that the Company assumes or takes subject to) contributed
to the Company by Members.

 

(5)                                  “Code”
shall mean the Internal Revenue Code of 1986, as amended from time to time, the
provisions of succeeding law, and to the extent applicable, the Regulations (as
defined below).

 

(6)                                  “Complete”
or “Completion” shall mean, with respect to any Show, delivery by CHS of an
authored DVD master of the Show ready for replication and distribution,
including without limitation video, sound track, graphics, packaging (including
approved CHS and SRS ad slicks and promotional materials), artwork and screen
capture, as applicable, in accordance with standard industry practices.

 

(7)                                  The
“Disability” of a Member shall mean that a court of competent jurisdiction has
adjudged which Member to be incompetent to manage such Member’s person or
property.

 

(8)                                  “Economic
Interest” shall mean a Member’s or Economic Interest Owner’s share of one or
more of the Company’s Net Profits, Net Losses, and distributions of the
Company’s assets pursuant to this Agreement and the Act, but shall not include
any other rights of a Member, including, without limitation, the right to vote
or participate in the management, or except as provided in Section 17106 of the
California Corporations Code, any right to information concerning the business
and affairs of the Company.

 

(9)                                  “Fiscal
Year” shall mean the Company’s fiscal year, which shall be the calendar year.

 

(10)                            “Member”
shall mean each Person (said term to include all authorized legal
representatives) who (a) is an initial signatory to this Agreement, has been
admitted to the Company as a Member in accordance with Section 8 and (b) has
not resigned, withdrawn, been expelled or, if other than an individual,
dissolved.

 

(11)                            “Membership
Interest” shall mean the interest in the Company issued by the Company and
owned by a Member.

 

(12)                            “Net
Cash” shall mean the (i) gross cash proceeds received from the sale or
exploitation of the Designated Contracts or any assets created in respect
thereof, including without limitation the Shows, less the portion thereof used
to pay or establish reserves for: any contracted sales management fees properly
chargeable by third parties in connection with the designated contracts,
provided that such fees were contracted prior to the formation of the Company, all
Artists’ Participations, Management Fees, Company expenses, debt payments,
capital improvements, replacements, and contingencies, all as determined
subject to the limitations set forth in this Agreement; and (ii) net
proceeds of capital transactions on refinancing transactions.

 

18

 

(13)                            “Net
Profits” and “Net Losses” shall have the meanings of the terms “Net Profit” and
“Net Loss,” respectively, as set forth in Exhibit B.

 

(14)                            “Person”
shall mean any individual, partnership, limited partnership, joint venture,
trust, estate, association, corporation, limited liability company, or other
entity, whether domestic or foreign.

 

(15)                            “Proceeds”
shall mean all monies, rights, property and any other economic benefit
generated from the exploitation or sale of the Designated Contracts, the Shows,
all copyrights and masters created in respect thereof or of any other asset
created in respect of or derived from the foregoing.

 

(16)                            “Regulations”
shall, unless the context clearly indicates otherwise, mean the regulations
currently in force as final or temporary that have been issues by the U.S.
Department of Treasury pursuant to its authority under the Code.

 

(17)                            “Repayment
Amount” shall have the meaning set forth in Section 7.4.

 

(18)                            “Units”
shall mean the units of Membership Interest held by a Member.

 

(19)                            “Unpaid
Additional Advance” shall mean an amount equal to (i) 130% of the excess, if
any, of the amount by which the cumulative Additional Advances made by SRS exceed
the cumulative Additional Advances made by CHS, less (ii) all prior
distributions to SRS pursuant to Section 7.4(a).

 

(20)                            “Unreturned
Target” of a Member shall mean the excess, if any, of (a) 175% of the capital
contribution of such Member over (b) the distributions to such Member pursuant
to Section 7.4(a).

 

11.2                           Legends.  Each Member understands and agrees that the
certificates (if any) evidencing the Membership Interest may bear the following
or a substantially similar legend:

 

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE LAWS OF ANY STATE,
AND MAY NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE, TRANSFERRED,
PLEDGED, OR HYPOTHECATED UNLESS QUALIFIED AND REGISTERED UNDER APPLICABLE STATE
AND FEDERAL SECURITIES LAWS OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY
TO THE COMPANY, SUCH QUALIFICATION AND REGISTRATION IS NOT REQUIRED.

 

11.3                           Headings;
Interpretation.  All headings herein
are inserted only for convenience and ease of reference and are not to be
considered in the construction or interpretation of any provision of this
Agreement.  Numbered or lettered
articles, sections and subsections herein contained refer to articles, sections
and subsections of this Agreement unless otherwise expressly 

 

19

 

stated.  In the
event any claim is made by any Member relating to any conflict, omission or
ambiguity in this Agreement, no presumption or burden of proof or persuasion
shall be implied by virtue of the fact that this Agreement was prepared by or
at the request of a particular Member or its counsel.  All pronouns and all variations thereof shall be deemed to refer
to the masculine, feminine, or neuter, singular or plural, as the context in
which they are used may require.  Any
statutes or laws will include all amendments, modifications, or replacements of
the specific sections and provisions concerned.

 

11.4                           Arbitration.  Any controversy or claim arising out of or
relating to this Agreement, or the breach thereof shall be settled by
arbitration in Los Angeles, California, by one (1) arbitrator (unless the
parties mutually agree to accept multiple arbitrators) in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.  The
cost of any such arbitration shall be borne equally by the parties involved
unless the arbitrator(s) deem such division of costs to be inequitable, in
which event the arbitrator(s) may allocate the costs of arbitration among the
parties thereto as they deem just and equitable under the circumstances.  The parties hereto specifically agree that
the provisions of Section 1283.05 of the Code of Civil Procedure of the State
of California are incorporated into, made a part of, and made applicable to any
arbitration pursuant to this Section 11.4 where the aggregate amount in
controversy exceeds Ten Thousand Dollars ($10,000), exclusive of costs,
expenses and fees.

 

11.5                           Jurisdiction.  Each Member hereby consents to the exclusive
jurisdiction of the state and federal courts sitting in Los Angeles, California
in any action on a claim arising out of, under or in connection with this Agreement
or the transactions contemplated by this Agreement.  Each Member further agrees that personal jurisdiction over it may
be effected by service of process by registered or certified mail addressed as
provided in Section 11.8, and that when so made shall be as if served upon it
personally within California.

 

11.6                           Severability.  If any provision of this Agreement or the
application of such provision to any Person or circumstance shall be held
invalid, the remainder of this Agreement or the application of such provision
to Persons or circumstances other than those to which it is held invalid shall
not be affected thereby.  All Exhibits
attached to this Agreement are incorporated and shall be treated as if set
forth herein.

 

11.7                           Additional
Documents and Acts.  Each Member
agrees to execute and deliver such additional documents and instruments and to
perform such additional acts as may be necessary or appropriate to effectuate,
carry out and perform all of the terms, provisions, and conditions of this
Agreement and the transactions contemplated hereby.

 

11.8                           Notices.  All notices, demands or other communications
given hereunder shall be in writing and shall be sufficiently given if
delivered by overnight delivery service or sent by communication, addressed to the
Members at the addresses specified for such Members in Exhibit A hereto or such
other address such Member designate upon five (5) days notice (given in
accordance with this Section).  Any such
notice, demand or communication shall be deemed to have been given (i) if so
mailed, as of the close of the third business day following the date so mailed,
and (ii) if personally delivered or otherwise sent as provided above, on the
date delivered or sent if sent by telecopy, and on the next business day after the
date sent in all other cases.

 

20

 

11.9                           Reliance
on Authority of Person Signing.  If
a Member is not a natural Person, neither the Company nor any Member will be
required to determine the authority of the individual signing this Agreement to
make any commitment or undertaking on behalf of such entity or to determine any
fact or circumstance bearing upon the existence of the authority of such
individual or be responsible for the application or distribution of proceeds
paid or credited to individuals signing this Agreement on behalf of such
entity.

 

11.10                     No Interest in Company Property.  No Member or Economic Interest Owner has any
interest in specific property of the Company. 
Without limiting the foregoing, each Member and Economic Interest Owner
irrevocably waives during the term of the Company any right that he or she may
have to maintain any action for partition with respect to the property of the
Company.

 

11.11                     Attorney’s Fees.  In the event that any dispute between the
Company and the Members or among the Members should result in litigation or
arbitration, the prevailing party in such dispute shall be entitled to recover
from the other party all reasonable fees, costs and expenses of enforcing any
right of the prevailing party, including without limitation, reasonable
attorneys’ fees and expenses.

 

11.12                     Time is of the Essence;
Remedies Cumulative.  All dates and
times in this Agreement are of the essence. 
The remedies under this Agreement are cumulative and shall not exclude
any other remedies to which any person may be lawfully entitled.

 

11.13                     Public Disclosure;
Confidentiality.  No Member will make any public statement,
disclosure or communication regarding the Company, the relationship between the
Members or otherwise without the other Member’s prior written consent;
provided, however that this Section 11.14 shall not prohibit (i) bona fide
marketing and promotional activities to promote the Company, its products and
its Members; or (ii) any disclosure that may be required by applicable
law.  CHS expressly acknowledges that
SRS is a publicly traded company and is therefore subject to, among other
things, certain accounting and disclosure obligations under applicable federal
and state law.

 

11.14                     Binding Effect; Parting in
Interest.  Subject to the provisions
of this Agreement relating to transferability, this Agreement will be binding
upon and inure to the benefit of the Members, Economic Interest Owner, and
their respective successors and assigns. 
Except as expressly provided in the Act, nothing in this Agreement shall
confer any rights or remedies under or by reason of this Agreement on any
Persons other than the Members and their obligation or liability of any third
person to any party to this Agreement, nor shall any provision give any third
person any right of subrogation or action over or against any party to this
Agreement.

 

11.15                     Complete Agreement; Amendments.  This Agreement and the articles constitute
the complete and exclusive statement of agreement among the Members with
respect to the subject matter herein and therein and replace and supersede all
prior written and oral agreements or statements by and among the Members or any
of them.  To the extent that any
provision of the Articles conflicts with any provision of this Agreement, the
Articles shall control.  All amendments
to this Agreement must be in writing and signed by all of the Members.  This 

 

21

 

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

 

11.16                     Notices.  All notices and other communications under
or in connection with this Agreement shall be in writing and shall be deemed
given (a) if delivered personally, upon delivery, (b) if delivered by
registered or certified mail (return receipt requested), upon the earlier of
actual delivery or three days after being mailed, or (c) if given by
telecopy, upon confirmation of transmission by telecopy, in each case to the
parties at the following addresses:

 

(a)                                  If to SRS, addressed to:

 

SRS Labs, Inc.

2909 Daimler Street

Santa Ana, California 92705

Attention: 
Chief Legal Officer

Facsimile: 
(949) 852-1099

 

With an additional copy to:

 

Paul, Hastings, Janofsky & Walker LLP

Seventeenth Floor

695 Town Center Drive

Costa Mesa, California  92626-1924

Attention:  John F. Della Grotta, Esq.

Facsimile:  (714) 979-1921

 

(b)                                 If to CHS or to the Manager, addressed to:

 

Coming Home Studios, LLC

6161 Santa Monica Boulevard, Suite 100

Los Angeles, California  90038

Attention: Daniel E. Catullo III

Manager

Facsimile:  (323) 467-6400

 

With an additional copy to:

 

Loeb & Loeb LLP

10100 Santa Monica Boulevard, Suite 2200

Los Angeles, California  90067

Attn:  David L. Ficksman, Esq.

Facsimile:  (310) 282-2200

 

22

 

IN WITNESS WHEREOF, the
undersigned, being all of the Members of CHS/SRS, LLC, a California limited
liability company, have executed this Agreement, effective as of the day and
year first herein written.

 

	
   

  	
  COMING HOME STUDIOS,
  LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /S/ DANIEL E. CATULLO III

  
	
   

  	
   

  	
  Daniel E. Catullo III

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SRS LABS, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /S/ THOMAS C.K.
  YUEN

  
	
   

  	
  Its:   Chairman
  and Chief Executive Officer

  

 

23

 

EXHIBIT A

 

CAPITAL CONTRIBUTION OF MEMBERS AND
ADDRESSES OF MEMBERS

 

	
  Member’s Name

  	
   

  	
  Member’s
  Address

  	
   

  	
  Capital
  Contribution

  	
   

  	
  Number 

  of Class A Units

  	
   

  	
  Number 

  of Class B Units

  	
   

  	
  Percentage
  Interest

  	
   

  	
  Initial 

  Capital 

  Account

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Coming Home Studios, LLC

  	
   

  	
  6161 Santa Monica
  Blvd., Suite 100 Los Angeles, CA 90038

  	
   

  	
  SEE SCHEDULE 1: 

  ASSETS & LIABILITIES CONTRIBUTED BY COMING HOME STUDIOS LLC

  	
   

  	
  1

  	
   

  	
   

  	
   

  	
  50

  	
  %

  	
  $

  	
  1,800,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SRS Labs, Inc.

  	
   

  	
  2909 Daimler Street
  Santa Ana, CA 92705

  	
   

  	
  $1,800,000 

  	
   

  	
  1

  	
   

  	
   

  	
   

  	
  50

  	
  %

  	
  $

  	
  1,800,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  SEE SCHEDULE 2:  

  ASSETS CONTRIBUTED BY SRS

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

Exhibit
A

 

Schedule
1

 

Assets Contributed by Coming Home Studios LLC to
CHS/SRS LLC

 

Coming
Home Studios LLC will contribute the following assets to CHS/SRS LLC free and
clear of any liens, security interests or other encumbrances:

 

(a)                                  (i)                                     The following agreements
(collectively, the “Designated Contracts”) and all of Coming Home Studios LLC’s
rights and economic interests thereunder, subject only to the rights of the
respective counterparties thereto:

 

2.                                       Artist
agreement between CHS and Duran Duran Ltd. dated March 1, 2004;

 

3.                                       Operating agreement between CHS and Duran
Duran L & I dated as of May 8, 2004 relating to DD/CHS, LLC;

 

4.                                       Artist agreement between CHS and Godsmack
Partnership dated March 18, 2004;

 

5.                                       Artist agreement between CHS and Gray Cat
Records, Inc. dated as of April 11, 2003 and executed August 18,
2003;

 

6.                                       Operating
Agreement dated as of June 4, 2003, between CHS and the Class B members of BS
Concert Video LLC; and

 

7.                                       Unexecuted
Distribution Agreement between CHS and Ideal Entertainment dated May 21,
2004;

 

provided, however, that Coming Home Studios LLC will
retain the legal title to the copyrights to and the masters of the Shows,
pursuant to the terms and conditions of the Operating Agreement between Coming
Home Studios LLC and SRS Labs, Inc., and provided further that Coming Home
Studios LLC’s transfer of its rights and interests under the Designated
Contracts shall not affect  the rights
under the Designated Contracts of the respective counterparties thereto

 

(ii)                                  All
assets of any kind derived from or created in respect of or acquired in
connection with the Designated Contracts, including without limitation all
Accounts, Books, Deposit Accounts, Equipment, General Intangibles (including
without limitation all copyright interests), Inventory, Investment Property,
Negotiable Collateral, and Supporting Obligations (all as defined in Article 9
of the Uniform Commercial Code), present and future inventory and merchandise,
all present and future goods held for sale or lease or to be furnished under a
contract of service, all raw materials, work in process (including without
limitation, Film Footage, audio, graphics screen capture and photographs) and
finished goods, all packing 

 

 

materials, supplies and
containers  relating to or used in
connection with any of the foregoing, and all bills of lading, warehouse
receipts or documents of title relating to any of the foregoing; and

 

(b)                                 all
proceeds and products, whether tangible or intangible, of any of the foregoing,
including, without limitation, the proceeds of insurance covering any or
all of the foregoing, and any proceeds resulting from the sale, exchange,
collection, or other disposition of any of the foregoing, or any portion
thereof or interest therein, and the proceeds and products thereof.  As used herein, “proceeds” means:
whatever is acquired upon the sale, lease, license, exchange or other
disposition of the foregoing assets; whatever is collected on, or distributed
on account of the foregoing assets; and any rights arising out of the foregoing
assets.

 

2

 

Exhibit A

 

Schedule 2

 

ASSETS CONTRIBUTED BY SRS LABS, INC.

 

	
  Asset

  	
   

  	
  Value

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Initial SRS Capital Contribution

  	
   

  	
  $

  	
  700,000

  	
   

  
	
  Cash

  	
   

  	
  $

  	
  1,100,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
  $

  	
  1,800,000

  	
   

  

 

 

EXHIBIT B

 

Additional Allocation Provisions

Section 1.                                            Allocations.

 

1.1                                 Allocation
of Income, Gain, Loss, and Deduction. 
After making any special allocations pursuant to Sections 1.2, 1.3 and
1.4 of this Exhibit B, all items of income, gain, loss and deduction shall be
allocated pursuant to Section 7 of this Agreement.

 

1.2                                 Special
Allocations.  The following special
allocations shall be made in the following order:

 

1.2.1                        Minimum
Gain Chargeback.  Notwithstanding any
other provision of this Section 1, if there is a net decrease in minimum gain
(“Company Minimum Gain”) during any Company taxable year, as determined under
Treasury Regulations Section 1.704-2(d), each Member shall be specially
allocated items of Company income and gain for such year (and, if necessary,
subsequent years) in an amount equal to such Member’s share of the net decrease
in Company Minimum Gain, determined in accordance with Treasury Regulations
Section 1.704-2(g).  A Member is not
subject to this minimum gain chargeback requirement to the extent (i) the
Member’s share in the net decrease in Company Minimum Gain is caused by a
guarantee, refinancing, or other change in the debt instrument causing it to
become partially or wholly recourse or treated as a “Member Nonrecourse Debt”
(having the meaning set forth in Treasury Regulations Section 1.704-2(b)(4) for
the phrase “partner nonrecourse debt”) made by such Member or a “Related
Person” of such Member (within the meaning of Treasury Regulation Section
1.752-4(b)), and the Member bears the economic risk of loss (within the meaning
of Treasury Regulations Section 1.752-2) for the newly guaranteed, refinanced
or otherwise changed liability, (ii) the Member contributes capital to the
Company that is used to repay the nonrecourse liability, and the Member’s share
of the net decrease in Company Minimum Gain results from such repayment, or
(iii) the Company receives consent from the appropriate United States federal
taxing authority to waive the minimum gain chargeback requirement of this
Section 1.2.1 because such requirement would cause a distortion in the economic
arrangement among the Members and it is not expected that the Company will have
sufficient other income to correct this distortion.  This Section 1.2.1 is intended to comply with the minimum gain
chargeback requirement in Treasury Regulations Section 1.704-2(f) and shall be
interpreted consistently therewith.

 

1.2.2                        Member
Minimum Gain Chargeback. 
Notwithstanding any other provision of this Section 1, if there is a net
decrease in the minimum gain attributable to a Member Nonrecourse Debt (“Member
Minimum Gain”) during any Company taxable year, as determined under Treasury
Regulations Section 1.704-2(i), each Member who has a share of Member Minimum
Gain attributable to a Member Nonrecourse Debt made by such Member or a Related
Person of such Member to the Company, determined in accordance with Treasury
Regulations Section 1.704-2(i)(5), shall be specially allocated items of
Company income and gain for such year (and, if necessary, subsequent years) in
an amount equal to such Member’s share of the net decrease in Member Minimum
Gain attributable to such Member’s or Related Person’s Member Nonrecourse Debt,
determined in accordance with Treasury Regulations 

 

 

Section 1.704-2(i)(4) and
(5).  The exceptions mentioned above in
Section 1.2.1 of this Exhibit B in connection with the minimum gain chargeback
shall similarly apply with respect to Member Nonrecourse Debt in appropriate
circumstances.  This Section 1.2.2 is
intended to comply with the minimum gain chargeback requirements in Treasury
Regulations Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.

 

1.2.3                        Qualified
Income Offset.  No Member shall be
allocated any item of loss or deduction to the extent such allocation would
cause or increase a deficit balance in such Member’s Capital Account (in excess
of any limited dollar amount of such deficit balance that such Member is
obligated to restore or is deemed obligated to restore under Treasury
Regulations Sections 1.704-2(g) and 1.704-2(i)(5)) as of the end of the taxable
year to which such allocation relates). 
In the event any Member unexpectedly receives any adjustments,
allocations, or distributions described in Treasury Regulations Sections
1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Company income and gain shall be
specially allocated to such Member in an amount and manner sufficient to
eliminate, to the extent required by the Treasury Regulations, such adjusted
Capital Account deficit of such Member as quickly as possible, provided that an
allocation pursuant to this Section 1.2.3 shall be made only if and to the
extent that such Member would have a Capital Account deficit (determined after
reducing such Member’s Capital Account for the items set forth in Treasury
Regulations Section 1.704-1(b)(2)(ii)(d) and after adjusting such Member’s Capital
Account upward for any amounts such Member is obligated to restore or is deemed
obligated to restore pursuant to Treasury Regulations Sections 1.704-2(g) and
1.704-2(i)(5)) after all other allocations provided for in this Section 1 have
been tentatively made as if this Section 1.2.3 were not in this Exhibit B.

 

1.2.4                        Gross
Income Allocation.  In the event any
Member has a deficit Capital Account at the end of any Company fiscal year
which is in excess of the amount such Member is obligated to restore or is
deemed to be obligated to restore pursuant to Treasury Regulations Sections
1.704-2(g) and 1.704-2(i)(5), such Member shall be specially allocated items of
Company income and gain in the amount of such excess as quickly as possible,
provided that an allocation pursuant to this Section 1.2.4 shall be made only
if and to the extent that such Member would have a Capital Account deficit
(determined after reducing such Member’s Capital Account for the items set
forth in Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and after adjusting
such Member’s Capital Account upward for any amounts such Member is obligated
to restore or is deemed obligated to restore pursuant to Treasury Regulations
Sections 1.704-2(g) and 1.704-2(i)(5)) in excess of such amount after all other
allocations provided for in this Section 1 have been tentatively made as if
Section 1.2.3 of this Exhibit B and this Section 1.2.4 were not in this Exhibit
B.

 

1.2.5                        Nonrecourse
Deductions.  Nonrecourse Deductions
shall be specially allocated to the Members in accordance with their respective
Percentage Interests.  For this purpose,
“Nonrecourse Deductions” has the meaning set forth in Treasury Regulations
Section 1.704-2(c), and the amount of Nonrecourse Deductions for a Company
taxable year equals the net increase, if any, in the amount of Company Minimum
Gain during such year, reduced (but not below zero) by the aggregate
distributions made during the year of proceeds of any nonrecourse liability (as
defined under Treasury Regulations Section 1.752-1(a)(2)) that are allocable to
an increase in Company Minimum Gain (determined in accordance with Treasury
Regulations Section 1.704-2(h)).

 

2

 

1.2.6                        Member
Nonrecourse Deductions.  Any Member
Nonrecourse Deductions shall be allocated to the Member who bears the economic
risk of loss (within the meaning of Treasury Regulations Section 1.752-2) with
respect to the Member Nonrecourse Debt to which such Member Nonrecourse
Deductions are attributable.  For this
purpose, “Member Nonrecourse Deductions” has the meaning set forth in Treasury
Regulations Section 1.704-2(i)(2) for the phrase “partner nonrecourse
deductions”, and for any Company taxable year, the amount of Member Nonrecourse
Deductions with respect to a Member Nonrecourse Debt equals the net increase,
if any, in the amount of Member Minimum Gain during such year, reduced (but not
below zero) by proceeds of the Member Nonrecourse Debt distributed during the
year to the Member bearing the economic risk of loss for such debt that are
both attributable to the debt and allocable to an increase in the Member
Minimum Gain.

 

1.2.7                        Section
754 Adjustments.  To the extent an
adjustment to the adjusted basis of any Company asset pursuant to Section
734(b) of the Code or Section 743(c) of the Code is required, pursuant to
Treasury Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in
determining Capital Accounts, the amount of such adjustment to Capital Accounts
shall be treated as an item of gain (if the adjustment increases the basis of
the asset) or loss (if the adjustment decreases such basis) and such gain or
loss shall be specially allocated to the Members in a manner consistent with
the manner in which their Capital Accounts are required to be adjusted pursuant
to Treasury Regulations Section 1.704-1(b)(2)(iv)(m).

 

1.2.8                        Allocations
Relating to Taxable Issuance of Company Interests.  Any income, gain, loss, or deduction realized as a direct or
indirect result of the issuance of a Company interest by the Company to a
Member (the “Issuance Items”) shall be allocated among Members so that, to the
extent possible, the net amount of such Issuance Items, together with all other
allocations under this Exhibit B to each Member, shall be equal to the net
amount that would have been allocated to each such Member if the Issuances
Items had not been realized.

 

1.3                                 Curative
Allocations.

 

1.3.1                        Regulatory
Allocations.  The “Regulatory
Allocations” consist of the “Basic Regulatory Allocations,” as defined in
Section 1.3.2 of this Exhibit B, the “Nonrecourse Regulatory Allocations,” as
defined in Section 1.3.3 of this Exhibit B, and the “Member Nonrecourse
Regulatory Allocations,” as defined in Section 1.3.4 of this Exhibit B.

 

1.3.2                        Basic
Regulatory Allocations.  The “Basic
Regulatory Allocations” consist of allocations pursuant to Sections 1.2.3,
1.2.4, and 1.2.7 of this Exhibit B. 
Notwithstanding any other provision of this Exhibit B, other than the
Regulatory Allocations, the Basic Regulatory Allocations shall be taken into
account in allocating items of income, gain, loss, and deduction among the
Members so that, to the extent possible, the net amount of such allocations of
such other items and the Basic Regulatory Allocations to each Member shall be equal
to the net amount that would have been allocated to each such Member if the
basic Regulatory Allocations had not occurred. 
For purposes of applying the foregoing sentence, allocations pursuant to
this Section 1.3.2 shall be made only with respect to allocations pursuant to
Section 1.2.7 hereof to the extent the Members reasonably determine that such
allocations will otherwise be inconsistent with the economic agreement among
the parties to this Agreement.

 

3

 

1.3.3                        Nonrecourse
Regulatory Allocations.  The
“Nonrecourse Regulatory Allocations” consist of all allocations pursuant to
Sections 1.2.1 and 1.2.5 of this Exhibit B. 
Notwithstanding any other provision of this Exhibit B, other than the
Regulatory Allocations, the Nonrecourse Regulatory Allocations shall be taken
into account in allocating items of income, gain, loss, and deduction among the
Members so that, to the extent possible, the net amount of such allocations of
such items and the Nonrecourse Regulatory Allocations to each Member shall be
equal to the net amount that would have been allocated to each such Member if
the Nonrecourse Regulatory Allocations had not occurred.  For purposes of applying the foregoing
sentence (i) no allocations pursuant to this Section 1.3.3 shall be made prior
to the Company taxable year during which there is a net decrease in Company
Minimum Gain, and then only to the extent necessary to avoid any potential
economic distortion caused by such net decrease in Company Minimum Gain, and
(ii) allocations pursuant to this Section 1.3.3 shall be deferred with respect
to allocations pursuant to Section 1.2.5 hereof to the extent the Members
reasonably determine that such allocations are likely to be offset by
subsequent allocations pursuant to Section 1.2.1 hereof.

 

1.3.4                        Member
Nonrecourse Regulatory Allocations.  The
“Member Nonrecourse Regulatory Allocations” consist of all allocations pursuant
to Sections 1.2.2 and 1.2.6 of this Exhibit B. Notwithstanding any other
provision of this Exhibit B, other than the Regulatory Allocations, the Member
Nonrecourse Allocations shall be taken into account in allocating items of
income, gain, loss, and deduction among the Members so that, to the extent
possible, the net amount of such allocations of such items and the Member
Nonrecourse Regulatory Allocations to each Members shall be equal to the net
amount that would have been allocated to each such Member if the Member
Nonrecourse Regulatory Allocations had not occurred.  For purposes of applying the foregoing sentence (i) no
allocations pursuant to this Section 1.3.4 shall be made with respect to
allocations pursuant to Section 1.2.6 relating to a particular Member
Nonrecourse Debt prior to the Company taxable year during which there is a net
decrease in Member Minimum Gain attributable to such Member Nonrecourse Debt,
and then only to the extent necessary to avoid any potential economic
distortions caused by such net decrease in Member Minimum Gain, and (ii)
allocations pursuant to this Section 1.3.4 shall be deferred with respect to
allocations pursuant to Section 1.2.6 hereof relating to a particular Member
Nonrecourse Debt to the extent the Members reasonably determine that such
allocations are likely to be offset by subsequent allocations pursuant to
Section 1.2.2 hereof.

 

1.3.5                        Member
Discretion.  The Members shall have
reasonable discretion, with respect to each Company taxable year, to (i) apply
the provisions of Section 1.3.2, 1.3.3, and 1.3.4 of this Exhibit B in whatever
order is likely to minimize the economic distortions that might otherwise
result from the Regulatory Allocations, and (ii) divide all allocations
pursuant to Sections 1.3.2, 1.3.3, and 1.3.4 of this Exhibit B among the
Members in a manner that is likely to minimize such economic distortions.

 

1.4                                 Tax
Allocations.  Section 704(c) of the
Code.  In accordance with Section 704(c)
of the Code and the Treasury Regulations thereunder and Treasury Regulations
Section 1.704-1(b)(4)(i), income, gain, loss and deduction (as computed for tax
purposes) with respect to any property contributed to the capital of the
Company or otherwise revalued on the books of the Company may, solely for tax
purposes, be allocated among the Members to take into account any variation
between the adjusted basis of such property to the Company for federal income
tax 

 

4

 

purposes and its fair
market value as determined at the time of the contribution.  In addition, if any gain (as computed for
tax purposes) on the sale or other disposition of Company property shall
constitute recapture of depreciation under Sections 291, 1245 or 1250 of the
Code or any similar provision, such gain shall (to the extent possible) be
divided among the Members in proportion to the depreciation deductions
previously claimed by them giving rise to such recapture; provided, however,
that this sentence shall not affect the amount of gain otherwise allocable to a
Member.

 

Section 2.  Net Profit and Net Loss.

 

Definition.  “Net Profit” and “Net Loss” of the Company
means for each fiscal year or other period, an amount equal to the Company’s
taxable income or loss for such year or period, determined in accordance with
Code Section 703(a).  For this purpose,
all items of income, gain, loss or deduction required to be stated separately
pursuant to Code Section 703(a)(1) shall be included in taxable income or loss,
with the following adjustments:

 

(a)                                  Any
income of the Company that is exempt from federal income tax and not otherwise
taken into account in computing Net Profit or Net Loss shall be added to such
taxable income or loss;

 

(b)                                 Any
expenditures of the Company described in Code Section 705(a)(2)(B) or treated
as Code Section 705(a)(2)(B) expenditures pursuant to Treasury Regulations
Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing
Net Profit or Net Loss, shall be subtracted from such taxable income or loss;

 

(c)                                  If
property other than cash has been contributed to the Company or the Capital
Accounts of the Members have been adjusted pursuant to Treasury Regulations
Section 1.704-1(b)(2)(iv)(f), depreciation, amortization, gain or loss with
respect to assets of the Company may be computed in accordance with Section 1.4
hereof; and

 

(d)                                 Nonrecourse
Deductions and Member Nonrecourse Deductions for any fiscal year, or any other
allocation period, shall not be taken into account in computing Net Profit or
Net Loss, but shall be separately allocated to the Members in accordance with
Paragraph 1.2.5 and 1.2.6 hereof.

 

5EXHIBIT
10.3

 

NEITHER THIS WARRANT NOR ANY OF THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAW. NO TRANSFER OF
THIS WARRANT OR OF THE SECURITIES ISSUABLE UPON EXERCISE HEREOF SHALL BE VALID
OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND IN COMPLIANCE WITH ANY
APPLICABLE STATE SECURITIES LAW, OR (B) THE HOLDER SHALL DELIVER TO THE COMPANY
AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE
COMPANY THAT SUCH TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND OF ANY APPLICABLE STATE SECURITIES LAW.

 

	
  WARRANT NO. 1

  	
   

  	
  SEPTEMBER 23,
  2004

  

 

COMING HOME STUDIOS LLC

 

CLASS A UNIT PURCHASE WARRANT

 

This
Class A Unit Purchase Warrant (this “Warrant”) is being issued as of September
23, 2004 in connection with that certain CHS/SRS LLC Operating Agreement dated
September 23, 2004 (the “LLC Agreement”) between SRS Labs, Inc., a Delaware
corporation (“SRS”) and Coming Home Studios LLC, a California limited liability
company (the “Company”).  For
consideration of $40,000, the Company hereby grants to SRS, or its permitted
assigns or transferees (SRS and each such permitted assignee or transferee
being referred to herein as a “Holder” and collectively as the “Holders”) the
right to purchase, at any time after the Original Issue Date (as defined below)
and from time to time on and after the date hereof until the Expiration Date
(as defined below), up to 122,000 units of Class A membership interests in the
Company (the “Class A Units”) at a price per Class A Unit of $9.836 (the
“Exercise Price”), on the terms and subject to the conditions set forth below.

 

This
Warrant was originally issued on September 23, 2004 (the “Original Issue
Date”). This Warrant shall expire and be of no further force or effect on the
later of the following dates (the “Expiration Date”):  (i) July 9, 2006; and (ii) 60 days after the Closing
(as defined below).  Appropriate
provisions shall be made in accordance with Section 3.2 below so that Holder
shall have the right to receive a similar warrant for the remainder of such
term in the event of a merger, consolidation, reorganization or similar
transaction.

 

 

Article I.

Exercise Of Warrant

 

1.1                                 Exercise.

 

(a)                                  Subject
to adjustment as hereinafter provided, the rights represented by this Warrant
are exercisable on and after the Original Issue Date until the Expiration Date,
at a price per Class A Unit issuable hereunder (hereinafter, “Warrant Units”)
equal to the Exercise Price. The Exercise Price shall be payable in cash, by
certified or official bank check or wire transfer as hereinafter provided.  This Warrant is fully vested as of the
Original Issue Date.

 

(b)                                 This
Warrant may be exercised in full or in part by the Holder by surrender of this
Warrant, together with the form of subscription attached hereto as Annex A,
duly executed by the Holder, to the Company at its principal office,
accompanied by payment, in cash or by certified or official bank check payable
to the order of the Company, of the Exercise Price of the Warrant Units to be
purchased hereunder in an amount equal to such Exercise Price.  For any partial exercise hereof, the Holder
shall designate in a subscription in the form of Annex A attached hereto
delivered to the Company the number of Warrant Units that it wishes to
purchase.  On any such partial exercise,
the Company at its expense shall forthwith issue and deliver to the Holder a
new warrant of like tenor, in the name of the Holder, which shall be
exercisable for such number of Class A Units represented by this Warrant which
have not been purchased upon such exercise.

 

(c)                                  Upon
surrender of this Warrant with a duly executed Notice of Exercise in the form
of Annex A hereto, together with payment, if applicable, of the Exercise
Price for the Warrant Units purchased, at the Company’s principal executive
offices presently located at 6161 Santa Monica Boulevard, Suite 100, Los
Angeles, California  90038, or at such
other address as the Company shall have advised the Holder in writing (the
“Designated Office”), the Holder shall be entitled to receive a certificate or
certificates for the Warrant Units so purchased. The Company agrees that the
Warrant Units shall be deemed to have been issued to the Holder as of the close
of business on the date on which this Warrant shall have been surrendered
together with the Notice of Exercise and payment, if applicable, for such
Warrant Units.

 

Article II.

Transfer; Issuance of Certificates; Restrictive Legends

 

2.1                                 Transfer.
Subject to compliance with the restrictions on transfer set forth in this
Article II, each transfer of this Warrant and all rights hereunder, in whole or
in part, shall be registered on the books of the Company to be maintained for
such purpose, upon surrender of this Warrant at the Designated Office, together
with a written assignment of this Warrant in the form of Annex B hereto
duly executed by the Holder or its agent or attorney. Upon such surrender and
delivery, the Company shall execute and 

 

2

 

deliver a new Warrant or
Warrants in the name of the assignee or assignees and in the denominations
specified in such instrument of assignment, and shall issue to the assignor a
new Warrant evidencing the portion of this Warrant not so assigned, if any. A
Warrant, if properly assigned in compliance with the provisions hereof, may be
exercised by the new Holder for the purchase of Warrant Units without having a
new Warrant issued. All Warrants issued upon any assignment of Warrants shall
be the valid obligations of the Company, evidencing the same rights, and
entitled to the same benefits as the Warrants surrendered upon such
registration of transfer or exchange.

 

2.2                                 Certificates.
Certificates for the Warrant Units shall be delivered to the Holder within a
reasonable time after the rights represented by this Warrant shall have been
exercised pursuant to Article I, and a new Warrant representing the Class A
Units or fraction of a Class A Unit, if any, with respect to which this Warrant
shall not then have been exercised shall also be issued to the Holder within
such time. The issuance of certificates for Warrant Units upon the exercise of
this Warrant shall be made without charge to the Holder including, without
limitation, any tax that may be payable in respect thereof; provided, however,
that the Company shall not be required to pay any income tax to which the Holder
may be subject in connection with the issuance of this Warrant or the Warrant
Units.

 

2.3                                 Restrictive
Legends.

 

(a)                                  Except
as otherwise provided in this Article II, each certificate for Warrant Units
initially issued upon the exercise of this Warrant, and each certificate for
Warrant Units issued to any subsequent transferee of any such certificate,
shall be stamped or otherwise imprinted with a legend in substantially the
following form:

 

THE UNITS REPRESENTED BY
THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAW. NO TRANSFER OF THE
UNIT REPRESENTED BY THIS CERTIFICATE SHALL BE VALID OR EFFECTIVE UNLESS (A)
SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND IN COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAWS, OR
(B) THE HOLDER SHALL DELIVER TO THE COMPANY AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH PROPOSED TRANSFER IS EXEMPT
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND OF ANY APPLICABLE
STATE SECURITIES LAWS.

 

3

 

(b)                                 Except
as otherwise provided in this Article II, each Warrant shall be stamped or
otherwise imprinted with a legend in substantially the following form:

 

NEITHER THIS WARRANT NOR
ANY OF THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE
SECURITIES LAW. NO TRANSFER OF THIS WARRANT OR OF THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF SHALL BE VALID OR EFFECTIVE UNLESS (A) SUCH TRANSFER IS MADE
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND IN
COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAW, OR (B) THE HOLDER SHALL
DELIVER TO THE COMPANY AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY
ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND OF ANY APPLICABLE STATE SECURITIES LAW.

 

(c)                                  Notwithstanding
the foregoing, the legend requirements of this Section 2.3 shall terminate as
to any particular Warrant or Warrant Unit when the Company shall have received
from the holder thereof an opinion of counsel in form and substance reasonably
acceptable to the Company that such legend is not required in order to ensure
compliance with the Securities Act and any applicable state securities laws.
Whenever the restrictions imposed by this Section 2.3 shall terminate, the Holder
or of Warrant Units, as the case may be, shall be entitled to receive from the
Company without cost to such Holder a new Warrant or certificate for Warrant
Units of like tenor, as the case may be, without such restrictive legend.

 

Article III.

Adjustment of Number of Warrant Units; Exercise Price; Nature of Securities
Issuable Upon Exercise of Warrants

 

3.1                                 Exercise
Price; Adjustment of Number of Warrant Units. The Exercise Price set forth
in Article I hereof and the number of Class A Units purchasable hereunder shall
be subject to adjustment from time to time as hereinafter provided.

 

3.2                                 Reorganization,
Reclassification, Consolidation, Merger or Sale. If any capital
reorganization or reclassification of the capital of the Company, or any
consolidation or merger of the Company with another entity, or the sale of all
or substantially all of the Company’s assets to another person or entity
(collectively referred to as a “Transaction”) shall be effected in such a way
that holders of units of any class of membership interest in the Company
(“Units”) shall be entitled to receive stock, securities, cash or assets with
respect to or in exchange for Units, then, as a condition of 

 

4

 

such Transaction,
reasonable, lawful and adequate provisions shall be made whereby the Holder
shall thereafter have the right to purchase and receive upon the basis and upon
the terms and conditions specified in this Warrant, upon exercise of this
Warrant and in lieu of the Warrant Units immediately theretofore purchasable
and receivable upon the exercise of the rights represented hereby, such number,
amount and like kind of shares of stock, securities, cash or assets as may be
issued or payable pursuant to the terms of the Transaction with respect to or
in exchange for the number of Units immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby as if such shares
were outstanding immediately prior to the Transaction, and in any such case appropriate
provision shall be made with respect to the rights and interest of the Holders
to the end that the provisions hereof (including, without limitation,
provisions for adjustments of the Exercise Price and of the number of Warrant
Units purchasable and receivable upon the exercise of this Warrant and the
remaining term of this Warrant) shall thereafter be applicable, as nearly as
may be practicable, in relation to any shares of stock or securities thereafter
deliverable upon the exercise hereof.

 

3.3                                 Stock
Splits, Stock Dividends and Reverse Stock Splits. In case at any time the
Company shall subdivide its outstanding Units into a greater number of units,
or shall declare and pay any dividend with respect to its outstanding Units
that has the effect of increasing the number of outstanding Units, the Exercise
Price in effect immediately prior to such subdivision or dividend shall be
proportionately reduced and the number of Warrant Units purchasable pursuant to
this Warrant immediately prior to such subdivision or dividend shall be
proportionately increased, and conversely, in case at any time the Company
shall combine its outstanding Units into a smaller number of units, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased and the number of Warrant Units purchasable upon the
exercise of this Warrant immediately prior to such combination shall be
proportionately reduced.

 

3.4                                 Dissolution,
Liquidation or Winding-Up. In case the Company shall, at any time prior to
the exercise of this Warrant, dissolve, liquidate or wind up its affairs, the
Holder shall be entitled, upon the exercise of this Warrant, to receive, in
lieu of the Warrant Units which the Holder would have been entitled to receive,
the same kind and amount of assets as would have been issued, distributed or
paid to such Holder upon any such dissolution, liquidation or winding up with
respect to such Warrant Units, had such Holder been the Holder of record of the
Warrant Units receivable upon the exercise of this Warrant on the record date
for the determination of those persons entitled to receive any such liquidating
distribution.

 

3.5                                 Issuance
of Additional Units.

 

(a)                                  Next
Round of Equity Financing.  If, upon
the closing of the Company’s first round of equity financing following the
Original Issue Date (including the issuance of convertible debt) that raises
not less than $1,500,000 in new equity (the “Closing”), the pre-money valuation
of the Company immediately prior to the 

 

5

 

Closing is less than
$12,000,000, the Exercise Price shall be adjusted to equal 10% of the pre-money
valuation of the Company immediately prior to the Closing divided by the number
of Warrant Units.

 

(b)                                 Other
Issuances.  If at any time or from
time to time after the Original Issue Date, the Company issues or sells, or is
deemed by the provisions of this Section 3.5 to have issued or sold, Additional
Units (as hereinafter defined), otherwise than in connection with a Transaction
as provided in Section 3.2 or a dividend or split as provided in Section 3.3,
for an Effective Price (as hereinafter defined) that is less than the Exercise
Price, then,

 

(i)                           the
number of Warrant Units shall be adjusted to equal the product obtained by multiplying
the number of Warrant Units immediately prior to such issuance or sale by a
fraction (A) the numerator of which shall be the sum of (1) the number of
Unit Equivalents Outstanding (as hereinafter defined) immediately prior to such
issue or sale plus (2) the number of Additional Units so issued or sold
(or deemed so issued and sold); and (B) the denominator of which shall be the
sum of (1) the number of Unit Equivalents Outstanding immediately prior to
such issue or sale of Additional Units plus (2) the quotient obtained by
dividing the Aggregate Consideration Received (as hereinafter defined) by the
Company for the total number of Additional Units so issued or sold (or deemed
so issued and sold) by the Exercise Price in effect immediately prior to such
issue or sale; and

 

(ii)                        the
Exercise Price shall be adjusted by multiplying such Exercise Price in effect
prior to such adjustment by a fraction (A) the numerator of which shall be the
number of Warrant Units immediately prior to such issue or sale; and (B) the
denominator of which shall be the number of Warrant Units immediately after
such issue or sale.

 

(c)                                  Certain
Definitions.  For the  purpose of making any adjustment required
under this Section 3.5:

 

(i)                           “Additional
Units” shall mean all Units issued by the Company, whether or not
subsequently reacquired or retired by the Company, other than:  (1) Units issued in connection with the
Closing; (2) Units (or options, warrants or rights therefor) issued to employees,
officers or directors of, or contractors, consultants or advisers to, the
Company or any subsidiary pursuant to equity purchase or option plans, equity
bonuses or awards, incentive equity arrangements, warrants, contracts or other
arrangements, provided that the exercise price for such options, warrants and
rights are at the fair market values of such securities as determined by the
Management Committee of the Company at the time of issuance and are approved by
the Management Committee of the Company; and (3) Units issued upon the exercise
of the outstanding options and warrants described in Section 5.4 of this
Warrant.

 

6

 

(ii)                        The “Aggregate
Consideration Received” by the Company for any issue or sale (or deemed
issue or sale) of securities shall (1) to the extent it consists of cash,
be computed at the gross amount of cash received by the Company before
deduction of any underwriting or similar commissions, compensation or
concessions paid or allowed by the Company in connection with such issue or
sale and without deduction of any expenses payable by the Company; (2) to
the extent it consists of property other than cash, be computed at the fair
value of that property as determined in good faith by the Management Committee;
and (3) if Additional Units, Convertible Securities or Rights or Options
to purchase either Additional Units or Convertible Securities are issued or
sold together with other stock or securities or other assets of the Company for
a consideration which covers both, be computed as the portion of the
consideration so received that may be reasonably determined in good faith by
the Management Committee to be allocable to such Additional Units, Convertible
Securities or Rights or Options.

 

(iii)                     “Unit
Equivalents Outstanding” shall mean the number of Units that is equal to
the sum of (1) all Units of the Company that are outstanding at the time
in question, plus (2) all Units of the Company issuable upon conversion of
all Convertible Securities that are outstanding at the time in question, plus
(3) all Units of the Company that are issuable upon the exercise of Rights
or Options that are outstanding at the time in question assuming the full
conversion or exchange into Units of all such Rights or Options that are Rights
or Options to purchase or acquire convertible Securities into or for Units.

 

(iv)                    “Convertible
Securities” shall mean units or other securities convertible into or
exchangeable for Units.

 

(v)                       The “Effective
Price” of Additional Units shall mean the quotient determined by dividing
the total number of Additional Units issued or sold, or deemed to have been
issued or sold, by the Company under this Section 3.5, into the Aggregate
Consideration Received, or deemed to have been received, by the Company under
this Section 3.5, for the issue of such Additional Units;

 

(vi)                    “Rights or
Options” shall mean warrants, options or other rights to purchase or
acquire Units or Convertible Securities.

 

(d)                                 Deemed
Issuances.  For the purpose of
making any adjustment required under this Section 3.5, if the Company issues or
sells any Rights or Options or Convertible Securities and if the Effective
Price of the Units issuable upon exercise of such Rights or Options and/or the
conversion or exchange of Convertible Securities (computed without reference to
any additional or similar protective or antidilution clauses) is less than the
Exercise Price then in effect, then the Company shall be deemed to have issued,
at the time of the issuance of such Rights, Options or Convertible Securities,
that number of Additional Units that is equal to the maximum number of Units
issuable upon exercise of conversion of such Rights or Options or 

 

7

 

Convertible Securities
upon their issuance and to have received, as the Aggregate Consideration
Received for the issuance of such shares, an amount equal to the total amount
of the consideration, if any, received by the Company for the issuance of such
Rights or Options or Convertible Securities, plus, in the case of such Rights
or Options, the minimum amounts of consideration, if any, payable to the
Company upon the exercise in full of such Rights or Options, plus, in the case
of Convertible Securities, the minimum amounts of consideration, if any,
payable to the Company (other than by cancellation of liabilities or
obligations evidenced by such Convertible Securities) upon the conversion or
exchange thereof; provided  that:

 

(i)                           if the
minimum amounts of such consideration cannot be ascertained, but are a function
of antidilution or similar protective clauses, then the Company shall be deemed
to have received the minimum amounts of consideration without reference to such
clauses;

 

(ii)                        if the
minimum amount of consideration payable to the Company upon the exercise of
Rights or Options or the conversion or exchange of Convertible Securities is
reduced over time or upon the occurrence or non-occurrence of specified events
other than by reason of antidilution or similar protective adjustments, then
the Effective Price shall be recalculated using the figure to which such
minimum amount of consideration is reduced; and

 

(iii)                     if the
minimum amount of consideration payable to the Company upon the exercise of
such Rights or Options or the conversion or exchange of Convertible Securities
is subsequently increased, then the Effective Price shall again be recalculated
using the increased minimum amount of consideration payable to the Company upon
the exercise of such Rights or Options or the conversion or exchange of such
Convertible Securities.

 

No further adjustment of the Exercise Price or number
of Warrant Units, adjusted upon the issuance of such Rights or Options or
Convertible Securities, shall be made as a result of the actual issuance of
Units on the exercise of any such Rights or Options or the conversion or
exchange of any such Convertible Securities. 
If any such Rights or Options or the conversion rights represented by
any such Convertible Securities shall expire without having been fully
exercised, then the as adjusted upon the issuance of such Rights or Options or
Convertible Securities shall be readjusted to the Exercise Price or number of
Warrant Units which would have been in effect had an adjustment been made on
the basis that the only Units so issued were the Units, if any, that were
actually issued or sold on the exercise of such Rights or Options or rights of
conversion or exchange of such Convertible Securities, and such Units, if any,
were issued or sold for the consideration actually received by the Company upon
such exercise, plus the consideration, if any, actually received by the Company
for the granting of all such Rights or Options, whether or not exercised, plus
the consideration received for issuing or selling all such Convertible
Securities actually converted or exchanged, plus the 

 

8

 

consideration, if any, actually received by the
Company (other than by cancellation of liabilities or obligations evidenced by
such Convertible Securities) on the conversion or exchange of such Convertible
Securities.

 

3.6                                 Accountant’s
Certificate.  In each case of an
adjustment in the Exercise Price, number of Warrant Units or other stock,
securities or property receivable upon the exercise of this Warrant, the
Company shall compute, and upon the Holder’s request shall at the Company’s
expense cause independent public accountants of recognized standing selected by
the Company and reasonably acceptable to the Holder to certify such
computation, such adjustment in accordance with the terms of this Warrant and
prepare a certificate setting forth such adjustment and showing in detail the
facts upon which such adjustment is based, including a statement of
(i) the number of Units of each class outstanding or deemed to be outstanding,
(ii) the adjusted Exercise Price and (iii) the number of Warrant
Units issuable upon exercise of this Warrant. 
The Company will forthwith mail a copy of each such certificate to the
Holder.  In the event that the Holder
disputes such adjustment, the Holder shall be entitled to select an additional
firm of independent certified public accountants of national standing and paid
for by the Holder to certify such adjustment and the Company and the Holder
shall use their good faith best efforts to agree on such adjustment based on
the reports of the two accounting firms. In the event that the Company and the
Holder are still unable to reach agreement as to such adjustment, the Company
and the Holder agree to submit such determination to binding arbitration pursuant
to Article XII.  Upon determination
of such adjustment, the Management Committee shall forthwith make the
adjustments described therein.

 

3.7                                 Certain
Other Events.  If any change in the
outstanding Units of the Company or any other event occurs as to which the
other provisions of this Article III are not strictly applicable or if strictly
applicable would not fairly protect the purchase rights of the Holder of the
Warrant in accordance with such provisions, then the Management Committee of
the Company shall make an adjustment in the number and class of Warrant Units,
the Exercise Price or the application of such provisions, so as to protect such
purchase rights as aforesaid.  The
adjustment shall be such as will give the Holder of the Warrant upon exercise for
the same aggregate Exercise Price the total number, class and kind of shares as
the Holder would have owned has the Warrant been exercised prior to the event
and had the Holder continued to hold such shares until after the event
requiring adjustment.

 

Article IV.

 Registration; Exchange and
Replacement of Warrant; Reservation of Units

 

4.1                                 The
Company shall keep at the Designated Office a register in which the Company
shall provide for the registration, transfer and exchange of this Warrant. The
Company shall not at any time, except upon the dissolution, liquidation or
winding-up of the Company, close such register so as to result in preventing or
delaying the exercise or transfer of this Warrant.

 

9

 

4.2                                 The
Company may deem and treat the person in whose name this Warrant is registered
as the Holder and owner hereof for all purposes and shall not be affected by
any notice to the contrary, until presentation of this Warrant for registration
or transfer as provided in this Article IV.

 

4.3                                 Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and upon surrender and
cancellation of this Warrant, if mutilated, the Company will make and deliver a
new Warrant of like tenor, in lieu of this Warrant without requiring the
posting of any bond or the giving of any security.

 

4.4                                 The
Company shall at all times reserve and keep available out of its authorized
Units, solely for the purpose of issuance upon the exercise of this Warrant,
such number of Units as shall be issuable upon the exercise hereof.  The Company covenants and agrees that, upon
exercise of this Warrant and payment of the Exercise Price therefor, if
applicable, all Warrant Units issuable upon such exercise shall be duly and
validly issued, fully paid and non-assessable.

 

Article V.

Representations and Warranties of the Company 

 

The
Company hereby represents and warrants to each Purchaser as follows:

 

5.1                                 Organization;
Good Standing; Qualification.  The
Company is a limited liability company duly organized, validly existing and in
good standing under the laws of the State of California and has full power and
authority to conduct its business as presently conducted and as proposed to be
conducted by it and to enter into this Warrant and to carry out the
transactions contemplated in this Warrant.

 

5.2                                 Authorization.  The Company has taken all limited liability
company action required to authorize the execution and delivery of this Warrant
and the performance of its obligations hereunder including the issuance of the
Warrant Units. This Agreement is a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, moratorium or other
similar laws relating to creditors’ rights generally and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which any proceeding therefor may be
brought.

 

5.3                                 Valid
Issuance of Warrant Units.  When
issued to and paid for by the Holder in accordance with the terms of this
Warrant, the Warrant Units will be duly authorized, validly issued, fully paid
and nonassessable free and clear of all liens, pledges, restrictions and
encumbrances, and the issuance of the Warrant Units will not be subject to any
preemptive or similar rights.  The
Company shall at all times reserve and keep available, out of its authorized
but unissued Units, solely for the purpose of 

 

10

 

effecting the
exercise of this Warrant, the full number of Class A Units issuable upon the
exercise of this Warrant.

 

5.4                                 Capitalization.  As of the Original Issue Date, the
authorized and outstanding capitalization of the Company consists of (i) a
total of 600,000 Class A Units, all of which are outstanding; (ii) a total of
400,000 units of Class B Membership (“Class B Units”), all of which are
outstanding.  All of such outstanding
Units are validly issued, fully paid and nonassessable, and have been issued in
compliance with the applicable federal and state securities laws, and none of
such outstanding shares was issued in violation of any preemptive rights or
similar rights to subscribe for or purchase securities.  In addition to the foregoing, as of the
Original Issuance Date, the following options and warrants are
outstanding:  (i) an option to purchase
a total of up to 60,000 Class A Units at an exercise price of $5.00 per Class A
Unit issued to Steven Savluk; (ii) an option to purchase up to 10,000 Class B
Units at an exercise price of $4.00 per Class B Unit issued to John Bendheim;
and (iii) a warrant to purchase up to 28,000 Class A Units issued to SBI
Advisors, LLC.  All Units issuable upon
exercise of such options and warrants, upon issuance in accordance with the
terms thereof, will be validly issued, fully paid and nonassessable.  Except as set forth in this Section 5.4,
there are no other outstanding options, warrants or similar agreements or
rights for the purchase from the Company of any Units or any securities
convertible into or ultimately exchangeable or exercisable for any Units,
whether or not having anti-dilution rights. 
Without limiting the foregoing, no preemptive right, co-sale right,
right of first refusal, registration right, or other similar right exists with
respect to the issuance and sale of the Warrant Units.

 

5.5                                 Defaults.  Neither the issuance and sale of the Warrant
Units hereunder nor execution and delivery of this Warrant and the performance
of the Company’s other obligations hereunder will (A) violate or conflict with,
result in a breach of or constitute a default (or an event that, with notice or
lapse of time, would constitute a default) under (i) the articles of
organization or operating agreement of the Company; (ii) any decree, judgment,
order or determination of any court, governmental agency or body, or any
arbitrator having jurisdiction over the Company or any of the Company’s assets;
(iii) any law, rule or regulation applicable to the Company; or (iv) any
contract, agreement, mortgage, indebtedness, indenture, or instrument by which
the Company is bound or to which any property or assets of the Company is
subject, or (B) result in the creation or imposition of any lien, encumbrance,
claim, security interest or restriction whatsoever upon any of the properties
or assets of the Company or an acceleration of indebtedness pursuant to any
obligation, agreement or condition contained in any bond, debenture, note or
any other evidence of indebtedness or any indenture, mortgage, deed of trust or
any other agreement or instrument to which the Company is a party or by which
it is bound or to which any of the property or assets of the Company is
subject.

 

11

 

Article VI.

Amendment to Operating
Agreement of the Company

 

Immediately
following the execution of this Agreement the Company shall cause the Coming
Home Studios LLC Operating Agreement dated March 21, 2003 (the “Operating
Agreement”)  to be amended and restated
as follows:

 

6.1                                 Units of Interest in the Company. 
Section 3.3 of the Operating Agreement shall be deleted and replaced in
its entirety as follows:

 

3.3  Units of Interest in the Company.  The Company shall issue 400,000 Units of
Class A membership interests to Daniel E. Catullo III and 200,000 Units of
Class A membership interests to Tilton Gardener (each such Unit being a “Class
A Unit”).  The Company shall issue
400,000 Units of Class B membership interests to Arthur Sterling (each such
Unit being a “Class B Unit”).  The
Company shall not initially issue any Units of Class C Membership interests
(each such Unit being a “Class C Unit”). 
The term “Unit” means a Class A Unit, a Class B Unit or a Class C
Unit.  Immediately upon the exercise of
the warrant to purchase Class A Units issued to SRS Labs, Inc. on September 23,
2004 pursuant to a warrant agreement between SRS Labs, Inc. and the Company
(the “Warrant Agreement”):  (i)  the Company shall issue that number of Class
A Units to SRS Labs, Inc. determined in accordance with the terms and
conditions of the Warrant Agreement, (ii) SRS Labs, Inc. shall become a Member
of the Company with all attendant rights and obligations and (iii) Exhibit A
hereto shall be amended to set forth the ownership interest of SRS Labs, Inc.
in the Company.

 

6.2                                 Tag Along Rights.  New
Section 7.5 shall be added to the Operating Agreement as follows:

 

7.5.                              Tag
Along Rights.  Notwithstanding the
foregoing:

 

(a)                                  If
any holder of Units (an “Offering Unitholder”) desires to transfer all or any
portion of such holder’s Units pursuant to a bona fide offer from a proposed
acquiror (a “Proposed Acquiror”), it shall be a  condition precedent to such sale by such Offering Unitholder that
each of the other Unit holders have the right to sell to the Proposed Acquiror,
at the same price per Unit and on the same terms and conditions as the sale by
such Offering Unitholder, a pro rata portion of the number of Units proposed to
be sold to the Proposed Acquiror.  A
Unit holder who elects to participate in a sale to a Proposed Acquiror under
this section is referred to herein as a “Participating Unitholder”  The pro rata portion of Units which any
Participating Unitholder shall be entitled to sell to the Proposed Acquiror
shall be that number of Units as shall equal the total number of Units proposed
to be sold to the Proposed Acquiror multiplied by a fraction, the numerator of
which is the number of Units then owned by such Participating Unitholder, and
the denominator of which is the number of Units owned by all Participating
Unitholders.

 

12

 

(b)                                 Each
Participating Unitholder who wishes to transfer units to a Proposed Acquiror shall
give to each other Unitholder notice that the Offering Unitholder proposes to
transfer offered Units to the Proposed Acquiror, and that the other Unitholders
have the right to participate in such transfer on a pro rata basis.  Such notice shall be given at least twenty
(20) days prior to the date of the proposed sale of the Proposed Acquiror.  Each Participating Unitholder wishing to
participate in any transfer pursuant shall notify the Offering Unitholder in
writing of such intention within fifteen (15) days after such Unit holder’s
receipt of the notice described in the preceding sentence, and if such Unit
holder fails to give notice within such time period, will conclusively deemed
to have waived such right.

 

(c)                                  The
Offering Unitholder and each Participating Unitholder shall sell to the
Proposed Acquiror all, or at the option of the Proposed Acquiror, any part of
the Units proposed to be sold by them at a price and upon the other terms and
conditions not more favorable to the Proposed Acquiror than those set forth in
the notice provided by the Offering Unitholder provided, however, that any
purchase of less than all of such Units by the Proposed Acquiror shall be made
from the Offering Unitholder and each Participating Unitholder pro rata based
upon the relative number of Units that the Offering Unitholder and each
Participating Unitholder is otherwise entitled to sell.

 

6.3                                 Bring-Along  Rights. 
New Section 7.6 shall be added to the Operating Agreement as follows:

 

7.6                                 Bring-Along
Rights.  If the holders of more than 50% of the issued and outstanding common
Units of the Company (the “Selling Unitholders”) propose to sell or otherwise
dispose of all of their Units to a third-party buyer in a single transactions
or related series of transactions, then each Unit holder who is not a Selling
Unitholder (collectively the “Minority Unitholders”) shall, at the Company’s
election, (i) sell or otherwise dispose of all of its Units pursuant to
the terms and conditions negotiated by the Selling Unitholders for the sale or
other disposition of the Selling Unitholders’ Units; and (ii) exercise or
convert any option, warrant or other security exercisable for or convertible
into common Units, including, without limitation, this Warrant, and sell or
otherwise dispose of the common Units resulting therefrom pursuant to the terms
and conditions negotiated by the Selling Unitholders for the sale or other
disposition of their Units; provided, however, that the terms and
conditions (including the price per Unit and form of consideration) for such
sale shall be no less favorable to each Minority Unitholder than to the Selling
Unitholders.  Subject to the foregoing,
each Minority Unitholder hereby agrees, at the Company’s request, (i) to
execute and deliver a definitive agreement providing for the sale of his
minority Units, together with any related documents, in such form as determined
by the Company, and (ii) to vote all of its minority Units in favor of
approval and 

 

13

 

adoption of a merger or other acquisition agreement
between the Company, the Selling Unitholders and the third-party buyer, in such
form as determined by the Company; provided, further, that in no
event shall any Minority Unitholder be required to make any representations or
warranties (other than as to title to its minority Units) or provide any
indemnities (other than as to title to its minority Units) to the third-party
buyer in connection with any sale or other disposition of the minority Units
pursuant to this Section 5.2. 
Notwithstanding anything in this Agreement to the contrary, the Minority
Unitholders shall have no obligation to reimburse the Company or the Selling
Unitholders for any expenses or fees incurred by the Company or the Selling
Unitholders.

 

Article VII.

Notices

 

All
notices, requests, consents and other communications hereunder shall be in
writing and shall be deemed to have been duly made when delivered personally,
or mailed by registered or certified mail, return receipt requested, or telecopied
or telexed and confirmed in writing and delivered personally or mailed by
registered or certified mail, return receipt requested:

 

(a)                                  If
to the Holder, to the address of such Holder as shown on the books of the
Company; or

 

(b)                                 If
to the Company, to the Designated Office;

 

or at such other address as the Holder or the Company
may hereafter have advised the other.

 

Article VIII.

Successors

 

All
the covenants, agreements, representations and warranties contained in this
Warrant shall bind the parties hereto and their respective heirs, executors,
administrators, distributees, successors, assigns and transferees.

 

Article IX.

Law Governing

 

This
Warrant shall be construed and enforced in accordance with, and governed by,
the laws of the State of California (not including the choice of law rules
thereof) regardless of the jurisdiction of creation or domicile of the Company
or its successors or of the Holder at any time hereof.

 

14

 

Article X.

Entire Agreement; Amendments and Waivers

 

This
Warrant sets forth the entire understanding of the parties with respect to the
transactions contemplated hereby. The failure of any party to seek redress for
the violation or to insist upon the strict performance of any term of this
Warrant shall not constitute a waiver of such term and such party shall be
entitled to enforce such term without regard to such forbearance. This Warrant
may be amended, and any breach of or compliance with any covenant, agreement,
warranty or representation may be waived, only if the Company has obtained the
written consent or written waiver of the Holder, and then such consent or
waiver shall be effective only in the specific instance and for the specific
purpose for which given.

 

Article XI.

Severability; Headings.

 

If any
term of this Warrant as applied to any person or to any circumstance is
prohibited, void, invalid or unenforceable in any jurisdiction, such term
shall, as to such jurisdiction, be ineffective to the extent of such
prohibition or invalidity without in any way affecting any other term of this
Warrant or affecting the validity or enforceability of this Warrant or of such
provision in any other jurisdiction. The Article and Section headings in this
Warrant have been inserted for purposes of convenience only and shall have no
substantive effect.

 

Article XII.

Arbitration

 

In the
event a dispute occurs with respect to any claim, dispute or other matter
arising out of or relating to this Warrant, the parties hereto will promptly
attempt to settle such dispute through consultation and negotiation in good
faith and in a spirit of mutual cooperation. If agreement is reached concerning
the resolution of such dispute, then such agreement shall be final, conclusive
and binding on the parties hereto. If, on or before the tenth day after written
notice of such dispute is given by one party to the other parties, such dispute
has not been resolved by the agreement of all the parties, such dispute shall
be settled by an expedited arbitration proceeding conducted in accordance with
the then-current CPR Non-Administered Arbitration Rules and the Federal Rules
of Evidence by a panel of three arbitrators who shall have experience relating
to the dispute or matter to be resolved. Each of the Company and the Holder
shall select an arbitrator, and those two arbitrators shall select a third
arbitrator. The parties hereto shall provide such arbitrators with such
information as may be reasonably requested in connection with the arbitration
of such dispute and shall otherwise cooperate with each other and such
arbitrators in good faith and with the goal of resolving such dispute as
promptly as reasonably practicable. The arbitrators’ decision and award with
respect to the dispute referred to shall be final and binding on the parties
hereto and may be entered in any court with jurisdiction, and the parties
hereto shall abide by such decision and award. The cost of the arbitration 

 

15

 

proceeding
and any proceeding in court to confirm or to vacate any arbitration award, as
applicable (including, without limitation, attorneys’ fees and costs), shall be
borne by the unsuccessful party (if any) and shall be awarded as part of the
arbitrators’ award; provided however, that if the arbitrators do not find one
party to be unsuccessful then the cost of the arbitral proceeding shall be paid
equally by the parties hereto.

 

16

 

IN
WITNESS WHEREOF, the Company has caused this Warrant to be duly executed as of
the date first written above.

 

	
   

  	
  COMING HOME STUDIOS LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
          /S/
  DANIEL E. CATULLO III

  
	
   

  	
  Name:

  	
    Daniel E.
  Catullo III

  
	
   

  	
  Title:

  	
     Manager

  
	
   

  	
   

  
	
  Accepted and agreed:

  	
   

  
	
   

  	
   

  
	
   

  	
  SRS LABS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
          /S/
  THOMAS C.K. YUEN

  
	
   

  	
  Name: 

  	
    Thomas C.K.
  Yuen

  
	
   

  	
  Title:

  	
      Chairman
  and Chief Executive Officer

  
					

 

17

 

ANNEX A

 

NOTICE OF EXERCISE

 

(TO BE EXECUTED
UPON PARTIAL OR

FULL EXERCISE OF
THE WITHIN WARRANT)

 

The undersigned hereby
irrevocably elects to exercise the right to purchase
                    
Units of Coming Home Studios LLC covered by the within Warrant according to the
conditions hereof and herewith makes payment of the Exercise Price of such
Units in full in the amount of
$                                  .

 

 

	
   

  	
   

  
	
   

  	
   

  	
  (Print Name)

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  (Signature of
  Registered Holder)

  
	
   

  	
   

  	
   

  
	
   Dated:                      

  	
   

  	
   

  

 

18

 

ANNEX B

 

ASSIGNMENT FORM

 

FOR VALUE RECEIVED the
undersigned registered owner of this Warrant hereby sells, assigns and
transfers unto the Assignee named below all of the rights of the undersigned
under this Warrant, with respect to the number of Units set forth below:

 

	
  No. of Units

  	
   

  	
  Name and
  Address of Assignee

  
	
   

  	
   

  	
   

  

 

and does hereby
irrevocably constitute and appoint
                                          
attorney-in-fact to register such transfer onto the books of Coming Home
Studios LLC maintained for the purpose, with full power of substitution in the
premises.

 

 

	
   

  	
   

  
	
   

  	
   

  	
  (Print Name)

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  (Signature of
  Registered Holder)

  
	
   

  	
   

  	
   

  
	
  Dated:                   

  	
   

  	
   

  

 

NOTICE: The signature on
this assignment must correspond with the name as written upon the face of this
Warrant in every particular, without alteration or enlargement or any change
whatsoever.

 

19

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