10-K 1 outt_10k.txt 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] for the fiscal year ended March 31, 2001 OR [__] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] for the transition period from ____________to_________ Commission File Number: 0-21322 OUT-TAKES, INC. (Name of small business issuer in its charter) Delaware 95-4363944 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3811 Turtle Creek Blvd., Suite 350 , Dallas, Texas 75219 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (214) 528-8200 Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. ___ The issuer's revenues for the most recent fiscal year were $547,755. 1 The aggregate market value of the voting stock held by non-affiliates as of March 31, 2001 was $********. The number of shares outstanding of the issuer's Common Stock as of March 31, 2001 was 20,788,122. Transitional Small Business Disclosure Format (Check One): Yes No X ___________________________________________________________________________ Out-Takes, INC. FORM 10-K ANNUAL REPORT FOR FISCAL YEAR ENDING MARCH 31, 2000 TABLE OF CONTENTS Page ----------------- ---- PART I 1 ITEM 1. DESCRIPTION OF BUSINESS 1 ITEM 2. DESCRIPTION OF PROPERTY 4 ITEM 3. LEGAL PROCEEDINGS 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12 PART II 12 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 12 ITEM 6. SELECTED FINANCIAL DATA 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 13 ITEM 8. FINANCIAL STATEMENTS 29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 38 PART III 38 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 38 ITEM 11. EXECUTIVE COMPENSATION 39 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 39 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 39 2 PART IV 39 ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K 39 PART I ITEM 1. DESCRIPTION OF BUSINESS Except for historical financial information contained herein, the matters discussed in this annual report may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended and subject to the safe harbor created by the Securities Litigation Reform Act of 1995. Such statements include declarations regarding the intent, belief or current expectations of the Company and its management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties; actual results could differ materially from those indicated by such forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: that the information is of a preliminary nature and may be subject to further adjustment, the possible unavailability of financing, risks related to the development, acquisition and operation of power plants, the impact of avoided cost pricing, energy price fluctuations and gas price increases, the impact of curtailment, start_up risks, general operating risks, the dependence on third parties, risks associated with the power marketing business, changes in government regulation, the availability of natural gas, the effects of competition, the dependence on senior management, (xvii) volatility in the Company's stock price, fluctuations in quarterly results and seasonality, and other risks identified from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission. GENERAL Out-Takes, Inc., a corporation incorporated in Delaware on March 18, 1992 ("the Company"), up until October 26, 1998, was engaged in the sale of photographic portraits of children, adults and family groups. On or about August 31, 1998, the Company acquired all of the issued and outstanding units of equity of Los Alamos Energy, LLC, which operates a 1 mega watt power plant in Los Alamos, California, which produces electricity from "waste gas," and shifted its business emphasis to that of electrical energy provider. On or about October 26, 1998, the Company leased its photo studio assets to Colorvision International, Inc., completing the shift of its business focus to the providing of electrical energy. 3 LOS ALAMOS ENERGY Los Alamos Energy was formed in June, 1996, for the purpose of becoming a principal electricity provider in the State of California. With the acquisition of Los Alamos Energy, the Company is engaged in a "niche" area of electricity production from "waste gas," natural gas which is produced in conjunction with oil production, but for which there is no market. Normally, waste gas is flared, or burned. The procurement of waste gas provides an inexpensive source of fuel for the Company's generators. The Company currently provides all of the electrical energy to the unincorporated town of Los Alamos, California, through Pacific Gas and Electric Company (PG&E), which is mandated by current law to purchase all the electrical energy that the Company can produce. On August 31, 1998, the Company entered into a Share Purchase Agreement (the "Acquisition Agreement") whereby the Company acquired (the "Acquisition") all of the issued and outstanding equity interests in Los Alamos Energy, LLC, a California limited liability company ("LAE"). The purchase price to be paid for the equity interests of LAE is Four Million Dollars ($4,000,000), which was paid by Promissory Notes (the "Notes") to the holders of LAE equity (the "Equity Holders") calling for interest on all outstanding amounts to accrue at the rate of ten percent (10%) per annum. Payments of principal and accrued interest under the Notes shall be made monthly in arrears up to the maturity date, which is the fifth anniversary of the Notes. The Notes may be prepaid at any time without premium or penalty. The Acquisition Agreement provides that, in the event the Equity Holders shall desire to do so, they may convert their indebtedness to common stock of the Company representing in the aggregate ninety percent (90%) of the issued and outstanding shares of such common stock as of the date of such conversion. The Acquisition Agreement provides that it is a condition of the conversion that the Company effect a reverse stock split of one (1) share for every one hundred (100) shares issued and outstanding as of such date. LAE contemplates that a significant number of persons currently holding promissory notes and/or working interests in its electricity production (collectively, "Interest Holders") will exercise their rights to convert such interests into the equity of LAE, and subsequently to join in the conversion of the Notes into common stock of the Company. Presently, management of LAE anticipates that, prior to the conversion of the Notes and after giving effect to the contemplated reverse stock split, the Company will issue approximately three million (3,000,000) additional shares of common stock, and that subsequent to completing the conversion, the Equity Holders and Interest Holders will own, in the aggregate, approximately two million eight hundred eighty thousand (2,880,000) shares of the Company's common stock, representing ninety percent (90%) of the total amount of common stock estimated to be issued and outstanding as of the date such conversion rights are exercised. As of March 31, 2000, the holders have not yet exercised their right to convert the note to common stock. 4 The indebtedness represented by the Notes is secured by (a) a Security Agreement, granting a first lien and security interest upon all of the assets of the Company; and (b) a pledge of the common stock of the Company held by Photo Corporation Group Pty Limited, an Australian corporation, which is the controlling stockholder of the Company. The stock pledge grants the Holders specific rights under certain circumstances, including the right to receive distributions made by the Company in respect of its common stock and the right to vote the pledged shares, for so long as the Notes are in force. The purchase price to be paid by the Company for all of the issued and outstanding equity of LAE was negotiated based upon several factors, including, without limitation, the asset value of LAE and its projected income from operations based, in part, upon management's estimates of its natural gas reserves and its current contracts. LAE is engaged in the collection and distribution of natural gas from properties owned or leased by it in the State of California, and management of LAE intends to position LAE to become an important independent power producer, and to benefit as a principal provider of electricity to consumers in California and elsewhere as deregulation is implemented. LAE will be operated as a wholly-owned subsidiary of the Company. THE MARKET The power industry represents the third largest industry in the United States, with an estimated end_user market of over $250 billion of electricity sales in 1998 produced by an aggregate base of power generation facilities with a capacity of approximately 750,000 megawatts. In response to increasing customer demand for access to low_cost electricity and enhanced services, new regulatory initiatives have been and are continuing to be adopted at both the state and federal level to increase competition in the domestic power generation industry. Management believes that this increase in competition will benefit rather than harm the Company, because the Company will be free to sell its power to any customer, rather than to just PG&E, who is now obligated to buy all the power the Company can produce. Management expects that with the advent of deregulation, prices for power will increase over and above what it the Company is being paid by PG&E. The power generation industry historically has been largely characterized by electric utility monopolies producing electricity from old, inefficient, high-cost generating facilities selling to a captive customer base. Industry trends and regulatory initiatives have transformed the existing market into a more competitive market where end users purchase electricity from a variety of suppliers, including non-utility generators, power marketers, public utilities and others. There is a significant need for additional power generating capacity throughout the United States, both to satisfy increasing demand, as well as to replace old and inefficient generating facilities. Due to environmental and economic considerations, management believes this new capacity will be provided predominantly by gas- 5 fired facilities. Management believes that these market trends will create substantial opportunities for efficient, low-cost power producers that can produce and sell energy to customers at competitive rates. In addition, as a result of a variety of factors, including deregulation of the power generation market, utilities, independent power producers and industrial companies are disposing of power generation facilities. To date, numerous utilities have sold or announced their intentions to sell their power generation facilities and have focused their resources on the transmission and distribution segments. Many independent producers operating a limited number of power plants are also seeking to dispose of their plants in response to competitive pressures, and industrial companies are selling their power plants to redeploy capital in their core businesses. STRATEGY The Company's strategy is to expand its existing power plant to 4 mW, and to further expand its power producing capacity by exploring acquisition opportunities in the power market, by exploring opportunities that exist to merge with other similarly situated small electrical power production companies which produce electrical energy from waste gas, in order to expand its current power production capacity, and to capture more of a market share of this growing industry, which the Company predicts will increase with the advent of deregulation of the power industry. DESCRIPTION OF FACILITIES The Company has purchased all of the natural gas reserves on the Blair Oil and Gas Field ("the field"), which is located adjacent to the unincorporated town of Los Alamos, California, on Rancho El Roblar, approximately 60 miles north of Santa Barbara along US 101, and which is operated by Texaco. The field has 15 oil wells producing approximately 500 barrels of oil per day, and from which approximately one million cubic feet (1073 BTU) of natural gas was being flared. The gas recoverable reserve is estimated to be sufficient to provide electrical production for the next several years. During 1986, the Blairs entered into an agreement with American Cogenics of California ("ACI") to convert the waste gas into electricity, and two gas driven, CAT G398T generator sets ("Gensets"), each respectively 550 kilowatts and 600 kilowatts, were installed, from which electricity was generated and sold to PG&E, pursuant to a power purchase agreement, dated November 28, 1988 (the "PG&E contract"). In early 1995, the Santa Barbara County Air Pollution Control District ("APCD") shut down the operation due to emissions violations. During October, 1996, Los Alamos Energy consummated the purchase and sale agreement with American Cogenics of California ("ACI"), dated August 28, 1996, and acquired the rights to the gas, the two Gensets, the PG&E contract, the FERC certification, and power purchase agreement with Texaco, and brought the equipment into APCD compliance. 6 When the Gensets were initially installed, there were only a few wells producing oil and gas on the field. Since that time, production has increased from about 150 MCFD to about 1,000 MCFD currently, providing the potential of adding more generators to increase the Company's current capacity from 1 mega watt (1 mW) to 4mW, at an estimated cost of $1.2 million to $1.5 million. ATLAS POWER Atlas Power is engaged in the business of power system and control system engineering for owners, engineers, manufacturers and construction companies serving the power industry. Atlas provides electrical design, project management, acceptance testing, startup and system studies for power plants and industrial facilities both domestically and internationally. Atlas offers in house electrical engineering and on-site development. RECENT DEVELOPMENTS Recent Developments. California has experienced a power crisis as demand for power far outstripped supply. Since June 2000, wholesale power prices in California have steadily increased to an average cost of 18.16 cents per kWh for the seven month period of June 2000 through December 2000, as compared to an average cost of 4.23 cents per kWh for the same period in 1999. Rolling blackouts have occurred as a result of a broken deregulated electricity market. During 2000, the Investor-Owned Utilities (IOUs) collected only approximately 5.4 cents per kWh through frozen rates for the recovery of its wholesale power costs. Many factors have contributed to the high wholesale power prices, including: - Economic and population growth in California. - A lack of new power supplies to meet the growing demand. - A substantial increase in natural gas prices. Since many power plants serving California are natural gas fired, the natural gas prices paid by generators in producing electricity are reflected in the price of power charged by the generators. - An unusually dry fall and winter in the Pacific Northwest, which reduced the amount of available hydroelectric power from that region (typically, California imports a portion of its power from this source). - Uncoordinated power plant outages due to scheduled maintenance or unplanned outages. 7 - The large number of power generating facilities in California nearing the end of their useful lives, resulting in increased downtime (either for repairs or because they have exhausted their air pollution credits and replacement credits have become too costly to acquire on the secondary market). - Dysfunctional power markets that produced unjust and unreasonable price levels. - The tendency of frozen retail rates to eliminate the incentive for customers to conserve energy and reduce demand. - Continued obstacles to new power plant construction in California, including delays in regulatory approvals to permit the California investor-owned utilities to enter into long-term power purchase contracts as a hedge against price fluctuations. After permission was given in August 2000, there have been further delays in regulatory approvals of reasonableness standards for entering into bilateral contracts. These high wholesale prices, coupled with the freeze on the utilities' retail rates mandated by the 1996 restructuring legislation, resulted in substantial increases in the amount of undercollections. As of December 31, 2000, the amount of undercollections recorded by Southern California Edison, for example, was $4.5 billion. The growing undercollections and the concerns of lenders and others that electric utilities might not obtain regulatory approval of rate increases sufficient to cover ongoing procurement costs and recover past costs materially and adversely affected their liquidity, becoming particularly pronounced in January 2001. With its revenues providing substantially less cash flow than needed for power purchases and other ongoing costs, these utilities soon had no unused borrowing capacity under their existing credit facilities and were unable to arrange any additional facilities. Moreover, they found themselves unable to issue commercial paper or otherwise access the capital markets on reasonable terms. To conserve cash and enable them to continue essential business operations, some utilities temporarily suspended the payment of certain obligations for principal and interest on outstanding debt and for purchased power, including to the PX or the ISO and to power producers that are qualifying facilities (QFs) such as Los Alamos Energy. The California Independent System Operator and the California Power Exchange (the ISO and PX), both California public benefit non-profit corporations, began operating on March 31, 1998, as provided for under AB 1890. The FERC has jurisdiction over both the ISO and the PX. Pursuant to the FERC order of December 15, 2000, the ISO Board of Governors, which included representatives of market participants, was replaced with a non-stakeholder board who are independent of market participants. 8 The ISO operates and controls most of the state's electric transmission facilities (which continue to be owned and maintained by the California utilities) and provides comparable open access to electric transmission service. The ISO accepts balanced schedules for supply and load from scheduling coordinators, including the PX and the Utility, and market participants and manages the availability of electric transmission on a statewide basis for these transactions. The ISO also purchases necessary generation and ancillary services on a real-time basis to maintain grid reliability. The ISO is required to ensure reliable transmission services consistent with planning and operating reserve criteria no less stringent than those established by the Western Systems Coordinating Council and the North American Electric Reliability Council. Oversight of utility distribution systems remains with the CPUC. Beginning in May 2000, wholesale energy prices in the California markets increased to levels well above 1999 levels. In response, on June 28, 2000, the ISO Board of Governors reduced the price cap applicable to the ISO's wholesale energy and ancillary services markets from $750/MWh to $500/MWh. The ISO subsequently reduced the price cap to $250/MWh on August 1, 2000. During this period, however, the California Power Exchange Corporation ("PX") maintained a separate price cap set at a much higher level applicable to the "day-ahead" and "day-of" markets administered by the PX. On August 23, 2000, the FERC denied a complaint filed August 2, 2000 by San Diego Gas & Electric Company ("SDG&E") that sought to extend the ISO's $250 price cap to all California energy and ancillary service markets, not just the markets administered by the ISO. However, in its order denying the relief sought by SDG&E, the FERC instructed its staff to initiate an investigation of the California power markets and to report its findings to the FERC and held further hearing procedures in abeyance pending the outcome of this investigation. On November 1, 2000, the FERC released a Staff Report detailing the results of the Staff investigation, together with an "Order Proposing Remedies for California Wholesale Markets" ("November 1 Order"). In the November 1 Order, the FERC found that the California power market structure and market rules were seriously flawed, and that these flaws, together with short supply relative to demand, resulted in unusually high energy prices. The November 1 Order proposed specific remedies to the identified market flaws, including: (1) imposition of a so-called "soft" price cap at $150/MWh to be applied to both the PX and ISO markets, which would allow bids above $150/MWh to be accepted, but will subject such bids to certain reporting obligations requiring sellers to provide cost data and/or identify applicable opportunity costs and specifying that such bids may not set the overall market clearing price, (2) elimination of the requirement that the California utilities sell into and buy from the PX, (3) establishment of independent non-stakeholder governing boards for the ISO and the PX, and (4) establishment of penalty charges for scheduling deviations outside of a prescribed range. 9 In the November 1 Order the FERC established October 2, 2000, the date 60 days after the filing of the SDG&E complaint, as the "refund effective date." Under the November 1 Order, rates charged for service after that date through December 31, 2002 will remain subject to refund if determined by the FERC not to be just and reasonable. While the FERC concluded that the Federal Power Act and prior court decisions interpreting that act strongly suggested that refunds would not be permissible for charges in the period prior to October 2, 2000, it noted that it was willing to explore proposals for equitable relief with respect to charges made in that period. Under FERC regulations, QF contracts are exempt from regulation under the Federal Power Act, which is the legislation that provides the authority for the FERC to compel refunds or frame other equitable relief with respect to the California wholesale markets. Therefore, it is the belief of the IPPs that any refund or other equitable remedy that the FERC may impose with respect to the California wholesale markets will not affect the IPPs' ability to pursue payment by the IOUs of all past due amounts as have been accumulated. On December 14, 2000, following an announcement from the ISO that electricity generators were refusing to sell into the California market due to concerns about the financial stability of SCE and Pacific Gas and Electric Company, the U.S. Secretary of Energy issued an order requiring power generators to make arrangements to generate and deliver electricity as required by the ISO after the ISO certifies it has been unable to secure adequate electricity supplies in the market. After being renewed multiple times, the order expired on February 6, 2001. However, on February 7, 2001, a federal court judge issued a temporary restraining order requiring power suppliers to sell to the California grid. On February 23, 2001, a federal court judge issued a stay of litigation in the case of four power suppliers who agreed to extend their power sales pending a hearing set for March 16, 2001. On March 16, 2001, a federal court judge put the case on hold until March 20, 2001. On March 21, 2001, a federal court judge ordered one of the power suppliers to continue to sell power to the California grid. The three other power suppliers had signed an agreement with the judge voluntarily agreeing to continue to sell power to the grid while awaiting a review of the issue by the FERC. On April 6, 2001, the United States Ninth Circuit Court of Appeals issued a stay order, suspending the lower court's March 21 order until a final appeals ruling can be issued. On December 15, 2000, the FERC issued an order adopting remedies for what the FERC characterized as the seriously flawed electric power markets in California. Among other matters, the FERC: - Eliminated, effective December 15, 2000, the requirement that the California investor-owned utilities sell all of their generation into and buy all of their energy needs from the PX, which results in over reliance on spot market (i.e., real-time) purchases. The order encourages the utilities to meet their purchase power needs through bilateral long-term contracts of two years or more and to adopt a balanced portfolio of contracts to mitigate cost exposure. To encourage the execution of bilateral contracts, the order requires the PX's rate schedules to terminate effective at the close of business on April 30, 2001. 10 - Adopted a price benchmark at $74 per MWh for assessing prices of five- year energy supply contracts to be used by the FERC in assessing any complaints regarding justness and reasonableness of pricing long-term contracts. - Permitted penalties to be imposed on market participants who do not schedule at least 95% of their load in advance of the ISO's real-time market (through self-scheduling, bilateral contracts, or the PX markets), to reduce the reliance on the ISO's real-time market to meet supply. A penalty charge will be assessed when more than 5% of a market participant's load is scheduled into the ISO's real-time market. Penalties are to be disbursed to other market participants who schedule their load properly. The FERC order does not contain provisions for penalties to be imposed on generators who do not schedule in advance. - Established an interim $150 per MWh "soft cap" modification of the single price auction so that bids above $150 MWh will not set the market clearing prices paid to all bidders at or below $150 per MWh. Bids above the $150 MWh level will trigger certain weekly reporting requirements and FERC monitoring. These price provisions will be in effect until April 30, 2001. - Deferred the consideration of retroactive refund issues linked to protective orders associated with the volatile prices experienced in California this past summer. Although the period for potential refund liability continues until December 31, 2002, with respect to specific transactions, refund potential on a transaction will close after 60 days unless the FERC has issued written notification to the seller that its transaction is still under review. IOUs argue that the actions outlined in the order may not provide a complete solution that ensures reliability of the state's electric supply and relief from future price increases, particularly since the FERC order fails to require sellers to enter into forward contracts at reasonable prices, and fails to provide an effective price cap. In addition, the FERC order does not address issues associated with retroactive refund and retroactive remedial authority issues. California IOUs currently operate in a highly regulated environment in which it has an obligation to deliver electric service to customers in return for an exclusive franchise within its service territory and certain obligations of the regulatory authorities to provide just and reasonable rates. In 1994, state lawmakers and the CPUC initiated the electric industry restructuring process. In 1996, the California Legislature enacted comprehensive restructuring legislation. IOUs were directed by the CPUC to divest the bulk of its generation portfolio. Today, those generating plants are owned by independent power companies. Along with electric industry restructuring, a mandated multi-year freeze on the rates that IOUs could charge their customers was mandated and transition cost recovery mechanisms allowing IOUs to recover their stranded costs associated with generation-related assets were implemented. 11 On January 19, 2001, PG&E was no longer able to continue purchasing power for its customers because of a lack of creditworthiness and the state of California authorized the California Department of Water Resources (DWR) to purchase electricity for the PG&E's customers. Until January 31, 2001, the PX provided an auction process, intended to be competitive, to establish hourly transparent market clearing prices for electricity in the markets operated by the PX. The PX operated two markets: the day-ahead market where market participants purchase power for their customers' needs on the following day and the day-of-or hour-ahead market where market participants purchase power needed to serve their customers on the same day. The PX set a market-clearing price for electricity by matching all demand bids (the amount of energy that an eligible customer is willing to purchase and the maximum price that the customer is willing to pay) with supply bids (the price at which a seller is prepared to sell energy) ranked from lowest to highest. The highest-accepted generation supply bid used to serve load set the PX market-clearing price for electricity. The market- clearing price then became the single cost for electricity throughout California for that energy delivery hour. On January 31, 2001, the PX suspended its day-of and day-ahead markets in response to the FERC's order directing the PX to comply with the terms of its December 15, 2000 order and implement a $150 per MWh "soft" price cap. The FERC ordered the PX to recalculate all PX transactions since December 15, 2000. The PX subsequently filed for bankruptcy protection. Some generation providers refused to sell power into the California markets based on their concern as to the credit quality of the California investor-owned utilities whose rates were still frozen. The Secretary of the U.S. Department of Energy (DOE) ordered such providers to continue selling into the California markets on request by the ISO. On January 18, 2001, the California Assembly passed Senate Bill 7X that appropriated $400 million and authorized the DWR to use such funds to purchase power at no more than 5.5 cents per kWh (far less than the current wholesale market rates in early 2001) and then resell it to the Utility at cost to enable the Utility to continue to serve its customers. The DWR was authorized to purchase power through January 31, 2001. On February 1, 2001, the California Governor signed Assembly Bill No. 1 (AB 1X) which was passed by the California Legislature during a special session to take effect immediately as an urgency statute. AB 1X authorizes the DWR to enter into contracts for the purchase of electric power for such periods and at such prices as the DWR deems appropriate consistent with the objectives of AB 1X to have an overall portfolio of contracts resulting in reliable service at the least cost. AB 1X prohibits the DWR from entering into any contract after January 1, 2003. AB 1X requires the DWR to sell power that it purchases directly to retail end use customers, except as may be necessary to maintain system integrity. AB 1X provides that the DWR will retain title to the power it purchases and that payment for any sale of power by the DWR is a direct obligation of retail end use customers to the DWR. The DWR may contract with the electric utilities for the electric utilities to transmit and distribute the power purchased and sold by the DWR and to provide billing, collection, and other 12 related services, as agent of the DWR, on terms that reasonably compensate the utilities. AB 1X does not authorize the DWR to take ownership of transmission, generation, or distribution assets of any electric utility. AB 1X states it shall not be construed (1) to reduce or modify any electrical corporation's obligation to serve, or (2) to obligate the DWR for any procurement cost obligations of the utilities that existed before January 31, 2001. AB 1X authorizes the CPUC to set rates to cover revenue requirements of DWR's power purchasing program, but prohibits the CPUC from increasing electric rates for residential customers who use less power than 130% of their existing baseline quantities, until the DWR has recovered the costs of power it has purchased for retail customers. The U.S. Secretary of Energy issued a temporary order on January 19, 2001, requiring the gas suppliers to continue to make deliveries to avoid a worsening natural gas shortage emergency. However, this order expired on February 7, 2001, and certain companies, representing about 10% of the IOUs' natural gas suppliers, terminated deliveries after the order expired. On March 9, 2001, the FERC directed 13 wholesale sellers of energy to refund $69 million or submit cost-of-service information to the FERC to justify their prices above $273/MWh during ISO Stage 3 emergencies in January 2001. On April 9, 2001, SCE filed opposing the order as inadequate, particularly because the FERC is unwilling to exercise any control over the sellers' exercise of market power during periods other than Stage 3 emergencies. On March 16, 2001, the FERC ordered six wholesale sellers of energy to refund an additional $55 million or submit cost-of-service information to the FERC to justify their prices above $430/MWh during ISO Stage 3 emergencies in February 2001. A Stage 3 emergency refers to 1.5% or less in reserve power, which could trigger rotating blackouts in some neighborhoods. On March 27, 2001, the CPUC issued a decision in which it noted that although the DWR has assumed responsibility to purchase some of the utilities' power requirements, it has not committed to purchase all of the utilities' net open position, i.e., the power needs of the retail electric customers that cannot be met by utility-owned generation or power under contract to the utilities. To the extent the DWR does not buy enough power to cover the Utility's net open position, the ISO purchases emergency power on the high- priced spot market to meet system reliability requirements and the net open position. The ISO may attempt to charge the IOUs a proportionate share of the ISO's purchases. The IOUs believe that under the current circumstances and applicable tariffs they are not responsible for such ISO charges. In addition, on March 27, 2001, the CPUC adopted several other significant decisions regarding California's current energy crisis. IOUs have announced that these decisions are regarded in many respects as unclear or ambiguous, and in some respects unlawful and unconstitutional. Many elements of the decisions will be developed further in ongoing proceedings, the timing of which is uncertain. 13 In an interim order adopted on March 27, 2001, the CPUC granted California utilities a rate increase in the form of a three-cents per kilowatt-hour (kWh) surcharge on electricity sold, effective immediately (rate stabilization decision). However, the three-cent surcharge will not be collected in rates until the CPUC establishes an appropriate rate design. The CPUC proposed a tiered rate design in an assigned commissioner's ruling and asked for comments. The assigned commissioner said the tiered rate design is intended to encourage conservation by requiring customers to pay more for electricity above a threshold usage level. The three-cent surcharge will not apply to residential electricity usage below 130% of baseline rates or to certain low-income customers. The utilities have asked the CPUC to immediately adopt an interim rate increase that would allow the rate change to go into effect sooner. The CPUC stated in its interim order that the utilities are to use revenue generated by the three-cent surcharge to pay power costs incurred after March 27, 2001, but that they must refund the surcharge to ratepayers if they do not properly use it to pay power costs. The CPUC also affirmed that an earlier one-cent per kWh surcharge granted on January 4, 2001 is now permanent under California legislation AB 1X, adopted in February 2001. On March 27, 2001, the CPUC also ordered utilities to begin making payments to QFs for power deliveries on a going forward basis, commencing with April 2001 deliveries. Utilities must pay QFs within 15 days of the end of the QF's billing period, and QFs are allowed to establish 15-day billing periods. Failure to make a payment when due will result in a fine equal to the amount owed. The CPUC also modified the formula used in calculating payments to most QFs by substituting natural gas index prices based on deliveries at the Oregon border in the place of index prices at the Arizona border. The order further revises other aspects of the payment formula to take into account changes in intrastate gas transportation costs. The changes apply where appropriate regardless of whether the QF uses natural gas or other resources such as solar or wind. At its March 27, 2000, meeting, the CPUC deferred action on a proposed order instituting an investigation whether California's investor-owned utilities have complied with past CPUC decisions authorizing the formation of their holding companies and governing affiliate transactions, as well as applicable statutes. At its meeting on April 3, 2001, the CPUC adopted the proposed order, which reopens past CPUC decisions authorizing the utilities to form holding companies and initiates an investigation into (1) whether the holding companies violated requirements to give priority to the capital needs of their respective utility subsidiaries; (2) whether "ring fencing" actions by Edison International and PG&E Corporation and their respective nonutility affiliates also violated the requirements to give priority to the capital needs of their utility subsidiaries; (3) whether the payment of dividends by the utilities violated requirements that the utilities maintain dividend policies as though they were comparable stand-alone utility 14 companies; (4) any additional suspected violations of laws or CPUC rules and decisions; and (5) whether additional rules, conditions, or other changes to the holding company decisions are necessary. As this situation has deteriorated, California has taken steps to restore a predictable and reliable power market to the State. Recently, California adopted legislation permitting it to issue long-term revenue bonds to provide funding for wholesale purchases of power. The bonds will be repaid with the proceeds of payments by retail customers over time. The California Department of Water Resources sought bids for long-term power supply contracts. In early February 2001, the DWR announced agreements on contracts totaling about 5,000 megawatts and ranging from three years to 10 years. The state is expected to purchase about one-third of the electricity used by the IOUs' customers. Calpine, for example, signed three significant long-term power supply contracts with DWR, including a 10-year, $4.6 billion fixed-price contract with DWR to provide electricity to the State of California, in which Calpine committed to sell up to 1,000 megawatts of electricity, with initial deliveries of 200 megawatts starting October 1, 2001, and increasing to 1,000 megawatts by January 1, 2004. This contract will continue through 2011. The electricity will be sold directly to DWR on a 24-hour, 7-day-a-week basis. The electric utility industry in the United States is currently undergoing a period of dramatic change as a result of regulatory and competitive factors. Among the primary agents of change has been the Energy Act, which allows IPPs to access a utility's transmission network in order to sell electricity to other utilities. This enhances the incentive for IPPs to build cogeneration plants for a utility's large industrial and commercial customers, and sell energy generation to other utilities. Also, electricity sales for resale rates are being driven down by wholesale transmission access and numerous potential new energy suppliers, including power marketers and brokers. Although the Energy Act does not permit retail customer access, it was a major catalyst for the current restructuring and consolidation taking place within the utility industry. Numerous federal and state initiatives are in varying stages to promote wholesale and retail competition. Among other things, these initiatives allow customers to choose their electricity provider. Some states (such as California) have approved initiatives that result in a separation of the ownership and/or operation of generating facilities from the ownership and/or operation of transmission and distribution facilities. Enactment of these initiatives would require numerous issues to be resolved, including those significant issues relating to recovery of any stranded investments, full cost recovery of energy produced, and other issues related to the current energy crisis in California. As a result of this crisis, many states have either discontinued or delayed implementation of initiatives involving retail deregulation. 15 Subsequent Events PG&E said that neither its parent holding company nor any of the parent's other subsidiaries are affected by PG&E's filing. PG&E cited as reasons for its bankruptcy filing the failure by the State of California to assume full procurement responsibility for PG&E's net short position, the CPUC's actions on March 27 and April 3, 2001, that created new payment obligations for PG&E, lack of progress in negotiations with the state to provide recovery of power purchase costs, the CPUC's adoption of an illegal and retroactive accounting change, and the slow progress of discussions with representatives of Governor Davis. On April 9, 2001, the SCE and the California Department of Water Resources (CDWR) executed a Memorandum of Understanding (MOU) which sets forth a comprehensive plan calling for legislation, regulatory action and definitive agreements to resolve important aspects of the energy crisis, and which, if implemented, is expected to help restore the utilities' creditworthiness and liquidity. The Governor of the State of California and his representatives participated in the negotiation of the MOU, and the Governor endorsed implementation of all the elements of the MOU. If required legislation is not adopted and definitive agreements executed by August 15, 2001, the MOU may be terminated by SCE or the CDWR. Implementation of the MOU will require numerous actions by the parties and by other California state agencies and the FERC, and would require significant changes in the regulatory decisions and other actions. Some key elements of the MOU include: (1) SCE will sell their transmission assets to the CDWR, or another authorized California state agency, at a price equal to 2.3 times their aggregate book value, or approximately $2.76 billion. SCE will agree to operate and maintain the transmission assets for at least three years, for a fee to be negotiated. (2) Two dedicated rate components will be established to assist IOUs in recovering the net undercollected amount of its power procurement costs through January 31, 2001. (3) SCE will continue to own its generation assets, which will be subject to cost-based ratemaking, through 2010. SCE will be entitled to collect revenues sufficient to cover its costs from January 1, 2001, associated with the retained generation assets and existing power contracts. (4) The CDWR will assume the entire responsibility for procuring the electricity needs of retail customers through December 31, 2002, to the extent that those needs are not met by generation sources owned by or under contract to SCE (The unmet needs are referred to as SCE's "net short position.") The IOUs will resume procurement of its net short position after 2002. After the other elements of the MOU are implemented, SCE may enter into a settlement of or dismiss its federal district court lawsuit against the CPUC, the State of California or any of its agencies, or against the federal government seeking recovery of past undercollected costs. 16 On April 6, 2001, PG&E filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. As of March 31, 2001, Los Alamos Energy had recorded approximately $228,000 in accounts receivable with PG&E as a bad debt. Therefore, Los Alamos Energy has provided for a reserve against collection uncertainties for these PG&E receivables. Los Alamos Energy has historically sold power to PG&E, which is one of the California utilities that is subject to the rate freeze. Due to uncertainties arising form PG&E's bankruptcy, Los Alamos Energy elected to terminate its contract with PG&E, and instead entered into a Participating Generator Agreement with the California Independent System Operator ("CAISO"), and is currently selling power to the CAISO through the Automated Power Exchange as its Scheduling Agent. GOVERNMENT REGULATION The Company is subject to complex and stringent energy, environmental and other governmental laws and regulations at the federal, state and local levels in connection with the development, ownership and operation of its energy generation facilities. Federal laws and regulations govern transactions by electrical and gas utility companies, the types of fuel which may be utilized by an electric generating plant, the type of energy which may be produced by such a plant and the ownership of a plant. State utility regulatory commissions must approve the rates and, in some instances, other terms and conditions under which public utilities purchase electric power from independent producers and sell retail electric power. Under certain circumstances where specific exemptions are otherwise unavailable, state utility regulatory commissions may have broad jurisdiction over non-utility electric power plants. Energy producing projects also are subject to federal, state and local laws and administrative regulations which govern the emissions and other substances produced, discharged or disposed of by a plant and the geographical location, zoning, land use and operation of a plant. Applicable federal environmental laws typically have both state and local enforcement and implementation provisions. These environmental laws and regulations generally require that a wide variety of permits and other approvals be obtained before the commencement of construction or operation of an energy- producing facility and that the facility then operate in compliance with such permits and approvals. FEDERAL ENERGY REGULATION As described below, the exemptions from extensive federal and state regulation afforded by PURPA to Qualifying Facilities are important to the Company and its competitors. The project that the Company currently owns meet the requirements under PURPA to be a Qualifying Facilities and will be maintained on that basis. Additionally, management expects regulatory impositions on power marketing operations to be minimal under existing regulatory standards. 17 PURPA The enactment of the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA") and the adoption of regulations thereunder by the Federal Energy Regulatory Commission ("FERC") provided incentives for the development of small power facilities (those having a capacity of less than 80 megawatts.) A domestic electtricity generating project must be a Qualifying Facility ("QF") under FERC regulations in order to take advantage of certain rate and regulatory incentives provided by PURPA> PURPA exempts QF's from most provisions of the Federal Power Act ("FPA") and, except under certain limited cicrcumstances, state laws concerning rate or financial regulation. In order to be a Qualifying Facility, a cogeneration facility must (i) produce not only electricity but also a certain quantity of thermal energy (such as steam) which is used for a purpose other than power generation, (ii) meet certain energy operating and efficiency standards when oil or natural gas is used as a fuel source and (iii) not be controlled or more than 50% owned by an electric utility or electric utility holding company, or any combination thereof. PURPA provides two primary benefits to Qualifying Facilities owned and operated by non_utility generators. First, Qualifying Facilities under PURPA are exempt from certain provisions of PUHCA, the Federal Power Act (the "FPA") and, except under certain limited circumstances, state laws respecting rate and financial regulation. Second, PURPA requires that electric utilities purchase electricity generated by Qualifying Facilities at a price equal to the purchasing utility's full "avoided cost" and that the utility sell back_up power to the Qualifying Facility on a non_discriminatory basis. Avoided costs are defined by PURPA as the "incremental costs to the electric utility of electric energy or capacity or both which, but for the purchase from the Qualifying Facility or Qualifying Facilities, such utility would generate itself or purchase from another source." The FERC regulations also permit Qualifying Facilities and utilities to negotiate agreements for utility purchases of power at rates other than the purchasing utility's avoided cost. Although public utilities are not required by PURPA to enter into long_term contracts, PURPA helped to create a regulatory environment in which it has become more common for such contracts to be negotiated or executed through selective procurement or competitive bidding. If Congress amends PURPA, the statutory requirement that an electric utility purchase electricity from a Qualifying Facility at full avoided costs could be eliminated. Although current legislative proposals specify the honoring of existing contracts, repeal of the statutory purchase requirements of PURPA going forward could increase pressure to renegotiate existing contracts. Any changes which result in lower contract prices could have an adverse effect on the Company's operations and financial position. See Competition. 18 PUHCA Under the Public Utility Holding Company Regulation ("PUHCA"), any person (defined by PUHCA to include corporations and partnerships and other legal entities) which owns or controls ten percent or more of the outstanding voting securities of a "public utility company" or a company which is a "holding company" of a "public utility company" is subject to registration with the Securities and Exchange Commission (the "Commission") and regulation under PUHCA, unless such person is eligible for an exemption, such as is available to Qualifying Facilities under PURPA, or as established elsewhere under PUHCA. A registered holding company is required by PUHCA to limit its operation to a single integrated utility system and to divest any other operations not functionally related to the operation of that utility system. THE ENERGY ACT Congress passed the Energy Act to promote further competition in the development of new wholesale power generation sources. Through amendments to PUHCA, the Energy Act encourages the development of independent power projects which will be certified by the FERC as exempt wholesale generators ("EWGs"). The owners or operators of these facilities are exempt from the provisions of PUHCA. The Energy Act also provides the FERC with extensive new authority to order electric utilities to provide other electric utilities, Qualifying Facilities and independent power projects with access to their transmission systems. However, the Energy Act does preclude the FERC from ordering transmission services to retail customers and prohibits sham wholesale energy transactions which appear to provide wholesale service, but actually are providing service to retail customers. A company engaged in the ownership or operation of electric power generation and transmission facilities faces certain types of regulation for its international activities. The principal regulatory consideration for international projects is PUHCA, since it is broadly applicable to the ownership and operation of power facilities (including generation and transmission facilities) both inside and outside of the United States. For international projects, the principal basis for exemption from PUHCA is by obtaining EWG status from the FERC. EWG status is even more beneficial for international projects because, although EWGs are not permitted to make retail sales in the United States, retail sales by EWGs are generally allowed in international markets. Another way to obtain an exemption from PUHCA for foreign ownership and operation activities is by filing a foreign utility company determination ("FUCO") with the Commission. However, FUCO filings are less frequently used, because unlike EWGs, no formal regulatory order is issued confirming the status of a FUCO, and more rigorous state commission scrutiny is entailed. Structuring the Company's activities to ensure that it is not a "holding company" of a "public utility company" under PUHCA is also important in providing financing and financial reporting flexibility to the Company. 19 The cogeneration facilities owned by the Company, or in which the Company has investments, are Qualifying Facilities under PURPA. The Company has also pursued the development of independent power projects which will not qualify for the benefits provided by PURPA, which could subject these projects to PUHCA jurisdiction. To avoid such a consequence, the Company will structure its participation in independent power projects in a manner to qualify for exemptions under PUHCA provided by the Energy Act. Such structures will permit the Company to take ownership positions in a number of independent power project projects. FPA The Federal Power Act ("FPA") grants the FERC exclusive rate-making jurisdiction over wholesale sales of electricity in interstate commerce. The FPA provides the FERC with ongoing as well as initial jurisdiction, enabling the FERC to revoke or modify previously approved rates. Such rates may be based on a cost-of-service approach or on rates that are determined through competitive bidding or negotiation on a market basis. Although Qualifying Facilities under PURPA are exempt from rate_making and certain other provisions of the FPA, independent power projects and certain power marketing activities are subject to the FPA and to the FERC's rate- making jurisdiction. Utilities are not obligated to purchase power from projects subject to regulation by the FERC under the FPA because they do not meet the requirements of PURPA. However, because such projects would not be bound by PURPA's thermal energy use requirement, they may have greater latitude in site selection and facility size. The project currently owned or operated by the Company as a Qualifying Facility under PURPA is exempt from the FPA. FERC has significantly relaxed the rules under which power marketers and independent power producers can sell or market power. With approval from FERC, such entities, with certain exceptions, are exempted from cost_based rates and can make all sales at market-based rates set through negotiations. The independent power project in which the Company currently participates have been granted market based rate authority and comply with the FPA requirements governing approval of wholesale rates and subsequent transfers of ownership interest in such projects. CHANGES IN FEDERAL REGULATIONS Historically in the United States, regulated and government-owned utilities have been the only significant producers of electric power for sale to third parties. The energy crisis of the 1970s led to the enactment of the federal Public Utility Regulatory Policies Act of 1978 ("PURPA"), which encouraged companies other than utilities to enter the electric power business by reducing regulatory constraints. In addition, PURPA and its implementing regulations created unique opportunities for the development of cogeneration facilities by requiring utilities to purchase electric power generated in cogeneration plants meeting certain requirements (referred to as "Qualifying Facilities"). See "Regulatory Matters -- Energy Regulation." 20 As a result of PURPA, a significant market for electric power produced by independent power producers such as the Company developed in the United States. In 1992, Congress enacted the Energy Policy Act of 1992 ("Energy Act"), which amended the Public Utility Holding Company Act of 1935 ("PUHCA") to create new exemptions from PUHCA for independent power producers selling electric energy at wholesale, to increase electricity transmission access for independent power producers and to reduce the burdens of complying with PUHCA's restrictions on corporate structures for owning or operating generating or transmission facilities in the United States or abroad. The Energy Act has enhanced the development of independent power projects and has further accelerated the changes in the electric utility industry that were initiated by PURPA. Implementation of federal and state policies resulting in increased availability of transmission access for wholesale and retail transactions could create additional markets and competition for electricity power sales. The Company believes it is possible that changes in PURPA, PUHCA and other related federal statutes may occur in the next several years. The nature and impact of such changes on the Company's projects operations and contracts is unknown at this time. The Company is actively monitoring these developments directly and through industry trade groups to determine such impacts as well as to evaluate new business opportunities created by restructuring of the electric power industry. Depending on the outcome of these legislative matters, changes in legislation could have an adverse effect on current contract prices. STATE REGULATION State public utility commissions, pursuant to state legislative authority, have jurisdiction over how any new federal initiatives are implemented in each state and have broad jurisdiction over regulated independent power projects which are not Qualifying Facilities under PURPA, and which are considered public utilities in many states. Such jurisdiction would include the issuance of certificates of public convenience and necessity to construct a facility as well as regulation of organizational, accounting, financial and other corporate matters on an ongoing basis. Although the FERC generally has exclusive jurisdiction over the rates charged by an independent power project to its wholesale customers, state public utility commissions have the practical ability to influence the establishment of such rates by asserting jurisdiction over the purchasing utility's ability to pass through the resulting cost of purchased power to its retail customers. In addition, states may assert jurisdiction over the siting and construction of independent power projects and, among other things, issuance of securities, related party transactions and sale and transfer of assets. The actual scope of jurisdiction over independent power projects by state public utility regulatory commissions varies from state to state. In the State of California, restructuring legislation was enacted in September 1996 and was implemented in 1998. This legislation established an Independent Systems Operator ("ISO") responsible for centralized control and 21 efficient and reliable operation of the state-wide electric transmission grid, and a Power Exchange responsible for an efficient competitive electric energy auction open on a non-discriminatory basis to all electric services providers. Other provisions include the quantification and qualification of utility stranded costs to be eligible for recovery through competitive transition charges ("CTC"), market power mitigation through utility divestiture of fossil generation plants, the unbundling and establishment of rate structure for historical utility functions, the continuation of public purpose programs and issues related to issuance of rate reduction bonds. The California Energy Commission ("CEC") and Legislature have responsibility for development of a competitive market mechanism for allocation and distribution of funds made available by the legislation for enhancement of in- state renewable resource technologies and public interest research and development programs. Funds are to be available through the four-year transition period to a fully competitive electric services industry. In addition to the significant opportunity provided for power producers such as the Company through implementation of customer choice (direct access), the California restructuring legislation both recognizes the sanctity of existing contracts, provides for mitigation of utility horizontal market power through divestiture of fossil generation and provides funds for continuation of public services programs including fuel diversity through enhancement for in_state renewable technologies (includes geothermal) for the four-year transition period to a fully competitive electric services industry. TRANSMISSION AND WHEELING Energy-producing projects that sell power to customers which are not geographically located near the project require that the project have the capability of transmitting its power over utility power transmission grids to the purchaser ("wheeling"). The FERC and state utility regulatory commissions have jurisdiction over the wheeling of power to remote users; the prices and related terms and conditions of wheeling in interstate commerce are regulated by the FERC. At the moment, the Company's customers being serviced by Los Alamos Energy are in the same geographical area as the Company's power plant. The PUCT has promulgated rules that require affected utilities to provide wheeling service. These rules are in effect in the Electrical Reliability Counsel of Texas system and the new transmission access provisions of the Energy Act do not alter that federal and state jurisdictional balance. Rules adopted at the FERC and a number of state utility regulatory commissions require utilities to grant power producers increased access to transmission and wheeling. The provisions of the Energy Act increase such access. The Energy Act supports increased transmission access, and in April 1996 the FERC adopted rules (Order 888) to expand significantly transmission service and access and provide alternative methods of pricing for 22 transmission services. Upon promulgation of the final rule by the FERC (and the PUCT for ERCOT), the interstate transmission grid in the continental United States was opened to all qualified persons that seek transmission services to wheel wholesale power. Utilities are required to provide transmission customers non_discriminatory open access to their transmission grids with rates, terms, and conditions comparable to that which the utility imposes on itself. This provides the Company with increased opportunities to sell and market the power produced by its independent power projects. It also increases competition on a nationwide basis between traditional and non_traditional power generators, such as the Company. ENVIRONMENTAL REGULATION The construction and operation of domestic and international energy and fuel producing projects and the exploitation of natural resource properties are subject to extensive federal, state and local laws and regulations adopted for the protection of the environment and to regulate land use. The laws and regulations applicable to the Company and projects in which it participates primarily involve the discharge of emissions into the water and air, but can also include wetlands preservation, noise regulation and a comprehensive Environmental Impact Assessment which includes evaluation of the facility's impact on air, water, ecology, human health and socioeconomic factors. These laws and regulations in many cases require a lengthy and complex process of obtaining licenses, permits and approvals from federal, state and local agencies. Obtaining necessary approvals regarding the discharge of emissions into the air is critical to the development of a project and can be time_ consuming and difficult. Each energy_producing project requires technology and facilities which comply with federal, state and local requirements and sometimes extensive negotiations with administrative agencies. Meeting the requirements of each jurisdiction with authority over a project can delay or sometimes prevent the completion of a proposed project, as well as require extensive modifications to existing projects. The Company monitors environmental standards and evaluates its selection of technology to ensure that applicable standards are being met. Based on current trends, the Company expects that environmental and land use regulation will become more stringent. Accordingly, the Company plans to continue to place a strong emphasis on the development and use of state-of- the-art technology to minimize potential impacts on the environment. In addition, the Company has developed expertise and experience in obtaining necessary licenses, permits and approvals. In November 1990, comprehensive amendments to the Clean Air Act were enacted (the "1990 Amendments"). The first major revisions to the Clean Air Act since 1977, the 1990 Amendments vastly expand the scope of federal regulations and enforcement in several significant respects. In particular, provisions relating to non_attainment, air toxics, permitting, enforcement and acid deposition may affect the Company's domestic projects. The Clean Air Act and the 1990 Amendments contain provisions that regulate the amount of sulfur dioxide and nitrogen oxides that may be emitted by a project. 23 These emissions may be a cause of "acid rain." The project the Company owns, operates or plan's to investment in are, or will be fueled by natural gas and are not expected to be significantly affected by the acid rain provisions of the 1990 Amendments. One of the key elements of the 1990 Amendments is the inclusion of an operating permit program in Title V. This program is intended to establish a central point in tracking all applicable air quality requirements for every source required to obtain a permit under the Clean Air Act. Final regulations implementing these provisions were issued by the EPA in 1992. These regulations created minimum requirements for the operating permit program. Each state was required to submit a program for its implementation of the regulations for approval to the EPA. The Company is required to submit complete operating permit applications to those states in which it has operating projects which meet the applicability standards under the 1990 Amendments. COMPETITION The power generation industry is characterized by intense competition, and the Company encounters competition from utilities, industrial companies and other power producers. The independent power industry has grown rapidly over the past twenty years. The demand for power may be met by generation capacity based on several competing technologies, such as gas-fired or coal- fired cogeneration and power generating facilities fueled by alternative energy sources including hydro power, synthetic fuels, solar, wind, wood, geothermal, waste heat, solid waste and nuclear sources. The Company competes with other non-utility generators, regulated utilities, unregulated subsidiaries of regulated utilities and other energy service companies in the development and operation of energy-producing projects and the marketing of electric power. In recent years, there has been increasing competition in an effort to obtain power sales agreements, and this competition has contributed to a reduction in electricity prices. In addition, many states are implementing or considering regulatory initiatives designed to increase competition in the domestic power industry. In California, the CPUC issued decisions which provide for direct access for all customers as of April 1, 1998. This competition has put pressure on electric utilities to lower their costs, including the cost of purchased electricity, and increasing competition in the future will increase this pressure. However, management believes that the deregulation of the electrical power industry in California will enable it to achieve higher revenues from the sale of power. At the Federal level, the Energy Act reduces certain restrictions currently applicable to certain projects which are not Qualifying Facilities (as further defined below) under PURPA and provides for the removal of certain impediments to competition in the power generation industry. Although the provisions of the Energy Act apply only to wholesale transactions, actions by many state authorities are also increasing competition for industrial, commercial and other larger scale customers in the provision of services by 24 Qualifying Facilities ("QF's"), and independent power projects, as well as power marketers and other unregulated suppliers. The development rights of Qualifying Facilities, which were facilitated by certain provisions of PURPA, have not been affected, nor amended, by the Energy Act. However, proposed legislation has been introduced in Congress to repeal all or part of PURPA. These federal legislative proposals would not abrogate or amend existing contracts with electric utilities and would only be effective prospectively for new contracts. Legislation to repeal PUHCA is also currently pending in Congress. Although passage of stand alone legislation repealing PUHCA is not expected during the current session, eventual repeal or modification of PUHCA is being considered. Congressional repeal or modification of PUHCA will loosen the strictures currently placed on utilities and others from acquiring generation and transmission assets outside of their service territories. This will significantly increase the competition the Company faces. The industry is presently characterized by rapid change in the regulatory and commercial aspects of competition. Although the timing and ultimate effect of these changes cannot be predicted, management of the Company believes that the overall effect of the current changes will be to increase competition in the generation, transmission and sale of electric power. EMPLOYEES As of March 31, 2001, the Company employed 5 people. None of the Company's employees are covered by collective bargaining agreements, and the Company has never experienced a work stoppage, strike or labor dispute. The Company considers relations with the Company's employees to be good. ITEM 2. PROPERTIES The Company rents offices from its Director, James C. Harvey, at the rate of $850 per month, on a month to month basis, and also rents offices from a member of LAE at a nominal rental on a month to month basis at 466 Bell Street, Los Alamos, California. The Company owns two internal combustion engine/generator sets located on the Blair Ranch. The Company owns all right, title and interest in and to the power purchase agreement between ACI and PG&E, dated November 28, 1988, and the power purchase agreement with Texaco, consisting of correspondence between Texaco and ACI. Atlas Power is the owner of its intellectual property and trade secrets. PATENTS, SERVICE MARKS, COPYRIGHTS AND OTHER PROPRIETARY TECHNOLOGY The Company has registered the marks Out-Takes(R), So You Want to be in Pictures(R), Photomation(R) and Create the Moment(R) with the U.S. Patent and Trademark Office and has registered the Out-Takes(R) service mark in Japan, in both Japanese and English. The Company actively manages the protection of its trademarks, know-how, trade secrets and other intellectual property by requiring all its employees and those contractors where 25 applicable, to execute confidentiality agreements in relation to the Company's intellectual property. The Company is not aware of any instance where there has been a breach of such confidentiality obligations. The Company has no patents, copyrights or trademarks with respect to its power plant operations. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock began trading on the Nasdaq Small Cap MarketSM ("NASDAQ") on March 9, 1993 under the symbol OUTT (also OUTTC during the period from October 28, 1994 through December 30, 1994). On January 3, 1995, the Company's securities were delisted from NASDAQ as a consequence of the Company's not fulfilling the minimum bid price requirements set forth in Paragraph 1(c)(4) of Schedule D of the NASDAQ By-Laws. On January 4, 1995, the Company's Common Stock began to be quoted on the over-the-counter Bulletin Board under the symbol "OUTT". On March 9, 2000, the Company's quotation of its securities on the Bulletin Board was deleted, due to the Company's failure to maintain current financial reports with the SEC. The Company's securities are now quoted on the National Quotation Bureau's pink sheets under the symbol "OUTT". The Company is now current in its reports to the SEC, and has applied to the NASD for a quotation on the Bulletin Board. There can be no assurance that the NASD will approve the Company's securities for a quotation on the Bulletin Board. The following table sets forth, for the periods indicated, the high and low closing prices for the Common Stock as reported by Nasdaq Freerealtime.com. Fiscal 2001 Fiscal 2000 High Low High Low ---- ---- ---- ---- First Quarter .06 .03 5/64 1/32 Second Quarter .06 .03 1/16 1/32 Third Quarter .06 .03 3/32 1/32 Fourth Quarter .06 .03 .06 .03 26 There were approximately 83 holders of record of the Company's Common Stock as of March 31, 2001. The Company has not paid any dividends on its Common Stock since incorporation in March 1992 and does not anticipate paying dividends in the foreseeable future. There are no restrictions on the Company's present ability to pay dividends on its Common Stock, other than those prescribed by Delaware law. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain data for the years ended March 31, 1998 through March 31, 2001. Refer to "Item 7. Management's Discussion and Analysis or Plan of Operation" for discussion of operations. 2000 1999 1998 2001 ------- ------ -------- --------- Income Statement Data Revenue from operations 216,623 637,450 $1,187,638 $541,755 Gross Income (Loss) (369,365) (541,246) 88,858 (344,578) Net (Loss) Income (884,110) (403,774) (1,082,306) (17,293) Net loss per share (0.04) (0.019) ($0.05) ($0.00) Balance Sheet Data Total Assets $4,550,824 $312,503 $285,840 $4,454,044 Total Liabilities 6,552,789 1,667,725 1,020,943 6,438,736 Stockholders' Equity (Deficit) (1,893,559) (1,355,672) (735,103) (1,876,286) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion should be read in conjunction with the historical financial statements of Out-Takes, Inc. ("the Company") and notes thereto included elsewhere in this Form 10-K. 27 Overview The Company leases to a third party, Colorvision, an operating photographic portrait studio, which was opened on May 24, 1993 at MCA/Universal's CityWalkSM project in Los Angeles, California ("the CityWalk Studio"). On March 31, 2001, the Company assigned this lease to Colorvision to pay off a note due a related party in the principal amount of $773,845. The Company currently operates a 1 mW waste gas electricity plant in Los Alamos, California, which was acquired from Los Alamos Energy, LLC on August 31, 1998. The following table summarizes the Company's fiscal quarter results: Results of Operations Year Ended March 31, 2000 Compared to Year Ended March 31, 2001. The net loss for the year ended March 31, 2000 was $884,110 compared with a net income of $17,273 for the year ended March 31, 2001. The primary reasons for the change was the recordation of the lease assignment. The Company overall generated $216,623 in revenues in the fiscal year ended March 31, 2000, compared to revenues of $541,775 in the fiscal year ended March 31, 2001. Management attributes this increase to increased power sales. Year Ended March 31, 2001 Compared to Year Ended March 31, 1999. The net loss for the year ended March 31, 1999 was $382,184 compared with $884,110 for the year ended March 31, 2000. The primary reasons for the increase in the net loss were the elimination of the photo studio. The Company overall generated $637,450 in revenues in the fiscal year ended March 31, 1999, compared to revenues of $216,623 in the fiscal year ended March 31, 2000. Management attributes this decline to the change in business focus from a photography studio to power plant operations. Liquidity and Capital Resources At March 31, 2000, the Company had a working capital deficit of $2,421,343 as compared to a working capital deficit on March 31, 2001 of $2,253,414. The difference is not significant in the opinion of management. Net cash used in operating activities was $164,635 for the fiscal year ended on March 31, 2000, compared to the utilization of $379,435 of cash for the same period March 31, 2001. The Company does not anticipate that it will have any problems in meeting its obligations for continuing fixed expenses, materials procurement or operating labor. 28 ITEM 8. FINANCIAL STATEMENTS OUT-TAKES, INC. FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT March 31, 2001 C O N T E N T S Page ---- Report of Independent Certified Public Accountants 3 Financial Statements Consolidated Balance Sheets 4 Consolidated Statements of Operations 5 Consolidated Statements of Stockholders' Equity 6 Consolidated Statements of Cash Flows 7 Consolidated Notes to Financial Statements 8-12 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors OUT-TAKES, INC. Dallas, Texas We have audited the accompanying consolidate balance sheets of OUT-TAKES, INC. (the "Company") and subsidiary as of March 31, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 29 We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of OUT-TAKES, INC. and its subsidiary as of March 31, 2001, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company has suffered recurring losses from operations and has a net working capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 9. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Oxnard, California June 27, 2001 30 OUT-TAKES, INC. CONSOLIDATED BALANCE SHEETS March 31, March 31, 2001 2000 --------- --------- ASSETS Current Assets Cash $52,745 $ 77,265 Accounts receivable (net) 132,118 42,722 --------- --------- Total Current Assets 184,863 119,987 --------- --------- Property and Equipment (net) 183,712 236,798 --------- --------- Other Assets Deposits and advances 23,148 23,148 Goodwill (net of amortization) 4,062,321 4,170,891 --------- --------- Total Other Assets 4,085,469 4,194,039 --------- --------- Total Assets $ 4,454,044 $ 4,550,824 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts Payable $ 25,766 $ 95,067 Accrued expenses 251,567 25,159 Accrued interest 858,843 422,931 Accrued interest-related parties - 173,001 Compensation payable-related parties 81,274 211,390 Notes Payable-Short-Term 1,213,856 832,966 Due to related parties - 773,845 31 Deferred Income 6,971 6,971 --------- --------- Total Current Liabilities 2,438,277 2,541,330 --------- --------- Long-Term Liabilities Notes payable-long term 4,000,459 4,011,459 --------- --------- Shareholders' Equity Common Stock, par value $.01 per share 35,000,000 shares authorized; 20,788,122 shares issued and outstanding of which 292,396 are in treasury 207,882 207,882 Preferred stock, par value $301 per share 5,000,000 shares authorized; none issued - - Additional Paid in Capital 9,913,230 9,913,230 Accumulated deficit (11,997,398) (12,014,671) --------- --------- Total Shareholders' Equity (1,876,286) (1,893,559) --------- --------- Treasury stock, as cost (108,406) (108,406) --------- --------- Total Liabilities and Shareholders' Equity $ 4,454,044 $ 4,550,824 ========== =========== OUT-TAKES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended March 31, 2001 2000 1999 --------- ----------- --------- Revenues $ 541,755 $ 216,623 $ 637,450 Cost of revenues 468,707 212,323 192,374 --------- ----------- --------- Gross margin 73,048 4,300 445,076 Operating expenses 417,626 373,665 734,802 --------- ----------- --------- Loss from operations (344,578) (369,365) (289,726) --------- ----------- --------- Other Expenses Interest income - - Interest expense (510,780) (509,945) (36,559) Asset lease agreement assignment 874,231 Discontinued operations - - (55,934) --------- ----------- --------- Total Other Expenses 363,451 (509,945) (92,458) --------- ----------- --------- Provision for income taxes 1,600 4,800 - --------- ----------- --------- Total Income Tax Expense 1,600 4,800 - --------- ----------- --------- Net income (loss) $ 17,273 $ (884,110) $ (382,184) ========= =========== ========= Net loss per share $ (0.00) $ (0.04) $ (0.02) ========= =========== ========= 33 OUT-TAKES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Common Stock Additional Number of Paid-In Accumulated Treasury Shares Amount Capital Deficit Stock Total ------ ------ ---------- ----------- -------- ---------- Balance, March 31, 1998 20,788,122 $ 207,882 $9,905,430 $(11,091,161) $(108,406) (1,086,255) Acquisition of subsidiary 342,784 342,784 Adjustments 7,800 7,800 Net loss for the year ended March 31, 1999 (382,184) (382,184) ------ ------ ---------- ----------- -------- ---------- Balance, March 31, 1999 20,788,122 207,882 9,913,230 (11,130,561) (108,406) (1,117,855) Net loss for the year ended March 31, 2000 (884,110) (884,110) ------ ------ ---------- ----------- -------- ---------- Balance, March 31, 2000 20,788,122 207,882 9,913,230 (12,014,671) (108,406)(2,001,965) Adjustments (4,634) Net loss for the year ended March 31, 2001 17,273 17,273 ------ ------ ---------- ----------- -------- ---------- Balance March 31, 2001 20,788,122 $ 207,882 $ 9,908,596 $(11,997,398) $(108,406)(1,984,692) ========== ========= ============ ============ ========== ========= 34 OUT-TAKES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended March 31, 2001 2000 1999 ---------- ---------- --------- Operating Activities: Net Loss $ 17,273) $(884,110) $(382,184) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 164,952 163,659 116,585 Compensation - related party - 80,887 Changes in operating assets and liabilities: Accounts receivable (89,396) (42,722) Due from related party (308,616) - (120,854) Deposits - (4,600) (25,504) Inventory - - 10,082 Prepaid expenses - - 11,954 Other current assets - 1,543 9,564 Accounts payable, accrued expenses 589,723 490,816 (162,039) Interest payable-related party (173,001) 79,993 36,556 Provision for studio closure - (31,878) Prepaid asset lease (30,604) 30,604 Compensation payable - related party 178,500 61,390 79,540 ---------- ---------- --------- Net cash provided by (used in) operating activities 379,435 (164,635) (346,687) ---------- ---------- --------- Investing Activities: Purchases of property, plant and equipment - (53,213) (33,522) 35 Proceeds from disposal of property, plant and equipment - 5,500 ---------- ---------- --------- Net cash used in investing activities - (47,713) (33,522) ---------- ---------- --------- Financing Activities: Proceed from issuance of stock Advances from related parties - 6,570 272,887 Payments to related parties (773,845) (116,903) Capital contribution - 7,800 Proceeds from short term debt 380,890 405,131 74,000 Notes & contracts payable (11,000) (6,541) - Net cash provided by (used in) financing activities (403,955) 288,257 354,687 ---------- ---------- --------- Increase (decrease) in cash and cash equivalents (24,520) 75,909 (25,522) ---------- ---------- --------- Cash and cash equivalents -beginning of year 77,265 1,356 26,878 ---------- ---------- --------- Cash and cash equivalents- end of year $ 52,745 $ 77,265 $ 1,356 ========== =========== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ - $ 2,516 $ 7,650 36 OUT-TAKES, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business ------------------ The Company's principal business activity is the collection and distribution of waste natural gas in the State of California, and the conversion of such natural gas into electricity, which is then sold to retail providers of consumer electricity. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Basis of Presentation --------------------- The accompanying financial statements include the accounts of Out-Takes, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. Property, Plant and Equipment ----------------------------- Plant and equipment are recorded at cost. Depreciation is provided over the estimated useful asset lives using the straight-line method over 5-7 years. Cash and cash equivalents ------------------------- The Company classifies all highly liquid debt instruments, readily convertible to cash and purchased with a maturity of three months or less at date of purchase, as cash equivalents. The Company had no cash equivalents at March 31, 2001. Accounts Receivable ------------------- Accounts receivable are shown net of the allowance for bad debts of $117,239 at March 31, 2001. Goodwill and acquisition related intangibles -------------------------------------------- Goodwill is recorded when the consideration paid for acquisitions exceeds the fair value of net tangible and intangible assets acquired. Goodwill is amortized on a straight-line basis over 40 years. Net goodwill at the reporting dates is as follows: 37 March 31, 2001 March 31, 2000 -------------- -------------- Goodwill $4,342,874 $4,342,784 Accumulated amortization (280,553) (171,983) --------- --------- Net Goodwill $4,062,321 $4,170,891 ========= ========= Amortization expense $180,570 $108,564 ======= ======= Earnings per share ------------------ Earnings per share data in the financial statements have been calculated in accordance with SFAS No. 128. Earnings per share reflects the amount of earnings for the period available to each share of common stock outstanding during the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period, such as common shares that could result from the potential exercise or conversion of securities into common stock. As of March 31, 2001 and 2000, no contingently issuable shares qualified as dilutive to be included in the earnings per share calculation. Reclassifications ----------------- Certain amounts reported in previous years have been reclassified to conform to the March 31, 2001 presentation. NOTE 2 MERGERS AND ACQUISITIONS On August 31, 1998, Out-Takes, Inc. acquired all of the issued and outstanding equity interests of Los Alamos Energy, LLC, a California limited liability company (LAE). This acquisition has been accounted for as an exchange between companies under common control. The investment has been recorded at historical cost in a manner similar to a pooling of interest, and the face value of the note given has been adjusted down to the net equity value of LAE at the date of the exchange. The Company has executed a letter of intent with Atlas Engineering, LLC to the effect that the Company shall acquire Atlas Engineering, LLC pursuant to the provisions of a Purchase Agreement. As of March 31, 2001, the merger is in process but had not yet been completed. NOTE 3 PROPERTY AND EQUIPMENT The components of property and equipment are as follows: March 31, 2001 March 31, 2000 ---------------- --------------- Computers and software 5,589 4,793 Equipment and furniture 350,633 350,633 38 Leased asset 19,000 19,000 Motor vehicle 2,500 - ------------ ------------- Total - At Cost 377,722 374,426 Less: Accumulated depreciation (194,010) (137,628) ------------- ------------- Net $ 183,712 $ 236,798 ============= ============= NOTE 4 NOTES PAYABLE Note Payable Consultant ------------------------- This is an unsecured note payable to a former financial consultant to the Company pursuant to a settlement agreement dated August 17, 1994. The note is non-interest bearing and payment is subject to availability of future cash flows from the Company's operations. The note holder has threatened to commence legal action, however management has advised the note holder that no amount is due at the present time as the Company has not generated positive cash flow. Counsel has advised the Company that no litigation has commenced and counsel is unable to assess a possible outcome, should litigation be commenced. The payable amount as of March 31, 2001 is $48,000. Note Payable Radovich ----------------------- This is an unsecured promissory note dated September 27, 1996. The note's original maturity dated was thirty (30) days, no interest. The note's maturity date has been extended indefinitely without interest. The payable amount as of March 31, 2001 is $30,557. Note Payable Reeves --------------------- This is an unsecured promissory note dated March 30, 1998. The note's original maturity date was sixty days with interest at 10% per annum and is convertible into Out-Takes, Inc. common stock at a rate to be negotiated between the parties. The payable amount as of March 31, 2001 is $25,000. Note Payable Boyd ------------------- This is an unsecured promissory note dated August 14, 1998. The note's original maturity date was sixty (60) days, 10% annum simple interest. The note's maturity date was extended to December 31, 1999 with interest and the parties are in negotiation for an additional extension. The payable amount as of March 31, 2001 is $45,000. 39 Note Payable Atlas Engineering -------------------------------- This is an unsecured promissory note dated March 19, 1999. The note is convertible into Out-Takes, Inc. common stock pursuant to a non-binding share purchase agreement executed between the parties. The note includes interest at 10% per annum until paid or converted. The payable amount as of March 31, 2001 is $62,984. Note Payable - Coastal Resources Corp. -------------------------------------- This note, dated June 15, 1999 is secured by the property, plant and equipment of Los Alamos Energy, LLC and includes interest at 8% per annum beginning October 1, 1999. The master loan agreement specifies a $300,000 maximum financing amount and was entered into pursuant to a non-binding merger agreement between the parties. If the merger is consummated, then the loan balance at that date shall be credited to Coastal Resources Corp. as part of its proportionate equity interest in Out-Takes, Inc. If the merger is not consummated, then the principal and interest is due and payable on the first anniversary date of each advance ranging from June 2000 through August 2000. The payable amount as of March 31, 2001 is $219,036. Note Payable Los Alamos Energy, LLC Equity Holders ---------------------------------------------------- This note, dated August 31, 1998, is pursuant to a share Purchase Agreement executed between Los Alamos Energy, LLC (LAE) and Out-Takes, Inc. The note specifies interest at 10% per annum and is convertible into a aggregate ninety percent of the issued and outstanding shares of common stock of Out- Takes, Inc. as of the date of conversion. The agreement also requires as a condition of the conversion that Out-Takes, Inc. effect a reverse stock split of one share for every one-hundred issued and outstanding shares at the conversion date. As of March 31, 2001, this conversion and reverse stock split has not been completed. The payable amount as of March 31, 2001 is $4,000,000. Note Payable Joint Venture Working Interest --------------------------------------------- These notes are pursuant to a Joint Venture Agreement executed between Los Alamos Energy, LLC and the participants in development and generation of electricity from waste natural gas activities. The agreement specifies that participants may be required to convert their working interest into an equity position when the Company merges with a publicly traded entity. Those participants electing not to convert would be repaid their original consideration plus a non-compounded annual yield of 12%. As of March 31, 2000, this conversion or repayment has not been completed. The payable amount as of March 31, 2001 is $250,279. 40 Note Payable Hall -------------------- This is an unsecured promissory note dated January 4, 2000. The note's maturity date is January 4, 2001 without interest. The payable amount as of March 31, 2001 is $4,000. Lease Payable Fairfield Energy Corp. --------------------------------------- The company is the lessee of a transformer under a capital lease expiring July 2003. The asset and liability under the capital lease is recorded at the present value of the minimum lease payments. The asset is depreciated over the lease term of 50 months. Depreciation of the asset under the capital lease is included in depreciation expense for the year ended March 31, 2001. The equipment held under capital lease at March 31, 2001 is valued at $19,000 less accumulated depreciation of $5,202. Future minimum lease obligations are as follows: Year ended March 31 ------------------- $ 6,137 6,137 6,137 2004 2,046 -------- Total $ 20,457 Less interest 5,162 ------- Present value of net minimum lease payment $ 15,295 ======= NOTE 5 RELATED PARTY TRANSACTIONS AND ASSET LEASE ASSIGNMENT The amount due to related party of $773,845 is unsecured and payable upon demand. Interest is charged at a rate of 10% per annum. As of March 31, 2001 and 2000 interest of $77,385 and $173,001 respectively was accrued. The Company holds an asset lease agreement that generates annual income for the Company. On March 30, 2001, the Company assigned this asset lease agreement in lieu of cash to payoff the above amount, including the accrued interest that was due to related party. In addition, the Company also issued a $150,000 promissory note, dated March 31, 2001. The note bears 10% interest per annum. Both principal and interest is due in 180 days. 42 NOTE 6 COMMITMENTS AND CONTINGENCIES The Company has an extended 12 month non-cancelable operating lease agreement for an office facility. Future minimum lease obligations are as follows: Year ended March 31 ------------------- 2002 $ 10,200 -------- Total $ 10,200 ========= In the twelve months to March 31, 2001, 2000, and 1999 total rent expense under this lease was $10,200, $10,200 and $10,200 respectively The Company's facilities are subject to federal, state and local provisions relating to the discharge of materials into the environment. Compliance with these provisions has not had, nor does the Company expect such compliance to have, any material effect on the capital expenditures, revenues or expenses, or financial condition of the Company. Management believes that its current practices and procedures for the control and disposition of materials comply with all applicable federal, state and local requirements. Los Alamos Energy, LLC (LAE) participates in certain agreements with respect to the generation of electricity from waste natural gas whereby its managing member also acts as the operator of the electrical power plant's development and production activities. As its managing member and operator, LAE is contingently liable for the activities of this venture. NOTE 7 - INCOME TAXES As of March 31, 2001, the Company has a net operating loss (NOL) carry forward of approximately $12,103,777. The net operating loss carry forwards expire between 2007 and 2016. No deferred tax asset has been recorded for these losses since a valuation allowance has been recorded for the portion of the NOL that is not expected to be realized. NOTE 8 NEW AUTHORITATIVE PRONOUNCEMENTS The Company intends to adopt Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as of the beginning of its fiscal year 2001. The standard will require the Company to recognize all derivatives on the balance sheet at fair value. The effect of adopting the standard is not expected to have a material effect on the Company's financial position or overall results in operations. 43 NOTE 9 GOING CONCERN The Company has been unsuccessful in generating net cash from operations. The Company incurred a net loss from operation of $344,578 for the year ended March 31, 2001 and has a working capital deficit as of March 31, 2001 of $2,254,565. The accompanying financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The continuation of the Company as a going concern is dependent upon its ability to generate net cash from operations. The Company's recurring operating losses and net working capital deficiency raises substantial doubt about the entity's ability to continue as a going concern. Management plans to expand its existing power plant to a four or five mega watt facility, reduce expenses, expand operations to include direct service of consumer electricity, and convert $4,250,279 of existing debt to equity which will substantially reduce interest expense. NOTE 10 CONCENTRATIONS OF CREDIT RISK All of the consolidated revenue of Out-Takes, Inc. is generated from the leasing of photographic equipment to one customer and the sale of electricity to Pacific Gas and Electric Company and Texaco. NOTE 11 SUPPLEMENTAL CASH FLOW DISCLOSURE Cash flows from operating activities include the following cash payments: March 31, March 31, March 31, 2001 2000 1999 --------- --------- --------- Income taxes $ - $ - $ - Interest $ - $2,516 $7,650 Noncash investing and financing activities include the following amounts: March 31, March 31, March 31, 2001 2000 1999 --------- --------- --------- Capital lease of equipment $ - $19,000 $ - 44 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Name Age Position ---------------- --- ---------------------- James. C. Harvey 52 Chairman, Director Kenneth L. Kinlaw 36 CEO, Secretary, President, Atlas Power Jody P. Lenihan 34 Vice President, Chief Executive Officer, Director, CFO Atlas Power James C. Harvey. Mr. Harvey is the current Chairman, President, Chief Executive Officer, Secretary and sole Director of the Company, and has acted in that capacity since 1998. He is a practicing attorney at law with emphasis on business, real estate, banking and finance. Mr. Harvey previously was of Counsel to Ludwick & Anderson providing legal services for the Resolution Trust Corporation in connection with the receivership of seven thrifts, and prior thereto was the Managing Partner of Simpson, Dowd, Kaplan & Moon, where he managed all business affairs for the firm. He received his B.B.A., Accounting Banking & Finance in 1963, and J.D. in 1966, both from Southern Methodist University. ITEM 11. EXECUTIVE COMPENSATION No executive salaries were paid to officers or directors in the last fiscal year. There were no grants of options or SAR grants given to any executive officers during the last fiscal year. The director of the Company, James Harvey, is paid $850 per month for rent of the Company's offices, and is reimbursed monthly for company telephone expenses. SALARIES NO SALARIES WERE PAID 45 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the shares of Common Stock of the Company as of the date of this disclosure(1), by (I) each person who is known by the Company to be the beneficial owner of more than five percent (5%) of the issued and outstanding shares of common stock, (ii) each of the Company's directors and executive officers, and (iii) all directors and executive officers as a group. Name and Address Number of Shares Percentage Owned ---------------- ---------------- ---------------- James C. Harvey 0 0% 3811 Turtle Creek Blvd. Suite 350 Dallas, Texas 75219 All Officers and Directors 0 0 as a Group No officers and directors hold any stock in the Company. However, the acquisition agreement providing for the acquisition of Los Alamos Energy provides that, in the event the Equity Holders shall desire to do so, they may convert their indebtedness to common stock of the Company representing in the aggregate ninety percent (90%) of the issued and outstanding shares of such common stock as of the date of such conversion. The Acquisition Agreement provides that it is a condition of the conversion that the Company effect a reverse stock split of one (1) share for every one hundred (100) shares issued and outstanding as of such date. LAE contemplates that a significant number of persons currently holding promissory notes and/or working interests in its electricity production (collectively, "Interest Holders") will exercise their rights to convert such interests into the equity of LAE, and subsequently to join in the conversion of the Notes into common stock of the Company. Presently, management of LAE anticipates that, prior to the conversion of the Notes and after giving effect to the contemplated reverse stock split, the Company will issue approximately three million (3,000,000) additional shares of common stock, and that subsequent to completing the conversion, the Equity Holders and Interest Holders will own, in the aggregate, approximately two million eight hundred eighty thousand (2,880,000) shares of the Company's common stock, representing ninety percent (90%) of the total amount of common stock estimated to be issued and outstanding as of the date such conversion rights are exercised. This means that, if James Harvey, who is the beneficial owner of 790,059 units of LAE (including those in the name of the Inwood 1991 Trust, of which he is Trustee, converted his indebtedness to common stock of the Company, giving effect to the contemplated reverse split, he would be the owner of approximately 26% of the Company's common stock. In addition, there are two other members of LAE who would own more than 5% of the Company's outstanding common stock should they decide to convert their indebtedness to common stock; Hannes Faul, who would own 25% of the outstanding common stock, and Lance Hall & Co., who would own 25% of the outstanding common stock. 46 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company rents offices from its President and shareholder, James C. Harvey, on a month to month basis at a monthly rental of $850 per month. The Company's acquisition agreement to acquire Los Alamos Energy gives Mr. Harvey and other members of LAE the right to convert the debt the Company owes under the acquisition agreement to Company common stock, which means that, if the members of LAE decided to convert the debt owed them to common stock, they would become the owners of 90% of the outstanding common stock of the Company. On March 31, 2001, the Company's lease rights to Colorvision were assigned to pay off a $775,845 note due to Photo Corporation. There have been no other transactions since the beginning of the fiscal year, or any current transactions, or series of similar transactions, to which the Company was or is to be a party, in which the amount involved exceeds $60,000, and in which any of the officers, or directors, or holders of over 5% of the Company's stock have or will have any direct or indirect material interest. The Company does not currently have any policy toward entering into any future transactions with related parties. PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report as required by Item 601 of Regulation S-B: 3.1 Certificate of Incorporation of the Company. (ii) 3.2 Certificate of Amendment of Certificate of Incorporation. (ix) 3.3 Bylaws of the Company. (I) 4.1 Form of Unit Purchase Option. (I) 4.2 Form of Warrant Agreement. (I) 4.3 Form of Escrow Agreement. (iv) 4.4 Section 203 of the Delaware General Corporation Law. (ix) 10.1 Form of Registration Rights Agreement. (I) 10.5 Form of Standard Employment Agreement for hourly wage employee. (vi) 47 10.6 Form of Standard Employment Agreement for hourly wage employee eligible to earn commissions. (vi) 10.7 Form of Standard Employment Agreement for salaried employee. (vi) 10.8 Form of Standard Employment Agreement for salaried employee eligible to earn commissions. (vi) 10.9 Form of Standard Employment Agreement for salaried employee eligible for bonus in the form of incentive compensation. (vi) 10.10 Agreement dated March 16, 1992 between the Placement Agent and Shelton on behalf of "Founders" specified therein, as amended. (I) + 10.11 Founders Agreement dated March 25, 1992 among Robert H. Shelton ("Shelton"), Ellen Korval ("Korval"), Robert A. Small ("Small"), Leah R. Shelton ("Shelton")and John L. Sigalos ("Sigalos"), as supplemented by letter agreement dated as of March 25, 1992 among Shelton, Shelton, Sigalos, Korval and Small. (I) + 10.12 Merchandising License Agreement dated February 25, 1992 between MCA/Universal Merchandising, Inc. and the Company. (I) 10.13 Merchandising License Agreement dated April 24, 1992 between Turner Home Entertainment, Inc. and the Company. (I) 10.14 Merchandising License Agreement dated as of April 16, 1992 between Paramount Pictures Corporation and the Company. (I) 10.15 Letter Agreement between the Image Bank West and the Company dated as of August 5, 1992. (I) 10.16 Letter Agreement between the Company and Tony Stone Worldwide dated as of August 31, 1992. (I) 10.17 1992 Employee Stock Option Plan. (iii) + 10.18 1992 Non-Employee Directors Stock Option Plan. (iii) 10.19 Metrum Imaging Products VAR Agreement dated September 11, 1992 between Metrum Information Storage and the Company. (I) 10.20 Lease dated November 13, 1992 between the Company and MCA Development Company. (ii) 10.21 Lease dated October 13, 1992 between the Company and Midis Properties, Ltd. (ii) 10.22 Lease dated March 28, 1993 between the Company and Midis Properties, Ltd. (vi) 48 10.23 Letter Agreement between the Company and Jay P. Morgan Photography dated September 28, 1992. (iii) 10.24 Settlement Agreement and Mutual Release dated as of August 11, 1994 between the Company, on the one hand, and Richard T. Eckhouse, B&E Financial Express, Business & Executives Financial Group, Innovative Business Management Inc., and R. T. Eckhouse & Assoc., on the other hand. (vii) 10.25 Promissory Note in favor of Photo Corporation of Australia Pty Limited, dated March 23, 1995. (viii) 10.26 Security Agreement between the Company and Photo Corporation of Australia Pty Limited, dated as of March 23, 1995. (viii) 10.27 Subscription Agreement between the Company and Oakrusk Pty Limited, dated May 26, 1995. (viii) 10.28 Stock Option Agreement between the Company and Oakrusk Pty Limited, dated May 26, 1995. (viii) 10.29 Form of Subscription Agreement. (ix) 10.30 Settlement and Mutual Release Agreement between the Company, Shelton, Shelton and Photo Corporation Group Pty Limited, dated August 31, 1996. (x) 10.31 Purchase and Sale Agreement between the Company and Los Alamos Energy, LLC, Dated August 31, 1998 10.32 Asset Lease Agreement dated October 26, 1998 (b) Reports on Form 8-K Current Report on Form 8-K dated April 27, 1998. Current Report on Form 8-K dated May 13, 1998 Current Report on Form 8-K dated October 28, 1998 (I) Incorporated by reference to the Company's Registration Statement on Form S_1 (Registration No. 33_ 52904) filed on October 5, 1992 (the "Registration Statement"). (ii) Incorporated by reference to Pre-Effective Amendment No. 1 to the Registration Statement filed on December 21, 1992. (iii) Incorporated by reference to Pre-Effective Amendment No. 2 to the Registration Statement filed on January 15, 1993. 50 (iv) Incorporated by reference to Pre-Effective Amendment No. 3 to the Registration Statement filed on February 3, 1993. (v) Incorporated by reference to the Company's Registration Statement on Form 8_A (No. 0_21322) filed on March 5, 1993 and effective on March 19, 1993. (vi) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1993. (vii) Incorporated by reference to the Company's Quarterly Report on Form 10_QSB for the quarterly period ended June 30, 1994. (viii) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995. (ix) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1995. (x) Incorporated by reference to the Company's Report on Form 10_QA for the period ended September 30, 1996. Management contract or compensatory plan. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Out-Takes, Inc. Dated: June 30, 2001 By: James Harvey, President ___________________________ James Harvey, President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 51 Signature Title Date --------- ----- ---- James Harvey Chairman of the Board, President, June 30, 2001 ----------------- Chief Executive Officer, Chief James Harvey Financial Officer and Secretary, And Sole Director EXHIBIT 10.31 PURCHASE AND SALE AGREEMENT BETWEEN COMPANY AND LOS ALAMOS ENERGY, LLC, DATED AUGUST 31, 1998 PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (the "Agreement") is made and entered into as of the 31st day of August, 1998, by and between Out-Takes, INC., a corporation duly organized and validly existing under the laws of the state of Delaware (the "Purchaser") and the several individuals named on the signature page of this Agreement (collectively, the "Seller"). WHEREAS, the Purchaser is a publicly-traded corporation on the OTC-Bulletin Board under the symbol OUTT; and WHEREAS, the Seller collectively owns all of the issued and outstanding units of equity interest (the "Equity") in LOS ALAMOS ENERGY, LLC, a limited liability company organized and existing under the laws of the State of California (the "Company"); and WHEREAS, the Purchaser desires to purchase from the Seller, and the Seller desires to sell and convey to the Purchaser, all of the Equity in the Company, subject to and in accordance with the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the foregoing premises and the covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: PURCHASE AND SALE OF THE EQUITY. Upon execution of this Agreement by both parties, and subject to the fulfillment of all Closing Conditions (as such term is defined below) contained in Section 7 below, the Purchaser hereby irrevocably agrees to purchase, and the Seller agrees to sell, transfer and convey to the Purchaser, all of the Equity in the Company outstanding as of the Closing (as defined below). Such units of Equity, once delivered to the Purchaser as set forth herein, shall be validly issued, fully paid and non_assessable. The Seller may elect, in its sole discretion at any time prior to the Closing, to convert its form of organization from a limited liability company to a corporation, in which case each reference to the Company shall be deemed to refer to the new corporation, and each reference to units of Equity in this Agreement shall be deemed to refer to shares of capital of the new corporation. 52 CONSIDERATION TO BE PAID FOR THE EQUITY. As consideration for the Equity to be purchased hereunder, the Purchaser shall deliver to the Seller promissory notes, substantially in the form of Exhibit A attached hereto, totaling four million dollars ($4,000,000) in the aggregate (collectively, the "Promissory Note"). The Promissory Note shall have a maturity of five (5) years, and shall bear interest at the rate of ten percent (10%) per annum until paid in full. As security for the Note, at the Closing, the Purchaser shall deliver to the Seller a security agreement (the "Security Agreement") substantially in the form of Exhibit B attached hereto, and a stock pledge agreement (the "Stock Pledge") substantially in the form of Exhibit C attached hereto. The security interests granted in the Security Agreement and the Stock Pledge shall remain in full force and effect until the Note has been repaid in its entirety, or converted as set forth in Section 3 below. 3. CONVERSION OPTION IN THE NOTE. The Note shall contain an option (the "Conversion Option") to convert the indebtedness represented thereby into such number of shares of voting common stock of the Purchaser as shall represent ninety percent (90%) of the shares of such voting stock issued and outstanding as of the date of conversion, on a fully_diluted basis (the "Conversion Shares"). In the event that the Seller desires to exercise the Conversion Option, it shall notify the Purchaser of such fact, and commence such actions not later than ninety days from the date of the Note. Within thirty (30) days after the Purchaser determines that the Conversion may be lawfully completed (or such other time as is mutually agreed between the parties), there shall be a closing of the Conversion Option (the "Conversion Closing"). At such Conversion Closing, the Seller shall deliver to the Purchaser the Note marked Paid in Full, and the Purchaser shall deliver to the Seller, or its nominees, a certificate or certificates evidencing the issuance to the Seller of the Conversion Shares, which Conversion Shares when so delivered shall be validly issued, fully paid, and non_assessable. The Conversion Closing shall be subject to the condition that the Purchaser shall have effected a reverse stock split of one (1) share for every one hundred (100) shares of the Purchaser outstanding as of such date. The Conversion Closing shall only occur if the foregoing condition has been fully satisfied or waived prior to or simultaneously with such Conversion Closing as set forth herein. 4. REPRESENTATIONS AND WARRANTIES OF THE SELLER. Each Seller hereby represents and warrants to the Purchaser, as to himself only and not jointly, as of the date hereof, the following: (a) each Seller is an adult individual, and has full power and capacity to enter into, execute, deliver and perform this Agreement in accordance with its terms, which Agreement, once so executed and delivered by such Seller, shall be the valid and binding obligation of such Seller, enforceable against him by any court of competent jurisdiction in accordance with its terms; 53 (b) no Seller, is bound by or subject to any contract, agreement, court order, judgment, administrative ruling, law, regulation or any other item which prohibits or restricts such party from entering into and performing this Agreement, or which requires the consent of any third party prior to the entry into or performance of this Agreement, in accordance with its terms. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants to the Seller, as of the date hereof, the following: the Purchaser is a corporation duly organized and validly existing under the laws of the State of Delaware, and has full power and authority to enter into and perform this Agreement in accordance with its terms; the individuals signing this Agreement on behalf the Purchaser are the duly elected executive officers of the Purchaser so indicated, and have full power and authority to execute and deliver this Agreement for and on behalf of the Purchaser, which Agreement, once so executed and delivered, shall be the valid and binding obligation of the Purchaser, enforceable against it by any court of competent jurisdiction in accordance with its terms; the Purchaser is not bound by or subject to any contract, agreement, court order, judgment, administrative ruling, law, regulation or any other item which prohibits or restricts such party from entering into and performing this Agreement, or which requires the consent of any third party prior to the entry into or performance of this Agreement, in accordance with its terms; (d) a majority of the Purchaser's voting stock is owned by PCG, which controls, beneficially and of record, fourteen million four hundred ten thousand (14,410,000) shares of the Company's common stock and a beneficial interest in another approximately eight hundred eighty five thousand (885,000) shares of the Company's common stock (common stock being the only voting securities of the Company outstanding as of the date hereof), on a fully_diluted basis, representing approximately seventy_five percent (75%) of the total number of shares of common stock issued and outstanding as of the date hereof; (e) the Purchaser has been given every opportunity to review all documents, and ask all questions of the Seller and the executive officers of the Company, as it shall have requested prior to executing and delivering this Agreement to the Seller; and the Purchaser has been advised to consult with its attorney and tax advisor regarding the consequences of purchasing the Equity. INDEMNIFICATION. The parties each hereby agree that they shall be responsible for, and shall hold harmless and indemnify the other party from and against, any and all obligations, liabilities, losses, costs, charges, damages or expenses (including, but not limited to, reasonable attorneys fees and court costs incurred in defense thereof) of whatever type or nature to the extent that any such Claim shall result from or arise out of the 54 breach by such party of any agreement, undertaking, representation or warranty contained in this Agreement (including, without limitation, all exhibits and other documents entered into pursuant hereto). 7. CLOSING. The transactions contemplated by this Agreement shall be consummated at such location, at such time and on such date as the parties shall mutually agree (the "Closing"). At the Closing, each Seller shall deliver to the Purchaser a certificate evidencing his respective portion of the Equity being acquired hereunder, and the Purchaser shall deliver to each such Seller an originally_signed Note, evidencing such Seller's pro rata portion of the Purchase Price, together with originally_signed copies of the Security Agreement and the Stock Pledge, and each party shall further deliver such documents and instruments as the other party may reasonably request to further the transactions to be consummated at the Closing (all of such delivery items being referred to herein as the "Closing Conditions"). 8. MISCELLANEOUS PROVISIONS. (A) NOTICES. All notices, requests, demands and other communications to be given hereunder shall be in writing and shall be deemed to have been duly given on the date of personal service or transmission by fax if such transmission is received during the normal business hours of the addressee, or on the first business day after sending the same by overnight courier service or by telegram, or on the third business day after mailing the same by first class mail, or on the day of receipt if sent by certified or registered mail, addressed as set forth below, or at such other address as any party may hereafter indicate by notice delivered as set forth in this Section 8(a): If to the Seller: Sellers of Equity in the Company c/o Los Alamos Energy, LLC 466 Bell Street Los Alamos, CA 93440 Attn: Mr. Hannes Faul Managing Member (with a copy) to: Feldhake, August & Roquemore 600 Anton Boulevard, Suite 1730 Costa Mesa, CA 92626 Attn: Kenneth S. August, Esquire Partner If to the Purchaser: Out-Takes, Inc. 1419 Peerless Place Suite 116 Los Angeles, California 90035 Attn: Mr. Peter C. Watt President 55 (with a copy) to: Photo Corporation Group Pty. Limited P.O. Box 415 Chester Hill, N.S.W. Australia 2162 Attn: Mr. Michael C. Roubicek Group Commercial Manager (B) BINDING AGREEMENT; ASSIGNMENT. This Agreement shall constitute the binding agreement of the parties hereto, enforceable against each of them in accordance with its terms. This Agreement shall inure to the benefit of each of the parties hereto, and their respective successors and permitted assigns; provided, however, that this Agreement may not be assigned (whether by contract or by operation of law) by either party without the prior written consent of the other party. (C) ENTIRE AGREEMENT. This Agreement constitutes the entire and final agreement and understanding between the parties with respect to the subject matter hereof and the transactions contemplated hereby, and supersedes any and all prior oral or written agreements, statements, representations, warranties or understandings between the parties, all of which are merged herein and superseded hereby. (D) WAIVER. No waiver of any provision of this Agreement shall be deemed to be or shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. (E) HEADINGS. The headings provided herein are for convenience only and shall have no force or effect upon the construction or interpretation of any provision hereof. (F) COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. FURTHER DOCUMENTS AND ACTS. Each party agrees to execute such other and further documents and to perform such other and further acts as may be reasonably necessary to carry out the purposes and provisions of this Agreement. GOVERNING LAW; VENUE. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without giving effect to the principles of conflicts of laws applied thereby. (I) INJUNCTIVE RELIEF. Each party hereby agrees that should either party materially breach any of its respective obligations under this Agreement, including without limitation any exhibit or other document entered into between the parties pursuant hereto, the non_breaching party would have no adequate remedy at law, since the harm caused by such a breach may not be 56 easily measured and compensated for in damages. Accordingly, the parties agree that in addition to such other remedies as may be available to the non_breaching party at law, such party may also obtain injunctive or other equitable relief including, but not limited to, specific performance, to compel the breaching party to meet its obligations under this Agreement. All of such remedies available to any party hereunder shall be cumulative and non_exclusive. (J) CONFIDENTIALITY. By their execution hereof, each party hereby acknowledges to the other that certain information furnished to it by the other party is proprietary to such disclosing party, and neither the receiving party, nor any affiliate, employee, officer, director, shareholder, agent or representative of such receiving party shall have any rights to distribute or divulge any of such Confidential Information to any third party without the disclosing party's prior, written consent, or to use any such Confidential Information in any way detrimental to the disclosing party or its affiliates, or which would otherwise destroy, injure or impair any of the disclosing party's rights in or in respect of any such Confidential Information including, without limitation, by using of such Confidential Information to establish or assist any person or entity which is, or will be, directly or indirectly in competition with the disclosing party. For purposes of this Agreement, the term "Confidential Information" shall mean any and all proprietary information belonging to the disclosing party, whether tangible or intangible, written or oral, including, without limitation, any non_public intellectual property rights, trade secrets, designs, books and records, computer software and files, and lists of (and/or information concerning) such disclosing party's financial condition, customers, suppliers, vendors, sources, methods, techniques and other business relationships or information. (K) SEVERABLE PROVISIONS. The provisions of this Agreement are severable, and if any one or more provisions is determined to be illegal, indefinite, invalid or otherwise unenforceable, in whole or in part, by any court of competent jurisdiction, then the remaining provisions of this Agreement and any partially unenforceable provisions to the extent enforceable in the pertinent jurisdiction, shall continue in full force and effect and shall be binding and enforceable on the parties. (L) EXHIBITS. All Schedules and Exhibits attached hereto are hereby incorporated by reference herein as an integral part of this Agreement, with the same force and effect as if the same had been written herein in their entirety. SURVIVAL. The provisions of Sections 4, 5, 6 and 8(j) shall expressly survive any expiration, termination or revocation of this Agreement by either party. 57 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. THE PURCHASER: Out-Takes, INC. ATTEST: By: Peter C. Watt By: Michael C. Roubicek ------------- -------------------- Peter C. Watt, President Michael C. Roubicek, Secretary THE SELLER: HANNES FAUL WITNESS: ----------------- HANNES FAUL LANCE HALL WITNESS: ---------- LANCE HALL THE INWOOD 1991 TRUST WITNESS: --------------------- By: James C. Harvey Trustee EXHIBIT A TO PURCHASE AND SALE AGREEMENT THIS CONVERTIBLE PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR UNDER THE LAWS OF ANY STATE, AND MAY NOT BE RESOLD, ASSIGNED, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE MAKER THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED. Out-Takes, INC. CONVERTIBLE PROMISSORY NOTE _____________________________ $_________ August __, 1998 58 FOR VALUE RECEIVED, Out-Takes, INC., a corporation organized and existing under the laws of the State of Delaware (hereinafter referred to as the "Maker"), hereby promises to pay to the order of _______________________________, an adult individual residing in the County of ________, State of California (hereinafter referred to as the "Payee"), at Payee's principal address located at ________________________, _______ California, 9____, or such other place or places as the Payee may hereafter direct from time to time, in lawful money of the United States and in immediately available funds, the principal sum of _____________________ DOLLARS ($_________). This Convertible Promissory Note (hereinafter referred to as the "Note") shall accrue simple interest at the rate of ten percent (10%) per annum. Amounts of principal and accrued interest due and payable in respect of this Promissory Note shall be paid out of gross operating revenues, as available, with payments to be made monthly in arrears up to ninety_nine percent (99%) of gross revenues from operations, being applied first to accrued interest and then to principal, with the balance due on August __, 2003 (the "Maturity Date"), unless this Note is earlier converted in accordance with the provisions set forth below (the "Conversion Date"). The principal amount of this Promissory Note shall be due and payable on the Maturity Date, unless earlier converted in accordance with the provisions set forth herein. This Promissory Note may be converted into shares of common stock of the Maker, having a par value of One Cent ($0.01) per share, (the "Common Stock") in whole or in part, in the manner set forth below. Each Promissory Note shall be convertible into such number of shares of Common Stock of the Maker as are obtained by (a) calculating the total outstanding amount of principal and accrued interest owed by Maker to all sellers of Los Alamos Energy, LLC (pursuant to that certain Purchase and Sale Agreement dated as of August 31, 1998, by and between Maker and the several sellers named therein (the "Purchase Agreement") as of the effective date of such conversion (the "Conversion Date"); (b) determining what percentage of such total amount is represented by the indebtedness evidenced by this Note; and (c) multiplying such percentage by the total number of Conversion Shares available (as such term is defined in the Purchase Agreement). The indebtedness represented by this Promissory Note constitutes senior secured indebtedness of the Maker, and shall be senior in right of payment to all other indebtedness of the Maker. By its execution of this Note, the Maker represents and warrants that it is not subject to any indebtedness which would be senior to, or pari passu with, the indebtedness to the Payee evidenced by this Note, other than in accordance with the Purchase Agreement. The Maker hereby agrees and covenants with the Payee that, in the event that the Maker shall hereafter become in default under this Promissory Note, the Maker shall not make or authorize any dividend or other distribution to shareholders of the Maker prior to the repayment in full of any amounts outstanding hereunder. 59 Upon the occurrence of either of the following specified Events of Default (each herein called an "Event of Default"): (i) Breach of Agreements. The Maker shall be in breach or violation, for a period of three (3) days, of any material agreement, undertaking, obligation, representation, warranty or statement contained in this Promissory Note, the Purchase Agreement, or any other Exhibit or document entered into by the Maker pursuant thereto; or (ii) Insolvency. The Maker shall suspend or discontinue its business, or make an assignment for the benefit of creditors or a composition with creditors, shall file a petition in bankruptcy, shall be adjudicated insolvent or bankrupt, shall petition or apply to any tribunal for the appointment of any custodian, receiver, liquidator or trustee of or for it or any substantial part of its property or assets, shall commence any proceedings relating to it under any applicable bankruptcy, reorganization, arrangement, readjustment of debt, receivership, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or there shall be commenced against the Maker any such proceeding which shall remain undismissed or unstayed for a period of forty_five (45) days or more, or any such order, judgment or decree shall be entered, or the Maker shall by any act or failure to act indicate its consent to, approval of or acquiescence in any such proceeding or in the appointment of any such custodian, receiver, liquidator or trustee; or the Maker shall take any action for the purpose of effecting any of the foregoing; then, and in any such event, and at any time thereafter if any Event of Default shall be continuing, the Payee may, by written notice to the Maker, declare the entire principal of this Promissory Note, and any accrued but unpaid interest in respect thereof, to be forthwith due and payable. The Maker hereby expressly waives presentment, demand, protest or other notice of any kind. This Promissory Note shall inure to the benefit of the Payee, his or her heirs, executors, successors and permitted assigns. The obligations of the Maker arising hereunder shall become the obligations of any successor in interest or permitted assignee thereof, whether by contract or by operation of law. This Promissory Note shall be governed by and construed in accordance with the internal laws of the State of California applicable to the enforcement and operation of such instruments in the State, and without giving effect to the principles of conflicts of laws which may be applied thereby. Any action brought under or in respect of this Promissory Note shall be brought only in a court of competent jurisdiction sitting in the County of Los Angeles, State of California. If any suit or other proceeding shall be instituted with respect to this Promissory Note, the prevailing party shall, in addition to such other relief as the court may award, be entitled to recover reasonable attorneys' fees, expenses and costs of investigation. 60 IN WITNESS WHEREOF, the Maker hereby sets its hand and seal in the County of Los Angeles, State of California, as of the date and year first above written. THE MAKER: Out-Takes, INC. ATTEST: [SEAL] By: _________________________ By: ____________________ Peter C. Watt Michael C.Roubicek President Secretary EXHIBIT B TO PURCHASE AND SALE AGREEMENT SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "Agreement") is made and entered into as of this ___th day of August, 1998 by and between Out-Takes, INC., a corporation organized and existing under the laws of the State of California (the "Grantor") and the several individuals named on the signature page of this Agreement (collectively, the "Secured Party"). WHEREAS, the Grantor and the Secured Party have entered into that certain Purchase and Sale Agreement, dated as of August ___, 1998 (the "Purchase Agreement"), pursuant to which Grantor has purchased (the "Acquisition") all of the equity securities issued and outstanding of LOS ALAMOS ENERGY, LLC, a California limited liability company (the "Subsidiary"); and WHEREAS, the Grantor has delivered to the Secured Party, as the Purchase Price for the Acquisition, a Secured Promissory Note in the amount of Four Million Dollars ($4,000,000) dated as of even date herewith (the "Note"); and WHEREAS, in order to induce the Secured Party to accept the Note as consideration for the Acquisition, the Grantor has agreed to provide the Secured Party with a security interest in and first lien upon all of its assets and the assets of the Subsidiary, and the parties now desire to enter into this Agreement to evidence the same; 61 NOW, THEREFORE, in consideration of the foregoing premises and the promises and covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, hereby agree as follows: 1. Grant of Security Interest. Grantor hereby assigns, conveys and grants to Secured Party a continuing security interest in and first lien upon all of Grantor's right, title and interest in and to all of the assets and properties owned or used by the Grantor in the conduct of its business, or the business of the Subsidiary, now owned or hereafter acquired at any time during the term hereof, whether tangible or intangible, fixed, movable or fixtures, of whatever kind or nature and wherever located, including, without limitation, all cash and cash equivalents, securities, accounts receivable, plant and equipment, inventory, rolling stock, materials, supplies, intellectual property rights, contract rights, choses in action, and any proceeds from the sale, lease, transfer or other disposition of any of such assets, whether for cash or property (all of the foregoing being herein referred to collectively as the "Collateral"). The security interest granted herein is intended to secure the prompt payment, when due, of all amounts due and payable to Secured Party under the Note including, without limitation, all principal amounts due thereunder, all interest accrued thereon, and all applicable late charges or other fees due under the Note, as well as the performance in full of all of Grantor's obligations under the Purchase Agreement (collectively, the "Secured Obligations"). 2. Transfers and Other Liens. Grantor hereby acknowledges to, and agrees with, Secured Party that for so long as this Agreement shall be in effect, Grantor, without the prior written consent of the Secured Party, shall not: (a) sell, assign or otherwise dispose of, any or all of the Collateral (except in the ordinary course of business); or (b) create or permit to exist or be created any lien, mortgage, security interest, or other charge or encumbrance upon or with respect to the Collateral, other than the Secured Obligations; or (c) move the Collateral from any location other than the Grantor's principal place of business located at the address set forth in Section 6(b) below. Remedies Upon an Event of Default. ---------------------------------- In the event that the Grantor shall fail to perform fully any Secured Obligation on the date such performance is due, or if the Grantor should breach or be in default of any other provision of the Note, the Purchase Agreement or this Agreement (any of such occurrences being hereinafter referred to as an "Event of Default"), to the extent that such Event of Default is not cured or waived within ten (10) days after the occurrence of such Event of Default, then the Secured Party shall be entitled to foreclose upon and take possession of the Collateral, in satisfaction (full or partial 62 as the case may be) of the indebtedness owed by Grantor. Promptly after retaking possession of the Collateral upon any such foreclosure, the Secured Party shall, after deducting therefrom any amounts expended by the Secured Party in enforcing the Note, the Purchase Agreement or this Agreement and/or repossessing the Collateral (including, without limitation, the cost of reasonable attorneys' fees), remit to the Grantor the difference between the liquidation value of the Collateral on the date of repossession thereof and the sum of any amounts paid to the Secured Party to purchase the Collateral in a liquidating sale. The parties hereby agree that any such payment to Grantor upon such foreclosure may be made in stock of the Grantor or a five (5)_year promissory note bearing interest at the rate of ten percent (10%) per annum, or some combination thereof, as determined in the sole discretion of the Secured Party. The Secured Party hereby agrees with the Grantor that, in the event it shall exercise any or all of its remedies upon an event of default set forth in Clause 3(a) above, it shall look first to satisfy all of the Secured Obligations out of the assets of the Subsidiary, which it shall exhaust as fully as reasonably possible prior to looking to the assets of the Grantor to satisfy any remaining Secured Obligations. 4. Continuing Security Interest; Termination of Same. ------------------------------------------------- (a) This Agreement shall create a continuing security interest in the Collateral, and shall (i) remain in full force and effect until all of the Secured Obligations of Grantor shall have been paid or performed in full; (ii) be binding upon the Grantor, its successors and permitted assigns; and (iii) inure to the benefit of the Secured Party and their respective successors, heirs, executors, administrators, transferees and assigns. (b) Upon the payment or performance in full of all Secured Obligations, and any fees, costs and penalties owing thereon, the security interest granted hereby shall automatically terminate. Upon any such termination, the Secured Party shall execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such termination and to effect the release of the Collateral. 5. Amendments and Waivers. No amendment or waiver of any provision of this Agreement, the Purchase Agreement or the Note, and no consent to any departure by the Grantor herefrom or therefrom, shall in any event be effective unless the same shall be in writing and signed by the Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the express written purpose for which given. 6. Notices. In the event that any notice or other communication is to be sent pursuant to this Agreement, such notice shall be in writing, sent by telex or by certified mail, return receipt requested, or by delivery in person, or by overnight courier, addressed as follows, or to such other address as either party may notify the other of in accordance with the provisions hereof: 63 if to Secured Party, to: c/o Mr. Hannes Faul 466 Bell Street Los Alamos, CA 93440 (with a copy) to: Feldhake, August & Roquemore 600 Anton Boulevard, Suite 1730 Costa Mesa, CA 92626 Attn: Kenneth S. August, Esquire Partner if to Grantor, to: Out-Takes, INC. 1419 Peerless Place Suite 116 Los Angeles, CA 90035 Attn: Mr. Peter C. Watt President (with a copy) to: Photo Corporation Group Pty. Limited P.O. Box 415 Chester Hill, N.S.W. Australia 2162 Attn: Mr. Michael C. Roubicek Group Commercial Manager All notices and other communications hereunder shall be deemed given when telexed or delivered, or upon receipt if mailed, in accordance with this paragraph. 7. Further Assurances. Grantor agrees to execute and deliver immediately upon request, financing statements on Form UCC_1 for recordation with the California Secretary of State; and (b) such other documents as may be necessary to perfect the Secured Parties' security interests in the Collateral. 8. Entire Agreement. This Agreement, together with the Note, constitutes the entire agreement between Grantor and Secured Party, with respect to the subjects contained herein, and supersedes any prior agreements or understandings, whether written or oral, express or implied. 9. Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without reference to principles of conflicts of law. Any action brought by any party to enforce any of the terms or provisions of this Agreement or the note, or otherwise in connection with or relating to this Agreement, shall be brought only in the courts of the State of California in the county of Los Angeles, and the parties hereby accept the exclusive jurisdiction of such courts for all disputes arising under this Agreement, the Purchase Agreement or the Note. 64 10. Miscellaneous. All other provisions of the Purchase Agreement, including, without limitation, the specific clauses setting forth the governing law and venue of this Agreement, the right of further assurances, severability, specific performance and other injunctive relief, and every other aspect of the performance, interpretation relationship between the parties and other miscellaneous provisions, are hereby incorporated herein by reference from the Purchase Agreement, and are of force and effect as fully as if the same had been repeated herein in their entirety. IN WITNESS WHEREOF, Grantor has caused this Agreement to be duly executed and delivered as of the date first above written. THE GRANTOR: Out-Takes, INC. ATTEST: By: _____________________ By: _____________________ Peter C. Watt Michael Roubicek President Secretary THE SECURED PARTY: LOS ALAMOS ENERGY, LLC WITNESS: By: ____________________________ By: ________________________ Hannes Faul Managing Member THE INDIVIDUALS: WITNESS: _____________________ ___________________ _____________________ ___________________ EXHIBIT 10.33 ASSET LEASE AGREEMENT BETWEEN COMPANY AND COLORVISION, INC. DATED OCTOBER 26, 1998 ASSET LEASE AGREEMENT This is an Asset Lease Agreement ("Agreement"), effective as of October __, 1998, by and between Colorvision International, Inc., a Florida corporation, located at 8250 Exchange Drive, Suite 132, Orlando, Florida 32809 (hereinafter referred to as "Lessee") and Out-Takes, Inc., a Delaware 65 corporation located at 1419 Peerless Place, Suite 116, Los Angeles, California 90035 (hereinafter referred to as "Lessor"). BACKGROUND Lessor owns and operates the Out Takes photo store (the "Business") located at Universal Studios California City Walk (the "Location"). Lessee seeks to lease from Lessor, and Lessor seeks to lease to Lessee certain of the assets of the Business for use at the Location as set forth in this Agreement, subject to the terms and conditions set forth below. Accordingly, in consideration of the mutual covenants and agree_ments set forth below, the parties agree as follows: TERMS 1. LEASE OF ASSETS. The parties hereby agree that, at Closing (as defined below), Lessor shall lease the assets of the Business set forth on Schedule 1 to this Agreement (collectively the "Assets") provided, however, that within thirty (30) days from the date of this Agreement they shall jointly prepare an item by item list of the Assets being leased hereunder, and the agreed-upon value thereof, which list will then be attached to this Agreement as a revised Schedule 1. Lessor further agrees that the Assets shall be used only at the Location during the Lease Term, as hereafter defined. Upon the expiration of the Lease Term, or its earlier termination, all of the Assets shall be returned to Lessor hereunder in the same condition as they are being delivered to Lessee at the Closing, normal wear and tear excepted, and free and clear of any lien, charge, security interest, claim or other encumbrance. The Assets are being leased to Lessee on an "as is_where is" basis, and Lessor makes no representation or warranty to Lessee, express or implied, as to the condition of any Asset or suitability to the Business or the contemplated use thereof by Lessee. Throughout the entire Lease Term, Lessee hereby agrees with and covenants to Lessor that it shall not do any of the following, nor suffer or permit any of the following to occur to the extent the same shall be within its discretion or control, without having obtained the prior written consent of Lessor: (a) sell, lease, sublease, exchange, transfer or otherwise dispose of any of the Assets; (b) subject any of the Assets to any lien, security interest or encumbrance; (c) take any action which would materially destroy, injure, alter or modify any Asset, or the right of Lessor to use any Asset, or which would render defective or otherwise encumber good and marketable title to any such Asset, to the extent such title exists in respect of such Asset at the Closing. 66 2. ASSIGNMENT OF LEASE. At Closing (as defined below), Lessor shall assign and transfer to Lessee all of its right, title and interest in and to that certain Business Lease executed as of November 13, 1992 ("Lease") between Lessor and MCA Development Company, a division of MCA Inc. ("Landlord") pursuant to an Assignment of Lease substantially in the form attached to this Agreement as Exhibit "A" ("Assignment"), which Assignment requires the written consent of the Landlord. 3. LEASE PRICE. The rental price for the Assets (the "Lease Price") shall be a monthly amount equal to seven percent (7%) of the gross revenues (less applicable sales taxes due on goods sold at the Location) ("Gross Revenues") derived by Lessee from the Business, or any other business conducted or engaged in by Lessee at the Location during each month, or portion thereof, that Lessee shall be in possession of the Assets, for the duration of the Lease, as currently extended through May 30, 2005 (the "Lease Term"). In the event Lessee ceases to conduct any business at the Location: (i) for reasons of bankruptcy or insolvency, (ii) acts of God, emergencies, strikes or other causes out of Lessee's control; (iii) any loss of the right of Lessor to lease the Assets to Lessee prior to the conclusion of the Lease Term; or (iv) any termination of Lease by Landlord if through no fault of the Lessee, then no further payments shall be due Lessor hereunder from the date Lessee ceases to operate at the Location until Lessee resumes business at the Location, if such a resumption of business occurs. Lessee acknowledges to Lessor by its execution of this Agreement that it intends in good faith to operate at the Location profitably in accordance with the Lease, and shall use its best efforts throughout the Lease term to do so, and Lessor acknowledges to Lessee that it understands such profitable operation cannot be guaranteed. 4. PAYMENT OF LEASE PRICE. Subject to the terms of this Agreement and in reliance on the representations and warranties of Lessor set forth below, Lessee shall lease, at Closing, the Assets and, in full consideration therefor, shall: (a) pay $50,000.00 as a deposit ("Deposit") to Lessor at Closing. Lessee shall have the option of making the payment by cashier's check or bank wire. Lessor shall provide bank wire instructions to Lessee if requested by Lessee; and (b) pay the entire amount of the Lease Price due and payable to Lessor (together with the applicable amount of any taxes as may be required in connection with payments of the Lease Price) on or before the fifteenth day of the month following each month of the Lease Term; provided, however, that Lessee may deduct up to $4,166.67 each month from any sum otherwise payable to Lessee pursuant to this subsection 4(b) until the entire amount of the Deposit has been repaid to Lessee; further provided that the amount of any security deposits shown on Schedule 2 to this Agreement which are transferred to, or credited to the account of, Lessee by the holders of such deposits shall be deemed repayments of the Deposit to Lessee and shall 67 thereby reduce, by a corresponding amount, any deductions from the Gross Revenues otherwise payable to Lessor which Lessee may make pursuant to this Subsection 4(b). 5. LICENSE TO USE TRADE NAME. In further consideration of the payment of the Lease Price to Lessor as set forth above, the Lessor hereby grants to Lessee a license (the "License") to use the trade name "Out-Takes" (the "Trade Name") only in connection with the Business at the Location and for so long as Lessee operates the Business at the Location. Lessee shall have no right to use the Trade Name in connection with any other present or future operations of Lessee. Lessee recognizes and acknowledges Lessor's ownership of and prior rights in the Trade Name and shall not take any action inconsistent with Lessor's ownership of and prior rights in the Trade Name or which would otherwise destroy or impair Lessor's interest in such rights. Notwithstanding any other provisions contained in this Agreement concerning the rights of Lessor to indemnification hereunder, and without limiting or excluding any of such rights, Lessee hereby expressly agrees with Lessor that in the event Lessor shall be named in any lawsuit or other proceeding solely by virtue of Lessee's use of the Trade Name hereunder (and not in connection with any actual liability or specific claim against Lessor in such lawsuit or proceeding), then Lessee shall provide to the Lessor directly, and promptly upon its request therefor, the full amount of any fees or expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred by Lessor in having itself dismissed from any such action. The license to use the Trade Name granted hereunder shall be co_ terminous with the Lease Term or such shorter period as Lessee shall actually operate the Business at the Location. Lessor agrees that, for so long as this Agreement shall be in effect, it shall not take any action, or omit to take any action which would have the effect of impairing any of Lessor's rights in the Trade Name, or the value thereof to Lessor. Lessor covenants that it shall not enter into any agreement, arrangement or undertaking, the effect of which would be to result in the transfer, assignment, mortgage, hypothecation, dilution or extinguishment of the Trade Name or any rights of Lessor therein. 6. CLOSING. The closing of the transaction contemplated by this Agreement (the "Closing") shall take place in Los Angeles, California on October ___, 1998, or such other date and/or place as the parties mutually agree in writing (the "Closing Date"). 7. DELIVERIES BY LESSOR. At Closing, Lessor shall deliver to Lessee: (a) an originally executed copy of this Agreement; (b) the Assignment, duly executed by Lessor; 68 (c) a certificate of actions by Board of Directors of Lessor authorizing the transaction contemplated by this Agreement to be undertaken by Lessor. 8. DELIVERIES BY LESSEE. At Closing, Lessee shall deliver to Lessor (1) an originally executed copy of this Agreement; (2) the Deposit in accordance with subsection 4(a) hereof; (3) the Assignment, duly executed by Lessee; and (4) a certificate of action by the Board of Directors of Lessee authorizing the transactions contemplated by the Agreement to be undertaken by Lessee. 9. LIABILITIES OF LESSOR. Except with respect to the Assignment and except as provided in Schedule 3 to this Agreement, Lessee will not assume any trade and accounts payable that are, or have become due for payment as of the Closing date or any other liabilities not incurred by Lessor in the ordinary course of business through the Closing Date. Without limiting the generality of the foregoing, Lessee will not assume intercompany liabilities, payables or obligations of Lessor, nor will it assume any of Lessor's liabilities or obligations arising out of employment agreements between Lessor and any of Lessor's employees or Lessor's liabilities or obligations relating to the negotiation and/or closing of the transaction contemplated herein including, but not limited to, any broker commission payable in connection with the transaction. Lessee shall be solely and exclusively liable for, and Lessor expressly does not agree to assume any of the obligations created or liabilities imposed upon Lessee by virtue of its use of the Assets after the Closing. Lessee further covenants to and agrees with Lessor that in the use of the Assets as contemplated herein, it shall not disturb any agreement to which such Assets are subject nor by which they are bound, nor create, nor suffer or permitted to be created or imposed, any lien, charge or other liability to, upon or for the account of, Lessor. 10. INDEMNIFICATION. (a) Except as otherwise contemplated herein, Lessor shall indemnify and hold Lessee harmless from, against, and in respect of the following: (i) any and all liabilities, obligations, debts, contracts or other commitments of Lessor of any kind, known or unknown, whether fixed or contingent, and whether arising in contract, in tort, or otherwise from the operation of the Business at the Location prior to Closing including, but not limited to, any liability of Lessor for sales and use taxes; (ii) any damage or deficiency resulting from any misrepresentation in or omission from any certificate or other instrument furnished or to be furnished to Lessee by Lessor pursuant to this Agreement; (iii) any and all losses, liabilities, claims, damages and expenses, including court costs and reasonable attorney's fees, arising out of any claim for brokerage or other commissions relative to this Agreement or the transactions contemplated hereby insofar as any such claim arises by reason of services alleged to have been rendered to or at the instance of Lessor; 69 (iv) any material breach by Lessor of this Agreement; and (v) all actions, suits, proceedings, claims, demands, assessments, judgments, legal fees, costs and expenses incident to any of the foregoing or arising out of any act or omission of Lessor in the conduct of the Business before the Closing. (b) Lessee shall indemnify and hold Lessor harmless from, against, and in respect of the following: (i) any and all liabilities, obligations, debts, contracts or other commitments of Lessee of any kind, known or unknown, whether fixed or contingent, and whether arising in contract, in tort, or otherwise from the operation of the Business (or any other business or activity conducted) at the Location after the Closing including, but not limited to, any liability of Lessee for sales and use taxes and any use of the Trade Name at any location by Lessee in breach of Section 5 hereof; and (ii) any material breach by Lessee of this Agreement. (iii) any liability or obligation arising out of the inclusion in the list of Assets of the license agreements set forth on Schedule 1 hereto, including without limitation for the failure of Lessor to obtain the consent of any licensor thereunder prior to leasing such licenses to Lessee, or any liability or obligation which may be agreed upon between Lessee and any of such licensors subsequent to the date of the Closing. (c) Each party agrees to give notice to the other party of the assertion of any claim or demand or the institution of any action, suit, or proceeding in respect of which indemnification may be claimed hereunder and the party receiving such notice shall have the right to undertake the defense or settlement of such action, suit or proceeding ("Litigation") at it's own expense. If the party receiving such notice does not undertake (or, within ten (10) days thereafter, express its intention to so undertake) the defense or settlement of the Litigation, the party giving such notice may control the defense or settlement of the Litigation, provided, that if at any time during the pendency of such Litigation it shall be deemed in good faith by either party, or its respective counsel, that the interests of the respective parties in respect of such Litigation are or may become adverse, or otherwise conflict in any material way, then each party shall be entitled to separate counsel thereafter, and, provided, further, that in no event shall either party be entitled to make any offer or agreement of settlement in respect of any such Litigation which is or will or could become binding upon the other party hereto, without having obtained such other party's prior written consent to be bound thereby. In the event Lessee is controlling the defense or settlement of Litigation pursuant to this Subsection 10(c), and provided that Lessor is not entitled to indemnification in respect of such Litigation pursuant to Section 10(b) above, Lessor hereby authorizes Lessee to deduct the costs of such defense or settlement from any sums due Lessor pursuant to subsection 4(b) hereof. In the event such costs exceed any sums due Lessor pursuant to subsection 4(b) hereof, Lessor shall remit the amount of such costs directly to Lessee. 70 (d) Notwithstanding anything else contained in this Section 10, Lessee shall promptly notify Lessor in the manner set forth in Section 16(d) below in the event it becomes aware of any threatened or pending litigation involving or relating to the Business, any other business or activity conducted at the Location, the Assets (or any part thereof) or the Lease. 11. REPRESENTATIONS AND WARRANTIES OF LESSOR. Lessor represents and warrants to Lessee as follows: (a) Organization and Standing. Lessor is a corporation organized under the laws of the State of Delaware and its status is active. (b) Power and Authority. Lessor has the requisite corporate authority to enter into this Agreement and to incur and perform its obligations under this Agreement. Lessor has all necessary corporate power to own, lease, hold, and operate all of its properties and assets and to carry on the Business as it is now being conducted. The execution, delivery and performance by Lessor of this Agreement has been authorized by all necessary corporate action. Upon the execution and delivery of this Agreement, this Agreement shall constitute a valid and binding agreement of Lessor, enforceable against Lessor in accordance with its terms, subject only to applicable bankruptcy, moratorium and similar laws. (c) Title to Assets. Except for any licenses listed on Schedule 7 hereto with respect to which Lessor makes no representation or warranty as to title, quality or validity thereof, Lessor has good and marketable title to all of the Assets, free and clear from all liens, encumbrances, security interests or claims of any kind or nature, other than liens incurred in the ordinary course of the Business for trade or in connection with the purchase of assets, or for services rendered to Lessor by materialmen or other similar persons, or for taxes not yet due and payable, or which otherwise do not have a material adverse impact upon the financial condition of the Business. With respect to any security interests by a third party in the Assets, Lessor shall deliver to Lessee at closing (or as soon thereafter as Lessor may become aware thereof) a copy of a duly filed UCC Form 3 terminating the security interest of any third party in the Assets. (d) Approvals and Consents. The execution, delivery and performance of this Agreement (and the transactions contemplated by this Agreement) do not and will not: (i) contravene any provision of the articles of incorporation or bylaws of Lessor; (ii) result in a material breach of, constitute a material default under, result in the modification or cancellation of, or give rise to any right of termination, modification or acceleration in respect of any indenture, loan agreement, mortgage, lease or any other contract, or agreement to which Lessor or any of the Assets are bound (other than in respect of the Lease); (iii) other than as may apply to Lessee, result in the creation of any security interest, pledge, lien, charge, claim, option, right to acquire, encumbrance, restriction on transfer, or adverse claim of any nature whatsoever upon any of the Assets; (iv) violate any writ, order, injunction or decree of any court or any federal, state, municipal or other domestic or foreign governmental department, commission, 71 board, bureau, agency or instrumentality, which violation or default in any such case would have a material adverse effect on the Business; (v) require approval of the shareholders of Lessor; or (vi) require any authorization, consent or approval of, or filing with or notice to, any governmental or judicial body or agency, or any other entity or person, including, without limitation, any filing with the Securities and Exchange Commission ("SEC") other than any obligation Lessor may have to file a Form 8_ K as contemplated by Section 15 of this Agreement. (d) Litigation. There are no actions or suits at law or in equity now pending or, to the actual knowledge of Lessor, threatened which could have a material adverse effect on the Business or any of the Assets, or the ability of Lessor to consummate the transactions contemplated by this Agreement. (e) Collective Bargaining Agreements. There are no collective _______________ bargaining agreements to which Lessor is a party or by which Lessor is bound, and there is no pending or threatened labor dispute, labor union organizing attempt, strike, or work stoppage affecting either Lessor or the Business. (f) Benefit Plans. There are no benefit plans applicable to any of the employees of the Business that are currently in effect or which, with respect to the Business, Lessor has committed to implement prior to the Closing, except as shown on Schedule 4 to this Agreement. (g) Contracts. Schedule 5 to this Agreement lists all material contracts (including contracts with consultants), leases (where Lessor is lessor or lessee) except the Lease, licenses, agreements, and undertakings of Lessor to which it is or at the Closing Date will be a party and bound, or to which any of its properties or Assets are or will be subject, and, if written, Lessor shall have supplied Lessee with copies of such documents. Except as shown on Schedule 6 to this Agreement, each such contract, undertaking or other commitment listed in Schedule 5 is, and upon the Closing will be (except as completed or expired by its terms), valid and enforce-able in accordance with its terms, and no party is in default under any material provision thereof. (h) Trade Name. Lessor has adopted and uses the Trade Name in connection with the Business. Lessor has not been notified that Lessor's use of the trade name or logo infringes the rights of a third party. No proceedings have been or will at the Closing Date have been instituted or threatened which assert infringement of rights of any third party against Lessor pursuant to its use of the Trade Name. (i) Compliance with Laws. As of the date of this Agreement, to the actual knowledge of Lessor, (i) there is no violation of any applicable laws, regulations or orders relating to the conduct of the Business, and (ii) there is no use of the Assets by Lessor in the Business which violates any applicable laws, codes, ordinances and regulations, whether federal, state or local, which, in either case, would have a material adverse effect on the Business. 72 (j) Conditions Affecting the Business. Other than as applicable to Gerry Wersh, who is deemed to be essential to the technical aspects of the Business as currently being conducted, Lessor is not aware of any extraordinary or unusual conditions in existence on the date hereof with respect to the markets, services, facili_ties, personnel, or supplies of Lessor that is not public information or known generally in Lessor's industry or which has not been disclosed in writing to Lessee and which Lessor believes will result in a material and adverse effect on the Business not experienced by others in similar businesses. (k) No Misrepresentations. None of the representations and warranties of Lessor set forth in this Agreement or in the attached exhibits and schedules nor any information or statements contained in the lists or documents provided or to be provided by Lessor to Lessee, notwithstanding any investigation thereof by Lessee, contains or will contain any untrue statement of a material fact, or omits or will omit the statement of any material fact necessary to render the same not misleading. (l) Conveyance Not Fraudulent. Lessor is not making the transactions contemplated by this Agreement with the intent to hinder, delay, or defraud either its present or future creditors. (m) Discontinuance of Business. Upon consummation of the transactions contemplated hereby, Lessor will discontinue its operation of the Business, but not of any other business owned or operated by Lessor. 12. REPRESENTATIONS AND WARRANTIES OF LESSEE. Lessee represents and warrants to Lessor as follows: (a) Organization and Standing. Lessee is a corporation organized and existing under the laws of the State of Florida and its status is active. (b) Power and Authority. Lessee has the requisite corporate authority to enter into this Agreement and to incur and perform its obligations under this Agreement. Lessee has all necessary corporate power to own, lease, hold, and 2operate the Assets and carry on the Business as it is now being conducted. The execution, delivery, and performance by Lessee of this Agreement has been authorized by all necessary corporate action. Upon the execution and delivery of this Agreement, this Agreement shall constitute a valid and binding agreement of Lessee, enforceable against Lessee in accordance with its terms, subject only to applicable bankruptcy, moratorium, and similar laws. (c) Approvals and Consents. The execution, delivery and performance of this Agreement (and the transactions contemplated by this Agreement) do not and will not: (i) contravene any provision of the articles of incorporation or bylaws of Lessee; (ii) result in a breach of, constitute a default under, result in the modification or cancellation of, or give rise to any right of termination, modification, or acceleration in respect of any indenture, loan agreement, mortgage, lease or any other contract, or agreement to which 73 Lessee is bound; (iii) require any authorization, consent or approval of, or filing with or notice to, any governmental or judicial body or agency, or any other entity or person. (d) No Misrepresentations. None of the representations and warranties of Lessee set forth in this Agreement or in the attached exhibits and schedules, nor any information or statements included in the lists or documents to be provided by Lessee to Lessor, notwithstanding any investigation thereof by Lessor, contains or will contain any untrue statement of a material fact, or omits or will omit the statement of any material fact necessary to render the same not misleading. (e) Brokers' Fees. Lessee has no liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement. 13. SURVIVAL OF PROVISIONS. All representations, warranties, agreements, covenants, assignments and licenses made or granted herein by Lessor or Lessee in connection with the transactions contemplated by or set forth in this Agreement or contained in any certificate, schedule, exhibit, or other document delivered pursuant to this Agreement shall survive the Closing. 14. DISCLOSURE AND NON-INTERFERENCE. The parties agree not to make any independent press releases or to disclose the terms of this Agreement except to their attorneys and other necessary parties. The parties further agree to prepare and issue a mutually agreeable press release upon Closing of this transaction, provided that Lessee understands that Lessor may be obligated to file with the SEC on Form 8-K within five days following the Closing. Further, the parties agree not to interfere in each other's businesses, nor to make any statements which would adversely impact the other's business interests. 15. RELATIONSHIP CREATED; INDEPENDENT CONTRACTOR. No provision of this Agreement is intended to make Lessee an employee or agent of Lessor for any purpose whatsoever, nor shall the execution of this Agreement be deemed to create any partnership, joint venture or other form of business association between the parties other than that of independent contractors. Lessor acknowledges that it shall not have the right to require Lessee to make any specific amount or number of sales, to attend sales meetings, to conform to any fixed or minimum number of hours devoted to selling effort, to follow prescribed itineraries, or do anything else which would jeopardize the relationship being created between the parties. Notwithstanding the foregoing, Lessor shall have the right to request Lessee to, and Lessee shall, provide Lessor with such reports or information regarding the Assets as Lessor may reasonably request from time to time during the Lease Term. 16. GENERAL PROVISIONS. (a) Further Assurances. The parties agree that, from time to time hereafter and upon request, each of them will execute, acknowledge and deliver such other instruments as may be reasonably required to carry out the terms and conditions of this Agreement. 74 (b) Benefit and Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The rights of Lessee hereunder may not be assigned without the prior written consent of Lessor which shall not unreasonably be withheld. The rights of Lessor hereunder may be assigned, provided that any such assignment shall in no way relieve Lessor of its obligations and responsibilities to Lessee under this Agreement. (c) Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of California, excluding those laws of California relating to conflicts of laws of different jurisdictions. The parties hereby expressly submit to the jurisdiction of any court of competent jurisdiction sitting in and for the County of Los Angeles, State of California. (d) Notices. All notices, requests, demands and other communications hereunder shall be in writing, and shall be deemed to have been duly given if delivered by overnight delivery service or hand delivered, addressed as follows: If to Lessor: Out-Takes, Inc. 1419 Peerless Place, Suite 116 Los Angeles, California 90035 With a copy (which shall not constitute notice) to: Feldhake, August & Roquemore 600 Anton Boulevard, Suite 1730 Costa Mesa, California 92626 Attention: Kenneth S. August, Esquire If to Lessee: Colorvision International, Inc. 8250 Exchange Drive, Suite 132 Orlando, Florida 32809 With a copy (which shall not constitute notice) to: Holland & Knight LLP Post Office Box 1526 Orlando, Florida 32802 Attention: John R. Dierking, Esquire (e) Expenses. Any expenses in connection with this Agreement or the transactions contemplated herein shall be paid for by the party incurring such expenses following the Closing. Lessee shall not assume any obligations of Lessor, nor Lessor assume any obligations of Lessee, in connection with any such expenses. 76 (f) Sales and Other Taxes. Any sales and other applicable taxes with respect to the lease of the Assets hereunder shall be borne by Lessee, and shall be paid by Lessee as and when such taxes become due consistent with the lease of the Assets set forth on Schedule 1 attached hereto. (g) Headings. All paragraph headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Agreement. (h) Counterparts; Faxes. This Agreement may be signed in one or more counterparts, each of which shall be considered an original copy but all of which together shall be deemed to be but one and the same instrument. Wherever in this Agreement an original signature shall be required, a facsimile of an original signature shall be deemed an original signature for all purposes. (i) Schedules and Exhibits. The schedules and exhibits attached to this Agreement are hereby incorporated herein as an integral part hereof as fully as if they had been written into the body of this Agreement in their entirety. (j) Amendment, Modification and Waiver. This Agreement may be modified, amended and supplemented only by the mutual written agreement of both of the parties hereto. Each party may waive in writing any condition intended to be for its benefit. (k) Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall remain in full force and effect, nor shall the invalidity or unenforceability of a portion of any provision of this Agreement affect the validity or enforceability of the balance of such provision. (l) Entire Agreement. This Agreement and the Schedules and Exhibits delivered herewith represent the entire Agreement of the parties and supersede all prior negotiations and discussions by and among the parties hereto with respect to the subject matter hereof. No provision or document of any kind shall be included in or form a part of this Agreement unless in writing and delivered to the other party by the party to be charged. This agreement supersedes and replaces the Letter which shall terminate upon the execution of this Agreement by the parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year set forth above. 77 LESSOR: Out-Takes, INC. ATTEST: By: By: __________________________ James C. Harvey James C. Harvey President Secretary LESSEE: COLORVISION INTERNATIONAL, INC. ATTEST: By: _____________________________ By: __________________________ President Secretary EXHIBIT "A" ASSIGNMENT, ASSUMPTION OF LEASE AND LANDLORD CONSENT AGREEMENT THIS AGREEMENT is made and entered into as of this ___ day of October, 1998 by and between Out-Takes, Inc. ("Assignor"), Colorvision International, Inc. ("Assignee") and Universal CityWalk Hollywood, a Unit of Universal Studios, Inc., as successor in interest to MCA Development, a division of MCA Inc. ("Landlord"). R E C I T A L S A. Landlord and Assignor, as Tenant, entered into that certain written Lease dated as of November 12, 1992 (" 1992 Lease") pursuant to which Landlord leased to Assignor certain premises located in Universal City, California as described in such 1992 Lease (the "Premises"), which was subsequently amended by that certain First Amendment to Lease dated March, 1993. The 1992 Lease and the First Amendment to Lease are collectively referred to herein as the "Lease". B. Simultaneously as of November 13, 1992 Guarantor executed and delivered a Guarantee of Lease (the "Guarantee") with respect to Assignor's obligations under the 1992 Lease, which Guarantee remains in full force and effect. C. Effective as of the date first written above, Assignor wishes to assign and Assignee wishes to accept such assignment and assume all of Assignor's rights and obligations under the Lease. 78 NOW, THEREFORE, in consideration of the above and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Assignor hereby assigns, conveys and transfers all of its right, title and interest in the Lease, a copy of which is attached and incorporated herein by reference. 2. Assignee hereby assumes, agrees to be bound by and undertakes to perform each and every one of the terms, covenants and conditions contained in the Lease. The Assignee further assumes all obligations and liabilities of the Assignor under the Lease in all respects as if Assignee were the original party to the Lease. 3. Assignee shall be liable for all amounts due under the Lease on or after the date hereof. In the event of a default under the Lease, Lessor shall have the right to proceed directly and immediately against the Assignee without first proceeding against the property and such proceeding is not deemed to be an irrevocable election of remedies. 4. Subject to the terms and conditions herein, Lessor consents to the assignment of the Lease from Assignor to Assignee. Assignor acknowledges that this consent by Lessor is given without releasing Assignor from its obligations under the Lease. This consent by Lessor shall not be deemed to be or construed as a consent to any subsequent assignment of the Lease. 5. Assignee and Lessor agree that Assignee shall replace Robert Shelton as Guarantor under said Lease, and shall assume all obligations of Guarantor consistent with the terms of the Lease. 6. Assignee shall deposit with Lessor a Security Deposit of two months Minimum Rent (as defined in the Lease) in the amount of Twenty Thousand Seven Hundred Forty Five Dollars and Seventy Cents ($20,745.70). Landlord hereby agrees that, notwithstanding the foregoing, Assignor shall transfer its Security Deposit currently held by Landlord in the amount of Eighteen Thousand Seven Hundred Twenty Two Thousand Dollars Sixty Six Cents ($18,722.66), less any amounts owed to Landlord prior to the Effective Date, to Assignee's Security Deposit account, and Assignee shall remit to Landlord on or before the Effective Date any balance remaining in order to satisfy the Security Deposit requirement of Assignee. 7. Assignor represents, warrants and agrees that all furniture, fixtures and equipment which are the property of Assignor (including but not limited to property which Assignor leases to Assignee as part of the assignment transaction) and used in the Premises will be owned by Assignor, free and clear of any lien or encumbrance, and further that in the event of a default by Assignee which results in the loss of the right of Assignee to occupy the Premises and the re_entry by Assignor, all of Assignor's furniture, fixtures and equipment located in the Premises will be left in the Premises for Assignor's use without compensation until the obligations of Assignor to Landlord under the Lease have been satisfied. 79 8. Except as modified hereby, all terms and conditions of the Lease shall remain in full force and effect. 9. All of the terms and provisions of this Agreement shall be binding and shall insure to the benefit of the parties, their respective successors and assigns. IN WITNESS WHEREOF, the parties have caused this instrument to be executed as of the date first written above. ASSIGNOR: Out-Takes, INC. By ________________________________ Name: ______________________________ Title: _______________________________ ASSIGNEE: Colorvision International, Inc. By: ________________________________ Name: ______________________________ Title: _______________________________ LANDLORD: Universal CityWalk Hollywood, a Unit of Universal Studios, Inc. By:___________________________________ Larry Kurzweil Senior Vice President & General Manager 80 SCHEDULE 1 ASSETS OF BUSINESS 1. All items remaining in the Out Takes store at Universal City Walk as of October ___ , 1998, excluding the Sticker Machine belonging to paradise Creations. 2. All items remaining in the Panorama City storage facility including equipment previously used by Lessor in operating its Irvine, California location. 3. The licenses listed on Schedule 7 hereof. [The parties shall prepare a definitive list of the above_referenced Assets being leased hereunder within thirty (30) days from the date of this Agreement in accordance with the provisions of Section 1 hereof.] SCHEDULE 2 SECURITY DEPOSITS City Walk premises deposit $18,722.66 Board of Equalization deposit $ 1,000.00 City Walk electricity deposit $ 700.00 SCHEDULE 3 LIABILITIES OF LESSOR TO BE ASSUMED BY LESSEE Lessee assumes all liabilities in connection with royalties on the below named contracts, as of October ___, 1998. Lessee will assume financial responsibility and liability for any and all existing or future guarantees or other commitments in respect of the below named contracts: 1. MTV Networks 2. King Features 3. Stan Gorman 4. Young Kwon 5. Simon Kornblit 6. Gerry Wersh/Watkins 7. 20th Century Fox 8. Curtis Archives 9. CMC 81 10. Universal Studios 11. Tony Stone Images 12. Paramount 13. JP Morgan 14. Queen B 15. Saban 16. Baywatch 17. Warner Brothers SCHEDULE 4 BENEFIT PLANS OF LESSOR 1. Group health insurance plan in effect as of September 30, 1998 SCHEDULE 5 SCHEDULE OF CONTRACTS 1. License Agreements listed on Schedule 3 SCHEDULE 6 CONTRACT DEFAULTS License agreements with: 1. JP Morgan 2. 20th Century Fox 3. Curtis Archives 4. CMC 4. Universal Studios 6. Warner Brothers SCHEDULE 7 LICENSE AGREEMENTS 1. MTV Networks 2. King Features 3. Stan Gorman 4. Young Kwon 5. Simon Kornblit 6. Gerry Wersh/Watkins 7. 20th Century Fox 8. Curtis Archives 9. CMC 10. Universal Studios 82 11. Tony Stone Images 12. Paramount 13. JP Morgan 14. Queen B 15. Saban 16. Baywatch 17. Warner Brothers OUT TAKES, INC. WRITTEN CONSENT of the SOLE DIRECTOR October 26, 1998 This Written Consent of the Sole Director of Out Takes, Inc., a Delaware Corporation (the "Corporation") is made as of the date set forth above in accordance with the Bylaws of the Corporation. The Sole Director hereby consents, pursuant to the provisions of Section 141(f) of the Delaware Corporations Code, to the adoption of the following Resolutions, effective as of 5:00 p.m. on October 26, 1998, which are to be filed with the Minutes of the Board of Directors: WHEREAS, it is in the best interests of the Corporation to lease to others certain of its assets; and WHEREAS, it is in the best interests of the Corporation to divest itself of certain of its liabilities: RESOLVED, that the Corporation enter into an Asset Lease Agreement with Colorvision International, Inc. FURTHER RESOLVED, that all of the actions taken by the executive officers of the Corporation since the last meeting of the Board of Directors are hereby specifically authorized, ratified and approved by the Sole Director. APPROVED: ____________________ James C. Harvey Sole Director 83