Optical Disc Replication and Loan Agreement - MRT Technology LLC d/b/a Ritek Global Media and Image Entertainment Inc.
OPTICAL DISC REPLICATION AND LOAN AGREEMENT
This Optical Disc Replication and Loan Agreement ("Agreement") is made and
entered into as of this 13/th/ day of March 2001 by and between MRT Technology,
LLC a California Limited Liability Company doing business as Ritek Global Media,
with its principal office at 18560 San Jose Avenue, City of Industry, California
("Ritek"), and Image Entertainment, Inc., a California corporation with its
principal office at 9333 Oso Avenue, Chatsworth, California ("Image").
The parties hereby agree as follows:
1. Definitions:
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(a) "DVD" means digital versatile disc formats, including but not limited
to DVD Video, DVD Hybrid Internet Disc, DVD Audio and DVD ROM, upon
which audio and/or visual information is encoded or stored for future
retrieval (e.g., by either a consumer electronics player, computer
playback system, or similar Optical technology).
(b) "CD" means compact disc formats, including Audio CD, CD-Rom or Video-
CD upon which audio, video and/or data information is encoded or
stored for future retrieval (e.g., by either a consumer electronics
player, computer playback system, or similar Optical technology).
(c) "DataPlay" means disc formats, including but not limited to, DataPlay
Video, DataPlay Hybrid Internet Disc, DataPlay Recordable, and
DataPlay Audio, upon which audio and/or visual information is encoded
or stored for future retrieval (e.g., by either a consumer
electronics player, computer playback system, or similar Optical
technology).
(d) "Ritek Services" means the following goods and services as supplied
by Ritek, a Ritek subsidiary or a Ritek OEM as described in Paragraph
3.(c):
(i) Mastering and electroforming;
(ii) Replica Sample Packages; and
(iii) DVD, CD, and DataPlay disc manufacturing and finishing.
"Optional Services" means the following optional services which shall be
provided to Image from time to time, but only on the request of Image:
(i) Compression, Encoding, Authoring and Menu Creation Services.
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(e) "Source Material" means a customer certified stamper and all the
customer-approved sources, tapes or discs, appropriate components,
label film, BOM (Bill of Materials) or work instruction, and any
other materials or documents necessary to manufacture an order.
(f) "Workable Date" means the date on which Ritek receives from Image
all Source Material for an order.
(g) "DVD Forum" means a group of companies that manages the DVD format
including the development of DVD specifications and the licensing of
DVD technologies.
(h) "DVD Specifications" means the specifications that define the
technical parameters and system requirements for the DVD media and
DVD playback devices. The DVD specifications were developed and
managed by the DVD Forum.
(i) "Inactive Components" printed slip-sheets, "Snapper-boards,"
inserts, and stickers which have not been used for an order for 12
consecutive months.
(j) "DLT" means digital linear tape.
(k) "Metal" means the mastered metal disc "mothers," "fathers," or
"stampers".
(l) "Standard Orders" means orders which allow for automated assembly
for packaging.
(m) "Special Orders" means orders which require manual assembly for
packaging.
(n) "International Orders" means orders which are to be shipped by Ritek
to a location outside of the United States or Canada.
(o) "Ritek OEM" means an outside original equipment manufacturer.
2. Term
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(a) Initial Term
------------
The initial term (the "Term") of this Agreement shall commence as of August
1, 2001 and continue through and until July 31, 2006 (the "Termination Date").
Image may begin submitting orders to Ritek prior to the beginning of the Term
for DVD Audio and/or CD product because Image's manufacturing agreement with its
current DVD manufacturer does not include those formats, provided that any such
order shall be
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subject to all of the other terms and conditions of this Agreement. Any order
for Ritek Services received by Ritek prior to the Termination Date will be
handled according to the terms hereof.
(b) Extension of Term/Right of First Offer
--------------------------------------
On or prior to August 1, 2005, provided that Ritek shall have performed in
all material respects all of its obligations under this Agreement, Ritek and
Image agree to begin negotiation for either an extension of this Agreement or a
new agreement for the provision of Ritek Services. If Image and Ritek do not
agree on the terms of an extension or new agreement on or before February 1,
2006, or such other date as the parties may jointly agree in writing, Image
shall be entitled to engage one or more third parties to provide Ritek Services
for all or any part of Image's worldwide DVD, CD, and/or DataPlay orders,
provided that before Image may do so, and so long as Ritek is not in default
hereunder beyond the expiration of all applicable notice and cure periods, Image
must first offer to engage Ritek to provide Ritek Services for all of Image's
worldwide DVD, CD, and/or DataPlay orders("Right of First Offer") by giving
written notice ("Image's Offer") of all of the material terms and conditions on
which Image is willing to do so. Notwithstanding the preceding sentence, this
Paragraph shall not be construed as a prohibition against or limitation on
Image's right to perform any of such services internally or through any
subsidiary and or affiliate of Image or to otherwise restrict any other business
activity of Image. Ritek will have thirty (30) days after the date of receipt of
Image's Offer within which to notify Image that Ritek accepts or rejects Image's
Offer on the terms and conditions therein contained. In the event Ritek fails to
notify Image in the above time period, Ritek shall be deemed to have rejected
Image's Offer. If Ritek accepts Image's Offer, the parties shall enter into a
definitive agreement incorporating the terms of Image's Offer within thirty (30)
days from the date of Ritek's acceptance of Image's Offer, or within such other
time as the parties herein may jointly agree in writing. If Ritek rejects
Image's Offer in writing within the aforementioned time period or is deemed to
have rejected the same, the Right of First Offer shall expire and Image may
engage one or more third parties to provide Ritek Services for all or any part
of Image's worldwide DVD, CD, and/or DataPlay orders. However, if Ritek rejects
Image's Offer, and subsequent to such rejection, any material term or condition
(e.g. length of term, price, shipping, or product) of Image's Offer is changed
with respect to engaging one or more third parties for Ritek Services (the
"Amended Offer"), Image shall submit the Amended Offer to Ritek and Ritek shall
have thirty (30) days after the date of receipt of Image's Amended Offer within
which to notify Image that Ritek accepts or rejects Image's Amended Offer on the
terms and conditions therein contained; in the event Ritek fails to notify Image
in the above time period, Ritek shall be deemed to have rejected Image's Amended
Offer. If Ritek accepts Image's Amended Offer, the parties shall enter into a
definitive agreement incorporating the terms of Image's Amended Offer within
thirty (30) days from the date of Ritek's acceptance of Image's Amended Offer.
Subject to earlier termination as set forth above, this Right of First Offer
will expire contemporaneously with the expiration or earlier termination of this
Agreement. The Right of First Offer is not assignable separate and apart from
this Agreement and is not separable from this Agreement in any manner, either by
reservation or otherwise.
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3. Ritek Obligations:
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(a) Exclusive Provider of Ritek Services
------------------------------------
(1) Ritek, a Ritek subsidiary, or a Ritek OEM shall be the
exclusive provider of Ritek Services for all Image's worldwide
DVD, CD, and/or DataPlay orders according to the specifications
set forth in purchase orders provided to Ritek by Image, on an
order-by-order basis. Ritek shall provide the Ritek Services to
Image according to the better of substantially the same quality
and service standards (e.g., turnaround and delivery schedule,
customer service, disc quality) as those provided to other
Ritek customers. Ritek shall use its standard in-house
procedures to ensure that the physical disc quality meets the
DVD Physical Specifications established by the DVD Forum (the
"Specifications"), and Ritek shall further abide by any
amendments or additions to such "Specifications" with respect
to DVD orders produced hereunder.
(2) Notwithstanding the foregoing, Ritek shall not be obligated to
provide Ritek Services to Image with respect to any particular
order if Ritek, in its sole and exclusive opinion, believes
that the material ordered by Image includes content that
advocates illegal activity, is patently offensive, invades the
rights to privacy or publicity of any persons, and/or defames
or violates the law or infringes on any rights of other
persons, including, without limitation, rights of copyright and
trademark, provided that Ritek shall notify Image within five
(5) business days after the date of receipt of masters for any
order if Ritek elects not to provide services hereunder due to
any of the considerations listed above.
(b) Shipping of Orders
------------------
(1) Standard Orders
---------------
Ritek shall ensure that all U.S. domestic Standard Orders of
150,000 units or less that are manufactured pursuant to this Agreement
will be shipped so that Image will receive each order at Image's Las
Vegas, Nevada distribution center within 7 to 14 days after the
Workable Date for such order, provided, however, that Ritek shall not
be held responsible and shall not be in breach of the terms hereof as
a result of any delay in shipping caused by events or circumstances
beyond Ritek's reasonable control.
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(2) Special Orders
--------------
Manufacturing and delivery times for domestic Special Orders
shall be determined by adding additional time to the 7-14 day
guarantee, such additional time to be determined by Ritek in good
faith, depending on the nature and extent of the special requirements
of the order.
(3) Orders Over 150,000 Units
-------------------------
Manufacturing and delivery times for orders in excess of 150,000
units shall be determined by the following formula: for each 50,000
units or fraction thereof above 150,000 units, one additional day
shall be added to the guaranteed delivery time. Notwithstanding the
above, Ritek and Image may agree that orders of more than 150,000 will
be received by Image in fewer days than is determined by the above
formula on an order by order basis.
(4) International Orders
--------------------
For international orders, the manufacturing time and delivery to
Ritek's subsidiary or OEM's facility (where Ritek provides
international services (section 3 (g)) for Image), shall be within 7
to 14 days after the Workable Date for such order. For purposes of
international orders only, "Workable Date" shall mean the date when
all Source Material are received and a check disk approved by Image
arrive at the international Ritek or Ritek OEM manufacturing facility.
(5) More Favorable Shipping Terms
-----------------------------
Ritek further agrees that if, during the Term, Ritek shall
provide shipping terms more favorable than those provided to Image
hereunder (e.g. delivery to a customer in fewer than 7 to 14 days from
the Workable Date for any U.S. domestic Standard Order of 150,000
units or less) to any company on a contractual basis of more than one
(1) year for substantially the same quality and quantity of services
and goods as those provided to Image hereunder, then Ritek shall offer
Image the same shipping terms on all its orders effective the same
date such more beneficial shipping terms became effective for such
company.
(6) Shipping Grace Period
---------------------
For all shipments, Ritek shall have a 4-day grace period in the
event that they are unable to deliver an order within the time
specified by sections 3.(b)(1), 3.(b)(2), 3.(b)(3), or 3(b)(4). If an
order is not received by Image within the above grace period, Ritek
will ship the order by expedited air freight, at no charge to Image.
After the first 90 days of this
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contract, if Image receives more than five percent of its orders under
sections 3.(b)(1), 3.(b)(2), 3.(b)(3) or 3.(b)(4) from Ritek beyond
the grace period, said five percent to be based upon the number of
orders shipped to Image by Ritek in the previous 90 day period, then
Ritek shall issue a written report to Image regarding the reasons for
the late deliveries, along with the planned methods of resolving the
problem. So long as Ritek complies with the provisions of this section
3(b)(6) and resolves the problem which causes the delay in delivery
within 60 days, the parties agree that Ritek shall not be in material
breach of the contract because of late delivery.
(c) Subsidiary and OEM Manufacturing
--------------------------------
To the extent Ritek shall send any orders for Ritek Services to a subsidiary
or a Ritek OEM, Ritek shall not be relieved of any of its representations,
warranties and obligations hereunder, including, but not limited to, those
obligations set forth in this Paragraph 3 above, with respect to any orders
manufactured by such subsidiary or Ritek OEM.
(d) Inactive and Excess Components
------------------------------
Prior to discarding any Inactive Components, Ritek shall so notify Image
and give Image the option to purchase any such Inactive Components at cost (at
the cost at which Ritek purchased the components), provided that Image shall
make the election to purchase any such Inactive Components in writing to Ritek
within ten (10) business days of receipt of Ritek's notice. Image shall also
have the right to purchase any components, at cost, at any time, provided such
components are available and deemed by Ritek at its sole discretion to be excess
(each, an "Excess Component"). Notwithstanding the foregoing, if Image had
originally paid for any such Inactive Component or Excess Component, Ritek shall
deliver such Inactive Component or Excess Component to Image at no additional
cost to Image, provided that Image shall make the election to receive any such
Inactive Components or Excess Components in writing to Ritek within ten (10)
business days of receipt of Ritek's notice.
(e) Compression, Encoding, Authoring and Menu Creation Services
-----------------------------------------------------------
During the Term, Ritek will provide all compression, encoding, authoring and
menu creation services ("CEA Services") for all of Image's DVD titles, except
for those DVD titles for which Image provides CEA Services internally and those
DVD titles for which SpeeDVD (an outside service provider with which Image
conducts business) provides CEA Services. All CEA Services provided by Ritek
under this Agreement shall be on the terms set forth in Ritek's Pricing Sheet
attached hereto as Exhibit "B." Nothing herein shall prohibit or limit Image's
ability to continue to perform CEA Services internally or continuing to engage
SpeeDVD to perform CEA Services for Image.
(f) DLTs and Metal
--------------
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As between Image and Ritek, Image shall be the sole owner of all DLTs and
metal used in connection with the performance of Ritek Services, and Ritek
agrees to deliver all of such DLTs and metal to Image if so requested by Image
within sixty (60) days after the expiration or earlier termination of this
Agreement.
(g) International Services Provided by Ritek
----------------------------------------
In addItion to the manufacturing of DVD,CD, and/or DataPlay discs for Image
programs which are to be released internationally (i.e., outside of the U.S. and
Canada), Ritek agrees to provide the following services in connection with
international releases:
(1) Ritek will purchase printed components for Image and Ritek will
invoice Image when the components are used for each order.
(2) Inventory management of DVD, CD and/or DataPlay discs and
packaging materials with multiple languages.
(3) Packaging of DVD,CD and/or DataPlay discs for multiple
territories.
(4) Distribution of finished goods to multiple territories for both
new release and catalogue reorders.
(5) All necessary reporting which shall include but is not limited
to, monthly inventory levels, and shipping reports.
All of the above Ritek Services shall be paid by Image, to Ritek, as
set forth on Ritek's Price Sheet attached hereto marked as Exhibit
"C."
(h) New Technology
--------------
If there is a new technology introduced during the term of this agreement,
excluding but not limited to DVD, DVD-R, DVD-RW, DVD-RAM, CD, CDRom, CDR, CDRW,
MiniDisc, DataPlay, MO, Compact Flash Card that Ritek does not provide, which
Image desires to purchase, Ritek shall have the option to procure such new
technology internally, from one of its subsidiaries, or from a Ritek OEM, as
long as Ritek can provide Image with comparable service and price of the new
technology that Image could otherwise procure from another manufacturer on a
direct basis.. If Ritek chooses not to procure such new technology, or if Ritek
is unable to procure such new technology within 60 days from Image's written
request for said new technology, then Image shall have the right to procure said
new technology at Image's discretion.
4. Image's Obligations:
--------------------
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(a) One Hundred Percent of Image Requirements
-----------------------------------------
Image agrees that Ritek shall supply one hundred percent (100%) of Image's
worldwide DVD, CD, and/or DataPlay manufacturing, provided, however, that
Image's obligation to order one hundred percent (100%) of its DVD, CD, and/or
DataPlay manufacturing requirements from Ritek shall not apply in the event that
(i) Ritek elects not to accept a purchase order pursuant to Paragraph 3(a)(2)
above, or (ii) Ritek is in material breach of any of its obligations under
Paragraph 3 above. In the event that the condition described in clause (ii) of
the preceding sentence applies, Image shall give written notice to Ritek
specifying the nature of such breach, and Ritek shall have twenty (20) business
days thereafter to cure such breach (the "Cure Period"). During the Cure Period,
Image shall have the option to procure the services of another DVD, CD, and/or
DataPlay manufacturing facility for its requirements hereunder until Ritek shall
have cured its breach. On or before the expiration of the Cure Period, Ritek
shall notify Image in writing if the breach has been cured. Not later than
twenty (20) days after receipt of such written notice from Ritek, in the event
that Image reasonably believes that such breach remains uncured, Image shall so
notify Ritek in writing, and Ritek shall then have ten (10) business days (the
"Additional Period") thereafter to cure such breach. During the Additional
Period, Image shall have the option to procure the services of another DVD, CD,
and/or DataPlay manufacturing facility for its requirements hereunder until
Ritek shall have cured its breach. If such breach remains uncured after the
expiration of the Additional Period, Image may immediately terminate this
Agreement only with respect to the particular Title that is the subject of the
breach.
(b) Titles Manufactured at Another Facility During a Cure Period
------------------------------------------------------------
With respect to the repressing of any Titles manufactured at another DVD,
CD and/or DataPlay manufacturing facility during the Cure Period and/or
Additional Period, Image shall have the right to continue to utilize such other
DVD, CD and/or DataPlay manufacturing facility unless and until Ritek elects to
provide to Image all of the mastering and set-up charges related to the title at
no charge to Image, and otherwise agrees to provide all other quality and
quantity of services that is provided for by the terms of this Agreement.
(c) Logo Credit
-----------
Image will display on their printed components the phrase "Manufactured by
Ritek Global Media" when allowed by Image's licensors.
(d) Image Licensee's or Distributor's Use of Ritek Services
-------------------------------------------------------
The parties acknowledge that Image is now, or may in the future be, a party
to one or more license or distribution agreements with third party licensees or
distributors pursuant to which such licensees and/or distributors are
responsible for the manufacturing of DVDs, CDs, and/or DataPlay. Image agrees
to use reasonable efforts to cause such
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third party licensees and/or distributors to engage Ritek to provide
manufacturing services for such DVDs, CDs, and/or DataPlay.
(e) Forecasts
--------
Image will also use reasonable efforts to provide Ritek with a rolling six
month forecast of Image's expected DVD, CD and/or DataPlay orders under this
Agreement in the United States and internationally. The forecasts are to be
received by Ritek on or before the first day of each calendar month. If a
materially accurate forecast is provided by Image and an order for over 150,000
units is submitted, then the shipping formula set forth in Paragraph 3.(b)(3)
above shall apply. If a materially accurate forecast is not provided by Image to
Ritek and an order for over 150,000 units is submitted, Ritek will manufacture
and deliver the order within a reasonable time. The reasonable time period shall
be determined in good faith by Ritek.
5. Title Development Fund; Loan from Ritek to Image:
-------------------------------------------------
Ritek will provide to Image a Title Development Fund (the "Fund") for the
purpose of Image obtaining programming for exclusive U.S. and/or worldwide
distribution, whether through a license or exclusive distribution agreement. The
Fund will be in the form of a non-interest bearing loan (the "Loan"), the
repayment of which shall be subordinate to all of Image's existing "Senior Debt"
(as defined below). For purposes of this Agreement, the term "Senior Debt" means
all indebtedness and obligations of Image to Foothill Capital Corporation, BA
Leasing and Capital Corporation, Bank of America National Trust and Savings
Association, and Image Investors Co., and all replacements, modifications,
renewals, extensions and refinancings of all or any part thereof. In addition to
the terms and conditions related to the Loan set forth in this Agreement, Ritek
agrees to enter into such subordination agreements as the holders of the Senior
Debt, now or in the future, may require. The terms of the Fund and the Loan are
as follows:
(a) Initial Advance
---------------
Although the manufacturing of DVD discs, excluding DVD Audio and/or CDs
(see Paragraph 2 above), will not begin until the commencement of the Term, on
or before Wednesday, March 30, 2001, Ritek shall make an initial advance under
the Loan (the "Initial Advance") to Image in an amount equal to six million five
hundred thousand dollars ($6,500,000).
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(b) Additional Advances
-------------------
In addition to the Initial Advance, on or before September 1st of each year
during the Term (other than September 1, 2001 and September 1, 2005) Ritek shall
make an additional advance under the Loan to Image in an amount equal to (x) the
sum of (a) one dollar ($1.00) for each DVD and (b) fifty cents ($0.50) for each
CD (for purposes of section 5 only, DataPlay will be defined as a CD), ordered
by Image from Ritek under this Agreement during the immediately preceding August
1 to July 31 period, minus (y) the then current outstanding balance of the Loan,
if any; provided that in no event shall the amount of any advance exceed the sum
of ten million dollars ($10,000,000). In the event that Image fails to meet the
Minimum Order Requirements as described in section 5 (g), Ritek shall have the
option to renegotiate new terms and conditions of future advances under the
Loan. Image will continue to repay any outstanding balance due on the Loan as
provided for in section 5 (d). If agreed upon, any future additional advances
shall be funded by Ritek within thirty (30) days.
(c) 2005 Advance
------------
On August 1, 2005, Ritek will make an additional advance under the Loan
(the "2005 Advance") to Image in an amount equal to (x) five million dollars
($5,000,000), minus (y) the then current outstanding balance of the Loan, if
any.
(d) Repayment of the Loan
---------------------
Image will repay the Loan (other than the 2005 Advance) to Ritek in an
amount equal to one dollar ($1.00) for each DVD ordered from Ritek under this
Agreement and fifty cents ($0.50) for each CD ordered from Ritek under this
Agreement, which amounts shall be payable at the same time payment is due for
such DVDs, CDs, and DataPlay ordered by Image under this Agreement.
Notwithstanding the foregoing, Image shall not be obligated to repay more than
two million five hundred thousand dollars ($2,500,000) of the outstanding
balance of the Loan in any calendar quarter (the "Maximum Quarterly Payment").
If, with respect to any calendar quarter, Image would have otherwise been
required to repay an amount in excess of the Maximum Quarterly Payment, the
amount of such excess shall be paid by Image to Ritek on or before the tenth
(10th) business day of the next ensuing calendar quarter, provided that in no
event shall such payment increase the Maximum Quarterly Payment for such
calendar quarter. The 2005 Advance shall be repaid in equal quarterly
installments equal to twenty-five percent (25%) of the amount of the 2005
Advance, payable on October 31, 2005, January 31, 2006, April 30, 2006 and July
31, 2006 respectively. Notwithstanding anything herein to the contrary, the Loan
shall be repaid in full on or prior to the Termination Date. Amounts paid by
Image to Ritek in repayment of the Loan shall be in addition to amounts
otherwise payable by Image to Ritek under this Agreement for the performance of
the Ritek Services. For example, if Image orders 100 DVDs and 100 CDs from Ritek
pursuant to this Agreement, in addition to the amounts payable by Image to Ritek
for the performance of the Ritek Services for such DVDs and CDs, Image shall
also at the same
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time repay $150 of the then outstanding balance of the Loan (i.e., $1.00
multiplied by 100 DVDs and $0.50 multiplied by 100 CDs).
(e) Discretion in Use of Proceeds
-----------------------------
Although the proceeds of the Loan will be used by Image to obtain
programming for exclusive distribution, Ritek acknowledges Image's banking
structure with its current lender Foothill Capital Corporation ("Foothill")
requires that all advances under the Loan received by Image are to be
immediately used to reduce the then-outstanding borrowings under Image's
revolving debt facility with Foothill. The payments under the Foothill facility
would result in an increase in Image's then-borrowing availability under that
facility. Image is then required under this Agreement to draw down on the
Foothill facility to acquire programming for exclusive distribution. It is
expressly understood and agreed between Ritek and Image that Image must use Loan
funds for the sole and exclusive purpose of acquiring programming for exclusive
distribution. Any other use of the loan funds shall be deemed by Ritek to be a
material breach on the part of Image. In addition to the foregoing, Image will
have complete and sole discretion over the programming it licenses and
distributes with the use of the proceeds of the Loan.
(f) Reporting Requirements
----------------------
(1) Image will provide Ritek with information of Image's use of the
Loan proceeds on a quarterly basis which shall include name of
licensor(s) or distributor(s), number of titles, name of
title(s), terms of agreement(s), dollar amount of advance paid,
and payment specifics.
(2) Image will provide Ritek with timely copies of its quarterly
financial statements and annual reports each year throughout
the Term of the Agreement.
(g) Minimum Orders Requirements
---------------------------
Notwithstanding the provisions of Paragraphs 5.(a) through 5.(c) to the
contrary, if Image does not meet the following minimum worldwide Disc (as
defined below) manufacturing requirements (in units), on a year-to-year basis,
Image will not be in default of the terms set forth in Paragraph 5. above, but
Ritek shall have the option to renegotiate the terms and conditions of future
advances of the Loan to Image. If Image and Ritek are unable to successfully
negotiate the amounts of future advances under the Loan, then Ritek's
obligations, in its entirety, under section 5 of this Agreement will be
extinguished and Image's obligation to repay any outstanding balance due under
the Loan, as set forth in section 5 (d) will be in effect. However, the
remaining rights and duties of the parties under this Agreement shall continue
in full force and effect.
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August 1, 2001-July 31, 2002 6,500,000 Discs
August 1, 2002-July 31, 2003 8,000,000 Discs
August 1, 2003-July 31, 2004 10,000,000 Discs
The above term "Discs" is defined as a combination of DVD and CD discs,
whereby each DVD disc will be counted as 1 and each CD will be counted on a 5 to
1 ratio (i.e., every 5 CD's manufactured will count as 1 Disc). The annual
number of CD discs under the aforesaid ratio that may be applied to the above
minimum annual orders shall be capped at fifteen percent (15%) of the annual
requirement (e.g., in the first year, 975,000 CD discs may apply toward the
minimum (which is 4,875,000 CD's)).
(h) Default by Ritek
----------------
If, at any time during the Term, Ritek does not perform in a timely manner
on all of its obligations under this Paragraph 5 (including, without limitation,
making the advances of the Loan to Image as contemplated by Paragraphs 5.(a)
through 5.(c)), Ritek shall be in default under this Agreement and, in addition
to whatever other rights and remedies Image may have, Image shall have the right
in its sole discretion to terminate this Agreement, subject to the following
cure provision:
In the event that Ritek should be in default under the preceding paragraph,
Image shall give written notice to Ritek specifying the existence of the
default, and Ritek shall have ten (10) business days thereafter to cure such
default (the "Cure Period"). On or before the expiration of the Cure Period,
Ritek shall notify Image in writing if the default has been cured. After
receipt of such written notice from Ritek, in the event that Image reasonably
believes that such default remains uncured, Image shall so notify Ritek in
writing, and Ritek shall then have five (5) business days (the "Additional
Period") thereafter to cure such default. If such default remains uncured after
the expiration of the Additional Period, Image may then terminate this
Agreement.
(i) Repayment of Title Development Fund Upon Termination by Image
-------------------------------------------------------------
Should Image terminate the Agreement, any unpaid portion of the Title
Development Fund shall be repaid to Ritek in equal quarterly installments so
that the Title Development Fund shall be fully repaid to Ritek over a one (1)
year period commencing on the effective date of termination of this Agreement.
6. Manufacturing of Previously Released Image Titles:
--------------------------------------------------
Image shall deliver to Ritek the metal, if the metal is available, a DLT,
pre-approved test disc, or finished disc, all of which would be obtained from
Image's previous manufacturer, namely WAMO, for programming which was released
by Image prior to the beginning of the term. Upon receipt of a purchase order
for such titles, Ritek shall furnish Image with a sample disc for each Title.
Said sample disc will be reviewed
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for quality control purposes and, if acceptable, approved for manufacturing. The
mastering cost, if any, for each title will be borne by Ritek unless Image
issues a purchase order for any said title for less than 1,500 units, thus,
Image agrees to split the cost of mastering equally as set forth in the price
sheet listed on exhibit "A".
7. Pricing and Most Favored Customer Provision
-------------------------------------------
Prices for Ritek Services are listed on Exhibit "A" to this Agreement, and
Ritek guarantees that such prices shall remain in effect during the Term. Ritek
further agrees that if, during the Term, (i) Ritek Services are provided to any
company on a contractual basis of more than one (1) year for substantially the
same quality and substantially the same or less quantity of services and goods
as those provided to Image hereunder, and (ii) any of such aggregate services
and goods are provided at a lower price than the prices set forth on Exhibit
"A," then Ritek will offer Image the same prices for such aggregate services and
goods on all of Image's orders retroactive to the same date such prices became
effective for such other company. Any amount owed to Image from Ritek under
this Paragraph shall be paid to Image in the form of a credit towards future
Ritek Services. In each such event, or in the event the parties renegotiate
the pricing, the prices set forth on Exhibit "A" shall be amended to reflect
the lower prices.
8. Payment Terms:
--------------
All amounts due and payable to Ritek for Ritek Services shall be payable by
Image seventy five (75) days after the date of Ritek's invoice to Image. If any
invoice is not paid timely, a late fee shall be imposed at the rate of 1.5% per
month until the invoice and all late fees have been paid in full.
9. Shipping Costs:
---------------
(a) Domestic Releases
-----------------
Ritek agrees to pay one hundred (100%) of the shipping costs for orders
manufactured at any Ritek, Ritek subsidiary, or Ritek OEM manufacturing facility
and delivered to Image's distribution facility located in Las Vegas, Nevada.
Image agrees to pay (100%) of shipping costs on an order-by-order basis for
orders delivered to Image and/or customers where the delivery is not in Las
Vegas, Nevada. Notwithstanding the foregoing, Ritek shall not be obligated to
ship to Image any purchase order or group of purchase orders aggregating less
than 10,000 units until such time as there is an aggregate of at least 10,000
units ready for shipment under one or more purchase orders. If Image desires to
cause Ritek to ship products prior to such threshold being reached, Image may
require Ritek to do so, provided that Image pays all of the shipping costs
incurred by Ritek in connection with shipping such smaller order.
(b) International Releases
----------------------
<PAGE>
Ritek agrees to pay one hundred (100%) of the shipping costs for orders
manufactured at any Ritek, Ritek subsidiary, or Ritek OEM manufacturing facility
and delivered to either Multimedia Infotech, Ltd., located in Belfast, Northern
Ireland, Primedisc Technologies, located in Weisbaden, Germany or any Ritek
subsidiary or Ritek OEM where international services are provided for Image.
Image agrees to pay (100%) of the shipping costs on an order-by-order basis for
orders delivered to Image and/or customers where the delivery is not made to any
of the above referenced location.
10. Ritek's Representations and Warranties:
---------------------------------------
(a) Workmanship and Quality
-----------------------
Ritek represents, warrants and agrees that each unit (disc and packaging)
delivered to Image hereunder:
(i) Shall conform to the Specifications stipulated in Paragraph
3(a) for a period of five (5) years from the date of delivery
to Image, and otherwise be of the same or better quality as
units manufactured for other Ritek customers;
(ii) Shall not contain any audio, visual or print materials or
elements of any title other than those stipulated to Ritek by
Image in conjunction with the purchase order for such unit; and
(iii) Shall be labeled and properly packaged according to the
materials provided to Ritek and shall otherwise conform to
customary industry practice.
Upon Ritek's breach of (i), above, Image has the right to return any
defective product to Ritek, and Ritek shall, at its sole discretion, either
fully refund the cost paid therefore by Image, or provide replacement products,
for any products that do not conform to the version of the Specifications in
effect at the time such products were manufactured.
Upon Ritek's breach of either (ii) or (iii), above, Ritek shall, at Image's
sole discretion, either (a) promptly replace, at Ritek's sole cost and expense,
all defective units; (b) promptly reimburse Image for the cost of all defective
units; or (c) promptly issue to Image a credit for the cost of all defective
units, and Ritek shall also promptly reimburse Image for the shipping, handling
and shipping insurance costs associated with Image's return of defective units
to Ritek and delivery of any replacement units to Image.
Ritek is not responsible for mishandling or damage caused to any products
by the acts of any person or entity other than Ritek's subsidiary or Ritek's
OEM. The rights of the parties under this Paragraph are subject to the terms
of Paragraph 12 below.
(b) Corporate Authority
-------------------
<PAGE>
Ritek further represents, warrants and agrees that:
(i) It has full legal right, power and authority to enter into and
perform this Agreement, and this Agreement has been duly
authorized, executed and delivered by Ritek, is enforceable
against Ritek in accordance with its terms and does not
conflict with any other agreement or obligation to which Ritek
is a party or by which Ritek is bound;
(ii) Image has the right to look solely to Ritek in the event it
seeks to compel any acts of an OEM pursuant to this Agreement
or in the event it seeks indemnification for any losses,
damages and liabilities incurred in connection with or arising
out of any acts of Ritek or an OEM which constitute a breach by
Ritek of this Agreement.
11. Image's Representations and Warranties:
---------------------------------------
Image hereby represents, warranties and agrees that:
(i) It has full legal right, power and authority to enter into and
perform this Agreement, and this Agreement has been duly
authorized, executed and delivered by Image, is enforceable
against Image in accordance with its terms and does not
conflict with any other agreement or obligation to which Image
is a party or by which Image is bound;
(ii) Image owns or controls the right to use, record and duplicate
the units ordered from Ritek; and
(iii) Image shall comply with all of its third party contractual
credit, trademark and copyright obligations in connection with
the materials for any order to be manufactured hereunder.
12. Rework, Reimbursement and Credit Obligations:
---------------------------------------------
(a) Rework Obligations
------------------
In the event there is a need for any manufacturing order to be reworked,
the cost of such work shall be borne by the party whose actions or failure to
act is the cause of the rework. The party responsible for the rework shall
memorialize the nature and cost of such rework in writing to the other party.
In the event the parties are jointly responsible for any rework, each party
shall pay its proportionate cost for such rework. All disputes relating to
responsibility or proportion of responsibility for rework shall be submitted to
an approved DVD and/or CD Alliance testing laboratory to be mutually agreed upon
by the parties. Each party shall be responsible for the costs of the rework and
the costs of
<PAGE>
the laboratory testing on a proportionate basis according to the determination
by the DVD and/or CD Alliance test laboratory of the responsibility of each
party.
(b) Reimbursement and Credit Obligations
------------------------------------
Similarly, if Image shall demand reimbursement or credit under Paragraph
10, and the parties are jointly responsible for the condition which supports
Image's demand for reimbursement or issuance of credit, the amount of the
reimbursement or credit to be provided by Ritek shall be based on Ritek's
proportionate share of responsibility for the defect, which will be determined
in the same manner provided in Paragraph 12.(a), above, for the determination of
the proportionate share of responsibility in the event of a rework.
13. Referral Service:
-----------------
Ritek shall use its reasonable good faith efforts to have its sales force
refer new third party business to Image when it deems such referral appropriate.
14. Distribution in China:
----------------------
Should an opportunity arise for Image to distribute its DVD, CD or DataPlay
products throughout Mainland China, Ritek may, at Ritek's discretion, act as
Image's sales agent on behalf of Aviva International, Image's joint venture
partner for international DVD distribution, to help facilitate the sale of said
product in this territory. Image and Ritek agree to explore opportunities for
the distribution of DVD, CD or DataPlay products, prior to Image offering any
such opportunities to any third party.
15. Audit Rights:
-------------
Each party shall have the right to audit the other party with respect to
performance of its obligations hereunder not more than once per each calendar
year of the Term and one time within six months after the Termination Date. All
such audits shall be conducted during regular business hours and upon thirty
(30) days advance written notice. If either party elects to audit the other
after the Termination Date, notice must be given at least 30 days prior to the
expiration of the six month period following the Termination Date, and the
failure to provide such timely notice will operate as a waiver of that party's
right to audit.
16. Force Majeure:
--------------
Notwithstanding anything contained herein to the contrary, neither party
shall be liable to the other for any non-performance or delay or interruption in
the performance of this Agreement as a result of any wars, acts of God, fires,
floods, government actions or proceedings, or any other reason beyond the
control of one or both of the parties or of their agents or personnel (each, a
"Force Majeure Event"). Upon the occurrence of any Force Majeure Event, each
party shall have the right to suspend this Agreement for the
<PAGE>
same period as the continuance of such Force Majeure Event (in each instance, a
"Suspension"); provided, however, that if Ritek is not able to provide Ritek
Services pursuant to this Agreement for six (6) months or more due to a Force
Majeure Event, either party shall have the right to terminate this Agreement.
With respect to the repressing of any titles manufactured at another DVD, CD
and/or DataPlay manufacturing facility during the Suspension, Image shall have
the right to continue to utilize such other DVD, CD and/or DataPlay
manufacturing facility unless and until Ritek elects to provide to Image all of
the mastering and set-up charges related to the title at no charge to Image, and
otherwise provides all other quality and quantity of services that is provided
for by the terms of this Agreement.
17. Indemnification:
----------------
(a) Image's Indemnification of Ritek
---------------------------------
Image shall at all times defend, indemnify and hold harmless Ritek and its
affiliates, and the officers, directors, employees, agents and attorneys of the
foregoing, against and from any and all third party claims, damages,
liabilities, costs and expenses, including reasonable outside attorneys' fees
(collectively the "Claims") arising out of
(i) the unauthorized use by Image of any patented invention;
(ii) Any illegal act committed by Image in connection with its
performance hereunder; or
(iii) Any breach by Image of any provision hereof, provided that
Image shall have the right to appear in any action and/or be
represented by its own counsel at its own cost with respect to
any such Claims.
(b) Ritek's Indemnification of Image
--------------------------------
Ritek shall at all times defend, indemnify and hold harmless Image and its
affiliates, and the officers, directors, employees and agents of the foregoing,
against and from any and all third party Claims arising out of
(i) The unauthorized use by Ritek of any patented invention;
(ii) Any illegal act committed by Ritek in connection with its
performance hereunder; or
(iii) Any breach by Ritek of any provisions hereof, provided that
Ritek shall have the right to appear in any action and/or be
represented by its own counsel at its own cost with respect to
any such Claims.
18. Relationship of Parties:
------------------------
Neither Image nor Ritek shall be deemed a fiduciary, partner nor joint
venturer of the other. Neither Image nor Ritek shall have the right to bind or
obligate the other party without the other party's prior written consent (which
consent may be granted or withheld in such party's sole and absolute
discretion).
<PAGE>
19. Miscellaneous:
--------------
(a) Notices
-------
All notices hereunder shall be in writing and sent by certified or
registered mail (return receipt requested), by facsimile, or messenger, with
receipt of delivery, to the addresses first set forth above or such other
address as may be designated by the respective parties herein.
(b) Unenforceability
-----------------
If there is any conflict between any provision of this Agreement and any
present or future statute, law, ordinance, regulation or collective bargaining
agreement, the latter shall prevail; provided that the provision hereof so
affected shall be limited only to the extent necessary and no other provision
shall be affected.
(c) Amendments
----------
This Agreement cannot be amended, modified, or changed in any way except by
written instrument executed by both parties.
(d) Assignment
----------
Each of Ritek and Image has the right to assign this Agreement to any such
successor entity acquiring all or substantially all of its business or assets or
into which such party is merged or consolidated without the prior written
consent of the other party. Except as set forth in the immediately preceding
sentence, neither this Agreement nor any right or obligation hereunder may
otherwise be assigned without the prior written consent, in each instance, of
the non-assigning party.
(e) No Waiver
---------
No delay in enforcing any right under this Agreement shall constitute a
waiver of such right. No waiver of any default hereunder shall be effective
unless executed in writing by the party charged herewith, nor shall any waiver
operate as a waiver of any default or of the same default on a future occasion.
(f) Confidentiality
---------------
The parties hereby agree that both during the Term hereof and indefinitely
thereafter each shall maintain in strict confidence all terms of this Agreement
and all information relating thereto, including, without limitation, books and
records of accounts, reports, and correspondence, and neither party shall
disclose any such information to a third party without the prior written consent
of the non-disclosing party. Notwithstanding the foregoing, nothing contained
in this Agreement shall prohibit either party from
<PAGE>
disclosing any matter related to this Agreement to the extent required by
applicable law, or court order or subpoena, nor shall Image be prohibited from
disclosing any matter related to this Agreement to the extent required by the
documents evidencing the Senior Debt.
(g) Arbitration of Disputes
-----------------------
Any controversy or claim arising out of or relating to this Agreement, or
the alleged breach thereof, shall be settled by arbitration administered by the
American Arbitration Association ("AAA"), or JAMS, in the discretion of the
party seeking arbitration. The arbitration shall be in accordance with the
Commercial Rules of administrating organization and judgment on the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof.
The place of arbitration shall be in the County of Los Angeles, State of
California. This Agreement shall be governed by and interpreted in accordance
with the laws of the State of California.
Either party may apply to the arbitrator seeking injunctive relief until
the arbitration award is rendered or the controversy is otherwise resolved.
Either party also may, without waiving any remedy under this Agreement, seek
from any court having jurisdiction any interim or provisional relief that is
necessary to protect the rights or property of that party.
Consistent with the expedited nature of arbitration, each party will, upon
the written request of the other party, promptly provide the other with copies
of documents relevant to the issues raised by any claim or counterclaim on which
the producing party may rely in support of or in opposition to any claim or
defense. Any dispute regarding discovery, or the relevance or scope thereof,
shall be determined by the arbitrator(s) which determination shall be
conclusive. Except for good cause shown, all discoveries shall be completed
within 60 days following the appointment of the arbitrator(s).
At the request of a party, the arbitrator(s) shall have the discretion to
order examination by deposition of witnesses to the extent the arbitrator deems
such discovery appropriate. Except for good cause shown, depositions shall
limited to a maximum of three (3) per party. Additional depositions may be
scheduled only with the permission of the arbitrator(s) and for good cause
shown. Except for good cause shown, each deposition shall be limited to a
maximum of seven (7) hours duration. All objections are reserved for the
arbitration hearing except for objections as to the form of the question.
The arbitrator, upon good cause shown, may allow testimony at the
arbitration to be made by telephone if the witness(es) are out of town (i.e.,
more than 2,500 miles from the location of the arbitration hearing).
<PAGE>
The arbitrators shall award to the prevailing party, if any, as determined
by the arbitrators, all of its costs and fees. "Costs and fees" mean all
reasonable pre-award expenses of the arbitration, including the arbitrators'
fees, administrative fees, travel expenses, out-of-pocket expenses such as
copying and telephone, court costs, witness fees, and attorneys' fees.
The award of the arbitrators shall be accompanied by a reasoned opinion.
(h) Signature and Counterpart.
This Agreement may be signed in counterpart, each of which shall be deemed
an original, but all of which together shall constitute the Agreement.
(i) Captions.
The captions herein are inserted for reference and convenience only and in
no way define, limit or describe the scope of this Agreement or interfere with
the provisions herein.
(j) Entire Agreement.
This Agreement contains the entire understanding of the parties and supersedes
all prior oral and written understandings of the parties hereto relating to the
subject matter herein.
/ / /
/ / /
/ / /
ACCEPTED AND AGREED BY:
MRT TECHNOLOGY, LLC IMAGE ENTERTAINMENT, INC.
By_________________________ By___________________________
Rick Marquardt, CEO David Borshell, COO
<PAGE>
ATTACHMENT "A"
(Full Service Price sheet)
<PAGE>
ATTACHMENT "B"
(CEA Price sheet)
<PAGE>
ATTACHMENT "C"
(International Fulfillment Services Price sheet)