Document:

exv10w3

 

Exhibit 10.3

JOINT VENTURE

AND

LIMITED LIABILITY COMPANY

AGREEMENT

by and among

Teknik Digital Arts, Inc.

and

Playentertainment, L.L.P.

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	ARTICLE 1 - DEFINITIONS
	 	 	1	 
	ARTICLE 2 - PRELIMINARY MATTERS
	 	 	4	 
	ARTICLE 3 - FORMATION OF THE JV
	 	 	5	 
	ARTICLE 4 - CONTRIBUTIONS; CAPITAL ACCOUNTS; DISTRIBUTIONS
	 	 	6	 
	ARTICLE 5 - MANAGEMENT OF THE JV
	 	 	8	 
	ARTICLE 6 - COVENANTS
	 	 	10	 
	ARTICLE 7 - REPRESENTATIONS AND WARRANTIES
	 	 	11	 
	ARTICLE 8 - TERM AND TERMINATION
	 	 	13	 
	ARTICLE 9 - TRANSFERS OF PARTICIPATING INTERESTS; WITHDRAWAL
	 	 	14	 
	ARTICLE 10 - CONVERSION OF JV INTERESTS
	 	 	16	 
	ARTICLE 11 - MISCELLANEOUS
	 	 	17	 

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JOINT VENTURE AND LIMITED LIABILITY COMPANY AGREEMENT

     THIS AGREEMENT is entered into as of March 24, 2004, by and between Teknik
Digital Arts, Inc., a Nevada corporation (“Teknik”), and Playentertainment,
L.L.P., an Arizona limited liability partnership (“Playentertainment” ).

WITNESSETH:

     WHEREAS, Teknik develops technologies and intellectual properties utilized
on desktop windows, wireless phones, video game consoles and other consumer
electronic devices;

     WHEREAS, Playentertainment licenses and publishes video games pursuant to
licensing rights based on television, motion picture, sports, comic book,
celebrity and similar properties;

     WHEREAS, Teknik and Playentertainment wish to enter into a joint venture
(the “JV”) for the purpose of developing, publishing and marketing video games
pursuant to the licensing rights obtained by Playentertainment (the
“Business”); and

     WHEREAS, Teknik and Playentertainment desire to form the JV as a limited
liability company under the Arizona Limited Liability Company Act, A.R.S. §§
29-601, et seq., as amended from time to time (the “Arizona Act”), to conduct
the Business.

     NOW, THEREFORE, in consideration of the covenants and agreements contained
in this Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Teknik and Playentertainment
agree as follows:

ARTICLE 1 - DEFINITIONS

     For purposes of this Agreement:
“Arizona Act” means “The Arizona Limited Liability Company Act,” Arizona
Revised Statutes, §§ 29-601, et seq.;

     “Capital Account” has the meaning set forth in Section 4.5(a);

     “Capital Expenditure” means any amount properly incurred by a Member to
purchase or maintain any item of equipment or other capital asset for the JV,
which amount would be recorded as a capital expenditure for GAAP purposes;

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     “Capital Expenditure Distribution Amount” means, with respect to any
Capital Expenditure, ten percent of the amount of such Capital Expenditure in
the fiscal quarter in which such Capital Expenditure is incurred and in each of
the succeeding nine fiscal quarters;

     “Change of Control” means any event (except going public), transaction or
occurrence as a result of which the current shareholders or interestholders of
a Member cease to directly or indirectly own and control 50% or more of the
economic and voting rights of each class of the outstanding capital stock or
the interests of such Member on a fully diluted basis.

     “Code” means the Internal Revenue Code of 1986, as amended;

     “Common Stock” means the common stock of Teknik.

     “Deceased Spouse” has the meaning set forth in Section 9.1(c);

     “Development Activities” means the research, development, manufacture and
sale of the Video Games, including the provision of the funding for the
acquisition of the Future JV Licenses and the provision of accounting services.

     “Distribution Allocation” has the meaning set forth in Section 4.6;

     “Divorced Member” has the meaning set forth in Section 9.1(d);

     “Divorced Spouse” has the meaning set forth in Section 9.1(d);

     “Existing Playentertainment Licensed Property” means, collectively, the
rights of Playentertainment or its affiliates; (i) subject to The Next Action
Star License, to publish Video Games for console and mobile applications; and
(ii) subject to the Fear Factor License, to publish Video Games for mobile
applications, which rights shall be assigned to the JV by Playentertainment
pursuant to Section 4.4(a)(i);

     “Existing Playentertainment Licenses” means the the Next Action Star
License and the Fear Factor License.

     “Fear Factor License” means the agreement dated April 1, 2003, and related
documents, by which an affiliate of Playentertainment has obtained from NBC
Enterprises, Inc. the right to use the Fear Factor name, logo, content, ideas
and copyrights associated with the “Fear Factor” television program in the
production and publishing of Video Games.

     “Fiscal Year” has the meaning set forth in Section 3.5;

     “Future JV Licenses” means the rights hereafter acquired by the JV to
publish Video Games.

     “GAAP” means generally accepted accounting practices in the United States,
consistently applied;

     “Improvements” means any and all Technology developed by (or on behalf of)
the JV or Teknik, alone or in conjunction with others, or with respect to which
the JV or Teknik acquires intellectual property rights, during the term of this
Agreement;

     “Initiating Member” has the meaning set forth in Section 9.6;

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     “JV” means “Teknik Playentertainment,LLC”, or such other name hereafter
selected by the Members, the limited liability company to be formed by the
Members pursuant to Article 3;

     “JV Financings” means short or long term secured or unsecured JV debt, or
private placements or public offerings of JV equity;

     “JV Licenses” means the Existing Playentertainment Licenses and the Future
JV Licenses;

     “Know-How” means the general and specific knowledge, experience, and
information, not in written or printed form, used by the JV or Teknik and
applicable to the design, development, manufacture, assembly, servicing, or
sale of Video Games;

     “Liens” means all charges, claims, encumbrances, leases, liens, mortgages,
security interests, and other restrictions of any kind and nature against
personal or real property;

     “Liquidating Member” has the meaning set forth in Section 8.3;

     “Management Committee” has the meaning set forth in Section 5.1(a);

     “Manager” has the meaning set forth in Section 5.4;

     “Maximum Drawdown Other Member” has the meaning set forth in Section 9.5;

     “Member Spouse” has the meaning set forth in Section 9.1(c);

     “Member Representatives” has the meaning set forth in Section 5.1(a);

     “Members” has the meaning set forth in Section 3.4;

     “Membership Interest Conversion Right” has the meaning set forth in
Section 10.1;

     “Net Distributions” has the meaning set forth in Section 4.6;

     “Net Profits” or “Net Loss” means, as appropriate, the taxable income or
loss of the JV for a designated period for Federal income tax purposes as
determined by the JV’s independent public accountants, increased by the amount
of any tax-exempt income of the JV during such period and decreased by the
amount of any Code Section 705(a)(2)(B) expenditures of the JV within the
meaning of Treasury Regulation Section 1.704-1(b)(2)(iv) of the JV;

     “Next Action Star License” means the agreement dated November 21, 2003,
and related documents, by which an affiliate of Playentertainment has obtained
from Joy Tashjian Marketing Group, LLC the right to use the Next Action Star
name, logo, content, ideas and copyrights associated with the “Next Action
Star” television program in the production and publishing of Video Games.

     “Other Member” has the meaning set forth in Section 9.5;

     “Participating Interests” has the meaning set forth in Section 4.1;

     “Party” or “Parties” means an individual or entity that has executed this
Agreement or is an assignee under it;

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     “Playentertainment” has the meaning set forth in Section 3.4;

     “Playentertainment Assignment” has the meaning set forth in Section
4.4(a)(i);

     “Profit/Loss Allocation” has the meaning set forth in Section 4.2;

     “Reimbursable Expenses” means: (i) a Party’s direct costs and expenses
incurred after the date hereof relative to the development, fabrication,
manufacture, or distribution of the Video Games for the JV, (ii) a Party’s
costs and expenses incurred after the date hereof relative to its corporate
overhead, administration of the JV, promotion of the Video Games, and
negotiation for the JV, which overhead, administrative and general costs that
are reasonable and fairly attributable to the JV shall be determined by mutual
agreement of both Parties, (iii) a Party’s out-of-pocket expenses incurred
after the date hereof for the JV in developing the Improvements, and (iv) a
Party’s out-of-pocket legal and other expenses incurred in the preparation of
this Agreement and the organization of the JV;

     “Subject Interest” has the meaning set forth in Section 9.1(a);

     “Technical Data” means documents containing technical information,
engineering or production data, blueprints, drawings, plans, specifications,
descriptions of assembly and manufacturing procedures, quality and inspection
standards, test records and data, and other written materials owned and used by
the JV or Teknik, and applicable to the design, development, manufacture,
assembly, servicing, or sale of Video Games;

     “Technology” means Technical Data in human or machine readable form,
inventions (whether or not patentable), works of authorship, products,
Know-How, manufacturing methods, processes, concepts, designs, computer
hardware and software, models, prototypes, automations, designs, and related

information and things applicable to the design, development, manufacture,
assembly, servicing, or sale of Video Games;

     “Teknik” has the meaning set forth in Section 3.4;

     “Terms of Sale” has the meaning set forth in Section 9.5;

     “Third Party Expenses” means any amounts owing by the JV or a Party on
behalf of the JV to third parties unaffiliated with a Party;

     “Unauthorized Transfer” has the meaning set forth in Section 9.2; and

     “Video Games” means the video games developed and marketed by the JV
pursuant to the JV Licenses;

     “Withdrawing Member” has the meaning set forth in Section 9.1(a).

ARTICLE 2 - PRELIMINARY MATTERS

     2.1. THE EXISTING PLAYENTERTAINMENT LICENSED PROPERTY. Concurrent with
the execution of this Agreement as defined in Paragraph 4.4, Playentertainment
and/or its affiliates shall assign its interest in the Existing
Playentertainment Licensed Property to the JV.

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ARTICLE 3 - FORMATION OF THE JV

     3.1 Name and Address. The name of the JV shall be “Teknik
Playentertainment, LLC”, or such other name hereafter selected by the Members.
The principal place of business of the JV shall be 7377 E. Doubletree Ranch
Road # 270, Scottsdale, Arizona.

     3.2 Registered Office and Registered Agent. John Ward is hereby
designated as the registered agent of the JV for service of process in the
State of Arizona. His office located at 3104 E. Camelback #509, Phoenix,
Arizona 85016 is designated as the registered office of the JV in the State of
Arizona. The JV may from time to time change its registered agent for service
of process, the location of its registered office within the State of Arizona
and the location of its principal place of business.

     3.3 Purpose and Powers of the JV. The purpose of the JV shall be to
develop, manufacture, market, and sell video games for mobile and console
applications, based on licensed television, motion picture, sports, comic book,
celebrity and similar properties. The JV may also engage in other businesses
that are either a direct or indirect outgrowth of or are reasonably related to
the foregoing purpose. In order to carry out its purpose, the JV shall have
and may exercise all powers now or hereafter conferred on limited liability
companies by the Arizona Act and other laws of the State of Arizona and,
without limitation, shall have the authority to execute, acknowledge, and
deliver instruments, and to do any and all things necessary, appropriate,
proper, advisable, incidental to, or convenient, for the furtherance and
accomplishment of its purpose and for the protection and benefit of the JV.

     3.4 Members. The names and the addresses of the initial Members
are as follows:

	 	 	 
	Name
	 	Address

	Teknik Digital Arts, Inc.

	 	7377 E. Doubletree Ranch Road #270

Scottsdale, Arizona 85258
	 
	 	 
	Playentertainment, L.L.P.

	 	7010 E. Acoma Drive #103

Scottsdale, Arizona 85254

     The initial Members may withdraw, be replaced, or be removed from the JV,
and new Members may be added, withdraw, be replaced, or be removed from the JV,
all as provided in this Agreement.

     3.5 Fiscal Year. A “Fiscal Year” of the JV shall be a calendar year.

     3.6 Liability of Members. The Members shall not have any liability for
the debts, obligations, or liabilities of the JV, except to the extent
expressly provided in the Arizona Act.

     3.7 Restrictions on Transfer. Except as provided in Article 9, no Member
shall have the right to sell, assign, pledge, transfer, encumber, or otherwise
dispose of or alienate, all or any part of its Participating Interest in the JV
without the prior written consent of the other Member in its sole discretion.
Any purported sale, assignment, transfer, or other disposition by a Party of
all or any part of its Participating Interest in the JV without such prior
written consent shall be null and void and of no force and effect.

     3.8 Admission of Additional or Substitute Members. No substitute or
additional Member shall be admitted to the JV, except as specifically set forth
in this Agreement.

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ARTICLE 4 - CONTRIBUTIONS; CAPITAL ACCOUNTS; DISTRIBUTIONS

     4.1 Participating Interests. The “Participating Interests” of the Members
in the ownership of the JV are as follows:

	 	 	 	 	 
	Name
	 	Participating Interest

	Teknik Digital Arts, Inc.
	 	 	50	%
	Playentertainment, L.L.P.
	 	 	50	%

     4.2 Allocation of Net Profits and Net Losses. The Net Profits and Net
Losses of the JV for each Fiscal Year (or other period) shall be allocated to
the Capital Account of each Member in accordance with the following table (the
“Profit/Loss Allocation”):

	 	 	 	 	 	 	 	 	 
	 	 	Allocations attributable to	 	 
	 	 	Video Games published	 	Allocations attributable to
	 	 	pursuant to the	 	Video Games published
	Name
	 	Next Action Star License
	 	pursuant to all other titles

	Teknik Digital Arts, Inc.
	 	 	50	%	 	 	60	%
	Playentertainment, L.L.P.
	 	 	50	%	 	 	40	%

     4.3 Initial Capital Contributions. The initial capital contribution of
each Member to the JV in cash or other property shall be as follows:

	 	 	 	 	 
	Name
	 	Initial Capital Contribution

	Teknik Digital Arts, Inc.
	 	$	37,500.00	 
	Playentertainment, L.L.P.
	 	$	37,500.00	 

     4.4 Equalization Transactions.

	(a)	 	Playentertainment shall:

	(i)	 	assign to the JV, in a form of
assignment mutually acceptable to each of Teknik and
Playentertainment (the “Playentertainment Assignment”),
all of Playentertainment’s right, title, and interest in
and to the Existing Playentertainment Licensed Property,
for the purposes of engaging in the activities set forth
in Section 3.3; and
	 
	(ii)	 	make available for purchase by the JV
the right to use all titles that Playentertainment
hereafter obtains through its license negotiations;
provided, that the purchase by the JV of such license
rights shall be by mutual agreement of each of Teknik
and Playentertainment.

	(b)	 	Teknik shall:

	(i)	 	undertake the Development Activities;
and
	 
	(ii)	 	make certain Capital Expenditures on
behalf of the JV, as more particularly set forth in
Section 6.1, and otherwise contribute, as Reimbursable
Expenses, funds necessary to finance the Development

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	 	 	Activities; provided, that at any time and from time to
time, Teknik may decide not to make such contributions
but to rely on JV Financings negotiated, approved, and
executed solely by Teknik during the term of this
Agreement; and if such JV Financings are not available,
Teknik will not be obligated to make such additional
contributions; and

     4.5 Capital Account.

	(a)	 	There shall be established for each Member on the
books of the JV a capital account (a “Capital Account”). The
Capital Account of a Member shall be: (i) credited with: (x)
such Member’s initial capital contribution, (y) allocations of
Net Profits to such Member, and (z) additional capital
contributions made by such Member, including, without
limitation, Capital Expenditures, and (ii) decreased by: (x)
allocations of Net Losses to such Member, and (y)
distributions to such Member of Capital Expenditure
Distribution Amounts or Net Distributions.
	 
	(b)	 	Upon the occurrence of any event specified in
Treasury Regulation Section 1.704-1(b)(2)(iv)(i), the
Management Committee may cause the Capital Accounts of the
Members to be adjusted to reflect the fair market value of the
JV’s assets at such time (as determined by the Management
Committee in its sole discretion) in accordance with such
regulation.

     4.6 Expenses; Distributions. Subject to Section 4.8, the gross cash
receipts of the JV for a fiscal quarter from all sources, including, without
limitation, cash from operations, JV Financings, or other sources, less
reserves for returns and inventory obsolescence, shall be used: first, to pay
Third Party Expenses incurred in such or prior fiscal quarters; second, to
distribute the sum of the Capital Expenditure Distribution Amounts for such or
prior fiscal quarters to the Member that incurred such Capital Expenditures;
and, third, to pay to the Members the Reimbursable Expenses incurred by each in
such or prior fiscal quarters; provided, that to the extent that the JV fails
to pay the full amount of the sum of the Capital Expenditure Distribution
Amounts, the unpaid balance of such amounts will be carried forward and become
payable as an additional Capital Expenditure Distribution Amount in the next
succeeding fiscal quarter; and provided further, that to the extent that the JV
fails to pay the full amount of the Reimbursable Expenses incurred in such
fiscal quarter: (i) the payments to a Party for Reimbursable Expenses will be
made in proportion to the relative amounts of Reimbursable Expenses owed to
each in such fiscal quarter, and (ii) any remaining amounts of Reimbursable
Expenses will be carried forward and become payable as an additional
Reimbursable Expense in the next succeeding fiscal quarter. Subject to Section
4.8, any amount remaining after the payments (and after reserves for returns
and inventory obsolescence) provided for in the preceding sentence will be
distributed to the Members (the “Net Distributions”) in accordance with the
distribution set forth in the following table (the “Distribution Allocation”):

	 	 	 	 	 	 	 	 	 
	 	 	Distributions attributable to	 	 
	 	 	Video Games published	 	Distributions attributable
	 	 	pursuant to the	 	to Video Games published
	Name
	 	Next Action Star License
	 	pursuant to all other titles

	Teknik Digital Arts, Inc.
	 	 	50	%	 	 	60	%
	Playentertainment, L.L.P.
	 	 	50	%	 	 	40	%

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     4.7 Liabilities. Liabilities shall be determined in accordance with GAAP;
provided, that: (i) the Management Committee, in its sole discretion, may
provide reserves for estimated accrued expenses, liabilities, or contingencies,
whether or not in accordance with GAAP, and (ii) Reimbursable Expenses and
Capital Expenditure Distribution Amounts shall constitute obligations of the
JV.

     4.8 Limitation of Distributions. Distributions will be subject to the
provision by the JV for: (i) all JV liabilities in accordance with the Arizona
Act, and (ii) reserves for liabilities taken in accordance with Section 4.7.
The unused portion of any reserve shall be distributed after the Management
Committee has determined that the need therefor has ceased.

     4.9 Allocation of Income and Loss for Tax Purposes. The JV’s ordinary
income and losses, capital gains, other losses, and other items as determined
for Federal income tax purposes (and each item of income, gain, loss, or
deduction entering into the computation thereof) shall be allocated to the
Members in accordance with the Profit/Loss Allocation set forth in Section 4.2.
Notwithstanding the foregoing sentence, Federal income tax items relating to
any Section 704(c) property shall be allocated among the Members in accordance
with Section 704(c) of the Code and Treasury Regulation Section
1.704-1(b)(2)(iv)(g) to take into account the difference between the fair
market value and the tax basis of such Section 704(c) property as of the date
of its revaluation pursuant to Section 4.5(b) hereof. Items described in this
Section 4.9 shall neither be credited nor charged to the Members’ Capital
Accounts.

     4.10 Determination by the Management Committee of Certain Matters. All
matters concerning valuations and the allocation of taxable income, deductions,
credits, Net Profits, and Net Losses among the Members including taxes thereon
and accounting procedures, not expressly provided for by the terms of this
Agreement shall be equitably determined in good faith by the Management
Committee, whose determination shall be final, conclusive, and binding as to
all of the Members.

ARTICLE 5 - MANAGEMENT OF THE JV

     5.1 Management of the JV.

	(a)	 	Management Committee. The business and affairs
of the JV shall be governed in all respects by a committee
(the “Management Committee”) composed of two individuals (the
“Member Representatives”), one of whom shall be appointed by
each Member. The Management Committee shall be responsible
for: (i) formulating the policy of the JV, (ii) determining
initial and annual capital and operating budgets, (iv)
authorizing individuals to carry out all material decisions
regarding JV activities and operations, including decisions
regarding material capital expenditures and investments, and
(iii) monitoring the efforts and progress of such individuals
to determine that such decisions are being properly
implemented. In these regards, each of the Members agrees to
devote the time and to exercise his best reasonable efforts to
cause the JV to achieve its purposes, as set forth in Section
3.3.
	 
	(b)	 	Meetings.

	(i)	 	The Management Committee shall meet
at least once every month, or more or less frequently as
determined by the Member Representatives. Management
Committee meetings may be held in person, by telephone
conference, or by use of similar communications
equipment. Any action required or permitted to be taken
by the Management Committee may be

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	 	 	taken without a meeting if all of the Member
Representatives consent in writing.
	 
	(ii)	 	Special meetings of the Management
Committee may be held upon the call of any Member
Representative for any purpose. Written notice of each
regular and special meeting shall be sent to each Member
Representative not less than twenty-four hours before
such meeting. Notice of any meeting need not be given
to any Member Representative who shall submit, either
before or after the meeting, a signed waiver of notice
or who shall attend the meeting.

	(c)	 	Term of Member Representatives. Each Member
Representative shall hold office until his death, resignation,
retirement, or removal by the Member that appointed him. If a
vacancy shall occur in the Management Committee, the Member
that appointed such vacating Member Representative may appoint
his successor by giving written notice thereof to the other
Member. Similarly, if either Member desires to replace its
appointee, such Member may remove and replace such appointee
at any time by giving written notice thereof to the other
Member.
	 
	(d)	 	Compensation. Member Representatives shall not
receive any salaries, fees, or other compensation or expense
reimbursement from the JV in respect of their service on the
Management Committee; any such compensation and reimbursement
shall be the obligation of the Member designating the
particular Member Representative.
	 
	(e)	 	Quorum. The presence, by proxy, in person, or by
telephone, of both Member Representatives at any regular or
special meeting of the Management Committee shall be necessary
to constitute a quorum.
	 
	(f)	 	Vote. Each Member Representative shall vote the
Participating Interest of the Member that appointed him.

     5.2 Actions of the Management Committee. At any meeting at which a quorum
is present, the Management Committee shall act, except as otherwise provided
herein, upon the vote of both Member Representatives, and such action shall be
binding upon the Members and the JV.

     5.3 Unanimous Consent Matters. The JV shall not take, and the Management
Committee shall not cause the JV to take, any of the following actions without
the consent in favor thereof of both Members:

	(a)	 	waive any provision of this Agreement;
	 
	(b)	 	sell, transfer, or encumber a material part of
the assets of the JV, or cause the JV to merge or consolidate
with any other person or entity;
	 
	(c)	 	admit any additional Members or issue any
additional ownership interests in the JV, except as permitted
in Section 4.4(b)(ii);

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	(d)	 	enter into a joint venture, partnership, or
similar arrangement with any person or entity other than
sales, distribution, and license agreements entered into in
the ordinary course of business of the JV;
	 
	(e)	 	enter into any transaction with, or make or incur
any obligation to make any payment to, a Member or an
affiliate of a Member, other than as expressly provided in
this Agreement;
	 
	(f)	 	merge, reorganize, or restructure the JV, or
register any securities in the JV pursuant to any provision of
any applicable securities laws, except as permitted in Section
4.4(b)(ii); or
	 
	(g)	 	file a petition in voluntary bankruptcy; make an
assignment for the benefit of creditors; consent to the
appointment of a receiver or receivers of a material part of
the property of the JV; or file a petition or answer seeking
reorganization under the federal bankruptcy laws or any other
applicable law or statute of the United States or any State
thereof or any similar laws of any other jurisdiction.

     5.4 Management. The day-to-day operations of the JV, including
manufacturing, marketing, and sales decisions, shall be managed by Teknik.
Teknik shall report regularly to the Management Committee. Teknik shall select
a general manager (the “Manager”) reasonably satisfactory to the other Member
and shall establish such other management positions as Teknik shall deem
appropriate from time to time. The Manager shall be under a fiduciary duty to
conduct the affairs of the JV in the best interests of the JV and its Members,
including the safekeeping of all JV property and the use thereof for the
exclusive benefit of the JV. The Manager may be removed by either Member for
“good cause”, which for purposes of this Agreement shall be limited to an act
relating to the business of the JV which constitutes fraud, gross negligence, a
willful violation of fiduciary duty, a willful usurpation of an opportunity of
the JV, willful misconduct, or a willful failure to follow directions of the
Management Committee. The removal of a Manager shall be effective upon written
notice from either Member. Following removal of a Manager, a new Manager may
be appointed by Teknik subject to Playentertainment’s reasonable satisfaction.
At any time when there is no Manager, the Manager’s responsibilities shall be
vested in Teknik. The Manager shall devote such time and effort as is
necessary for the management of the JV and the conduct of its business in an
efficient, thorough, and businesslike manner, devoting appropriate attention to
all matters affecting the conduct of the JV’s business.

     5.5 Communications. The Members shall promptly advise and inform each
other of any transaction, notice, event, or proposal, other than in the
ordinary course of business of the JV, of which they become aware that directly
relates to the management and operation of the JV or to any assets of the JV,
to the extent any such matter does or could materially affect, either adversely
or favorably, the JV, its business, or its assets.

ARTICLE 6 - COVENANTS

     6.1 Capital Expenditures.

	(a)	 	Teknik shall devote adequate resources to the JV,
subject to its right to rely on JV Financings as provided in
Section 4.4(b), to engage in such Development Activities as
are needed or desirable for the JV to achieve its purposes set
forth in Section 3.3.

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	(b)	 	Consistent with capital budgets approved by the
Management Committee, Teknik shall have the exclusive
authority to commit to and make Capital Expenditures on behalf
of the JV; provided, that a Capital Expenditure in excess of
$100,000.00 shall require the prior written consent of
Playentertainment, such consent not to be unreasonably
withheld. Any equipment or capital assets purchased by Teknik
on behalf of the JV shall be the property of the JV.

     6.2 Improvements; Protection of Rights in Improvements.

	(a)	 	The JV shall devote adequate resources to the
Development Activities in the furtherance of the development
of the Video Games and to the research and development of
Improvements to maximize the exploitation by the JV of the JV
Licenses. Teknik shall present such Improvements to the JV
and shall provide all information regarding such Improvements
reasonably necessary for the JV to determine whether or not to
endeavor to have patent letters issued for such Improvements.
	 
	(b)	 	Playentertainment shall promptly consult with
Teknik on any actions or events that could materially impact
the value of the Existing Playentertainment Licenses assigned
to the JV, including litigation.

ARTICLE 7 - REPRESENTATIONS AND WARRANTIES

     7.1 Playentertainment Representations and Warranties. Playentertainment
hereby represents and warrants to Teknik as follows:

	(a)	 	Due Organization and Good Standing.
Playentertainment is a limited liability partnership duly
organized, validly existing, and in good standing under the
laws of the jurisdiction of its organization and has full
power and authority to own its assets and properties and to
carry on its business as now conducted. Playentertainment is
duly qualified as a foreign limited liability partnership to
transact business, and is in good standing, in each
jurisdiction where the character of its properties, owned or
leased, or the nature of its activities makes such
qualification necessary, except where the failure to be so
qualified would not have an adverse effect material to
Playentertainment.
	 
	(b)	 	Authorization and Validity of Agreements.
Playentertainment has the full corporate power and authority
to enter into, execute, and deliver this Agreement and the
Playentertainment Assignment and to perform fully its
obligations hereunder and thereunder. The execution,
delivery, and performance of this Agreement and the
Playentertainment Assignment, and the consummation of the
transactions contemplated hereby and thereby, have been duly
authorized by all necessary action on the part of
Playentertainment. No other action is necessary for the
authorization, execution, delivery, and performance by
Playentertainment of this Agreement and the Playentertainment
Assignment and the consummation by Playentertainment of the
transactions contemplated hereby and thereby. This Agreement
and the Playentertainment Assignment have been duly executed
and delivered by Playentertainment and constitute valid and
legally binding obligations of Playentertainment enforceable
against it in accordance with their terms.

11

 

	(c)	 	No Governmental Approvals or Notices. Neither
the execution and delivery by Playentertainment of this
Agreement and the Playentertainment Assignment, the
performance by Playentertainment of its obligations hereunder
and thereunder, nor the performance by Playentertainment of
any action contemplated hereby or thereby requires any
consent, approval, order, or authorization of, or registration
or filing with, or the giving of notice to, any governmental
or public body or authority.
	 
	(d)	 	No Conflict. Neither the execution and delivery
by Playentertainment of this Agreement and the
Playentertainment Assignment, the performance by
Playentertainment of its obligations hereunder and thereunder,
nor the performance by Playentertainment of any action
contemplated hereby or thereby will: (i) violate (with or
without the giving of notice or the lapse of time or both) any
law, rule, regulation, order, judgment, or decree, or (ii)
conflict with or result in the breach or violation of, or
constitute (or with or without the giving of notice or the
lapse of time, or both, would constitute) a default under: (x)
the partnership agreement of Playentertainment, or (y) any
instrument, contract, or other agreement to which
Playentertainment is a party or by or to which its assets or
properties are bound or subject, including without limitation
the Next Action Star License and the Fear Factor License.

     7.2 Teknik Representations and Warranties. Teknik hereby represents and
warrants to Playentertainment as follows:

	(a)	 	Due Organization and Good Standing.
Playentertainment is a limited liability partnership duly
organized, validly existing, and in good standing under the
laws of the jurisdiction of its organization and has full
power and authority to own its assets and properties and to
carry on its business as now conducted. Playentertainment is
duly qualified as a foreign limited liability partnership to
transact business, and is in good standing, in each
jurisdiction where the character of its properties, owned or
leased, or the nature of its activities makes such
qualification necessary, except where the failure to be so
qualified would not have an adverse effect material to
Playentertainment.
	 
	(b)	 	Authorization and Validity of Agreements. Teknik
has the full authority to enter into, execute, and deliver
this Agreement and to perform fully its obligations hereunder.
No other action is necessary for: (i) the authorization,
execution, delivery, and performance by Teknik of this
Agreement, or (ii) the consummation by Teknik of the
transactions contemplated hereby. This Agreement has been
duly executed and delivered by Teknik and constitutes a valid
and legally binding obligation of Teknik enforceable against
it in accordance with its terms.
	 
	(c)	 	No Governmental Approvals or Notices. Neither
the execution and delivery by Teknik of this Agreement, the
performance by Teknik of its obligations hereunder, nor the
performance by Teknik of any action contemplated hereby,
requires any consent, approval, order, or authorization of, or
registration or filing with, or the giving of notice to, any
governmental or public body or authority.
	 
	(d)	 	No Conflict. Neither the execution and delivery
by Teknik of this Agreement, the performance by Teknik of its
obligations hereunder, nor the performance by

12

 

	 	 	Teknik of any action contemplated hereby will: (i) violate
(with or without the giving of notice or the lapse of time or
both) any law, rule, regulation, order, judgment, or decree,
or (ii) conflict with or result in the breach or violation
of, or constitute (or with or without the giving of notice or
the lapse of time, or both, would constitute) a default under
any instrument, contract, or other agreement to which Teknik
is a party or by or to which his assets or properties are
bound or subject.

ARTICLE 8 - TERM AND TERMINATION

     8.1 Term. The JV shall continue to operate for an initial term of ten
years (the “Initial Term”), subject to earlier termination as set forth herein.
If not terminated during or at the end of the Initial Term, the JV shall
continue to operate for additional five year terms (“Additional Terms”).

     8.2 Termination. The JV shall be dissolved as set forth below:

	(a)	 	by the mutual agreement of both Members;
	 
	(b)	 	by the remaining Member, in the event the JV is
required by a court of competent jurisdiction to recognize an
Unauthorized Transfer, as set forth under Article 9.2 hereof;
	 
	(c)	 	by the remaining Member, in the event the other
Member withdraws, pursuant to Article 9.4 hereof;
	 
	(d)	 	upon a Change of Control of Teknik;
	 
	(e)	 	upon the exercise by Playentertainment of its
Membership Interest Conversion Rights under Article 10 of this
Agreement; or
	 
	(f)	 	upon the giving of at least ninety days’ prior
written notice:

	(i)	 	by either of the Members, effective
at the end of the Initial Term or any Additional Term,
	 
	(ii)	 	by either Member in the event the
other Member has materially breached its obligations
under this Agreement and fails to cure such breach
within thirty days of receipt of notice from the
non-breaching Member of such breach,
	 
	(iii)	 	by either Member at any time
following the end of the first year of the Initial Term
if the JV does not secure JV Financing adequate to fund
the activities of JV, but only if Teknik is not funding
the Reimbursable Expenses of the JV, or
	 
	(iv)	 	by either Member in the event the
other Member is in bankruptcy proceedings or has entered
into an assignment for the distribution of assets to
creditors.

     8.3 Dissolution. In the event the JV is dissolved, Playentertainment shall
serve as the managing Member over such dissolution (the “Liquidating Member”)
for the JV: (i) to liquidate all

13

 

inventory, and (ii) to sell any equipment and other assets owned by the
JV. Upon the dissolution of the JV, the Liquidating Member shall pay out of JV
assets, first the expenses of winding up, liquidation, and dissolution of the
JV, and thereafter all of the remaining assets of the JV shall be distributed
in the following order:

     (a) to creditors, including the Members, in the order of priority as
provided by law; provided, that repayment of Capital Expenditure Distribution
Amounts and Reimbursable Expenses to Members shall be made in accordance with
the Distribution Allocation, as set forth in Section 4.6; and provided further,
that the excess of the amount of any Capital Expenditure over the prior
distributions of Capital Expenditure Distribution Amounts made with respect to
such Capital Expenditure shall be deemed to be a Capital Expenditure
Distribution Amount for purposes of this Section 8.3(a); and

     (b) to each Member in an amount equal to such Member’s Capital Account and
thereafter in accordance with their respective Distribution Allocation, as set
forth in Section 4.6. Any gain or loss attributable to the termination of the
JV shall be allocated among the Members in accordance with their respective
Profit/Loss Allocation, as set forth in Section 4.2.

ARTICLE 9 - TRANSFERS OF PARTICIPATING INTERESTS; WITHDRAWAL

     9.1 Transfers of Participating Interests.

	(a)	 	Death, Divorce, or Bankruptcy of a Member.

	(i)	 	In the event of the death of a Member
(which for purposes of this Section 9.1 shall be deemed
to cover the death, divorce, or bankruptcy of an
individual owning a controlling interest in a Member
that is a business entity), where the Participating
Interest owned by the bankrupt or divorcing Member is or
would be transferred in any manner to any other person
as a result of the death, divorce, or bankruptcy of the
Member (the deceased, divorcing, or bankrupt Member is
referred to as the “Withdrawing Member”), the JV shall
have the option to purchase and acquire from the estate
of the Withdrawing Member, the Member, or any other
person, all of the Participating Interest which the
Withdrawing Member owned at the time of his death,
divorce, or bankruptcy at the price and upon the terms
and conditions set forth herein. Such purchase shall be
closed within thirty days following the death of the
Withdrawing Member or the agreement or order authorizing
or compelling the transfer of the Member’s Participating
Interest as a result of the divorce or bankruptcy of the
Withdrawing Member. The Participating Interest subject
to the obligations set forth in the preceding sentence
shall be referred to herein as the “Subject Interest.”
In the event that the JV shall be prohibited by law from
purchasing the Subject Interest, or any portion thereof
or elect not to purchase the Subject Interest, or any
portion thereof, the remaining Member of the JV shall
have the option to purchase and acquire the Subject
Interest or the portion thereof which the JV does not
purchase at the same price and upon the same terms and
conditions applicable to the purchase thereof by the JV.
Upon the occurrence of any of the foregoing, the
Withdrawing Member or the personal representative of the
Member shall be obligated to sell and convey the Subject
Interest to the JV or the remaining Member at such price
and upon the terms and conditions hereinafter set forth.

14

 

	(ii)	 	The purchase price for the Subject
Interest shall be that price agreed to by the
Withdrawing Member, the personal representative of the
Withdrawing Member, or any other legal representative of
the Withdrawing Member, as applicable, and the JV or the
remaining Member, as applicable.

	(b)	 	Death of a Member’s Spouse.
	 
	 	 	In the event of the death of a spouse (the “Deceased Spouse”)
of a Member (the “Member Spouse”) under circumstances in
which by the will of the Deceased Spouse or by the laws of
intestate succession the community interest of the Deceased
Spouse in any Member’s Participating Interest would pass to
or vest in a person other than the Member Spouse, either
legally or beneficially, the Member Spouse shall have the
option to purchase from such other person or the estate of
the Deceased Spouse the community interest of the Deceased
Spouse in such Participating Interest, and such other person
and/or the estate of such Deceased Spouse shall sell any
Member’s Participating Interest to the Member Spouse, at the
price determined in accordance with Section 9.1(a)(ii).
	 
	(c)	 	Divorce of a Member.
	 
	 	 	In the event of the divorce of a person that has ownership
in, or contractual rights to control, a Member (the “Divorced
Member”) under circumstances in which such person’s spouse
(the “Divorced Spouse”) has or receives any interest in or to
any Member’s Participating Interest by community property
rights or otherwise, the Divorced Member shall have the
option to purchase from the Divorced Spouse any and all
interest of the Divorced Spouse in or to any Member’s
Participating Interest, and the Divorced Spouse shall sell
any such interest in and to such Member’s Participating
Interest to the Divorced Member, at the price determined in
accordance with Section 9.1(a)(ii).
	 
	(d)	 	Liens and Security Interests.
	 
	 	 	No Member shall pledge, mortgage, hypothecate, or grant (or
permit or suffer to attach) any lien or security interest in
his or her Participating Interest without the prior written
consent of the other Member, which approval shall not be
unreasonably withheld.
	 
	(e)	 	Parties Bound.
	 
	 	 	The provisions of this Section 9.1 shall be binding on each
Member of the JV, and on the spouses, heirs, executors,
administrators, successors, and assigns of each such Member.

     9.2 Unauthorized Transfers. Any purported transfer of any Member’s
Participating Interest which does not comply with the conditions set forth in
Section 9.1 (an “Unauthorized Transfer”) shall be null and void and of no force
or effect whatsoever; provided, that if the JV is required by a court of
competent jurisdiction to recognize an Unauthorized Transfer, then the person
to whom such Participating Interest is transferred shall have only the rights
of an assignee with respect to such Interest, and the remaining Member may
terminate this Agreement pursuant to Section 8.2. Any distributions with
respect

15

 

to such transferred Participating Interest may be applied (without
limiting any other legal or equitable rights of the JV) towards the
satisfaction of any debts, obligations, or liabilities for damages that the
transferor or transferee of such transferred Participating Interest may have to
the JV.

     9.3 Rights of Assignee. An assignee under Section 9.2 shall be entitled
to distributions pursuant to Article 4 with respect to the Participating
Interest transferred to such assignee. An assignee, in such capacity: (a)
shall have no right to vote or otherwise participate in JV matters, (b) shall
take no part in the management of the JV’s business and affairs or transact any
business on behalf of the JV, (c) shall have no right to any notices provided
hereunder, (d) shall have no power to sign on behalf of, or to bind, the JV,
(e) shall have no right to any information or accounting of the affairs of the
JV, (f) shall not be entitled to inspect the books or records of the JV, and
(g) shall not have any other rights of a Member under the Arizona Act or this
Agreement, other than those described in the first sentence of this Section
9.3.

     9.4 Withdrawal of Members. Except as provided herein, a Member shall have
the right to withdraw from the JV, but shall have no right to withdraw capital
from the JV. Upon the written notice of a Member to withdraw, the remaining
Member may terminate this Agreement pursuant to Section 8.2. Upon the written
notice of a Member to withdraw and the continuation of the JV by the remaining
Member, the withdrawn Member shall not receive any distribution for its
Participating Interest, shall no longer be obligated to make additional capital
contributions, shall remain obligated for liabilities and obligations incurred
or accrued hereunder or by the JV prior to such withdrawal, and shall have (or
may exercise) only those rights, if any, determined by the remaining Member.
        .

ARTICLE 10 - CONVERSION OF JV INTERESTS

     10.1 Membership Interest Conversion Right. Commencing one year after the
date of this Agreement, Playentertainment shall have the right (the “Membership
Interest Conversion Right”), at its option at any time, to convert its
Membership Interest (except that upon any liquidation of the JV the right of
conversion shall terminate at the close of business on the business day fixed
for payment of the amount distributable to the Members) into such number of
fully paid and nonassessable shares of Common Stock obtained by dividing the
value of Playentertainment’s Membership Interest (the “Membership Interest
Conversion Value”) by the prior 90 day average market price per share of the
Common Stock on a recognized stock exchange at the time of conversion if
Teknik is a publicly traded company, or if private, as determined in good
faith by the Board of Directors of Teknik. For purposes of this Article 10,
the Membership Interest Conversion Value shall be the greater of, but not to
exceed 50% of the outstanding common stock:

	(a)	 	twenty (20) times the share of the net pre-tax
earnings of the JV for the most recent Fiscal Year allocated
to Playentertainment; and
	 
	(b)	 	five (5) times the share of the gross revenues of
the JV for the most recent Fiscal Year allocated to
Playentertainment.

Such right of conversion shall be exercised by Playentertainment by giving
written notice to Teknik of its election to convert its Membership Interest
into Common Stock at any time during Teknik’s usual business hours on the date
set forth in such notice, together with a statement of the name or names (with
address) in which the certificate or certificates for shares of Common Stock
shall be issued.

     10.2 Issuance of Certificates; Time Conversion Effected. Promptly after
the receipt of the written notice referred to in Section 10.1 of the Membership
Interest to be converted, Teknik shall issue

16

 

and deliver, or cause to be issued and delivered, to Playentertainment,
registered in such name or names as Playentertainment may direct, a certificate
or certificates for the number of whole shares of Common Stock issuable upon
the conversion of the Membership Interest. To the extent permitted by law,
such conversion shall be deemed to have been effected and the Membership
Interest Conversion Value and the per share value of the Common Stock shall be
determined as of the close of business on the date on which such written notice
shall have been received by Teknik, and at such time the rights of
Playentertainment in respect of the JV shall cease, and the person or persons
in whose name or names any certificate or certificates for shares of Common
Stock shall be issuable upon such conversion shall be deemed to have become the
holder or holders of record of the shares of Common Stock represented thereby.

     10.3 No Fractional Shares. No fractional shares shall be issued upon
conversion of the Membership Interest into Common Stock. If any fractional
share of Common Stock would, except for the provisions of the first sentence of
this Section 10.3, be delivered upon such conversion, Teknik, in lieu of
delivering such fractional share, shall pay to Playentertainment upon
conversion an amount in cash equal to the current market price of such
fractional share as determined in good faith by the Board of Directors of
Teknik.

     10.4 Change of Control of Teknik. Upon a Change of Control of Teknik,
Playentertainment shall have the right to exercise its Membership Interest
Conversion Right under this Article 10 following the Change of Control but
prior to the dissolution of the JV.

ARTICLE 11 - MISCELLANEOUS

     11.1 Confidentiality. Each Member agrees that it shall not, directly or
indirectly, without the prior written consent of the other Member, use for its
own benefit (except as a Member) or disclose to any person any information,
trade secrets, confidential customer information, patents, patent rights,
Technical Data, or Know-How relating to the products, processes, methods,
equipment, or business practices of the JV or the other Member, except: (a) to
the extent the Member can clearly show any of the foregoing is, or has become,
available to the public other than as a result of disclosure by such Member or
any of its affiliates or the directors, officers, employees, agents, advisors,
and controlling persons of it or any of its affiliates, (b) as may be required
by law, (c) as a Member may disclose to its business, financial, and legal
advisors (under confidentiality agreements, as appropriate or necessary), or
(d) to the extent the Member can clearly show any of the foregoing is received
by such Member in a non-confidential manner from a third party having the right
to disclose such information, or was already in such Member’s possession prior
to negotiations related to this Agreement. If a Member is required by
applicable law or regulation or by legal process to disclose any of the
foregoing, it will provide the other Member with prompt notice thereof, to the
extent practicable under the circumstances, to enable it to seek an appropriate
protective order. In the event the JV is dissolved, each Member shall return
to the other Member all confidential documents (and all copies thereof) in its
possession, or will certify to the others that all such documents not returned
have been destroyed. This confidentiality provision shall survive the
expiration or termination of this Agreement for a period of five years.

     11.2 Public Announcements. Except as may otherwise be required by law,
neither Member shall make any public announcement with respect to the JV or any
of the transactions contemplated by this Agreement or the agreements entered
into in connection herewith without the prior consent of the other Member.

     11.3 Affiliate Transactions. The Members shall not cause or permit the JV
to enter into any agreement or arrangement with a Member or any affiliate
thereof, other than on commercially reasonable arms-length terms.

17

 

     11.4 Books and Records. The books and records of the JV shall be
maintained by Teknik at the principal offices of the JV. Playentertainment
shall have the right to inspect, audit, and copy said books and records upon
reasonable notice and at reasonable times. Within forty-five days after the
close of each fiscal quarter, Teknik or the Manager shall provide each Member
with a balance sheet, income statement, and statement of sources and uses of
cash for the month then ended, together with a comparison of actual and
budgeted results. Within ninety days following the end of each fiscal year,
Teknik or the Manager shall provide each Member with the statements required
above for the year then ended, together with a comparison of actual and
budgeted results. The Manager shall provide the Members with such additional
reports and information relating to the JV as the Members may reasonably
request from time to time in writing.

     11.5 Tax Matters; Accountants. The accountants for the JV shall be the
accounting firm selected by the Management Committee. All tax returns of the
JV shall be prepared by such accounting firm. As soon as practicable after the
end of each year, the Manager or the Accountants shall provide all Members with
all information necessary to complete the income tax returns for the JV and the
Member’s taxable income or loss, deductions, and other items relating to the
operating results of the JV. The Manger or the Accountants shall cause all
income tax returns for the JV to be prepared and timely filed, and shall
furnish a copy thereof to each Member promptly after the filing thereof. The
Members intend that the JV be treated as a partnership for Federal income tax
purposes. The JV shall maintain a capital account for each Member in
accordance with Treasury Regulation Section 1.704-1(b). The JV’s taxable
income and tax losses shall be allocated pro rata based on Participating
Interests. Teknik shall be designated to act as the “Tax Matters Partner”
within the meaning of Section 623(a)(7) of the Internal Revenue Code of 1986,
as amended. Distributions made in connection with a sale of all or
substantially all of the JV’s assets or a liquidation of the JV shall be made
in accordance with the Capital Account balances of the Members within the time
period set forth in Treasury Regulation Section 1.704-1(b)(2)(ii)(B)(3).

     11.6 Benefits of Agreement. None of the provisions of this Agreement
shall be for the benefit of or enforceable by any creditor of the JV or of any
Member.

     11.7 Integration. This Agreement constitutes the entire agreement among
the parties hereto pertaining to the subject matter hereof and supersedes all
prior and contemporaneous agreements and understandings of the parties in
connection therewith

     11.8 Headings. The headings in this Agreement are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.

     11.9 Counterparts. This Agreement may be executed by the parties hereto
in counterparts, each of which shall be considered an original, and all of
which shall together constitute but one and the same instrument.

     11.10 Notices. All notices or other communications relating to this
Agreement shall be in writing and shall be deemed to have been duly given upon
receipt by personal delivery, facsimile transmission, or by registered,
certified, or express mail, postage prepaid, addressed as set forth in Section
3.4. Any party may change the address to which such notices are to be sent by
giving written notice of such change in the manner provided herein for giving
notice

     11.11 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Arizona, without giving effect to
the conflicts of law principles of such State.

18

 

     11.12 Tax Code References. References to sections of the U.S. Tax Code
or Treasury Regulations shall be deemed to be references to any amendments or
substitutions thereof.

     11.13 Amendments. This Agreement may be amended only by unanimous vote of
the Management Committee.

19

 

     IN WITNESS WHEREOF, the undersigned have duly executed this Joint Venture
and Limited Liability Company Agreement as of the date first written above.

MEMBERS:

	 	 	 	 	 	 	 
	TEKNIK DIGITAL ARTS, INC.	 	PLAYENTERTAINMENT, L.L.P.
	 
	 	 	 	 	 	 
	By:

	 	 	 	By:	 	 
	

	 	

	 	 	 	

	Name: John Ward	 	Name: Lawrence E. Meyers
	Title: President	 	Title: General Manager
	 
	 	 	 	 	 	 
	

	 	 	 	By:	 	 
	

	 	 	 	 	 	

	 	 	 	 	Name: Lawrence L. Kohler
	 	 	 	 	Title: General Manager
	 
	 	 	 	 	 	 
	NAS, L.P.	 	PLAYINTERACTIVE, L.L.P.
	 
	 	 	 	 	 	 
	By:

	 	 	 	By:	 	 
	

	 	

	 	 	 	

	Name: Lawrence E. Meyers	 	Name: Lawrence E. Meyers
	Title: General Manager	 	Title: General Manager
	 
	 	 	 	 	 	 
	By:

	 	 	 	By:	 	 
	

	 	

	 	 	 	

	Name: Lawrence L. Kohler	 	Name: Lawrence L. Kohler
	Title: General Manager	 	Title: General Manager

20exv10w4

 

Exhibit 10.4

TENIK DIGITAL ARTS INC.

2004 STOCK OPTION PLAN

     1. Establishment, Purpose and Term of Plan.

          1.1 Establishment. The Teknik Digital Arts Inc. 2004 Stock Option Plan
(the “Plan”) is hereby established effective as of December 31, 2003.

          1.2 Purpose. The purpose of the Plan is to advance the interests of the
Participating Company Group and its stockholders by providing an incentive to
attract, retain and reward officers, directors, and key employees performing
services for the Participating Company Group and by motivating such persons to
contribute to the growth and profitability of the Participating Company Group.

          1.3 Term of Plan. The Plan shall continue in effect until the earlier of
its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed. However, all Options shall be granted, if
at all, within ten (10) years from the earlier of the date the Plan is adopted
by the Board or the date the Plan is duly approved by the stockholders of the
Company.

     2. Definitions and Construction.

          2.1 Definitions. Whenever used herein, the following terms shall have
their respective meanings set forth below:

               (a) “Board” means the Board of Directors of the Company. If one or more
Committees have been appointed by the Board to administer the Plan, “Board”
also means such Committee(s).

               (b) “Code” means the Internal Revenue Code of 1986, as amended, and any
applicable regulations promulgated thereunder.

               (c) “Committee” means the Compensation Committee or other committee of the
Board duly appointed to administer the Plan and having such powers as shall be
specified by the Board. Unless the powers of the Committee have been
specifically limited, the Committee shall have all of the powers of the Board
granted herein, including, without limitation, the power to amend or terminate
the Plan at any time, subject to the terms of the Plan and any applicable
limitations imposed by law.

               (d) “Company” means Teknik Digital Arts Inc., a Nevada corporation, or any
successor corporation thereto.

1

 

               (e) “Director” means a member of the Board or of the board of directors of
any other Participating Company.

               (f) “Disability” means the inability of the Optionee, in the opinion of a
qualified physician acceptable to the Company, to perform the major duties of
the Optionee’s position with the Participating Company Group because of the
sickness or injury of the Optionee.

               (g) “Employee” means any person treated as an employee (including an
Officer or a Director who is also treated as an employee) in the records of a
Participating Company and, with respect to any Incentive Stock Option granted
to such person, who is an employee for purposes of Section 422 of the Code;
provided, however, that neither service as a Director nor payment of a
director’s fee shall be sufficient to constitute employment for purposes of the
Plan. The Company shall determine in good faith and in the exercise of its
discretion whether an individual has become or has ceased to be an Employee and
the effective date of such individual’s employment or termination of
employment, as the case may be. For purposes of an individual’s rights, if
any, under the Plan as of the time of the Company’s determination, all such
determinations by the Company shall be final, binding and conclusive,
notwithstanding that the Company or any court of law or governmental agency
subsequently makes a contrary determination.

               (h) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

               (i) “Fair Market Value” means, as of any date, the value of a share of
Stock or other property as determined by the Board, in its discretion, or by
the Company, in its discretion, if such determination is expressly allocated to
the Company herein, subject to the following:

                    (i) If, on such date, the Stock is listed on a national or regional
securities exchange or market system, the Fair Market Value of a share of Stock
shall be the closing price of a share of Stock (or the mean of the closing bid
and asked prices of a share of Stock if the Stock is so quoted instead) as
quoted on the Nasdaq National Market, The Nasdaq SmallCap Market or such other
national or regional securities exchange or market system constituting the
primary market for the Stock, as reported in The Wall Street Journal or such
other source as the Company deems reliable. If the relevant date does not fall
on a day on which the Stock has traded on such securities exchange or market
system, the date on which the Fair Market Value shall be established shall be
the last day on which the Stock was so traded prior to the relevant date, or
such other appropriate day as shall be determined by the Board, in its
discretion.

                    (ii) If, on such date, the Stock is not listed on a national or regional
securities exchange or market system, the Fair Market Value of a share of Stock
shall be

2

 

as determined by the Board in good faith without regard to any restriction
other than a restriction which, by its terms, will never lapse.

               (j) “Incentive Stock Option” means an Option intended to be (as set forth
in the Option Agreement), and which qualifies as, an incentive stock option
within the meaning of Section 422(b) of the Code.

               (k) “Insider” means an Officer, a Director of the Company or other person
whose transactions in Stock are subject to Section 16 of the Exchange Act.

               (l) “Key Employee” means any Employee determined by the Board to be key to
any portion of the Participating Company business (including an Officer or a
Director who is also treated as a key employee) and, with respect to any
Incentive Stock Option granted to such person, who is an employee for purposes
of Section 422 of the Code; provided, however, that neither service as a
Director nor payment of a director’s fee shall be sufficient to constitute
employment for purposes of the Plan. The Board shall determine in its complete
discretion whether any individual has become or has ceased to be a Key Employee
and the effective date of such individual’s employment or termination of
employment, as the case may be. For purposes of an individual’s rights, if
any, under the Plan as of the time of the Board’s determination, all such
determinations by the Board shall be final, binding and conclusive,
notwithstanding that the Board, the Company or any court of law or governmental
agency subsequently makes a contrary determination

               (m) “Nonstatutory Stock Option” means an Option not intended to be (as set
forth in the Option Agreement) or which does not qualify as an Incentive Stock
Option.

               (n) “Officer” means any person designated by the Board as an officer of
the Company.

               (o) “Option” means a right to purchase Stock pursuant to the terms and
conditions of the Plan. An Option may be either an Incentive Stock Option or a
Nonstatutory Stock Option.

               (p) “Option Agreement” means a written agreement between the Company and
an Optionee setting forth the terms, conditions and restrictions of the Option
granted to the Optionee and any shares acquired upon the exercise thereof. An
Option Agreement may consist of a form of “Notice of Grant of Stock Option” and
a form of “Stock Option Agreement” incorporated therein by reference, or such
other form or forms as the Board may approve from time to time.

               (q) “Optionee” means a person who has been granted one or more Options.

               (r) “Parent Corporation” means any present or future “parent corporation”
of the Company, as defined in Section 424(e) of the Code.

3

 

               (s) “Participating Company” means the Company or any Parent Corporation or
Subsidiary Corporation.

               (t) “Participating Company Group” means, at any point in time, all
corporations collectively which are then Participating Companies.

               (u) “Rule 16b-3” means Rule 16b-3 under the Exchange Act, as amended from
time to time, or any successor rule or regulation.

               (v) “Securities Act” means the Securities Act of 1933, as amended.

               (w) “Service” means an Optionee’s employment or service with the
Participating Company Group, whether in the capacity of an Employee, a Key
Employee, an Officer, a Director or a Consultant. An Optionee’s Service shall
not be deemed to have terminated merely because of a change in the capacity in
which the Optionee renders Service to the Participating Company Group or a
change in the Participating Company for which the Optionee renders such
Service, provided that there is no interruption or termination of the
Optionee’s Service. Furthermore, an Optionee’s Service with the Participating
Company Group shall not be deemed to have terminated if the Optionee takes any
military leave, sick leave, or other bona fide leave of absence approved by the
Company; provided, however, that if any such leave exceeds ninety (90) days, on
the ninety-first (91st) day of such leave the Optionee’s Service shall be
deemed to have terminated unless the Optionee’s right to return to Service with
the Participating Company Group is guaranteed by statute or contract.
Notwithstanding the foregoing, unless otherwise designated by the Company or
required by law, a leave of absence shall not be treated as Service for
purposes of determining vesting under the Optionee’s Option Agreement. The
Optionee’s Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee performs
Service ceasing to be a Participating Company. Subject to the foregoing, the
Company, in its discretion, shall determine whether the Optionee’s Service has
terminated and the effective date of such termination.

               (x) “Stock” means the common stock of the Company, as adjusted from time
to time in accordance with Section 4.2.

               (y) “Stock Appreciation Right” means the right, exercisable by a
Participant, to receive a cash payment from the Company upon the exercise of an
Option in the manner, and upon such terms and conditions, as are specified by
the Committee.

               (z) “Subsidiary Corporation” means any present or future “subsidiary
corporation” of the Company, as defined in Section 424(f) of the Code.

               (aa) “Ten Percent Owner Optionee” means an Optionee who, at the time an
Option is granted to the Optionee, owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.

4

 

          2.2 Construction. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular.
Use of the term “or” is not intended to be exclusive, unless the context
clearly requires otherwise.

     3. Administration.

          3.1 Administration by the Board. The Plan shall be administered by the
Board. All questions of interpretation of the Plan or of any Option shall be
determined by the Board, and such determinations shall be final and binding
upon all persons having an interest in the Plan or such Option.

          3.2 Authority of Officers. Any Officer shall have the authority to act on
behalf of the Company with respect to any matter, right, obligation,
determination or election which is the responsibility of or which is allocated
to the Company herein, provided the Officer has apparent authority with respect
to such matter, right, obligation, determination or election.

          3.3 Powers of the Board. In addition to any other powers set forth in the
Plan and subject to the provisions of the Plan, the Board shall have the full
and final power and authority, in its discretion:

               (a) to determine the persons to whom, and the time or times at which,
Options shall be granted and the number of shares of Stock to be subject to
each Option;

               (b) to designate Options as Incentive Stock Options or Nonstatutory Stock
Options;

               (c) to determine the Fair Market Value of shares of Stock or other
property;

               (d) to determine the terms, conditions and restrictions applicable to each
Option (which need not be identical) and any shares acquired upon the exercise
thereof, including, without limitation, (i) the exercise price of the Option,
(ii) the method of payment for shares purchased upon the exercise of the
Option, (iii) the method for satisfaction of any tax withholding obligation
arising in connection with the Option or such shares, including by the
withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee’s termination of Service with the
Participating Company Group on any of the foregoing, (vii) whether a Stock
Appreciation Right will be granted in conjunction with such Option, and (viii)
all other terms, conditions and restrictions applicable to the Option or such
shares not inconsistent with the terms of the Plan;

               (e) to approve one or more forms of Option Agreement;

5

 

               (f) to amend, modify, extend, cancel or renew any Option or to waive any
restrictions or conditions applicable to any Option or any shares acquired upon
the exercise thereof;

               (g) to accelerate, continue, extend or defer the exercisability of any
Option or the vesting of any shares acquired upon the exercise thereof,
including with respect to the period following an Optionee’s termination of
Service with the Participating Company Group;

               (h) to prescribe, amend or rescind rules, guidelines and policies relating
to the Plan, or to adopt supplements to, or alternative versions of, the Plan,
including, without limitation, as the Board deems necessary or desirable to
comply with the laws of, or to accommodate the tax policy or custom of, foreign
jurisdictions whose citizens may be granted Options; and

               (i) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent not inconsistent with the
provisions of the Plan or applicable law.

          3.4 Administration with Respect to Insiders. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if
any, of Rule 16b-3.

          3.5 Indemnification. In addition to such other rights of indemnification
as they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board or
the Company is delegated shall be indemnified by the Company against all
reasonable expenses, including attorneys’ fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or
in connection with any appeal therein, to which they or any of them may be a
party by reason of any action taken or failure to act under or in connection
with the Plan, or any right granted hereunder, and against all amounts paid by
them in settlement thereof (provided such settlement is approved by independent
legal counsel selected by the Company) or paid by them in satisfaction of a
judgment in any such action, suit or proceeding, except in relation to matters
as to which it shall be adjudged in such action, suit or proceeding that such
person is liable for gross negligence, bad faith or intentional misconduct in
duties; provided, however, that within sixty (60) days after the institution of
such action, suit or proceeding, such person shall offer to the Company, in
writing, the opportunity at its own expense to handle and defend the same.

6

 

     4. Shares Subject to Plan.

          4.1 Maximum Number of Shares Issuable. Subject to adjustment as provided
in Section 4.2, the maximum aggregate number of shares of Stock that may be
issued under the Plan shall be one million (1,000,000) and shall consist
of authorized but unissued or reacquired shares of Stock or any combination
thereof. If an outstanding Option for any reason expires or is terminated or
canceled or if shares of Stock are acquired upon the exercise of an Option
subject to a Company repurchase option and are repurchased by the Company at
the Optionee’s exercise price, the shares of Stock allocable to the unexercised
portion of such Option or such repurchased shares of Stock shall again be
available for issuance under the Plan. However, except as adjusted pursuant to
Section 4.2, in no event shall more than two million (2,000,000) shares of
Stock be available for issuance pursuant to the exercise of Incentive Stock
Options (the “ISO Share Issuance
Limit”).

          4.2 Adjustments for Changes in Capital Structure. In the event of any
stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of
shares subject to the Plan and to any outstanding Options, in the ISO Share
Issuance Limit set forth in Section 4.1, and in the exercise price per share of
any outstanding Options. If a majority of the shares which are of the same
class as the shares that are subject to outstanding Options are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event, as defined in Section 8.1) shares of another corporation (the
“New Shares”), the Board may unilaterally amend the outstanding Options to
provide that such Options are exercisable for New Shares. In the event of any
such amendment, the number of shares subject to, and the exercise price per
share of, the outstanding Options shall be adjusted in a fair and equitable
manner as determined by the Board, in its discretion. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 4.2 shall be rounded down to the nearest whole number, and in no event
may the exercise price of any Option be decreased to an amount less than the
par value, if any, of the stock subject to the Option. The adjustments
determined by the Board pursuant to this Section 4.2 shall be final, binding
and conclusive.

     5. Eligibility and Option Limitations.

          5.1 Persons Eligible for Options. Options may be granted only to Key
Employees, Officers and Directors. For purposes of the foregoing sentence,
“Key Employees,” “Officers” and “Directors” shall include prospective Key
Employees, prospective Officers and prospective Directors to whom Options are
granted in connection with written offers of an employment or other service
relationship with the Participating Company Group. Eligible persons may be
granted more than one (1) Option. However, eligibility in accordance with this
Section shall not entitle any person to be granted an Option, or, having been
granted an Option, to be granted an additional Option.

          5.2 Option Grant Restrictions. Any person who is not an Employee on the
effective date of the grant of an Option to such person may be granted only a
Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective
Key Employee upon the condition

7

 

that such person become a Key Employee shall be deemed granted effective
on the date such person commences Service with a Participating Company, with an
exercise price determined as of such date in accordance with Section 6.1.

          5.3 Fair Market Value Limitation. To the extent that options designated
as Incentive Stock Options (granted under all stock option plans of the
Participating Company Group, including the Plan) become exercisable by an
Optionee for the first time during any calendar year for stock having a Fair
Market Value greater than One Hundred Thousand Dollars ($100,000), the portions
of such options which exceed such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5.3, options designated as Incentive
Stock Options shall be taken into account in the order in which they were
granted, and the Fair Market Value of stock shall be determined as of the time
the option with respect to such stock is granted. If the Code is amended to
provide for a different limitation from that set forth in this Section 5.3,
such different limitation shall be deemed incorporated herein effective as of
the date and with respect to such Options as required or permitted by such
amendment to the Code. If an Option is treated as an Incentive Stock Option in
part and as a Nonstatutory Stock Option in part by reason of the limitation set
forth in this Section 5.3, the Optionee may designate which portion of such
Option the Optionee is exercising. In the absence of such designation, the
Optionee shall be deemed to have exercised the Incentive Stock Option portion
of the Option first. Separate certificates representing each such portion
shall be issued upon the exercise of the Option.

     6. Terms and Conditions of Options.

          Options shall be evidenced by Option Agreements specifying the number of
shares of Stock covered thereby, in such form as the Board shall from time to
time establish. No Option or purported Option shall be a valid and binding
obligation of the Company unless evidenced by a fully executed Option
Agreement. Option Agreements may incorporate all or any of the terms of the
Plan by reference and shall comply with and be subject to the following terms
and conditions:

          6.1 Exercise Price. The exercise price for each Option shall be
established in the discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option and (b) no Incentive Stock Option granted to a Ten Percent Owner
Optionee shall have an exercise price per share less than one hundred ten
percent (110%) of the Fair Market Value of a share of Stock on the effective
date of grant of the Option. Notwithstanding the foregoing, an Option (whether
an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with
an exercise price lower than the minimum exercise price set forth above if such
Option is granted pursuant to an assumption or substitution for another option
in a manner qualifying under the provisions of Section 424(a) of the Code.

          6.2 Exercisability and Term of Options. Options shall be exercisable at
such time or times, or upon such event or events, and subject to such terms,
conditions, performance criteria and restrictions as shall be determined by the
Board and set forth in the Option Agreement evidencing such Option; provided,
however, that, unless any Option

8

 

Agreement provides for less favorable conditions (a) no Option shall be
exercisable after the expiration of ten (10) years after the effective date of
grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent
Owner Optionee shall be exercisable after the expiration of five (5) years
after the effective date of grant of such Option, and (c) no Option granted to
a prospective Key Employee, prospective Officer or prospective Director may
become exercisable prior to the date on which such person commences Service
with a Participating Company. Subject to the foregoing, unless otherwise
specified by the Board in the grant of an Option, any Option granted hereunder
shall terminate ten (10) years after the effective date of grant of the Option,
unless earlier terminated in accordance with its provisions.

          6.3 Payment of Exercise Price.

               (a) Forms of Consideration Authorized. Except as otherwise provided
below, payment of the exercise price for the number of shares of Stock being
purchased pursuant to any Option shall be made (i) in cash, by check or cash
equivalent, (ii) by tender to the Company, or attestation to the ownership, of
shares of Stock owned by the Optionee having a Fair Market Value not less than
the exercise price, (iii) by delivery of a properly executed notice together
with irrevocable instructions to a broker providing for the assignment to the
Company of the proceeds of a sale or loan with respect to some or all of the
shares being acquired upon the exercise of the Option (including, without
limitation, through an exercise complying with the provisions of Regulation T
as promulgated from time to time by the Board of Governors of the Federal
Reserve System) (a “Cashless
Exercise”), (iv) provided that the Optionee is an
Employee (unless otherwise not prohibited by law, including, without
limitation, any regulation promulgated by the Board of Governors of the Federal
Reserve System) and in the Company’s sole discretion at the time the Option is
exercised, by delivery of the Optionee’s promissory note in a form approved by
the Company for the aggregate exercise price, provided that, if the Company is
incorporated in the State of Delaware, the Optionee shall pay in cash that
portion of the aggregate exercise price not less than the par value of the
shares being acquired, (v) by such other consideration as may be approved by
the Board from time to time to the extent permitted by applicable law, or (vi)
by any combination thereof. The Board may at any time or from time to time, by
approval of or by amendment to the standard forms of Option Agreement described
in Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.

               (b) Limitations on Forms of Consideration.

                    (i) Tender of Stock. Notwithstanding the foregoing, an Option may not be
exercised by tender to the Company, or attestation to the ownership, of shares
of Stock to the extent such tender or attestation would constitute a violation
of the provisions of any law, regulation or agreement restricting the
redemption of the Company’s stock. Unless otherwise provided by the Board, an
Option may not be exercised by tender to the Company, or attestation to the
ownership, of shares of Stock unless such shares either have been owned by the
Optionee for more than six (6) months (and not used for another Option exercise
by attestation during such period) or were not acquired, directly or
indirectly, from the Company.

9

 

                    (ii) Cashless Exercise. The Company reserves, at any and all times, the
right, in the Company’s sole and absolute discretion, to establish, decline to
approve or terminate any program or procedures for the exercise of Options by
means of a Cashless Exercise.

                    (iii) Payment by Promissory Note. No promissory note shall be permitted
if the exercise of an Option using a promissory note would be a violation of
any law. Any permitted promissory note shall be on such terms as the Board
shall determine at the time the Option is granted. The Board shall have the
authority to permit or require the Optionee to secure any promissory note used
to exercise an Option with the shares of Stock acquired upon the exercise of
the Option or with other collateral acceptable to the Company. Unless
otherwise provided by the Board, if the Company at any time is subject to the
regulations promulgated by the Board of Governors of the Federal Reserve System
or any other governmental entity affecting the extension of credit in
connection with the Company’s securities, any promissory note shall comply with
such applicable regulations, and the Optionee shall pay the unpaid principal
and accrued interest, if any, to the extent necessary to comply with such
applicable regulations.

          6.4 Tax Withholding. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its discretion, the Company shall have the right to require the
Optionee, through payroll withholding, cash payment or otherwise, including by
means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in
connection with the Option or the shares acquired upon the exercise thereof.
The Fair Market Value of any shares of Stock withheld or tendered to satisfy
any such tax withholding obligations shall not exceed the amount determined by
the applicable minimum statutory withholding rates. The Company shall have no
obligation to deliver shares of Stock or to release shares of Stock from an
escrow established pursuant to the Option Agreement until the Participating
Company Group’s tax withholding obligations have been satisfied by the
Optionee.

          6.5 Repurchase Rights. Shares issued under the Plan may be subject to a
right of first refusal, one or more repurchase options, or other conditions and
restrictions as determined by the Board in its discretion at the time the
Option is granted. The Company shall have the right to assign at any time any
repurchase right it may have, whether or not such right is then exercisable, to
one or more persons as may be selected by the Company. Upon request by the
Company, each Optionee shall execute any agreement evidencing such transfer
restrictions prior to the receipt of shares of Stock hereunder and shall
promptly present to the Company any and all certificates representing shares of
Stock acquired hereunder for the placement on such certificates of appropriate
legends evidencing any such transfer restrictions.

10

 

          6.6 Effect of Termination of Service.

               (a) Option Exercisability. Subject to earlier termination of the Option
as otherwise provided herein and unless otherwise provided by the Board in the
grant of an Option and set forth in the Option Agreement, an Option shall be
exercisable after an Optionee’s termination of Service only during the
applicable time period determined in accordance with this Section 6.6 and
thereafter shall terminate:

                    (i) Disability. If the Optionee’s Service terminates because of the
Disability of the Optionee, the Option, to the extent unexercised and
exercisable on the date on which the Optionee’s Service terminated, may be
exercised by the Optionee (or the Optionee’s guardian or legal representative)
at any time prior to the expiration of twelve (12) months (or such longer
period of time as determined by the Board, in its discretion) after the date on
which the Optionee’s Service terminated, but in any event no later than the
date of expiration of the Option’s term as set forth in the Option Agreement
evidencing such Option (the “Option Expiration
Date”).

                    (ii) Death. If the Optionee’s Service terminates because of the death of
the Optionee, the Option, to the extent unexercised and exercisable on the date
on which the Optionee’s Service terminated, may be exercised by the Optionee’s
legal representative or other person who acquired the right to exercise the
Option by reason of the Optionee’s death at any time prior to the expiration of
twelve (12) months (or such longer period of time as determined by the Board,
in its discretion) after the date on which the Optionee’s Service terminated,
but in any event no later than the Option Expiration Date. The Optionee’s
Service shall be deemed to have terminated on account of death if the Optionee
dies within three (3) months (or such longer period of time as determined by
the Board, in its discretion) after the Optionee’s termination of Service.

                    (iii) Termination After Change in Control. The Board may, in its
discretion, provide in any Option Agreement that if the Optionee’s Service
ceases as a result of “Termination After Change in Control” (as defined in such
Option Agreement), then (1) the Option, to the extent unexercised and
exercisable on the date on which the Optionee’s Service terminated, may be
exercised by the Optionee (or the Optionee’s guardian or legal representative)
at any time prior to the expiration of six (6) months (or such longer period of
time as determined by the Board, in its discretion) after the date on which the
Optionee’s Service terminated, but in any event no later than the Option
Expiration Date, and (2) the exercisability and vesting of the Option and any
shares acquired upon the exercise thereof shall be accelerated effective as of
the date on which the Optionee’s Service terminated to such extent, if any, as
shall have been determined by the Board, in its discretion, and set forth in
the Option Agreement.

                    (iv) Termination for Cause. Notwithstanding any other provision of the
Plan to the contrary, if the Optionee’s Service with the Participating Company
Group is terminated for Cause, as defined by the Optionee’s Option Agreement or
contract of employment or service (or, if not defined in any of the foregoing,
as defined below), the Option shall terminate and cease to be exercisable
immediately upon such termination of Service. Unless otherwise defined by the
Optionee’s Option Agreement or contract of employment or

11

 

service,
for purposes of this Section 6.6(a)(iv) “Cause” shall mean any of
the following: (1) the Optionee’s theft, dishonesty, or falsification of any
Participating Company documents or records; (2) the Optionee’s improper use or
disclosure of a Participating Company’s confidential or proprietary
information; (3) any action by the Optionee which has a detrimental effect on a
Participating Company’s reputation or business; (4) the Optionee’s failure or
inability to perform any reasonable assigned duties after written notice from a
Participating Company of, and a reasonable opportunity to cure, such failure or
inability; (5) any material breach by the Optionee of any employment or service
agreement between the Optionee and a Participating Company, which breach is not
cured pursuant to the terms of such agreement; or (6) the Optionee’s conviction
(including any plea of guilty or nolo contendere) of any criminal act which
impairs the Optionee’s ability to perform his or her duties with a
Participating Company.

                    (v) Other Termination of Service. If the Optionee’s Service terminates
for any reason, except Cause, Disability, death or Termination After Change in
Control, the Option, to the extent unexercised and exercisable by the Optionee
on the date on which the Optionee’s Service terminated, may be exercised by the
Optionee at any time prior to the expiration of three (3) months (or such
longer period of time as determined by the Board, in its discretion) after the
date on which the Optionee’s Service terminated, but in any event no later than
the Option Expiration Date.

               (b) Extension if Exercise Prevented by Law. Notwithstanding the
foregoing, if the exercise of an Option within the applicable time periods set
forth in Section 6.6(a) is prevented by the provisions of Section 10 below, the
Option shall remain exercisable until three (3) months (or such longer period
of time as determined by the Board, in its discretion) after the date the
Optionee is notified by the Company that the Option is exercisable, but in any
event no later than the Option Expiration Date.

               (c) Extension if Optionee Subject to Section 16(b). Notwithstanding the
foregoing, if a sale within the applicable time periods set forth in Section
6.6(a) of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee’s termination of Service, or (iii) the Option Expiration
Date.

          6.7 Transferability of Options. During the lifetime of the Optionee, an
Option shall be exercisable only by the Optionee or the Optionee’s guardian or
legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
Notwithstanding the foregoing, to the extent permitted by the Board, in its
discretion, and set forth in the Option Agreement evidencing such Option, a
Nonstatutory Stock Option shall be assignable or transferable subject to the
applicable limitations, if any, described in Rule 701 under the Securities Act
and the General Instructions to Form S-8 Registration Statement under the
Securities Act.

          6.8 Stock Appreciation Rights. The Committee may grant Stock Appreciation
Rights with respect to an Option, with such Stock Appreciation Rights
exercisable

12

 

on such terms and conditions as the Committee shall establish. A Stock
Appreciation Right may be granted concurrently with the grant of an Option or,
in the case of a Nonstatutory Stock Option, after the grant of such Option.
Each Stock Appreciation Right shall expire no later than the expiration of the
Option to which it relates and shall be exercisable only to the extent the
related Option is exercisable.

     7. Standard Forms of Option Agreement.

          7.1 Option Agreement. Unless otherwise provided by the Board at the time
the Option is granted, an Option shall comply with and be subject to the terms
and conditions set forth in the form of Option Agreement approved by the Board
concurrently with its adoption of the Plan and as amended from time to time.

          7.2 Authority to Vary Terms. The Board shall have the authority from time
to time to vary the terms of any standard form of Option Agreement described in
this Section 7 either in connection with the grant or amendment of an
individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such
new, revised or amended standard form or forms of Option Agreement are not
inconsistent with the terms of the Plan.

     8. Change in Control.

          8.1 Definitions.

               (a) An
“Ownership Change Event” shall be deemed to have occurred if any of
the following occurs with respect to the Company: (i) the direct or indirect
sale or exchange in a single or series of related transactions by the
stockholders of the Company of more than fifty percent (50%) of the voting
stock of the Company; (ii) a merger or consolidation in which the Company is a
party; (iii) the sale, exchange, or transfer of all or substantially all of the
assets of the Company; or (iv) a liquidation or dissolution of the Company.

               (b) A "Change in Control” shall mean an Ownership Change Event or a series
of related Ownership Change Events (collectively, a
“Transaction”) wherein the
stockholders of the Company immediately before the Transaction do not retain
immediately after the Transaction, in substantially the same proportions as
their ownership of stocks of the Company’s voting stock immediately before the
Transaction, direct or indirect beneficial ownership of more than fifty percent
(50%) of the total combined voting power of the outstanding voting securities
of the Company or, in the case of a Transaction described in Section
8.1(a)(iii), the corporation or other business entity to which the assets of
the Company were transferred (the
“Transferee”), as the case may be. For
purposes of the preceding sentence, indirect beneficial ownership shall
include, without limitation, an interest resulting from ownership of the voting
securities of one or more corporations or other business entities which own the
Company or the Transferee, as the case may be, either directly or through one
or more subsidiary corporations or other business entities. The Board shall
have the right to determine whether multiple sales or exchanges of the voting
securities of the Company or

13

 

multiple Ownership Change Events are related, and its determination shall
be final, binding and conclusive.

          8.2 Effect of Change in Control on Options. In the event of a Change in
Control, the surviving, continuing, successor, or purchasing corporation or
other business entity or parent thereof, as the case may be (the
“Acquiring Corporation”), may, without the consent of the Optionee, either assume the
Company’s rights and obligations under outstanding Options or substitute for
outstanding Options substantially equivalent options for the Acquiring
Corporation’s stock. Any Options which are neither assumed or substituted for
by the Acquiring Corporation in connection with the Change in Control nor
exercised as of the date of the Change in Control shall, unless otherwise
provided in any applicable Option Agreement, terminate and cease to be
outstanding effective as of the date of the Change in Control. Notwithstanding
the foregoing, shares acquired upon exercise of an Option prior to the Change
in Control and any consideration received pursuant to the Change in Control
with respect to such shares shall continue to be subject to all applicable
provisions of the Option Agreement evidencing such Option except as otherwise
provided in such Option Agreement. Furthermore, notwithstanding the foregoing,
if the corporation the stock of which is subject to the outstanding Options
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Change in Control is the surviving or continuing corporation and
immediately after such Ownership Change Event less than fifty percent (50%) of
the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the outstanding Options shall not
terminate unless the Board otherwise provides in its discretion.

     9. Provision of Information.

          The Company shall deliver to each Optionee such disclosures as are
required in accordance with Rule 701 under the Securities Act.

     10. Compliance with Securities Law.

          The grant of Options and the issuance of Stock upon exercise of Options
shall be subject to compliance with all applicable requirements of federal,
state and foreign law with respect to such securities. Options may not be
exercised if the issuance of Stock upon exercise would constitute a violation
of any applicable federal, state or foreign securities laws or other law or
regulations or the requirements of any stock exchange or market system upon
which the Stock may then be listed. In addition, no Option may be exercised
unless (a) a registration statement under the Securities Act shall at the time
of exercise of the Option be in effect with respect to the shares issuable upon
exercise of the Option or (b) in the opinion of legal counsel to the Company,
the shares issuable upon exercise of the Option may be issued in accordance
with the terms of an applicable exemption from the registration requirements of
the Securities Act. The inability of the Company to obtain from any regulatory
body having jurisdiction the authority, if any, deemed by the Company’s legal
counsel to be necessary to the lawful issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the failure to issue
or sell such shares as to which such requisite authority shall not have been

14

 

obtained. As a condition to the exercise of any Option, the Company may
require the Optionee to satisfy any qualifications that may be necessary or
appropriate, to evidence compliance with any applicable law or regulation and
to make any representation or warranty with respect thereto as may be requested
by the Company.

     11. Termination or Amendment of Plan.

          The Board may terminate or amend the Plan at any time. However, subject
to changes in applicable law, regulations or rules that would permit otherwise,
without the approval of the Company’s stockholders, there shall be (a) no
increase in the maximum aggregate number of shares of Stock that may be issued
under the Plan (except by operation of the provisions of Section 4.2), (b) no
change in the class of persons eligible to receive Incentive Stock Options, and
(c) no other amendment of the Plan that would require approval of the Company’s
stockholders under any applicable law, regulation or rule. No termination or
amendment of the Plan shall affect any then outstanding Option unless expressly
provided by the Board. In any event, no termination or amendment of the Plan
may adversely affect any then outstanding Option without the consent of the
Optionee, unless such termination or amendment is required to enable an Option
designated as an Incentive Stock Option to qualify as an Incentive Stock Option
or is necessary to comply with any applicable law, regulation or rule.

     12. Stockholder Approval.

          The Plan or any increase in the maximum aggregate number of shares of
Stock issuable thereunder as provided in Section 4.1 (the
“Authorized Shares”)
shall be approved by the stockholders of the Company within twelve (12) months
of the date of adoption thereof by the Board. Options granted prior to
stockholder approval of the Plan or in excess of the Authorized Shares
previously approved by the stockholders shall become exercisable no earlier
than the date of stockholder approval of the Plan or such increase in the
Authorized Shares, as the case may be.

15

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