-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AbXvyJ0GgMk1xRqzI1f3uOyU7yFR32KXzwbb2XP/CW+3E9CXYwWtsuLHa8c+DOax qbqoFTNPQ9uXnLMkQeG3HA== 0001014733-02-000015.txt : 20020515 0001014733-02-000015.hdr.sgml : 20020515 20020515123514 ACCESSION NUMBER: 0001014733-02-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POINT 360 CENTRAL INDEX KEY: 0001014733 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ALLIED TO MOTION PICTURE PRODUCTION [7819] IRS NUMBER: 954272619 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21917 FILM NUMBER: 02649813 BUSINESS ADDRESS: STREET 1: 7083 HOLLYWOOD BLVD SUITE 200 STREET 2: SUITE 200 CITY: HOLLYWOOD STATE: CA ZIP: 90028 BUSINESS PHONE: 3239577990 MAIL ADDRESS: STREET 1: 7083 HOLLYWOOD BLVD SUITE 200 STREET 2: SUITE 200 CITY: HOLLYWOOD STATE: CA ZIP: 90028 FORMER COMPANY: FORMER CONFORMED NAME: VDI MEDIA DATE OF NAME CHANGE: 19960516 FORMER COMPANY: FORMER CONFORMED NAME: VDI MULTIMEDIA DATE OF NAME CHANGE: 19991115 10-Q 1 f10q1st2002.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended March 31, 2002 or __ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to_________ Commission file number 0-21917 ------------- Point.360 (Exact Name of Registrant as Specified in Its Charter) California ------------------------------- (State or Other Jurisdiction of Incorporation or Organization) 95-4272619 ---------------- (IRS Employer Identification Number) 7083 Hollywood Boulevard, Suite 200, Hollywood, CA 90028 -------------------------------------------------------- (Address of principal executive offices) (Zip Code) (323) 957-7990 ---------------------------- (Registrant's Telephone Number, Including Area Code) ---------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ------ As of April 20, 2002, there were 9,014,232 shares of the registrant's common stock outstanding. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
POINT.360 CONSOLIDATED BALANCE SHEETS ASSETS DECEMBER 31, MARCH 31, 2001 2002 (unaudited) Current assets: Cash and cash equivalents $ 3,758,000 $ 5,161,000 Accounts receivable, net of allowances for doubtful accounts of $681,000 and $779,000, respectively 12,119,000 12,661,000 Notes receivable from officers 928,000 773,000 Income tax receivable 1,399,000 1,132,000 Inventories 820,000 833,000 Prepaid expenses and other current assets 554,000 722,000 Deferred income taxes 884,000 924,000 --------------- --------------- Total current assets 20,462,000 22,206,000 Property and equipment, net 23,232,000 22,007,000 Other assets, net 833,000 804,000 Goodwill and other intangibles, net 26,320,000 26,445,000 --------------- --------------- Total assets $ 70,847,000 $ 71,462,000 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,675,000 $ 3,645,000 Accrued expenses 2,715,000 3,632,000 Current portion of notes payable 28,999,000 6,750,000 Current portion of capital lease obligations 79,000 71,000 --------------- --------------- Total current liabilities 36,468,000 14,098,000 --------------- --------------- Deferred income taxes 2,650,000 2,931,000 Notes payable, less current portion - 22,249,000 Capital lease obligations, less current portion 78,000 71,000 Derivative valuation liability 579,000 377,000 Shareholders' equity Preferred stock - no par value; 5,000,000 authorized; none outstanding - - Common stock - no par value; 50,000,000 authorized; 8,992,806 and 9,011,324 shares issued and outstanding, respectively 17,336,000 17,340,000 Additional paid-in capital 439,000 439,000 Comprehensive income - FAS 133 238,000 223,000 Retained earnings 13,059,000 13,734,000 --------------- --------------- Total shareholders' equity 31,072,000 31,736,000 --------------- --------------- Total liabilities and shareholders' equity $ 70,847,000 $ 71,462,000 =============== ===============
See accompanying notes to consolidated financial statements. 2 POINT.360 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
THREE MONTHS ENDED MARCH 31, 2001 2002 ---- ---- Revenues $ 19,108,000 $ 16,846,000 Cost of goods sold (12,643,000) (10,594,000) ------------ ------------ Gross profit 6,465,000 6,252,000 Selling, general and administrative expense (5,499,000) (4,607,000) ------------ ------------ Operating income 966,000 1,645,000 Interest expense, net (785,000) (678,000) Derivative fair value change (253,000) 217,000 ------------ ------------ Income (loss) before income taxes (72,000) 1,184,000 (Provision for) benefit from income taxes 40,000 (509,000) ------------ ------------ Income (loss) before adoption of FAS 133 (2001) (32,000) 675,000 Cumulative effect of adopting FAS 133 (2001) (139,000) - ------------ ------------ Net income (loss) $ (171,000) $ 675,000 ============ ============ Other comprehensive income: Derivative fair value change $ (26,000) $ (15,000) ------------ ------------ Comprehensive income (loss) $ (197,000) $ 660,000 ============ ============ Earnings per share: Basic: Income (loss) per share before adoption of FAS 133 (2001) $ - $ 0.07 Cumulative effect of adopting FAS 133 (2001) (0.02) - ------------ ------------ Net income (loss) $ (0.02) $ 0.07 ============ ============ Weighted average number of shares 9,136,559 9,011,324 Diluted: Income (loss) per share before adoption of FAS 133 (2001) $ - $ 0.07 Cumulative effect of adopting FAS 133 (2001) (0.02) - ------------ ------------ Net income (loss) $ (0.02) $ 0.07 ============ ============ Weighted average number of shares including the dilutive effect of stock options 9,136,559 9,069,172
See accompanying notes to consolidated financial statements. 3 POINT.360 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31, --------- 2001 2002 ---- ---- Cash flows from operating activities: Net income (loss) $ (171,000) $ 675,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,649,000 1,507,000 Provision for doubtful accounts 143,000 169,000 Deferred income taxes (327,000) 241,000 Other non cash item 602,000 (217,000) Cumulative effect of adopting FAS 133 139,000 - Write-off of note receivable - 148,000 Changes in assets and liabilities: Decrease (increase) in accounts receivable 736,000 (711,000) (Increase) in inventories (85,000) (13,000) (Increase) in prepaid expenses and other current assets (29,000) (177,000) Decrease in other assets 8,000 29,000 Decrease in accounts payable (1,174,000) (1,010,000) Increase in accrued expenses 967,000 775.000 (Decrease) increase in income taxes (60,000) 267,000 ------------- --------------- Net cash provided by operating activities 2,398,000 1,683,000 ------------- --------------- Cash used in investing activities: Capital expenditures (1,325,000) (287,000) Proceeds from sale of equipment - 27,000 Net cash paid for acquisitions (333,000) (5,000) ------------- --------------- Net cash used in investing activities (1,658,000) (265,000) Cash flows used in financing activities: Repurchase of common stock (300,000) - Repayment of capital lease obligations (29,000) (15,000) ------------- --------------- Net cash used in financing activities (329,000) (15,000) Net increase in cash 411,000 1,403,000 Cash and cash equivalents at beginning of period 769,000 3,758,000 ------------- --------------- Cash and cash equivalents at end of period $ 1,180,000 $ 5,161,000 ============= =============== Supplemental disclosure of cash flow information - Cash paid for: Interest $ 565,000 $ 663,000 ============= ============== Income tax $ 37,000 $ - ============= ==============
See accompanying notes to consolidated financial statements. 4 POINT.360 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 NOTE 1 - THE COMPANY Point.360 (the "Company") is a leading provider of video and film asset management services to owners, producers and distributors of entertainment and advertising content. The Company provides the services necessary to edit, master, reformat, digitize, archive and ultimately distribute its clients' video content. The Company provides physical and electronic delivery of commercials, movie trailers, electronic press kits, infomercials and syndicated programming to thousands of broadcast outlets worldwide. The Company provides worldwide electronic distribution, using fiber optics and satellites. Additionally, the Company provides a broad range of video services, including the duplication of video in all formats, element storage, standards conversions, closed captioning and transcription services and video encoding for air play verification purposes. The Company also provides its customers value-added post production, editing and digital media services. The Company operates in one reportable segment. The Company seeks to capitalize on growth in demand for the services related to the distribution of entertainment content, without assuming the production or ownership risk of any specific television program, feature film or other form of content. The primary users of the Company's services are entertainment studios and advertising agencies that generally choose to outsource such services due to the sporadic demand of any single customer for such services and the fixed costs of maintaining a high-volume physical plant. Since January 1, 1997, the Company has successfully completed eight acquisitions of companies providing similar services. The Company will continue to evaluate acquisition opportunities to enhance its operations and profitability. As a result of these acquisitions, the Company believes it is one of the largest and most diversified providers of technical and distribution services to the entertainment and advertising industries, and is therefore able to offer its customers a single source for such services at prices that reflect the Company's scale economies. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles and the Securities and Exchange Commission's rules and regulations for reporting interim financial statements and footnotes. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. These financial statements should be read in conjunction with the financial statements and related notes contained in the Company's Form 10-K for the year ended December 31, 2001. NOTE 2 - ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133"). The standard, as amended, requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in other income. In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS Nos. 141 and 142, "Business Combinations" and "Goodwill and Other Intangible Assets," respectively. FAS No. 141 replaces Accounting Principles Board ("APB") Opinion No. 16. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS No. 142 changes the accounting for goodwill and other intangible assets with indefinite useful lives ("goodwill") from an amortization method to an impairment-only approach. Under FAS No. 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS No. 141 and FAS No. 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of FAS No. 142, 5 amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under FAS No. 141 will be reclassified to goodwill. The Company implemented FAS No. 142 in the first quarter of fiscal 2002 which required no goodwill impairment. In August 2001, the FASB issued FAS No. 143, "Accounting for Asset Retirement Obligations," which requires entities to record the fair value of a liability for an asset retirement obligation in the period in which the obligation is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. FAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not have asset retirement obligations and, therefore, believes there will be no impact upon adoption of FAS No. 143. In October 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and portions of APB Opinion No. 30, "Reporting the Results of Operations." FAS No. 144 provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. FAS No. 144 also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The Company is in the process of evaluating the impact of adopting FAS No. 144. NOTE 3 - STOCK REPURCHASE In February 1999, the Company commenced a stock repurchase program. The board of directors authorized the Company to allocate up to $4,000,000 to purchase its common stock at suitable market prices. In September 2000, the board of directors authorized the Company to allocate an additional $5,000,000 to purchase its common stock. As of March 31, 2002, the Company had repurchased 860,766 shares of the Company's common stock in connection with this program. NOTE 4 - LONG TERM DEBT AND NOTES PAYABLE In November 1998, the Company borrowed $29,000,000 on a term loan with a bank, payable in 60 monthly installments of $483,000 plus interest. The term loan was repaid in 2000 with the proceeds of a new borrowing arrangement with a group of banks. Deferred financing costs related to the term loan of approximately $232,000, net of $168,000 tax benefit, were concurrently written off and treated as an extraordinary item during the quarter ended September 30, 2000. In September 2000, the Company entered into a credit agreement ("Agreement") with a group of banks providing a revolving credit facility of up to $45,000,000. The purpose of the facility was to repay previously outstanding amounts under a prior agreement with a bank, fund working capital and capital expenditures and for general corporate purposes including up to $5,000,000 of stock repurchases under the Company's repurchase program. The Agreement provided for interest at the banks' reference rate, the federal funds effective rate plus 0.5%, or a LIBOR adjusted rate. Loans made under the Agreement are collateralized by substantially all of the Company's assets. The borrowing base under the Agreement is limited to 90% of eligible accounts receivable, 50% of inventory and 100% of operating machinery and equipment. The Agreement provided that the aggregate commitment will decline by $5,000,000 on each December 31 beginning in 2002 until expiration of the entire commitment on December 31, 2005. The Agreement also contained covenants requiring certain levels of annual earnings before interest, taxes, depreciation and amortization (EBITDA) and net worth, and limits the amount of capital expenditures. By December 31, 2000, the Company had borrowed $31,024,000 under the Agreement and was not in compliance with certain financial covenants due to adjustments recorded to prior years' and 2000 results. The bank waived compliance with the covenants and amended the Agreement in April 2001. In connection with the amendment, the Company paid the banks a restructuring fee of $225,000 which was expensed in the second quarter of 2001. 6 As of April 30, May 31 and June 30, 2001, outstanding amounts under the line of credit exceeded the borrowing base. On June 11 and July 20, 2001, the Company entered into amendment and forbearance agreements with the banks which required the Company to repay the amount of excess borrowings and amended the Agreement to reduce the aggregate commitment from $45,000,000 to $30,050,000 until the expiration of the commitment on December 31, 2005. In August 2001, the Company did not make required debt payments which created a breach of the amendment and forbearance agreements. As a consequence of the breach, the amount outstanding under the credit facility became immediately due and payable. In May 2002, the Company and the banks entered into a restructured loan agreement changing the revolving credit facility to a term loan, with all existing defaults being waived. The term loan has a maturity date of December 31, 2004. Pursuant to the agreement, the Company made a $2 million principal payment and will make additional principal payments of $3.5 million, $5.0 million and $18.5 million in 2002, 2003 and 2004, respectively. The agreement provides for interest at the banks' reference rate plus 1.25% and requires the Company to maintain certain financial covenant ratios. The term loan is secured by substantially all of the Company's assets. 7 POINT.360 MANAGEMENT'S DISCUSSION AND ANALYSIS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001. REVENUES. Revenues decreased by $2.3 million or 12% to $16.8 million for the three-month period ended March 31, 2002, compared to $19.1 million for the three-month period ended March 31, 2001 due to a decline in studio post production sales as some work was brought in-house. Studios have traditionally maintained in-house capacity and several customers utilized that capacity in 2002 to a greater extent thereby affecting our sales. GROSS PROFIT. Gross profit decreased $0.2 million or 3% to $6.3 million for the three-month period ended March 31, 2002, compared to $6.5 million for the three-month period ended March 31, 2001. As a percent of revenues, gross profit increased from 34% to 37%. The increase in gross profit as a percentage of revenues was principally due to lower wages and benefits as headcount was reduced 13% since March 31, 2001. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative ("SG&A") expense decreased $0.9 million, or 16% to $4.6 million for the three-month period ended March 31, 2002, compared to $5.5 million for the three-month period ended March 31, 2001. As a percentage of revenues, SG&A decreased to 27% for the three-month period ended March 31, 2002, compared to 29% for the three-month period ended March 31, 2001. Excluding amortization of goodwill in 2001, SG&A expenses were $5.1 million, or 27% of sales in the 2001 first quarter. The decrease in 2002 was due principally to lower wage costs. OPERATING INCOME. Operating income increased $0.7 million to $1.6 million for the three-month period ended March 31, 2002, compared to $1.0 million for the three-month period ended March 31, 2001. INTEREST EXPENSE. Interest expense for the three-month period ended March 31, 2002 was $0.7 million, a decrease of $0.1 million from the three-month period ended March 31, 2001 due to a lower average level of debt outstanding partially offset by a 2% default rate of interest premium charged by the Company's banks. ADOPTION OF FAS 133 AND DERIVATIVE FAIR VALUE CHANGE. On January 1, 2001, the Company adopted FAS 133 by recording a cumulative effect adjustment of $0.1 million after tax benefit. During the quarter ended March 31, 2001, the Company recorded the difference between the derivative fair value of the Company's hedge contract at the beginning and end of the first quarter, or $0.3 million. During the quarter ended March 31, 2002, the Company recorded the difference between the derivative fair value of the Company's interest rate hedge contract at the beginning and end of the first quarter, or $0.2 million, and amortization of the cumulative-effect adjustment. INCOME TAXES. The Company's effective tax rate was 43% for the first quarter of 2002 and 55% for the first quarter of 2001. The decrease in effective tax rate is the result of the Company's periodic assessment of the relationship of book/tax timing differences to total expected annual pre-tax results and the elimination of goodwill expense for financial statement purposes. The effective tax rate percentage may change from period to period depending on the difference in the timing of the recognition of revenues and expenses for book and tax purposes. NET INCOME (LOSS). The net income (loss) for the three-month period ended March 31, 2002 was $0.7 million, an increase of $0.9 million compared to a loss of $0.2 million for the three-month period ended March 31, 2001. LIQUIDITY AND CAPITAL RESOURCES This discussion should be read in conjunction with the notes to the financial statements and the corresponding information more fully described in the Company's Form 10-K for the year ended December 31, 2001. On March 31, 2002, the Company's cash and cash equivalents aggregated $5.2 million. The Company's operating activities provided cash of $1.7 million for the three months ended March 31, 2002. 8 The Company's investing activities used cash of $0.3 million in the three months ended March 31, 2002. The Company spent approximately $0.3 million for the addition and replacement of capital equipment and management information systems which we believe is a reasonable capital expenditure level given the current revenue volume. In the prior year, the Company's capital expenditures were greater than a normal recurring amount partially due to the investment of approximately $0.3 million in high definition television equipment. The Company's business is equipment intensive, requiring periodic expenditures of cash or the incurrence of additional debt to acquire additional fixed assets in order to increase capacity or replace existing equipment. In September 2000, the Company signed a $45 million revolving credit facility agented by Union Bank of California. The amount of the commitment was reduced to $30 million in July 2001. The facility provided the Company with funding for capital expenditures, working capital needs and support for its acquisition strategies. Due to lower sales levels in the second and third quarters of Fiscal 2001, the borrowing base (eligible accounts receivable, inventory and machinery and equipment) securing the Company's bank line of credit was less than the amount borrowed under the line. Consequently, the Company was in breach of certain covenants. On June 11 and on July 20, 2001, the Company entered into amendment and forbearance agreements with the banks and agreed to repay the overdraft amount in weekly increments. In August 2001, the Company failed to meet the repayment schedule and again entered discussions with the banks. In May 2002, the Company and the banks entered into a restructured loan agreement changing the revolving credit facility to a term loan, with all existing defaults being waived. The term loan has a maturity date of December 31, 2004. Pursuant to the agreement, the Company made a $2 million principal payment and will make additional principal payments of $3.5 million, $5.0 million and $18.5 million in 2002, 2003 and 2004, respectively. The agreement provides for interest at the banks' reference rate plus 1.25% and requires the Company to maintain certain financial covenant ratios. The term loan is secured by substantially all of the Company's assets. We believe that cash on hand plus that generated from operations will be sufficient to meet debt service and operational requirements for the next twelve months. The Company, from time to time, considers the acquisition of businesses complementary to its current operations. Consummation of any such acquisition or other expansion of the business conducted by the Company may be subject to the Company securing additional financing. CAUTIONARY STATEMENTS AND RISK FACTORS In our capacity as Company management, we may from time to time make written or oral forward-looking statements with respect to our long-term objectives or expectations which may be included in our filings with the Securities and Exchange Commission, reports to stockholders and information provided in our web site. The words or phrases "will likely," "are expected to," "is anticipated," "is predicted," "forecast," "estimate," "project," "plans to continue," "believes," or similar expressions identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We wish to caution you not to place undue reliance on any such forward-looking statements, which speak only as of the date made. In connection with the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995, we are calling to your attention important factors that could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The following list of important factors may not be all-inclusive, and we specifically decline to undertake an obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Among the factors that could have an impact on our ability to achieve expected operating results and growth plan goals and/or affect the market price of our stock are: 9 o Recent history of losses o Prior breach of credit agreement covenants and new principal payment requirements. o Our highly competitive marketplace. o The risks associated with dependence upon significant customers. o Our ability to execute our expansion strategy. o The uncertain ability to manage growth. o Our dependence upon and our ability to adapt to technological developments. o Dependence on key personnel. o Our ability to maintain and improve service quality. o Fluctuation in quarterly operating results and seasonality in certain of our markets. o Possible significant influence over corporate affairs by significant shareholders. These risk factors are discussed further below. RECENT HISTORY OF LOSSES. The Company has reported losses for each of the four fiscal quarters ended September 30, 2001 due, in part, to lower gross margins and lower sales levels and a number of unusual charges. Although we achieved profitability in Fiscal 2000 and prior years, as well as in the two fiscal quarters ending March 31, 2002, there can be no assurance as to future profitability on a quarterly or annual basis. PRIOR BREACH OF CREDIT AGREEMENT COVENANTS AND NEW PRINCIPAL PAYMENT REQUIREMENTS. Due to lower operating cash amounts resulting from reduced sales levels in 2001 and the consequential net losses, the Company breached certain covenants of its credit facility. The breaches were temporarily cured based on amendments and forbearance agreements among the Company and the banks which called for, among other provisions, scheduled payments to reduce amounts owed to the banks to the permitted borrowing base. In August 2001, the Company failed to meet the principal repayment schedule and was once again in breach of the credit facility. The banks ended their formal commitment to the Company in December 2001. In May 2002, we entered into an agreement with the banks to restructure the credit facility to a term loan maturing on December 31, 2004. As part of this restructuring, the banks waived all existing defaults and the Company made a principal payment of $2.0 million. The Company also agreed to make additional principal payments of $3.5 million, $5.0 million and $18.5 million in 2002, 2003, and 2004, respectively. Based upon the Company's financial forecast, the Company will have to refinance the facility by 2004 to satisfy the final payment requirement. COMPETITION. Our broadcast video post production, duplication and distribution industry is a highly competitive, service-oriented business. In general, we do not have long-term or exclusive service agreements with our customers. Business is acquired on a purchase order basis and is based primarily on customer satisfaction with reliability, timeliness, quality and price. We compete with a variety of post production, duplication and distribution firms, some of which have a national presence, and to a lesser extent, the in-house post production and distribution operations of our major motion picture studio and advertising agency customers. Some of these firms, and all of the studios, have greater financial, distribution and marketing resources and have achieved a higher level of brand recognition than the Company. In the future, we may not be able to compete effectively against these competitors merely on the basis of reliability, timeliness, quality and price or otherwise. We may also face competition from companies in related markets which could offer similar or superior services to those offered by the Company. We believe that an increasingly competitive environment and the possibility that customers may utilize in-house capabilities to a greater extent could lead to a loss of market share or price reductions, which could have a material adverse effect on our financial condition, results of operations and prospects. CUSTOMER AND INDUSTRY CONCENTRATION. Although we have an active client list of over 2,500 customers, seven motion picture studios accounted for approximately 34% of the Company's revenues during the year ended December 31, 2001. If one or more of these companies were to stop using our services, our business could be adversely affected. Because we derive substantially all of our revenue from clients in the entertainment and advertising industries, the financial condition, results of operations and prospects of the Company could also be adversely affected by an adverse change in conditions which impact those industries. 10 EXPANSION STRATEGY. Our growth strategy involves both internal development and expansion through acquisitions. We currently have no agreements or commitments to acquire any company or business. Even though we have completed eight acquisitions in the last five fiscal years, we cannot be sure additional acceptable acquisitions will be available or that we will be able to reach mutually agreeable terms to purchase acquisition targets, or that we will be able to profitably manage additional businesses or successfully integrate such additional businesses into the Company without substantial costs, delays or other problems. Certain of the businesses previously acquired by the Company reported net losses for their most recent fiscal years prior to being acquired, and our future financial performance will be in part dependent on our ability to implement operational improvements in, or exploit potential synergies with, these acquired businesses. Acquisitions may involve a number of special risks including: adverse effects on our reported operating results (including the amortization of acquired intangible assets), diversion of management's attention and unanticipated problems or legal liabilities. In addition, we may require additional funding to finance future acquisitions. We cannot be sure that we will be able to secure acquisition financing on acceptable terms or at all. We may also use working capital or equity, or raise financing through equity offerings or the incurrence of debt, in connection with the funding of any acquisition. Some or all of these risks could negatively affect our financial condition, results of operations and prospects or could result in dilution to the Company's shareholders. In addition, to the extent that consolidation becomes more prevalent in the industry, the prices for attractive acquisition candidates could increase substantially. We may not be able to effect any such transactions. Additionally, if we are able to complete such transactions they may prove to be unprofitable. The geographic expansion of the Company's customers may result in increased demand for services in certain regions where it currently does not have post production, duplication and distribution facilities. To meet this demand, we may subcontract. However, we have not entered into any formal negotiations or definitive agreements for this purpose. Furthermore, we cannot assure you that we will be able to effect such transactions or that any such transactions will prove to be profitable. MANAGEMENT OF GROWTH. During the three years ended December 31, 1999, we experienced rapid growth that resulted in new and increased responsibilities for management personnel and placed and continues to place increased demands on our management, operational and financial systems and resources. To accommodate this growth, compete effectively and manage future growth, we will be required to continue to implement and improve our operational, financial and management information systems, and to expand, train, motivate and manage our work force. We cannot be sure that the Company's personnel, systems, procedures and controls will be adequate to support our future operations. Any failure to do so could have a material adverse effect on our financial condition, results of operations and prospects. DEPENDENCE ON TECHNOLOGICAL DEVELOPMENTS. Although we intend to utilize the most efficient and cost-effective technologies available for telecine, high definition formatting, editing, coloration and delivery of video content, including digital satellite transmission, as they develop, we cannot be sure that we will be able to adapt to such standards in a timely fashion or at all. We believe our future growth will depend in part, on our ability to add to these services and to add customers in a timely and cost-effective manner. We cannot be sure we will be successful in offering such services to existing customers or in obtaining new customers for these services, including the Company's significant investment in high definition technology in 2000 and 2001. We intend to rely on third party vendors for the development of these technologies and there is no assurance that such vendors will be able to develop such technologies in a manner that meets the needs of the Company and its customers. Any material interruption in the supply of such services could materially and adversely affect the Company's financial condition, results of operations and prospects. DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts and abilities of certain of its senior management, particularly those of R. Luke Stefanko, President and Chief Executive Officer. The loss or interruption of the services of key members of management could have a material adverse effect on our financial condition, results of operations and prospects if a suitable replacement is not promptly obtained. Although we have employment agreements with Mr. Stefanko and certain of our other key executives and technical personnel, we cannot be sure that such executives will remain with the Company during or after the term of their employment agreements. In addition, our success depends to a significant degree upon the continuing contributions of, and on our ability to attract and retain, qualified management, sales, operations, marketing and technical personnel. The competition for qualified 11 personnel is intense and the loss of any such persons, as well as the failure to recruit additional key personnel in a timely manner, could have a material adverse effect on our financial condition, results of operations and prospects. There is no assurance that we will be able to continue to attract and retain qualified management and other personnel for the development of our business. ABILITY TO MAINTAIN AND IMPROVE SERVICE QUALITY. Our business is dependent on our ability to meet the current and future demands of our customers, which demands include reliability, timeliness, quality and price. Any failure to do so, whether or not caused by factors within our control could result in losses to such clients. Although we disclaim any liability for such losses, there is no assurance that claims would not be asserted or that dissatisfied customers would refuse to make further deliveries through the Company in the event of a significant occurrence of lost deliveries, either of which could have material adverse effect on our financial condition, results of operations and prospects. Although we maintain insurance against business interruption, such insurance may not be adequate to protect the Company from significant loss in these circumstances or that a major catastrophe (such as an earthquake or other natural disaster) would not result in a prolonged interruption of our business. In addition, our ability to make deliveries within the time periods requested by customers depends on a number of factors, some of which are outside of our control, including equipment failure, work stoppages by package delivery vendors or interruption in services by telephone or satellite service providers. FLUCTUATING RESULTS, SEASONALITY. Our operating results have varied in the past, and may vary in the future, depending on factors such as the volume of advertising in response to seasonal buying patterns, the timing of new product and service introductions, the timing of revenue recognition upon the completion of longer term projects, increased competition, timing of acquisitions, general economic factors and other factors. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. For example, our operating results have historically been significantly influenced by the volume of business from the motion picture industry, which is an industry that is subject to seasonal and cyclical downturns, and, occasionally, work stoppages by actors, writers and others. In addition, as our business from advertising agencies tends to be seasonal, our operating results may be subject to increased seasonality as the percentage of business from advertising agencies increases. In any period our revenues are subject to variation based on changes in the volume and mix of services performed during the period. It is possible that in some future quarter the Company's operating results will be below the expectations of equity research analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. Fluctuations in sales due to seasonality may become more pronounced if the growth rate of the Company's sales slows. CONTROL BY PRINCIPAL SHAREHOLDER; POTENTIAL ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Company's President and Chief Executive Officer, R. Luke Stefanko, beneficially owned approximately 18.4% of the outstanding common stock as of February 28, 2002. Mr. Stefanko's ex-spouse owned approximately 25.2% of the common stock on that date. Together, they owned approximately 43.6%. In August 2000 and May 2001, Mr. Stefanko was granted one-time proxies to vote his ex-spouse's shares in connection with the election of directors at the Company's annual meetings. The Company's Chairman of the Board, Haig Bagerdjian, beneficially owned approximately 6.7% of the common stock on February 28, 2002. By virtue of their stock ownership, Messrs. Stefanko and Bagerdjian individually or together may be able to significantly influence the outcome of matters required to be submitted to a vote of shareholders, including (i) the election of the board of directors, (ii) amendments to the Company's Restated Articles of Incorporation and (iii) approval of mergers and other significant corporate transactions. The foregoing may have the effect of discouraging, delaying or preventing certain types of transactions involving an actual or potential change of control of the Company, including transactions in which the holders of common stock might otherwise receive a premium for their shares over current market prices. Our Board of Directors also has the authority to issue up to 5,000,000 shares of preferred stock without par value (the "Preferred Stock") and to determine the price, rights, preferences, privileges and restrictions thereof, including voting rights, without any further vote or action by the Company's shareholders. Although we have no current plans to issue any shares of Preferred Stock, the rights of the holders of common stock would be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. Issuance of Preferred Stock could have the effect of discouraging, delaying, or preventing a change in control of the Company. Furthermore, certain provisions of the Company's Restated Articles of Incorporation and By-Laws and of California law also could have the effect of discouraging, delaying or preventing a change in control of the Company. 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK. The Company had borrowings of $28,999,000 at March 31, 2002 under a credit agreement. Amounts outstanding under the credit agreement now bear interest at the bank's reference rate plus 1.25%. The Company's market risk exposure with respect to financial instruments is to changes in the London Interbank Offering Rate ("LIBOR"). The Company entered into an interest rate swap transaction with a bank on November 28, 2000. The swap transaction was for a notional amount of $15,000,000 for three years and fixes the interest rate paid by the Company on such amount at 6.50% less the applicable LIBOR rate, plus 1.25% over prime rate. On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The standard, as amended by Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133, and Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133 (referred to hereafter as "FAS 133"), is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or in other comprehensive income, depending on whether a derivative is designated as part of a hedging relationship and, if it is, depending on the type of hedging relationship. During 2001, the Company recorded a cumulative effect type adjustment of $247,000 (net of $62,000 tax benefit), and an expense of $508,000 ($406,000 net of tax benefit) for the derivative fair value change of an interest rate hedging contract. During the quarter ended March 31, 2002, the Company recorded income of $124,000 (net of $93,000 tax expense) for the derivative fair value change and amortization of the cumulative effect type adjustment. PART II - OTHER INFORMATION ITEM 3. DEFAULTS UPON SENIOR SECURITIES For a discussion of the May 2002 agreement in which the Company's defaults under its bank borrowings were waived, see Note 4 to the Financial Statements that are included in Part I, Item 1 of this Report on Form 10-Q. ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Third Amendment and Restated Credit Agreement dated May 2, 2002, among the Company, Union Bank of California, N.A., United California Bank, and U.S. Bank National Association (b) Reports On Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. POINT.360 DATE: May 14, 2002 BY: /s/ Alan Steel ----------------------------- Alan Steel Executive Vice President, Finance and Administration (duly authorized officer and principal financial officer) 13 EX-10 3 thirdamend.txt ================================================================ THIRD AMENDED AND RESTATED CREDIT AGREEMENT among POINT.360 as Borrower THE LENDERS PARTIES HERETO, and UNION BANK OF CALIFORNIA, N.A. as Agent Dated as of May 2, 2002 ================================================================ TABLE OF CONTENTS Page ---- SECTION 1. DEFINITIONS...................................................1 1.1 Defined Terms.................................................1 1.2 Other Definitional Provisions................................14 SECTION 2. AMOUNT AND TERMS OF LOANS....................................15 2.1 Loans........................................................15 2.2 Agreements Regarding Existing Letter of Credit...............16 2.3 Optional Prepayments.........................................18 2.4 Mandatory Prepayments........................................19 2.5 Interest Rates and Payment Dates.............................19 2.6 Computation of Interest and Fees.............................19 2.7 Pro Rata Treatment and Payments..............................20 2.8 Increased Costs..............................................20 2.9 Taxes........................................................20 2.10 Mitigation of Costs..........................................21 2.11 Amendment Fee................................................21 SECTION 3. REPRESENTATIONS AND WARRANTIES...............................22 3.1 Organization and Good Standing...............................22 3.2 Power and Authority..........................................22 3.3 Validity and Legal Effect....................................22 3.4 No Violation of Laws or Agreements...........................22 3.5 Title to Assets; Existing Encumbrances; Legal Names..........22 3.6 Capital Structure; Equity Ownership..........................23 3.7 Subsidiaries and Affiliates..................................23 3.8 Material Contracts...........................................23 3.9 Taxes and Assessments........................................23 3.10 Litigation and Legal Proceedings.............................24 3.11 Accuracy of Financial Information............................24 3.12 Accuracy of Other Information................................24 3.13 Compliance with Laws Generally...............................24 3.14 ERISA Compliance.............................................24 3.15 Environmental Compliance.....................................25 3.16 Federal Regulations..........................................26 3.17 Fees and Commissions.........................................26 3.18 Solvency.....................................................26 3.19 Investment Company Act; Public Utility Holding Company Act...26 3.20 Nature of Business...........................................26 3.21 Event of Default.............................................26 3.22 Ranking of Loans.............................................26 SECTION 4. CONDITIONS PRECEDENT.........................................27 4.1 Conditions to Restatement Date...............................27 4.2 Condition Subsequent.........................................29 SECTION 5. AFFIRMATIVE COVENANTS........................................30 5.1 Financial Statements.........................................30 5.2 Certificates; Other Information..............................31 5.3 Payment of Obligations.......................................33 5.4 Conduct of Business and Maintenance of Existence.............33 5.5 Maintenance of Property......................................33 5.6 Insurance....................................................33 5.7 Inspection of Property; Books and Records; Discussions.......33 5.8 Environmental Laws...........................................34 5.9 Compliance With Laws, Etc....................................34 5.10 Certain Obligations Respecting Subsidiaries; Prohibitions on Certain Agreements...........................35 5.11 Interest Rate Protection.....................................35 5.12 Reviews and Appraisals.......................................35 5.13 Financial Consultant.........................................35 5.14 Bank Accounts................................................35 5.15 Landlord Consents............................................35 SECTION 6. NEGATIVE COVENANTS...........................................36 6.1 Financial Condition Covenants................................35 6.2 Limitation on Indebtedness...................................37 6.3 Limitation on Liens..........................................38 6.4 Limitation on Fundamental Changes............................39 6.5 Limitation on Sale of Assets.................................39 6.6 Limitation on Dividends......................................39 6.7 Limitation on Investments, Loans and Advances................39 6.8 Transactions with Affiliates.................................40 6.9 Fiscal Year..................................................40 6.10 Sale-Leaseback Transactions..................................40 6.11 Lines of Business............................................40 6.12 Certain Accounting Changes...................................41 SECTION 7. EVENTS OF DEFAULT............................................41 SECTION 8. THE AGENT....................................................43 8.1 Appointment..................................................43 8.2 Delegation of Duties.........................................43 8.3 Exculpatory Provisions.......................................43 8.4 Reliance by the Agent........................................44 8.5 Notice of Default............................................44 8.6 Non-Reliance on the Agent and Other Lenders..................44 8.7 Indemnification..............................................45 8.8 The Agent in Its Individual Capacity.........................45 8.9 Successor Agent..............................................45 8.10 Collateral Documents.........................................46 SECTION 9. MISCELLANEOUS................................................46 9.1 Amendments and Waivers.......................................46 9.2 Notices......................................................47 9.3 No Waiver; Cumulative Remedies...............................47 9.4 Survival of Representations and Warranties...................48 9.5 Payment of Expenses and Taxes................................48 9.6 Successors and Assigns; Participations; Purchasing Lenders...49 9.7 Adjustments; Set-Off.........................................51 9.8 Counterparts.................................................52 9.9 Severability.................................................52 9.10 Integration..................................................52 9.11 GOVERNING LAW................................................52 9.12 Acknowledgements.............................................52 9.13 Headings.....................................................52 9.14 Copies of Certificates, Etc..................................52 9.15 Treatment of Certain Information; Confidentiality............52 9.16 Consent to Jurisdiction; Waiver of Jury Trial................53 9.17 Waivers......................................................54 9.18 Effect of Amendment and Restatement..........................55 Exhibits A Form of Note B Form of Assignment and Acceptance C Form of Release Agreement D Form of Officer's Certificate E Form of Covenant Compliance Certificate F Projections Schedules 2.1 Loan Amounts 3.1 Business Qualification Jurisdictions 3.5 Legal and Trade Names 3.6 Capital Structure; Equity Ownership 3.7 Subsidiaries and Affiliates 3.10 Litigation 5.15 Value of Certain Personal Property 6.3 Liens THIRD AMENDED AND RESTATED CREDIT AGREEMENT THIS THIRD AMENDED AND RESTATED CREDIT AGREEMENT, dated as of May 2, 2002, among (1) POINT.360, a California corporation (the "Borrower"), (2) the several banks and other financial institutions parties to this Agreement (the "Lenders"), and (3) UNION BANK OF CALIFORNIA, N.A., as Agent for the Lenders hereunder ("UBOC"; in its capacity as agent, the "Agent"). RECITALS A. The Borrower, the Agent, and certain banks and other financial institutions named as Lenders therein are parties to that certain Second Amended and Restated Credit Agreement dated as of September 28, 2000, as amended by that certain First Amendment to Second Amended and Restated Credit Agreement and Waiver, dated as of April 5, 2001, that certain Second Amendment to Second Amended and Restated Credit Agreement and Forbearance, dated as of June 11, 2001 and that certain Third Amendment to Second Amended and Restated Credit Agreement and Forbearance, dated as of July 20, 2001 (such Credit Agreement, as so amended, the "Existing Agreement") pursuant to which the Lenders made available to the Borrower a revolving credit facility, with a letter of credit subfacility, upon the terms and conditions therein set forth. B. As of the date hereof, prior to the principal repayment contemplated by Section 4.1, the aggregate principal amount of revolving loans outstanding under the Existing Agreement is $28,999,484. The sole Letter of Credit outstanding was issued by the Agent on January 30, 1998 to O.D.S. Technologies, LP in the face amount of $92,239.20 and bearing letter of credit no. 306S230996 (the "Existing Letter of Credit"). There is no past-due interest outstanding. C. The Borrower is in default of its obligations under the Existing Agreement. The Borrower has requested that the Agent and the Lenders (i) agree to restructure such obligations on the terms set forth herein and (ii) waive such existing defaults. The Agent and the Lenders have agreed to such restructuring and such waiver, in each case subject to the terms and conditions set forth herein. D. Accordingly, the Borrower, the Agent and the Lenders agree that the Existing Agreement is hereby amended and restated in its entirety, subject to satisfaction of the conditions set forth in Section 4.1, on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "ACCOUNTS RECEIVABLE": all of the Borrower's or any Domestic Subsidiary's now owned or hereafter acquired (a) accounts receivable for the sale of inventory or the performance of services, book debts and other forms of obligations, whether arising out of goods sold or services rendered or from any other transaction; (b) rights in, to and under all purchase orders or receipts for goods or services; (c) rights to any goods represented or purported to be represented by any of the foregoing (including unpaid sellers' rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods); (d) moneys due or to become due to the Borrower or any Domestic Subsidiary under all purchase orders and contracts for the sale of goods or the performance of services or both by the Borrower or any Domestic Subsidiary (whether or not yet earned by performance on the part of the Borrower or such Domestic Subsidiary), including the proceeds of the foregoing; (e) any notes, drafts, letters of credit, insurance proceeds or other instruments, documents and writings evidencing or supporting the foregoing; and (f) all collateral security and guarantees of any kind given by any other Person with respect to any of the foregoing. "ACCOUNTANTS": such firm of independent certified public accountants of recognized regional or national standing as shall be selected by the Borrower and acceptable to the Majority Lenders (such acceptance by the Majority Lenders not to be unreasonably withheld, and to be in writing). "AFFILIATE": as to any Person, (a) any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person or (b) any Person who is a director, officer or partner (i) of such Person or (ii) of any Subsidiary of such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "AGENT": as defined in the preamble hereto. "AGGREGATE LOAN AMOUNT": at any time of determination, the aggregate principal amount of Loans outstanding at such time. "AGREEMENT": this Third Amended and Restated Credit Agreement, as amended, waived, supplemented or otherwise modified from time to time. "APPLICABLE LENDING OFFICE": for any Lender, its office for Loans specified below its signature on the signature pages hereof or in the Assignment and Acceptance pursuant to which it became a party hereto, as the case may be, any of which offices may, upon 10 days' prior written notice to the Agent and the Borrower, be changed by such Lender. "ASSET DISPOSITION": the sale, sale and leaseback, transfer, conveyance, exchange, long-term lease accorded sales treatment under GAAP or similar disposition (including by means of a merger, consolidation, amalgamation, joint venture or other substantive combination) of any of the Properties, business or assets (other than marketable securities, including "margin stock" within the meaning of Regulation U, liquid investments and other financial instruments but, including, without limitation, the assignment of any lease, license or permit relating to the Properties) of the Borrower or any of its Subsidiaries to any Person or Persons other than to the Borrower or any Guarantor. "ASSIGNMENT AND ACCEPTANCE": an Assignment and Acceptance substantially in the form of Exhibit B to this Agreement. "BENEFITTED LENDER": as defined in Section 9.7. "BORROWER": as defined in the preamble hereto. "BUSINESS DAY": a day other than a Saturday, Sunday or other day on which commercial banks in the State of California are authorized or required by law to close. "CAPITAL EXPENDITURES": for any period, expenditures (including, without limitation, the aggregate amount of Capitalized Lease Obligations incurred during such period) made by the Borrower or any of its Subsidiaries to acquire or construct fixed assets, plant and equipment (including renewals, improvements and replacements, but excluding repairs) during such period computed in accordance with GAAP. "CAPITALIZED LEASE OBLIGATIONS": obligations for the payment of rent for any real or personal property under leases or agreements to lease that, in accordance with GAAP, have been or should be capitalized on the books of the lessee and, for purposes hereof, the amount of any such obligation shall be the capitalized amount thereof determined in accordance with GAAP. "CAPITAL STOCK": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation), any and all warrants, options or rights to purchase any of the foregoing or any other securities convertible into any of the foregoing. "CASH": unrestricted cash held in a deposit account with the Agent or a Lender; provided that "Cash" shall not include funds in the Cash Collateral Account (unless and until such funds are returned to the Borrower in accordance with Section 2.2). "CASH COLLATERAL ACCOUNT": as defined in Section 2.2(a). "CASH INCOME TAXES": for any period, cash income taxes paid by the Borrower and its Subsidiaries. "CODE": the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL": all of the property (tangible or intangible) purported to be subject to the lien or security interest purported to be created by any mortgage, deed of trust, security agreement, pledge agreement, assignment or other security document heretofore or hereafter executed by the Borrower as security for all or part of the Obligations. "COLLATERAL DOCUMENTS": the Security Agreement, any Control Agreements executed pursuant to the Security Agreement, all Form UCC-1 Financing Statements and amendments thereto and any other document encumbering the Collateral or evidencing or perfecting a security interest therein for the benefit of the Lenders executed by the Borrower. "COMMONLY CONTROLLED ENTITY": as to any Person, an entity, whether or not incorporated, which is under common control with such Person within the meaning of Section 4001 of ERISA or is part of a group which includes such Person and which is treated as a single employer under Section 414 of the Code. "CONTRACTUAL OBLIGATION": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "CONTROL AGREEMENT": a control agreement, restricted account agreement or similar agreement or document, in each case in form and substance satisfactory to the Agent and entered into for the purpose of perfecting a security interest in one or more deposit accounts or securities accounts of the Obligors. "COVENANT COMPLIANCE CERTIFICATE": a certificate of a senior financial officer of the Borrower, substantially in the form of Exhibit E hereto, with regard to (and setting forth the calculations for) each of the covenants set forth in this Agreement. "DEBT SERVICE": for any period, the sum, for the Borrower and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (a) all regularly scheduled payments or regularly scheduled prepayments of principal of Indebtedness (including, without limitation, the principal component of any payments in respect of Capitalized Lease Obligations) made during such period plus (b) all Interest Expense for such period. "DEFAULT": any of the events specified in Section 7, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "DOLLARS" AND "$": dollars in lawful currency of the United States. "DOMESTIC SUBSIDIARY": each Subsidiary organized under the laws of the United States or any state thereof. "EBITDA": for any period, Net Income after eliminating extraordinary gains and losses, plus (i) provisions for income taxes, (ii) depreciation and amortization, (iii) Interest Expense, (iv) the amount of any charge taken by the Borrower solely for the adoption of FASB Rule 142 and (v) the fees contemplated by Section 4.1(e) and paid by the Borrower in connection with the execution of this Agreement. "ELIGIBLE ACCOUNTS RECEIVABLE": an Account Receivable which is acceptable to the Agent, but in no event shall Eligible Accounts Receivable include any Account Receivable: (a) that does not arise from the sale of finished goods in the ordinary course of the Borrower's or a Domestic Subsidiary's business; (b) that is not subject to a valid, perfected first priority Lien in favor of the Agent; (c) as to which any covenant, representation or warranty contained in the Loan Documents with respect to such Account Receivable has been breached; (d) that is not owned by the Borrower or any Domestic Subsidiary or is subject to any right, claim or interest of another Person other than the Lien in favor of the Agent; (e) with respect to which an invoice has not been sent; (f) that is due and payable from a buyer located outside of the United States, but only to the extent that inclusion of such Accounts Receivable as Eligible Accounts Receivable would result in Accounts Receivables due and payable from buyers located outside of the United States constituting in excess of 10% of the aggregate Eligible Accounts Receivable; (g) that is not paid within 120 days from the date of the invoice; (h) that arises from a sale of goods to or performance of services for an Affiliate of the Borrower, or an employee of the Borrower or an Affiliate of the Borrower; (i) that the Agent, in its reasonable judgment, deems uncollectible for any reason; (j) that is due and payable in a currency other than Dollars; (k) that is due and payable from a buyer who (i) applies for, suffers, or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property or calls a meeting of its creditors, (ii) admits in writing its inability, or is generally unable, to pay its debts as they become due or ceases operations of its present business, (iii) makes a general assignment for the benefit of creditors, (iv) commences a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect), (v) is adjudicated as bankrupt or insolvent, (vi) files a petition seeking to take advantage of any other law providing for the relief of debtors, (vii) acquiesces to, or fails to have dismissed, any petition which is filed against it in any involuntary case under such bankruptcy laws, or (viii) takes any action for the purpose of effecting any of the foregoing; (l) that arises from a bill-and-hold, guaranteed sale, sale-and-return, sale on approval, consignment or any other repurchase or return basis or is evidenced by chattel paper; (m) for which the goods giving rise to such Account Receivable have not been shipped and delivered to and accepted by the buyer or the services giving rise to such Account Receivable have not been performed by the Borrower or any Domestic Subsidiary and accepted by the buyer or the Account Receivable otherwise does not represent a final sale; (n) that is subject to any offset, deduction, defense, dispute, or counterclaim or the buyer is also a creditor or supplier of the Borrower or any Domestic Subsidiary or the Account Receivable is contingent in any respect or for any reason; (o) for which the Borrower or any Domestic Subsidiary has made any agreement with the buyer for any deduction therefrom, except for (i) discounts or allowances made in the ordinary course of business for prompt payment and (ii) cooperative advertising discounts; (p) for which any of the goods giving rise to such Account Receivable have been returned, rejected or repossessed, or for which any part of the payment due from buyer is overdue; or (q) that arises from or out of any contract or other agreement involving the United States of America, any agency or instrumentality of the United States of America, or any entity entitled to full of partial immunity under the laws applicable in any domestic or foreign jurisdiction or any entity to which an assignment of claims is subject to consent. "ENVIRONMENTAL CONTROL STATUTES": as defined in Section 3.15. "EPA": as defined in Section 3.15. "EQUITY OFFERING": the sale or issuance (or reissuance) by the Borrower or any Subsidiary of any equity interest (common stock, preferred stock, partnership interests, member interests or otherwise) or any options, warrants, convertible securities or other rights to purchase such beneficial or equity interests. "EQUITY RIGHTS": with respect to any Person, any subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including, without limitation, any stockholders' or voting trust agreements) for the issuance, sale, registration or voting of, or securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such Person. "EQUITYHOLDER AGREEMENTS": each shareholder agreement, limited liability company agreement, partnership agreement, voting agreement, buy-sell agreement, option, warrant, put, call, or right of first refusal, and any other agreement or instrument with conversion rights into equity of the Borrower or any Subsidiary either (a) between the Borrower or any Subsidiary and any holder or prospective holder of any equity interest of the Borrower or any Subsidiary (including interests convertible into such equity) or (b) otherwise between any two or more such holders of equity interests. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA AFFILIATE": as to any Person, each trade or business including such Person, whether or not incorporated, which together with such Person would be treated as a single employer under Section 4001(a)(14) of ERISA. "EVENT OF DEFAULT": any of the events specified in Section 7, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "EXCLUDED TAXES": all taxes imposed on or by reference to the net income of the Agent or any Lender or its Applicable Lending Office by any Governmental Authority and all franchise taxes, taxes on doing business or taxes measured by capital or net worth imposed on the Agent or on any Lender or its Applicable Lending Office by any Governmental Authority and any taxes imposed by any Governmental Authority arising as a consequence of the failure of any Lender to provide accurate documentation required to be provided by such Lender pursuant to Section 2.9(b). "EXISTING AGREEMENT": as defined in the Recitals hereto. "EXISTING LETTER OF CREDIT": as defined in the Recitals hereto. "FIXED CHARGE RATIO": as at any date of determination, with respect to any period, determined on a consolidated basis for the Borrower and its Subsidiaries, the ratio of EBITDA less Capital Expenditures divided by Fixed Charges for such period. "FIXED CHARGES": for any period, the sum, for the Borrower and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (i) Debt Service for such period (excluding (A) the $2,000,000 Reduction Installment due on the Restatement Date and (B) $1,000,000 of the Reduction Installment due on December 31, 2002) and (ii) Cash Income Taxes for such period. "FUNDED DEBT": the sum of the outstanding principal balance of all Indebtedness (including, but not limited to, Indebtedness to the Lenders and Capitalized Lease Obligations) of Borrower and its Subsidiaries on a consolidated basis. "GAAP": generally accepted accounting principles in the United States in effect from time to time. "GOVERNMENTAL AUTHORITY": any nation or government, any federal, state or other political subdivision thereof and any federal, state or local entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "GUARANTEE AMENDMENT": an amendment to each Guarantee existing on the Restatement Date, in each case in form and substance satisfactory to the Agent. "GUARANTEE OBLIGATION": as to any Person (the "guaranteeing person"), any obligation (without duplication) of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") of any other third Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds for the purchase or payment of any such primary obligation or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lesser of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "GUARANTEES": the Second Amended and Restated Guarantees made by each of VDIMI and Multi-Media, each as amended by a Guarantee Amendment, and all other guarantees executed by a Guarantor in favor of the Agent for the benefit of the Lenders, in form and substance reasonably satisfactory to the Agent, as the same may be amended or modified from time to time in accordance with the terms hereof. "GUARANTOR COLLATERAL": all of the property (tangible or intangible) purported to be subject to the lien or security interest purported to be created by any mortgage, deed of trust, security agreement, pledge agreement, assignment or other security document heretofore or hereafter executed by any Guarantor as security for all or part of the Obligations or the Guarantees. "GUARANTOR COLLATERAL DOCUMENTS": the Guarantor Security Agreements, any Control Agreements executed pursuant to any Guarantor Security Agreement, all Form UCC-1 Financing Statements and amendments thereto and any other document encumbering the Guarantor Collateral or evidencing or perfecting a security interest therein for the benefit of the Lenders executed by any Guarantor. "GUARANTOR SECURITY AGREEMENTS": the security agreements, in form and substance reasonably satisfactory to the Agent, made by each Subsidiary in favor of the Agent, for the benefit of the Lenders, as the same may be amended from time to time in accordance with the terms hereof. "GUARANTORS": each Subsidiary. "HAZARDOUS MATERIAL": collectively, (a) any petroleum or petroleum products, flammable materials, explosives, radioactive materials, asbestos, urea formaldehyde foam insulation, and transformers or other equipment that contain polychlorinated biphenyls ("PCB's"), (b) any chemicals or other materials or substances that are now or hereafter become defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous wastes", "restricted hazardous wastes", "toxic substances", "toxic pollutants", "contaminants", "pollutants" or words of similar import under any Environmental Control Statute and (c) any other chemical or other material or substance, exposure to which is now or hereafter prohibited, limited or regulated under any Environmental Control Statute. "INDEBTEDNESS": of any Person at any date, without duplication, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than trade liabilities (other than for borrowed money) incurred in the ordinary course of business so long as such trade liabilities are payable within 90 days of the date the respective goods are delivered or the respective services are rendered) or which is evidenced by a note, bond, debenture or similar instrument, (b) all obligations of such Person under Capitalized Lease Obligations, (c) all obligations of such Person in respect of acceptances issued or created for the account of such Person, (d) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof, (e) all obligations of such Person, whether absolute or contingent, in respect of letters of credit opened for the account of such Person, (f) all obligations of such Person under Non-Compete Agreements and (g) all Guarantee Obligations of such Person in respect of any indebtedness, obligations or liabilities of any other Person of the type referred to in clauses (a) through (f) of this definition. "INSOLVENCY": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "INTEREST EXPENSE": for any period, the sum, for the Borrower and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (i) all interest on Funded Debt (including, without limitation, the interest component of any payments in respect of Capitalized Lease Obligations) which was paid, payable and/or accrued for such period and (ii) all commitment, letter of credit or line of credit fees paid, payable and/or accrued for such period (without duplication of previous amounts) to any lender in exchange for such lender's commitment to lend. "INTEREST PAYMENT DATE": (a) the first day of each month and (b) on the day on which the Loans become due and payable in full and are paid or prepaid in full. "INTEREST RATE PROTECTION AGREEMENT": shall mean any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, or interest rate hedging agreement or other similar agreement or arrangement. "INVESTMENT": as defined in Section 6.7. "LETTER OF CREDIT REQUEST": with respect to the Existing Letter of Credit, the letter of credit application executed by the Borrower on the Agent's standard form. "LANDLORD CONSENT": a waiver and consent, in form and substance reasonably satisfactory to the Agent, of each Person who is the owner of real property leased to the Borrower or any Guarantor. "LENDERS": as defined in the preamble hereto and Section 8.8. "LIEN": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Capitalized Lease Obligation having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing). "LOAN": as defined in Section 2.1(a). "LOAN DOCUMENTS": this Agreement, the Notes, the Collateral Documents, the Landlord Consents, the Release Agreement, the Guarantor Collateral Documents and the Guarantees and any other agreement executed by an Obligor in connection therewith and herewith including, but not limited to, UCC-1 Financing Statements and amendments thereto, the Letter of Credit Request, and the fee sideletter executed between the Borrower and the Agent, as such agreements and documents may be amended, supplemented and otherwise modified from time to time in accordance with the terms hereof. "LOAN PERCENTAGE": as to any Lender at any time, the percentage of the Aggregate Loan then constituted by the outstanding principal amount of such Lender's Loans. "MAJORITY LENDERS": Lenders having at least 51% of the aggregate outstanding principal amount of the Loans, provided that during any such time as UBOC alone would otherwise constitute a Majority Lender under the definition set forth above, "Majority Lenders" shall be deemed to refer to UBOC and at least one other Lender. "MARGIN STOCK": as defined in Regulation U. "MATERIAL ADVERSE EFFECT": a material adverse effect on (a) the business, operations, property, financial condition, prospects or liabilities of the Borrower and its Subsidiaries taken as a whole, (b) the ability of any Obligor to perform its respective obligations under the Loan Documents, (c) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Agent and the Lenders hereunder or thereunder or (d) the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith. "MATERIAL CONTRACTS": each contract and agreement, including, but not limited to, site leases and licenses, material to the financial condition or operation of the Borrower or any Subsidiary. "MATURITY DATE": December 31, 2004, or such earlier date as the Loans shall become due and payable in full in accordance with the terms hereof (whether by acceleration or otherwise). "MULTI-MEDIA": Multi-Media Services, Inc., a California corporation. "MULTIEMPLOYER PLAN": a plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NET BOOK VALUE": net book value as determined in accordance with GAAP. "NET INCOME": net income as determined in accordance with GAAP. "NET PROCEEDS": with respect to any Equity Offering, the net amount equal to the aggregate amount received in cash (including any cash received by way of deferred payment pursuant to a note receivable, other non-cash consideration or otherwise, but only as and when such cash is so received) in connection with such Equity Offering minus the reasonable fees, commissions and other out-of-pocket expenses incurred by the Borrower in connection with such Equity Offering (other than amounts payable to Affiliates of the Person making such Equity Offering). "NON-COMPETE AGREEMENTS": all agreements pursuant to which the Borrower or any Subsidiary has agreed to make payments (whether in cash or in kind) to another Person for the agreement of such Person not to compete with the Borrower or such Subsidiary in a given area. "NOTE" AND "NOTES": as defined in Section 2.1(b). "OBLIGATIONS": the unpaid principal of and interest on (including, without limitation, interest accruing after the maturity the Loans and interest accruing on or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding and whether or not at a default rate) the Notes, and all other obligations and liabilities of the Obligors to the Agent and the Lenders, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, the Notes, any other Loan Document and any other document made, delivered or given in connection herewith or therewith, including, but not limited to, any Interest Rate Protection Agreement to which the Agent or any Lender is party, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all reasonable fees and disbursements of counsel (including the allocated reasonable cost of internal counsel) to the Agent or the Lenders that are required to be paid by the Borrower pursuant to the terms of this Agreement) or otherwise. "OBLIGOR": the Borrower, each Guarantor and any other Person (other than the Agent or a Lender) obligated under any Loan Document. "OPERATING MACHINERY AND EQUIPMENT": the Net Book Value of all of the machinery and equipment set forth in the notes to the Borrower's consolidated balance sheet, as determined in accordance with GAAP consistently applied. "ORGANIC DOCUMENTS": relative to any entity, its certificate or articles of incorporation or organization, its by-laws or operating agreement, any Equityholder Agreements, its partnership agreement, and any other agreements or documents relating to the control or management of any such entity (whether existing as corporation, a partnership, a limited liability company or otherwise). "PARTICIPANT": as defined in Section 9.6(b). "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA or any successor thereto. "PERSON": any individual, firm, partnership, joint venture, corporation, association, limited liability company, business enterprise trust, unincorporated organization, government or department or agency thereof or other entity, whether acting in an individual, fiduciary or other capacity. "PLAN": as to any Person, any plan (other than a Multiemployer Plan) subject to Title IV of ERISA maintained for employees of such Person or any ERISA Affiliate of such Person (and any such plan no longer maintained by such Person or any of such Person's ERISA Affiliates to which such Person or any of such Person's ERISA Affiliates has made or was required to make any contributions within any of the five preceding years). "PROHIBITED TRANSACTION": with respect to any Plan, a prohibited transaction (as defined in Section 406 of ERISA) with respect to such Plan. "PROJECTIONS": those certain projections delivered by the Borrower to the Agent and the Lenders in connection with this Agreement, a copy of which is attached hereto as Exhibit F. "PROPERTIES": the collective reference to the real and personal (tangible and intangible) property owned, leased, used, occupied or operated, under license or permit by the Obligors. "PURCHASING LENDERS": as defined in Section 9.6(c). "REFERENCE RATE": the rate of interest per annum publicly announced from time to time by Union Bank of California, N.A. as its "reference rate" in effect at its office in Los Angeles, California. Any change in the Reference Rate shall be effective on the effective date specified in the public announcement of such change. The Reference Rate is an index rate determined by UBOC from time to time as a means of pricing certain extensions of credit and is neither directly tied to any external rate of interest or index nor necessarily the lowest rate of interest charged by UBOC at any given time. "REGISTER": as defined in Section 9.6(d). "REGULATION D": Regulation D of the Board of Governors of the Federal Reserve System, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof and any successor regulation thereto. "REGULATION U": Regulation U of the Board of Governors of the Federal Reserve System, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof and any successor regulation thereto. "RELEASE AGREEMENT": a Release Agreement, in the form of Exhibit C hereto, executed by the Borrower and each Guarantor in favor of the Agent and the Lenders. "REORGANIZATION": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "REPORTABLE EVENT": any of the events set forth in Section 4043(b) of ERISA, other than those events as to which the thirty day notice period is waived under PBGC regulations. "REQUIREMENT OF LAW": as to any Person, the Organic Documents of such Person, and any law, treaty, rule or regulation, determination or policy statement or interpretation of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "RESPONSIBLE OFFICER": with respect to the Borrower or any Subsidiary, the chief executive officer or the president, or, with respect to financial matters, the chief financial officer, treasurer or controller of such entity. "RESTATEMENT DATE": the date on which the conditions precedent set forth in Section 4.1 have been satisfied. "RESTRICTED PAYMENTS": as defined in Section 6.6. "SECURITY AGREEMENT": the Second Amended and Restated Security Agreement dated as of September 28, 2000, made by the Borrower in favor of the Agent, for the benefit of the Lenders, in respect of the tangible and intangible personal property of the Borrower described therein, as amended by the applicable Security Agreement Amendment, as the same may be further amended from time to time in accordance with the terms hereof. "SECURITY AGREEMENT AMENDMENT": an amendment to the Security Agreement, and each Guarantor Security Agreement existing on the Restatement Date, in each case in form and substance satisfactory to the Agent. "SINGLE EMPLOYER PLAN": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "SOLVENT": when used with respect to any Person, that: (i) the present fair salable value of such Person's assets is in excess of the total amount of the probable liability on such Person's liabilities; (ii) such Person is able to pay its debts as they become due; (iii)such Person does not have unreasonably small capital to carry on such Person's business as theretofore operated and all businesses in which such Person is about to engage; and (iv) such Person is not otherwise insolvent as defined in Section 3439.02 of the California Civil Code and as defined in 11 U.S.C. Section 101 (32) of the Bankruptcy Code. "SUBSIDIARY": as to any Person at any time of determination, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries or Subsidiaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "TAXES": as defined in Section 2.9. "TERMINATION EVENT": (i) a Reportable Event, (ii) the institution of proceedings to terminate a Single Employer Plan by the PBGC under Section 4042 of ERISA, (iii) the appointment by the PBGC of a trustee to administer any Single Employer Plan or (iv) the existence of any other event or condition that would reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment by the PBGC of a trustee to administer, any Single Employer Plan. "TRANSFEREE": as defined in Section 9.6(f). "UBOC": as defined in the Recitals hereto. "UCC": the Uniform Commercial Code as the same may be in effect from time to time in the State of California. "VDIMI": VDI Multimedia, Inc., a Delaware corporation. "WHOLLY OWNED SUBSIDIARY": with respect to any Person, any corporation, partnership or other entity of which all of the equity securities or other ownership interests (other than, in the case of a corporation, directors' qualifying shares) are directly or indirectly owned or controlled by such Person or one or more Wholly Owned Subsidiaries of such Person. 1.2 OTHER DEFINITIONAL PROVISIONS. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have such defined meanings when used in the Notes, any other Loan Document or any certificate or other document made or delivered pursuant hereto or thereto. (b) As used herein, in the Notes, in any other Loan Document, and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. (e) For the purpose of determining financial covenant compliance hereunder for any period, divestitures and asset sales occurring during such period will be included in the calculations for such period on a pro forma basis, and will be deemed to have occurred on the first day of such period. SECTION 2. AMOUNT AND TERMS OF LOANS 2.1 LOANS. (a) Upon the occurrence of the Restatement Date, the revolving loans owing to each Lender under the Existing Agreement shall be deemed to be a term loan (each a "Loan," and collectively, the "Loans") payable to such Lender in the amount set forth on Part 1 of Schedule 2.1 with respect to such Lender. Each Lender may maintain its Loan by or through any Applicable Lending Office. For the avoidance of doubt, in no event will any borrowings or credit advances be available hereunder, all commitments of the Lenders to lend or make extensions of credit having been terminated under the Existing Agreement. (b) The Loans made by each Lender to the Borrower shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A (a "Note"), with appropriate insertions therein as to payee, date and principal amount, payable to the order of such Lender and representing the obligations of the Borrower to pay the aggregate unpaid principal amount of Loans made by such Lender to the Borrower, with interest thereon as prescribed in Sections 2.5 and 2.6. Each Lender is hereby authorized (but not required) to record the date and amount of each payment or prepayment of principal of its Loans made to the Borrower in the books and records of such Lender, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded. The failure of any Lender to make any such recordation or notation in the books and records of the Lender (or any error in such recordation or notation) shall not affect the obligations of the Borrower hereunder or under the Notes. Each Note shall (i) be dated the Restatement Date, (ii) provide for the payment of interest in accordance with Sections 2.5 and 2.6 and (iii) be stated to be payable in full on the Maturity Date. (c) On each date described in the following table (each a "Reduction Date"), the Borrower shall repay the principal of the Loans in an aggregate amount equal to the amount set forth below opposite such Reduction Date (each such payment, a "Reduction Installment"): REDUCTION REDUCTION DATE INSTALLMENT -------------- ----------- Restatement Date 2,000,000.00 May 31, 2002 325,000.00 June 30, 2002 325,000.00 July 31, 2002 283,333.33 August 31, 2002 283,333.33 September 30, 2002 283,333.34 October 31, 2002 333,333.33 November 30, 2002 333,333.33 December 31, 2002 1,333,333.34 January 31, 2003 416,666.66 February 28, 2003 416,666.67 March 31, 2003 416,666.67 April 30, 2003 416,666.66 May 31, 2003 416,666.67 June 30 2003 416,666.67 July 31 2003 416,666.66 August 31, 2003 416,666.67 September 30, 2003 416,666.67 October 31, 2003 416,666.66 November 30, 2003 416,666.67 December 31, 2003 416,666.67 January 31, 2004 500,000.00 February 28, 2004 500,000.00 March 31, 2004 500,000.00 April 30, 2004 500,000.00 May 31, 2004 500,000.00 June 30, 2004 500,000.00 July 31, 2004 500,000.00 August 31, 2004 500,000.00 September 30, 2004 500,000.00 October 31, 2004 500,000.00 November 30, 2004 500,000.00 December 31, 2004 12,999,484.00 (d) All outstanding Loans shall be due and payable, to the extent not previously paid in accordance with the terms hereof, on the Maturity Date. The aggregate amount payable to any Lender on any Reduction Date shall be determined in accordance with the provisions of Section 2.7. (e) Each Reduction Installment shall be accompanied by accrued interest on the amount being prepaid to the date of such prepayment. 2.2 AGREEMENTS REGARDING EXISTING LETTER OF CREDIT(A). (a) The Borrower shall at all times maintain with the Agent, for the benefit of the Agent in its capacity as issuer of the Existing Letter of Credit, a cash collateral account (the "Cash Collateral Account"), in at least the outstanding face amount of such letter of credit. Such account shall be pledged to the Agent pursuant to the Security Agreement, shall be under the sole dominion and control of the Agent, and the Borrower shall have no right to make withdrawals therefrom. Within ten Business Days following cancellation or termination of such letter of credit, and reimbursement to the Agent of all amounts owing to the Agent with respect thereto, any remaining funds in such account shall be returned to the Borrower; provided that if a Default shall have occurred and be continuing, such funds shall instead be deemed to be held by the Agent, for the benefit of itself and the Lenders, as collateral for all Obligations. (b) Each Lender confirms and acknowledges that it holds an undivided interest and participation in the Existing Letter of Credit, each drawing thereunder and the obligations of the Borrower under this Agreement in respect thereof in an amount equal to the product of (i) such Lender's Loan Percentage and (ii) the maximum amount available to be drawn under such Letter of Credit (assuming compliance with all conditions to drawing) which amount is, as of the Restatement Date, as set forth in Part 2 of Schedule 2.1. The payment by the Agent of a draft drawn under the Existing Letter of Credit shall first be made from the Cash Collateral Account. In the event that amounts on deposit in the Cash Collateral Account are insufficient to compensate the Agent for such drawing, each Lender agrees to forward to the Agent, within one Business Day following notice thereof from the Agent to the Lenders, funds (the "Letter of Credit Funds") in an amount equal to the amount of such Lender's participation in such drawing for application to repay the Agent. Any Letter of Credit Funds funded by any Lender hereunder shall be due and payable by the Borrower upon demand, shall be deemed to be Obligations hereunder, and shall accrue interest at the rate specified in Section 2.6(b) until repaid in full. (c) The obligations of the Borrower with respect to the Existing Letter of Credit, the Letter of Credit Request with respect thereto, and any other agreement or instrument relating to such Letter of Credit shall be absolute, unconditional and irrevocable and shall be paid strictly in accordance with the terms of the aforementioned documents under all circumstances, including the following: (i) any lack of validity or enforceability of such Letter of Credit, this Agreement or any other Loan Document; (ii) the existence of any claim, setoff, defense or other right that the Borrower may have at any time against any beneficiary or transferee of such Letter of Credit (or any Person for whom any such beneficiary or transferee may be acting), the Agent, any Lender (other than the defense of payment to a Lender in accordance with the terms of this Agreement) or any other Person, whether in connection with this Agreement, any other Loan Document, the transactions contemplated hereby or thereby or any unrelated transaction; (iii) any statement or other document presented under such Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect, or any statement therein being untrue or inaccurate in any respect whatsoever; provided that payment by the Agent under such Letter of Credit shall not have constituted gross negligence or willful misconduct of the Agent under the circumstances in question, as determined by a final judgment of the highest applicable court; and (iv) any exchange, release or nonperfection of any Collateral or other collateral, or any release, amendment or waiver of or consent to departure from any Guarantee, other Loan Document or other guaranty, for any of the Obligations of the Borrower. (d) The Borrower shall pay to the Agent for its own account, with respect to such Letter of Credit, from time to time, such additional fees and charges (including cable charges) as are generally associated with letters of credit, in accordance with the Agent's standard internal charge guidelines and the related Letter of Credit Request. (e) The Borrower agrees to the provisions in the Letter of Credit Request form; provided, however, that the terms of the Loan Documents shall take precedence if there is any inconsistency between the terms of the Loan Documents and the terms of said form. (f) The Borrower assumes all risks of the acts or omissions of any beneficiary or transferee of such Letter of Credit with respect to its use of such Letter of Credit. Neither the Agent nor any Lender nor any of their respective officers or directors shall be liable or responsible for (i) the use that may be made of such Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; or (ii) the validity, sufficiency or genuineness of documents, or of any endorsement thereof, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; provided that, with respect to clause (ii) of this Section 2.2(f), the Borrower shall retain any and all rights it may have against the Agent for any liability arising out of the gross negligence or willful misconduct of the Agent, as determined by a final judgment of the highest applicable court. In furtherance and not in limitation of the foregoing, the Agent may accept any document that appears on its face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. (g) The Borrower hereby indemnifies and holds harmless each Lender and the Agent from and against any and all claims and damages, losses, liabilities, costs or expenses that such Lender or the Agent may incur (or that may be claimed against such Lender or the Agent by any Person whatsoever) by reason of or in connection with the execution and delivery or transfer of or payment or refusal to pay by the Agent, as issuer of such Letter of Credit; provided that the Borrower shall not be required to indemnify any Lender or the Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (x) the willful misconduct or gross negligence of the Agent, as issuer of such Letter of Credit, in determining whether a request presented under such Letter of Credit complied with the terms of such Letter of Credit or (y) in the case of the Agent, as issuer of such Letter of Credit, the Agent's failure to pay under such Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit. Nothing in this Section 2.2 is intended to limit the other obligations of the Borrower, any Lender, or the Agent under this Agreement. 2.3 OPTIONAL PREPAYMENTS. The Borrower may at any time and from time to time, prepay the Loans, in whole or in part, without premium or penalty, upon at least one Business Day's irrevocable written notice from the Borrower to the Agent, specifying the date and amount of prepayment. Upon receipt of any such notice from the Borrower, the Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable by the Borrower on the date specified therein, together with accrued interest to such date on the amount prepaid. Each prepayment hereunder shall be applied to the outstanding Reduction Installments in the order designated by the Borrower in such notice or, if not so designated, in inverse order of maturity. Partial prepayments of the Loans shall be in an aggregate principal amount of $250,000 and integral multiples of $100,000 in excess thereof. For the avoidance of doubt, no amounts prepaid under this Section 2.3 shall be available for reborrowing. 2.4 MANDATORY PREPAYMENTS. (a) If the Borrower or any of its Subsidiaries receives insurance proceeds or condemnation proceeds with respect to any of their Properties which are not fully applied (or contractually committed pursuant to contract(s) approved by the Agent in its reasonable discretion) toward the repair or replacement of such damaged or condemned Property within 30 days of the receipt thereof, the Borrower shall, on such 30th day prepay the Loans in an amount equal to the amount of such proceeds not so applied. (b) In the event that the Borrower or any of its Subsidiaries makes an Equity Offering, the Borrower shall immediately prepay the Loans in an amount equal to 100% of the Net Proceeds of such Equity Offering; provided that if such Equity Offering is the result of the exercise of an option or other right to purchase beneficial or equity interests in the Borrower pursuant to the 1996 Stock Incentive Plan or the 2000 Non-Qualified Stock Option Plan, each as in effect as of the Restatement Date, then such prepayment shall be in an amount equal to 50% of the Net Proceeds of such Equity Offering. No such prepayment shall limit or restrict the rights and remedies of the Lenders under the Loan Documents upon the occurrence and during the continuance of a Default. (c) Each prepayment of the Loans pursuant to this Section 2.4 shall be (i) applied to the outstanding Reduction Installments in inverse order of maturity and (ii) accompanied by payment in full of all accrued interest thereon to and including the date of such prepayment. The Borrower agrees to give the Agent at least five Business Days' irrevocable written notice of any prepayment under this Section 2.4. For the avoidance of doubt, no amounts prepaid under this Section 2.4 shall be available for reborrowing. 2.5 INTEREST RATES AND PAYMENT DATES. (a) Each Loan shall bear interest at a rate per annum equal to the Reference Rate plus 1.25%. (b) If any Default shall have occurred and be continuing, all amounts outstanding shall bear interest at a rate per annum equal to the Reference Rate plus 3.25% from the date of the occurrence of such Default until such Default is no longer continuing (after as well as before judgment). (c) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (b) of this Section shall be payable on demand. 2.6 COMPUTATION OF INTEREST AND FEES. (a) Interest on the Loans shall be calculated on the basis of a 365- (or 366-, as the case may be), day year for the actual days elapsed, and interest on all other Obligations of the Borrower shall be calculated on the basis of a 360-day year for the actual days elapsed. Any change in the interest rate on a Loan resulting from a change in the Reference Rate shall become effective as of the opening of business on the day on which such change in the Reference Rate is announced. The Agent shall as soon as practicable notify the Borrower and the Lenders of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. 2.7 PRO RATA TREATMENT AND PAYMENTS. Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Loans shall be made pro rata according to the respective outstanding principal and interest amounts of the Loans then held by the Lenders. All payments (including prepayments) to be made by the Borrower hereunder and under the Notes, whether on account of principal, interest, fees or otherwise, shall be made without set off or counterclaim and shall be made prior to 12:00 Noon, Los Angeles time, on the due date thereof to the Agent, for the account of the applicable Lenders, at the Agent's office specified in Section 9.2, in Dollars and in immediately available funds. The Agent shall distribute such payments to the applicable Lenders promptly upon receipt in like funds as received. If any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. 2.8 INCREASED COSTS. If, after the date of this Agreement, the introduction of or any change in any applicable law, rule, regulation or guideline regarding capital adequacy, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or the National Association of Insurance Commissioners or comparable agency charged with the interpretation or administration thereof, affects the amount of capital required or expected to be maintained by any Lender or any corporation controlling any Lender, and such Lender (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) determines that the amount of capital maintained by such Lender or such corporation which is attributable to or based upon the Loans or this Agreement must be increased as a consequence of such introduction or change by an amount deemed by such Lender to be material, then, upon demand of the Agent at the request of such Lender, the Borrower shall immediately pay to the Agent on behalf of such Lender, additional amounts sufficient to compensate such Lender or such corporation for the increased costs to such Lender or corporation of such increased capital. Any such demand shall be accompanied by a certificate of such Lender setting forth in reasonable detail the computation of any such increased costs, which certificate shall be conclusive, absent manifest error. This covenant shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. 2.9 TAXES. (a) All payments made by the Borrower in respect of the Obligations shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority or any political subdivision or taxing authority thereof or therein, other than Excluded Taxes (all such non-Excluded Taxes being hereinafter called "Taxes"). If any Taxes are required to be withheld from any amounts payable to the Agent or any Lender in respect of the Obligations, the amounts so payable to the Agent or such Lender shall be increased to the extent necessary to yield to the Agent or such Lender (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the Notes. The Agent or a Lender, as the case may be, shall deliver to the Borrower a certificate in good faith setting forth the amount of such Taxes, the calculation of such Taxes and an explanation of the requirement therefor, all in reasonable detail and such certificate shall be conclusive, absent manifest error. Whenever any Taxes are payable by the Borrower, as promptly as possible thereafter, the Borrower shall send to the Agent, for its own account or for the account of such Lender, as the case may be, a copy of an original official receipt received by the Borrower showing payment thereof or such other evidence of payment reasonably satisfactory to the Agent. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Agent and the Lenders for any incremental taxes, interest or penalties (and related reasonable fees and expenses of counsel) that may become payable by the Agent or any Lender as a result of any such failure. The agreements in this Section shall survive the termination of this Agreement and the payment of the Notes and all other amounts payable hereunder. (b) Each Lender that is not organized under the laws of the United States of America or a state thereof agrees that it will deliver to the Borrower and the Agent two duly completed copies of United States Internal Revenue Service Form W-9, W-8BEN and/or W-8ECI (as applicable to it), or successor applicable form(s), as the case may be. Each such Lender also agrees to deliver to the Borrower and the Agent two further copies of Form W-9, W-8BEN and/or W-8ECI (as applicable to it), or successor applicable form(s) or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower and the Agent, and such extensions or renewals thereof as may reasonably be requested by the Borrower or the Agent, unless in any such case an event beyond the control of such Lender (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advised the Borrower and the Agent. Each such Lender shall certify pursuant to such form(s) that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, or that it is entitled to an exemption from United States backup withholding tax, as applicable. 2.10 MITIGATION OF COSTS. If any Lender, by changing its Applicable Lending Office or taking any other reasonable action, so long as making such change or taking such other action is not disadvantageous to it in any financial, regulatory or other respect, can mitigate any adverse effect on the Borrower under Section 2.8 or 2.9, such Lender shall take such action. 2.11 AMENDMENT FEE. The Borrower shall pay to the Agent, for the benefit of the Lenders on a pro rata basis, an amendment fee of $300,000. Such fee shall be deemed earned in full on the Restatement Date, and no part of such fee shall refundable notwithstanding any earlier termination of this Agreement or early repayment of the Loans. Such fee shall be payable in immediately available funds as follows: (i) $50,000 of such fee shall be payable on the Restatement Date and (ii) $250,000 of such fee shall be payable on June 30, 2003; provided that, notwithstanding the foregoing, the $250,000 installment referred to in clause (ii) shall be waived by the Lenders if all Obligations of the Agent and the Lenders shall have been paid in full on or before June 30, 2003. SECTION 3. REPRESENTATIONS AND WARRANTIES To induce the Lenders to enter into this Agreement, the Borrower hereby represents and warrants to the Agent and each Lender that: 3.1 ORGANIZATION AND GOOD STANDING. The Borrower and each Subsidiary (a) is duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation as indicated on Schedule 3.1, (b) has all requisite corporate power and authority to own its properties and to conduct its business as now conducted and as currently proposed to be conducted and (c) is duly qualified to conduct business as a foreign corporation and is currently in good standing in each state and jurisdiction in which it conducts business except, in each case referred to in clause (c), to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. Each state and jurisdiction in which the Borrower or any Subsidiary is or should be qualified to conduct business is listed on Schedule 3.1. 3.2 POWER AND AUTHORITY. The Borrower and each Subsidiary has all requisite power and authority under applicable law and under its Organic Documents to execute, deliver and perform its respective obligations under the Loan Documents to which it is a party. All actions, waivers and consents (corporate, regulatory and otherwise) necessary or appropriate for the Borrower and each Subsidiary to execute, deliver and perform the Loan Documents to which it is a party have been taken and/or received. 3.3 VALIDITY AND LEGAL EFFECT. This Agreement constitutes, and the other Loan Documents to which the Borrower or any Subsidiary is a party constitute (or will constitute when executed and delivered), the legal, valid and binding obligations of the Borrower or such Subsidiary, as applicable, enforceable against it in accordance with the terms thereof, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3.4 NO VIOLATION OF LAWS OR AGREEMENTS. The execution, delivery and performance of the Loan Documents (a) will not violate or contravene any Requirement of Law, (b) will not result in any material breach or violation of, or constitute a material default under, any agreement or instrument by which the Borrower or any Subsidiary, or any of its property, may be bound, and (c) will not result in or require the creation of any Lien upon or with respect to any property of the Borrower or any Subsidiary, whether such property is now owned or hereafter acquired. 3.5 TITLE TO ASSETS; EXISTING ENCUMBRANCES; LEGAL NAMES. The Borrower and each Subsidiary has good and marketable title to all of its real and personal properties and assets, free and clear of any Liens (other than those permitted by Section 6.3). Neither the Borrower nor any Subsidiary has used (or permitted the filing of any financing statement under) any legal or operating name at any time during the twelve consecutive calendar months immediately preceding the execution of this Agreement, except as identified on Schedule 3.5. 3.6 CAPITAL STRUCTURE; EQUITY OWNERSHIP. The authorized capital stock of the Borrower consists of an aggregate of 50,000,000 shares of common stock, without par value, 8,995,704 shares of which are issued and outstanding, and 5,000,000 shares of preferred stock, without par value, no shares of which are issued and outstanding. All of the issued and outstanding shares of common stock of the Borrower are duly and validly issued and outstanding, and each of such shares is fully paid and nonassessable. Except as set forth on Schedule 3.6, there are no outstanding Equity Rights with respect to the Borrower or any Subsidiary and there are no outstanding obligations of the Borrower or any of its Subsidiaries to repurchase, redeem, or otherwise acquire any shares of capital stock of the Borrower, nor are there any outstanding obligations of the Borrower or any of its Subsidiaries to make payments to any Person, such as "phantom stock" payments, where the amount thereof is calculated with reference to the fair market value or equity value of Borrower or any of its Subsidiaries. 3.7 SUBSIDIARIES AND AFFILIATES. Schedule 3.7 accurately and completely discloses (i) each Subsidiary and Affiliate of the Borrower (other than its officers and directors), (ii) each Person holding ownership interests in such Subsidiary and (iii) the nature of the ownership interests held by each such Person and the percentage of ownership of such Subsidiary represented by such ownership interests. 3.8 MATERIAL CONTRACTS. Schedule 3.8 attached hereto sets forth a description of the Material Contracts of the Borrower and the Subsidiaries as of the Restatement Date. Neither the Borrower nor any Subsidiary has committed any unwaived breach or default under any Material Contract, and the Borrower has no knowledge or reason to believe that any other party to any Material Contract has committed any unwaived breach or default thereof. Each of the Material Contracts is a legal, valid and binding obligation of the Borrower or the Subsidiaries party thereto, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. The Borrower has made available to the Lenders and the Agent a complete and correct copy of each Material Contract (including in each case all exhibits, schedules and disclosure letters referred to therein or delivered pursuant thereto, if any) and all amendments thereto and other side letters or agreements affecting the terms thereof. Neither the Borrower nor any of its Subsidiaries is party to any current agreements or letters of intent providing for the acquisition or disposition of any assets. 3.9 TAXES AND ASSESSMENTS. The Borrower and each Subsidiary has timely filed all required tax returns and reports (federal, state and local) or has properly filed for extensions of the time for the filing thereof. The Borrower has no knowledge of any deficiency, penalty or additional assessment due or appropriate in connection with any such taxes. All taxes (federal, state and local) imposed upon the Borrower or any Subsidiary or any of its properties, operations or income have been paid and discharged prior to the date when any interest or penalty would accrue for the nonpayment thereof, except for those taxes being contested in good faith by appropriate proceedings diligently prosecuted and with adequate reserves reflected on the financial statements in accordance with GAAP. There are no taxes imposed on the Borrower or its Subsidiaries by any political subdivision or taxing authority due or payable either on or by virtue of the execution and delivery by the Borrower, the Subsidiaries, the Agent, or the Lenders of this Agreement or any other Loan Document to which the Borrower or the Subsidiaries are party, or on any payment to be made by the Borrower pursuant hereto or thereto. 3.10 LITIGATION AND LEGAL PROCEEDINGS. Except as disclosed on Schedule 3.10, there is no litigation, claim, investigation, administrative proceeding, labor controversy or similar action that is pending or, to the knowledge of the Borrower, threatened (i) with respect to any Loan Document or the transactions contemplated thereby, or (ii) against the Borrower, any Subsidiary or any Property which, if determined adversely to the Borrower or any Subsidiary, would reasonably be expected to have a Material Adverse Effect. 3.11 ACCURACY OF FINANCIAL INFORMATION. (a) All information previously furnished to the Agent and the Lenders that was prepared by or on behalf of the Borrower concerning the financial condition and operations of the Borrower or any Subsidiary, including the audited consolidated financial statements of the Borrower and its Subsidiaries for the fiscal year ended December 31, 2001 (including, separately stated, consolidating statements of income, retained earnings and cash flows of the Borrower and its Subsidiaries), (A) have been prepared in accordance with GAAP consistently applied, (B) are true, accurate and complete in all material respects, (C) fairly present the financial condition of the organizations covered thereby as of the dates and for the periods covered thereby and (D) disclose all material liabilities (contingent and otherwise) of the Borrower and the Subsidiaries. (b) Since December 31, 2001 there has been no event or condition resulting in a Material Adverse Effect. 3.12 ACCURACY OF OTHER INFORMATION. All information contained in any application, schedule, report, certificate, or any other document given to the Agent or any Lender by the Borrower or any agent of the Borrower in connection with the Loan Documents is in all material respects true, accurate and complete, and no such Person has omitted to state therein (or failed to include in any such document) any material fact or any fact necessary to make such information not misleading. All projections given to the Agent, or any Lender by the Borrower or any other Person have been prepared with a reasonable basis and in good faith making use of such information as was available at the date such projection was made. The projections and pro forma financial information contained in such materials are based upon good faith estimates and assumptions believed by the Borrower to be reasonable at the time made and as of the Restatement Date, it being recognized that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. 3.13 COMPLIANCE WITH LAWS GENERALLY. The Borrower and each Subsidiary is in compliance in all material respects with all Requirements of Law applicable to it, its operations and its properties. 3.14 ERISA COMPLIANCE. (a) The Borrower and each Subsidiary is in compliance in all material respects with all applicable provisions of ERISA, and all rules, regulations and orders implementing ERISA. (b) Neither the Borrower nor any Subsidiary, or any ERISA Affiliate thereof, maintains or contributes to (or has maintained or contributed to) any Multiemployer Plan under which the Borrower, any Subsidiary or any ERISA Affiliate thereof could have any withdrawal liability. (c) Neither the Borrower nor any Subsidiary, or any ERISA Affiliate thereof, sponsors or maintains any defined benefit pension plan under which there is an accumulated funding deficiency within the meaning of Section 412 of the Code, whether or not waived. (d) The liability for accrued benefits under each defined benefit pension plan that will be sponsored or maintained by the Borrower, any Subsidiary or any ERISA Affiliate thereof (determined on the basis of the actuarial assumptions utilized by the PBGC) does not exceed the aggregate fair market value of the assets under each such defined benefit pension plan. (e) The aggregate liability of the Borrower, each Subsidiary and each ERISA Affiliate thereof arising out of or relating to a failure of any employee benefit plan within the meaning of Section 3(2) of ERISA to comply with provisions of ERISA or the Code will not have a Material Adverse Effect. (f) There does not exist any unfunded liability (determined on the basis of actuarial assumptions utilized by the actuary for the plan in preparing the most recent annual report) of the Borrower, any Subsidiary or any ERISA Affiliate thereof under any plan, program or arrangement providing post-retirement, life or health benefits. (g) No Reportable Event and no Prohibited Transaction (as defined in ERISA) has occurred or is occurring with respect to any plan with which the Borrower or any Subsidiary is associated. 3.15 ENVIRONMENTAL COMPLIANCE. (a) The Borrower and each Subsidiary has received all permits and filed all notifications necessary under and is otherwise in compliance in all material respects with all federal, state and local laws, rules and regulations governing the control, removal, storage, transportation, spill, release or discharge of Hazardous Materials, including, without limitation, as provided in the provisions of and the regulations under (i) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendment and Reauthorization Act of 1986, (ii) the Solid Waste Disposal Act, (iii) the Clean Water Act and the Clean Air Act, (iv) the Hazardous Materials Transportation Act, (v) the Resource Conservation and Recovery Act of 1976 and (vi) the Federal Water Pollution Control Act Amendments of 1972 (all of the foregoing enumerated and nonenumerated statutes, including without limitation any applicable state or local statutes, all as amended, collectively, the "Environmental Control Statutes"). (b) Neither the Borrower nor any Subsidiary has given any written or oral notice to the Environmental Protection Agency ("EPA") or any state or local agency with regard to any actual or imminently threatened removal, storage, transportation, spill, release or discharge of Hazardous Wastes either (i) on properties owned or leased by the Borrower or such Subsidiary or (ii) otherwise in connection with the conduct of its business and operations. (c) Neither the Borrower nor any Subsidiary has received notice that it is potentially responsible for costs of clean-up of any actual or imminently threatened spill, release or discharge of Hazardous Wastes pursuant to any Environmental Control Statute. (d) No judicial proceedings or governmental or administrative action is pending, or, to the knowledge of the Borrower, threatened, under any Environmental Control Statute to which the Borrower or any of its Subsidiaries is named as a party with respect to the Properties or the business conducted at the Properties, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Control Statute with respect to the Properties or such business. 3.16 FEDERAL REGULATIONS. No part of the proceeds of any Loans are intended to be or will be used, directly or indirectly for any purpose which violates the provisions of the Regulations of the Board of Governors of the Federal Reserve System. If requested by any Lender or the Agent, and in any event upon consummation of any acquisition involving the purchase of stock by the Borrower or any Subsidiary, the Borrower will furnish to the Agent and each Lender a statement to the foregoing effect in conformity with the requirements of Form U-1 referred to in Regulation U. 3.17 FEES AND COMMISSIONS. Except for the fees referred to in Sections 2.11 and 4.1(e), neither the Borrower nor any Subsidiary owes or will owe any fees or commissions of any kind in connection with this Agreement or the transactions contemplated hereby or thereby, and the Borrower does not know of any claim (or any basis for any claim) for any fees or commissions in connection with this Agreement or the transactions contemplated hereby or thereby. 3.18 SOLVENCY. Immediately prior to and upon the execution of this Agreement, the Borrower and each Guarantor was, is and will be Solvent. 3.19 INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT. (a) Neither the Borrower nor any Subsidiary is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (b) Neither the Borrower nor any Subsidiary is a "holding company," or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 3.20 NATURE OF BUSINESS. Neither the Borrower nor any of its Subsidiaries is engaged in any material business other than as described in Section 6.11. 3.21 EVENT OF DEFAULT. No Event of Default exists. 3.22 RANKING OF LOANS. This Agreement and the other Loan Documents to which the Borrower is party, when executed, and the Loans, are and will be the direct and general obligations of the Borrower. The Borrower's obligations hereunder and thereunder rank and will rank at least pari passu in priority of payment to all other Indebtedness. SECTION 4. CONDITIONS PRECEDENT 4.1 CONDITIONS TO RESTATEMENT DATE. The agreement of each Lender to execute this Agreement, to waive the Events of Default referred to in Section 9.17, and to amend and restate the Existing Agreement on the terms set forth herein, are subject to the satisfaction of the following conditions precedent: (a) CREDIT AGREEMENT. The Agent shall have received this Agreement, executed and delivered by an officer of the Borrower as of the Restatement Date. (b) OTHER LOAN DOCUMENTS. The Agent shall have received the Notes, the Release Agreement, a Guarantee Amendment with respect to each Guarantee existing on the Restatement Date, a Security Agreement Amendment with respect to the Security Agreement, a Security Agreement Amendment with respect to each Guarantor Security Agreement existing on the Restatement Date, the fee sideletter executed between the Borrower and the Agent, and all other agreements or instruments required to create or perfect a security interest in the Collateral and the Guarantor Collateral, including any Control Agreements requested by the Lenders, executed in connection herewith, in each case executed and delivered by an officer of the relevant Obligor. (c) CORPORATE DOCUMENTS. The Agent shall have received certified copies of the charter and by-laws of each Obligor and of all corporate authority for each Obligor (including, without limitation, board of director resolutions and evidence of the incumbency, including specimen signatures, of officers) with respect to the execution, delivery and performance of such of the Loan Documents to which such Obligor is intended to be a party and each other document to be delivered by such Obligor from time to time in connection herewith and the extensions of credit hereunder (or, with respect any charter or by-laws delivered under the Existing Agreement with respect to any Obligor, a certificate of the Secretary or Assistant Secretary of such Obligor, certifying that such document(s) delivered under the Existing Agreement remain true and correct and in full force and effect or, if either has been amended or replaced, attaching such amendment or replacement and certifying that such documents are true and correct and in full force and effect). The Agent shall have received (x) subject to Section 4.2, a copy of each Material Contract and (y) whether or not such contracts constitute Material Contracts, a copy of each employment agreement with a senior officer of the Borrower or any Subsidiary, in each case certified by a Responsible Officer of the Borrower to be true and correct and in full force and effect (or, with respect any Material Contract delivered under the Existing Agreement, a certificate of the Secretary or Assistant Secretary of such Obligor, certifying that such Material Contract(s) delivered under the Existing Agreement remain true and correct and in full force and effect or, if any have been amended or replaced, attaching such amendment or replacement and certifying that such documents are true and correct and in full force and effect). (d) PRINCIPAL REPAYMENT. The Agent shall have received, for the benefit of the Lenders, in immediately available funds, the $2,000,000 Reduction Installment required to be paid on the Restatement Date pursuant to Section 2.1(c). (e) FEES AND COSTS. The Agent shall have received payment of (i) all fees owing to Ernst & Young in connection with their valuation of the Borrower, (ii) the first installment of the amendment fee contemplated by Section 2.9 and (iii) all other fees, costs and expenses, including legal fees and any LIBOR breakage costs, of the Agent and the Lenders incurred pursuant to the Existing Agreement or this Agreement, in each case in immediately available funds. (f) LIEN SEARCHES. The Agent shall have received such lien searches as it shall request, none of which shall evidence Liens (except for Liens permitted by Section 6.3) covering any of the Collateral or the Guarantor Collateral. (g) COVENANT COMPLIANCE CERTIFICATE. The Agent shall have received a Covenant Compliance Certificate prepared on a pro forma basis as of the Restatement Date (provided that EBITDA, Fixed Charges and Eligible Accounts Receivable shall be as of March 31, 2002), and assuming repayment of the Reduction Installment due on such date. (h) GOOD STANDING CERTIFICATES. With respect to each Obligor, the Agent shall have received a certificate, dated a recent date, of the Secretary of State of the state of formation of such Obligor and each other jurisdiction where such Obligor is required to be qualified to do business under such jurisdiction's law (each as respectively set forth on Schedule 3.1), certifying as to the existence and good standing of, and the payment of taxes by, each such Obligor in such state. (i) OFFICER'S CERTIFICATE. A certificate of a senior officer of the Borrower substantially in the form of Exhibit D, dated the Restatement Date. (j) INSURANCE POLICIES. The Agent shall have received evidence in form and substance reasonably satisfactory to the Agent that the insurance required by Section 5.6 is in full force and effect. (k) EXISTING LETTER OF CREDIT. The Agent shall have received a cash collateral deposit in the amount of $92,239.20 to cash secure the Existing Letter of Credit, along with such account agreement or other agreements, documents or instruments as the Agent may request to establish a separate account for such deposit. (l) FINANCIAL CONSULTANT. The Agent shall have received a copy of that certain letter dated March 25, 2002, pursuant to which the Borrower retained Kibel Green, Inc., which letter shall be in the form previously delivered to the Agent, along with a certificate of the Borrower stating that such copy is true, correct and complete and that such letter remains in full force and effect. (m) STOCK CERTIFICATES; ETC. The Agent shall have received original stock certificates representing all outstanding shares of stock of each Subsidiary, together with an undated stock power for each of such certificates, duly executed in blank by an authorized officer of the pledgor thereof. (n) ADDITIONAL PROCEEDINGS. The Agent shall have received such other approvals, opinions and documents as the Agent may reasonably request. (o) LEGAL OPINIONS. The Agent shall have received, with a counterpart for each Lender, the following executed legal opinions: (i) the executed legal opinion of Troy & Gould Professional Corporation, counsel to the Borrower and the Guarantors, in form and substance satisfactory to the Agent; and (ii) such other legal opinions as the Agent may reasonably request. (p) ADDITIONAL CONDITIONS PRECEDENT. The following statements shall be true: (A) The representations and warranties contained in this Agreement and in each other Loan Document and certificate or other writing delivered to the Lenders prior to, on or after the Restatement Date pursuant hereto are correct on and as of such date in all material respects as though made on and as of such date except to the extent that such representations and warranties expressly relate to an earlier date; and (B) No Default has occurred and is continuing or would result from the amendment and restatement of the Existing Agreement as set forth herein; (C) The amendment and restatement of the Existing Agreement as set forth herein shall not contravene any law, rule or regulation applicable to any Lender or any Obligor. (q) CERTIFICATION RE PROJECTIONS. The Agent shall have received a copy of the duly executed certification regarding the Borrower's projections, in the exact form prepared by Ernst & Young in connection with their valuation of the Borrower. 4.2 CONDITIONS SUBSEQUENT. The agreement of each Lender to execute this Agreement, to waive the Events of Default referred to in Section 9.17, and to amend and restate the Existing Agreement on the terms set forth herein, are subject to the satisfaction of the following conditions subsequent: (a) LEASES. The Borrower agrees to deliver to the Agent, on or before May 29, 2002, copies of each real property lease to which the Borrower or any Subsidiary is party, all certified by a Responsible Officer of the Borrower to be true and correct and in full force and effect. (b) UCC TERMINATIONS. The Borrower agrees to deliver to the Agent, on or before May 29, 2002, evidence of termination of the following UCC financing statements against Multi-Media: (A) Filing Number 211047 by Community Bank, N.A. in New York; (B) Filing Number 231261 by Community Bank, N.A. in New York; (C) Filing Number 240006 by Community Bank, N.A. in New York; (D) Filing Number 137761 by Community Bank, N.A. in New York; (E) Filing Number 204160 by Community Bank, N.A. in New York; and (F) Filing Number 215449 by Community Bank National Association in New York. (c) TRADEMARK REGISTRATIONS. The Borrower agrees to deliver to the Agent, on or before May 29, 2002, evidence of filing with the United States Patent and Trademark Office of all necessary documentation to register each trademark listed on Schedule A to the Security Agreement or any Guarantor Security Agreement in the legal name of the Borrower or one of its Subsidiaries. (d) GOOD STANDING CERTIFICATES. The Borrower agrees to deliver to the Agent, on or before May 29, 2002: (i) certificates, dated a recent date, of the Secretary of State of Texas and New York with respect to the Borrower in its legal name, certifying as to the existence and good standing of, and the payment of taxes by, the Borrower in such states; and (ii) a certificate, dated a recent date, of the Secretary of State of Illinois with respect to Multi-Media, certifying as to the existence and good standing of, and the payment of taxes by, Multi-Media in such state. SECTION 5. AFFIRMATIVE COVENANTS The Borrower hereby agrees that from and after the Restatement Date, so long as any Note remains outstanding and unpaid or any other amount is owing to any Lender or the Agent hereunder: 5.1 FINANCIAL STATEMENTS. (a) As soon as available and in any event within 45 days after the end of the first three quarterly fiscal periods of each fiscal year of the Borrower, the Borrower shall deliver to the Agent, with sufficient copies for each Lender, (i) consolidated statements of income, retained earnings and cash flows of the Borrower and its Subsidiaries for such period, and the related consolidated balance sheets of the Borrower and its Subsidiaries as at the end of such period, setting forth in each case in comparative form (A) the corresponding consolidated figures for the corresponding periods in the preceding fiscal year (except that, in the case of the balance sheets, such comparison shall be to the last day of the prior fiscal year) and (B) the consolidated figures for the corresponding period in the Projections, accompanied by a certificate of a senior financial officer of the Borrower, which certificate shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Borrower and its Subsidiaries, in each case in accordance with GAAP consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments and the absence of footnotes) and (ii) a schedule showing all equipment sales and purchases (including relevant serial numbers) during such period, such schedule to be in form and detail acceptable to the Majority Lenders. (b) As soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, the Borrower shall deliver to the Agent, with sufficient copies for each Lender, audited consolidated statements of income, retained earnings and cash flows of the Borrower and its Subsidiaries for such fiscal year and the related consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year, setting forth in comparative form the corresponding consolidated figures for the preceding fiscal year, and accompanied by (i) all management letters relating thereto and (ii) an opinion thereon of the Accountants, which opinion shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Borrower and its Subsidiaries as at the end of, and for, such fiscal year in accordance with GAAP, and a statement of the Accountants to the effect that, in making the examination necessary for their opinion, nothing came to their attention that caused them to believe that the Borrower was not in compliance with Section 6.1, insofar as such Section relates to accounting matters. (c) As soon as available and in any event within 60 days after the end of each fiscal year of the Borrower, the Borrower shall deliver to the Agent, with sufficient copies for each Lender, unaudited consolidated and consolidating statements of income, consolidated statements of retained earnings and cash flows of the Borrower and its Subsidiaries for such fiscal year and the related consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year, setting forth in comparative form the corresponding consolidated figures for the preceding fiscal year, and accompanied by a certificate of a senior financial officer of the Borrower, which certificate shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Borrower and its Subsidiaries, in each case in accordance with GAAP consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments and the absence of footnotes). (d) As soon as available and in any event within 30 days after the end of each month, the Borrower shall deliver to the Agent, with sufficient copies for each Lender, (i) consolidated and consolidating statements of income, consolidated statements of retained earnings and cash flows of the Borrower and its Subsidiaries for such month, and the related consolidated balance sheets of the Borrower and its Subsidiaries as at the end of such month, accompanied by a certificate of a senior financial officer of the Borrower, which certificate shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Borrower and its Subsidiaries, in each case in accordance with GAAP consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments and the absence of footnotes), (ii) a comparison of such results with the consolidated figures for the corresponding period in the Projections and (iii) the corresponding consolidated and consolidating figures for the corresponding periods in the preceding fiscal year (except that, in the case of the balance sheets, such comparison shall be to the last day of the prior fiscal year). (e) The Borrower will promptly furnish to the Agent such other information (including information pertaining to the Borrower's financial condition, operations and otherwise) as the Agent may reasonably request. 5.2 CERTIFICATES; OTHER INFORMATION. The Borrower shall deliver to each Lender: (a) within 45 days after the end of each month, a Covenant Compliance Certificate as of the end of such month; (b) within five Business Days after the same are filed, copies of all financial statements and reports which the Borrower or any Subsidiary may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; (c) promptly but, in any event, within five Business Days after receipt thereof, copies of all financial reports (including, without limitation, management letters), if any, submitted to the Borrower or any Subsidiary by the Accountants in connection with any annual or interim audit of the books thereof; (d) as soon as available and in any event within 30 days after December 31 of each fiscal year, a budget for the next following fiscal year setting forth anticipated income, expense and capital expenditure items for each month during such fiscal year; (e) as soon as possible and in any event within five Business Days after the occurrence of a Default or, in the good faith determination of a Responsible Officer of the Borrower, a Material Adverse Effect, the written statement by a Responsible Officer of the Borrower, setting forth the details of such Default or Material Adverse Effect and the action which the Borrower proposes to take with respect thereto; (f) (A) as soon as possible and in any event within 30 days after the Borrower knows or has reason to know that any Termination Event with respect to any Plan has occurred, a statement of a Responsible Officer of the Borrower describing such Termination Event and the action, if any, which the Borrower proposes to take with respect thereto, (B) promptly and in any event within ten days after receipt thereof by the Borrower or any ERISA Affiliate of the Borrower from the PBGC, copies of each notice received by the Borrower or such ERISA Affiliate of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan, (C) promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Single Employer Plan maintained for or covering employees of the Borrower or any Subsidiary if the present value of the accrued benefits under the Plan exceeds its assets by an amount in excess of $500,000 and (D) promptly and in any event within ten days after receipt thereof by the Borrower or any ERISA Affiliate of the Borrower from a sponsor of a Multiemployer Plan or from the PBGC, a copy of each notice received by the Borrower or such ERISA Affiliates concerning the imposition or amount of withdrawal liability under Section 4202 of ERISA or indicating that such Multiemployer Plan may enter reorganization status under Section 4241 of ERISA; (g) promptly after the commencement thereof, but in any event not later than five Business Days after service of process with respect thereto on, or the obtaining of knowledge by, the Borrower or any Subsidiary, notice of each material action, suit or proceeding against the Borrower or any Subsidiary before any Governmental Authority; (h) within five days following receipt by the Borrower or any Subsidiary, copies of all notices received by the Borrower or such Subsidiary from the Internal Revenue Service or other taxing authority relating to any material dispute regarding deductions, audits or any other material matter; and (i) promptly, such additional financial and other information as any Lender, through the Agent, may from time to time reasonably request. 5.3 PAYMENT OF OBLIGATIONS. The Borrower shall, and shall cause each of its Subsidiaries to, pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature (except for those referred to in Section 5.9), except where the failure to so satisfy such obligations would not have a Material Adverse Effect or except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or its Subsidiaries, as the case may be. 5.4 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Borrower shall, and shall cause each of its Subsidiaries to, (i) continue to engage in the video duplication business, the post-production business, the audio sweetening business, the business of distributing national television spot advertising, trailers and electronic press kits for the motion picture and television industries, or engage in the business of owning (and renting) limited amounts of niche programming and media buying, (ii) preserve, renew and keep in full force and effect its corporate existence, (iii) take all reasonable action to maintain all rights, registrations, licenses, privileges and franchises necessary or desirable in the normal conduct of its business, and (iv) comply with all Contractual Obligations and Requirements of Law except to the extent, in the case of this clause (iv), that failure to comply therewith would not, in the aggregate, have a Material Adverse Effect. 5.5 MAINTENANCE OF PROPERTY. The Borrower shall, and shall cause each of its Subsidiaries to, keep all property useful or necessary in its business in good working order and condition (ordinary wear and tear excepted). 5.6 INSURANCE. The Borrower will, and will cause each of its Subsidiaries to, maintain insurance with financially sound and reputable insurance companies, and with respect to Property and risks of a character usually maintained by Persons engaged in the same or similar business similarly situated, against loss, damage and liability of the kinds and in the amounts customarily maintained by such Persons. The Borrower shall designate the Agent as loss payee or additional insured, as appropriate with respect to such insurance and cause such insurance to provide for 30 days' prior written notice to Agent of any modification or cancellation of such insurance. 5.7 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. The Borrower shall, and shall cause each of its Subsidiaries to, keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all material dealings and transactions in relation to its business and activities; and upon reasonable notice and at such reasonable times during usual business hours, permit representatives of any Lender to visit and inspect any of its properties and (i) examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with officers and employees of the Borrower and its Subsidiaries and with its Accountants, and (ii) make such further inspections and examinations, including appraisals and field audits, as deemed reasonably necessary by the Agent or any Lender and at the sole cost and expense of the Borrower. 5.8 ENVIRONMENTAL LAWS. The Borrower shall, and shall cause each of its Subsidiaries to: (a) Comply in all material respects with, and ensure compliance by all tenants and subtenants, if any, with, all applicable Environmental Control Statutes and obtain and comply in all material respects with any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Control Statutes; (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Control Statutes and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Control Statutes except to the extent that the same are being contested in good faith by appropriate proceedings; and (c) Defend, indemnify and hold harmless the Agent and the Lenders, and their respective employees, agents, officers and directors, from and against any and all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of, noncompliance with or liability under any Environmental Control Statutes applicable to the operations of the Borrower or any of its Subsidiaries, or the Borrower's or any of such Subsidiaries' interest in Properties, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, attorneys' and consultants' fees, investigation and laboratory fees, response costs, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor. This indemnity shall continue in full force and effect regardless of the termination of this Agreement. 5.9 COMPLIANCE WITH LAWS, ETC. The Borrower shall comply, and shall cause each of its Subsidiaries to comply, in all material respects with all applicable Requirements of Law, such compliance to include, without limitation (i) paying before the same become delinquent all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any of its Properties and (ii) paying all lawful claims which if unpaid might become a Lien upon any of its Properties; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to pay and discharge or to cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as (A) the validity or applicability thereof is being contested in good faith by appropriate proceedings, (B) the Borrower or such Subsidiary shall, to the extent required by GAAP, have set aside on its books adequate reserves with respect thereto and (C) the failure to pay or discharge such tax, assessment, charge, levy or claim would not have a Material Adverse Effect or. 5.10 CERTAIN OBLIGATIONS RESPECTING SUBSIDIARIES; PROHIBITIONS ON CERTAIN AGREEMENTS. (a) The Borrower will cause each of its Subsidiaries hereafter formed or acquired to execute and deliver to the Agent promptly upon the formation or acquisition thereof (i) a Guarantee in form and substance satisfactory to the Agent, guaranteeing the Obligations, (ii) a Guarantor Security Agreement, in form and substance satisfactory to the Agent, granting to the Agent, for the benefit of the Lenders, a security interest in the tangible and intangible personal property of such Subsidiary, together with appropriate Lien searches requested by the Agent indicating the Lenders' first priority Lien on such personal property, (iii) such UCC-1 Financing Statements as the Agent shall request and (iv) such charter and authorization documents as the Agent shall request. (b) The Borrower will not, and will not permit any of its Subsidiaries to, without the prior written consent of the Majority Lenders, enter into any indenture, agreement, instrument or other arrangement that, directly or indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or imposes materially adverse conditions upon, the incurrence or payment of indebtedness, the granting of Liens, the declaration or payment of dividends, the making of loans, advances or investments or the sale, assignment, transfer or other disposition of Property, or which imposes any financial covenants on the Borrower or any of its Subsidiaries. 5.11 INTEREST RATE PROTECTION. The Borrower shall maintain in effect, until at least November 28, 2003, one or more Interest Rate Protection Agreements mutually agreeable to the Borrower and the Agent establishing a fixed or maximum interest rate acceptable to the Agent for a notional principal amount equal to not less than $15,000,000. 5.12 REVIEWS AND APPRAISALS. The Agent shall be entitled to conduct, with respect to the Borrower and the Subsidiaries and at the Borrower's expense, (i) quarterly reviews of the books and records of such entities (with each such review expected to involve several Business Days, and provided that the cost to the Borrower for such reviews shall not exceed $1,000 per day) and (ii) annually (by June 30 of each year), with a semi-annual update (by December 31 of each year), appraisals of their assets. Such reviews and appraisals shall be in scope, and by a review firm or appraisal firm (as applicable) satisfactory to the Majority Lenders. The Agent and the Lenders shall be entitled to conduct more frequent reviews and appraisals, at the expense of the Borrower, if a Default exists. 5.13 FINANCIAL CONSULTANT. At the time of the Restatement Date, the Borrower shall have retained Kibel Green, Inc., or such other financial consultant satisfactory to the Lenders, to assist the Borrower in implementing a turnaround of its performance, such retention to be on terms and conditions, and with scope of services, satisfactory to the Lenders. 5.14 BANK ACCOUNTS. The Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, its primary operating bank account(s) with Union Bank of California. 5.15 LANDLORD CONSENTS. The Borrower agrees to use Best Efforts to deliver to the Agent, in recordable form: (a) within 30 days after the Restatement Date, Landlord Consents with respect to each of the following properties at which the Borrower or any Subsidiary maintains personal property having a value of $100,000 or greater: 1) 1680 Vine Street, Los Angeles, CA 90028; 2) 1645 North Vine Street, Los Angeles, CA 90028; 3) 430 West Erie Street, Suites 101 and 200, Chicago, IL 60610; 4) 114 West 26th Street, Suite 700, New York, NY 10001; 5) 1025 Sansome Street, San Francisco, CA 94111; and 6) 812 Mariposa Street, Burbank, CA 91505; and (b) prior to any personal property of the Borrower or any Subsidiary having a value of $100,000 or greater being moved to, or located at, any premises not owned in fee by the Borrower or such Subsidiary, a Landlord Consent with respect to such premises. For purposes of this Section 5.15, "Best Efforts" shall mean that the Borrower has (i) made written request to the relevant landlord for execution of a Landlord Consent (with copies of such request to be concurrently delivered to the Agent) and (ii) if requested by the Agent, has afforded the Agent and/or its counsel an opportunity to speak with representatives of such landlord regarding any objections to such Landlord Consent. (c) The Borrower represents and warrants to the Agent and the Lenders that, as of the Restatement Date, the book value of the personal property of the Borrower and the Subsidiaries located at the premises referred to in Section 5.15(a) is respectively as set forth on Schedule 5.15 attached hereto. SECTION 6. NEGATIVE COVENANTS The Borrower hereby agrees that from and after the Restatement Date, so long as any Note remains outstanding and unpaid or any other amount is owing to any Lender or the Agent hereunder: 6.1 FINANCIAL CONDITION COVENANTS. The Borrower shall not violate any of the following covenants (compliance with which shall be measured for the Borrower on a consolidated basis): (a) Maximum Funded Debt to EBITDA. As of the last day of any month, commencing with the month ending March 31, 2002, permit the ratio of Funded Debt to EBITDA, calculated on a cumulative 12-month rolling basis for such month and the eleven immediately preceding months, to exceed the following levels for the months indicated: Month Ending Ratio ------------ ----- March 31, April 30 and May 31, 2002 4.44 June 30, July 31 and August 31, 2002 3.40 September 30, October 31 and November 30, 2002 2.95 December 31, 2002, January 31, 2003 and February 28, 2003 2.73 March 31, April 30 and May 31, 2003 2.26 June 30, July 31 and August 31, 2003 1.98 September 30, October 31 and November 30, 2003 1.77 December 31, 2003, January 31, 2004 and February 28, 2004 1.51 March 31, April 30 and May 31, 2004 1.32 June 30, July 31 and August 31, 2004 1.16 September 30, 2004 and thereafter 1.01 (b) Fixed Charge Ratio. As of the last day of any month, commencing with the month ending March 31, 2002, permit the Fixed Charge Ratio, calculated on a cumulative 12-month rolling basis for such month and the eleven immediately preceding months, to be less than the following levels for the months indicated: Month Ending Ratio ------------ ----- March 31, April 30 and May 31, 2002 1.07 June 30, July 31 and August 31, 2002 1.12 September 30, October 31 and November 30, 2002 1.05 December 31, 2002, January 31, 2003 and February 28, 2003 0.88 March 31, April 30 and May 31, 2003 0.90 June 30, July 31 and August 31, 2003 0.86 September 30, October 31 and November 30, 2003 0.85 December 31, 2003, January 31, 2004 and February 28, 2004 0.89 March 31, April 30 and May 31, 2004 0.92 June 30, July 31 and August 31, 2004 0.92 September 30, 2004 and thereafter 0.93 (c) Liquidity Ratio. As of the last day of any month, commencing with the month ending March 31, 2002, permit the ratio of (i) the sum of (A) Cash on such date plus (B) 80% of Eligible Accounts Receivable as of such date to (ii) the outstanding Obligations on such date, to be less than: (x) for the period from the Closing Date to and including July 31, 2002, 0.34:1.00 and (y) thereafter, 0.39:1.00. 6.2 LIMITATION ON INDEBTEDNESS. The Borrower shall not create, incur, assume or suffer to exist any Indebtedness, and shall not permit any of its Subsidiaries to create, incur, assume or suffer to exist any Indebtedness, except for: (a) Indebtedness created hereunder and under the Notes and the other Loan Documents; (b) Indebtedness (i) evidenced by performance bonds issued in the ordinary course of business or reimbursement obligations in respect thereof, (ii) evidenced by a letter of credit facility related to insurance associated with claims for work-related injuries or (iii) for bank overdrafts incurred in the ordinary course of business that are promptly repaid, in an aggregate amount (under clauses (i), (ii) and (iii)) not to exceed $100,000 at any one time outstanding; (c) Indebtedness secured by Liens permitted by Section 6.3(g); (d) Capitalized Lease Obligations in an aggregate principal amount not exceeding the following amounts for the periods indicated: (i) from the Closing Date to and including December 31, 2002, not more than $844,000 outstanding, (ii) from January 1, 2003 to and including December 31, 2003, not more than $1,381,000 outstanding and (iii) thereafter, not more than $1,696,000 outstanding; (e) Indebtedness of Wholly Owned Subsidiaries of the Borrower to the Borrower or to other Wholly Owned Subsidiaries of the Borrower; and (f) Guarantee Obligations of the Borrower incurred in the ordinary course of business in respect of Indebtedness of any Subsidiary; provided that such Indebtedness is otherwise permitted by this Section 6.2. 6.3 LIMITATION ON LIENS. The Borrower shall not, and shall not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens created hereunder or under any of the other Loan Documents; (b) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Borrower or its Subsidiaries, as the case may be, in conformity with GAAP; (c) Liens created by operation of law not securing the payment of Indebtedness for money borrowed or guaranteed, including carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith by appropriate proceedings; (d) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; (e) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (f) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, would not cause a Material Adverse Effect; (g) Liens securing Capitalized Lease Obligations with respect to equipment used by the Borrower or its Subsidiaries in the ordinary course of its business; provided that any such Lien attaches solely to the equipment financed by such Capitalized Lease Obligation; and (h) Liens existing on the date hereof and referred to in Schedule 6.3 (and not referred to in any other clause of this Section 6.3). 6.4 LIMITATION ON FUNDAMENTAL CHANGES. The Borrower shall not, and shall not permit any of its Subsidiaries to, (i) enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or (ii) convey, sell, lease, assign, transfer or otherwise dispose of all or substantially all of its property, business or assets, or (iii) acquire any business or Property from, or capital stock of, or be a party to any acquisition of, any Person except that, so long as no Default has occurred and is continuing or would result therefrom: (a) any Subsidiary of the Borrower may be merged or consolidated with or into: (i) the Borrower, if the Borrower shall be the continuing or surviving corporation or (ii) any other Subsidiary; provided that if any such transaction shall be between a Subsidiary and a Wholly Owned Subsidiary, the Wholly Owned Subsidiary shall be the continuing or surviving corporation; and (b) any Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its Property (upon voluntary liquidation or otherwise) to the Borrower or a Wholly Owned Subsidiary of the Borrower. 6.5 LIMITATION ON SALE OF ASSETS. The Borrower will not, nor will it permit any of its Subsidiaries to, make any Asset Disposition except Asset Dispositions of obsolete or worn-out Property, tools or equipment no longer used or useful in its business so long as the aggregate amount thereof sold in any single fiscal year by the Borrower and its Subsidiaries shall not have a fair market value in excess of $250,000; provided that in each case, no Default has occurred and is continuing or would result from such Asset Disposition. 6.6 LIMITATION ON DIVIDENDS. The Borrower shall not, and shall not permit any of its Subsidiaries to (a) if a corporation, declare or pay any dividend (other than dividends payable solely in common stock of the Borrower or its Subsidiaries) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Borrower or its Subsidiaries or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding, and (b) if a partnership or a limited liability company, make any distribution with respect to the ownership interests therein, or, in either case, make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower or any Subsidiary (such declarations, payments, setting apart, purchases, redemptions, defeasance, retirements, acquisitions and distributions being herein called "Restricted Payments"), except that any Subsidiary may make Restricted Payments to the Borrower or to any other Wholly Owned Subsidiary of the Borrower; provided that in each case no Default has occurred and is continuing or would result from the making of such Restricted Payment. Notwithstanding any provision herein to the contrary, neither the Borrower nor any Subsidiary shall repurchase any of its Capital Stock without the prior written approval of each Lender. 6.7 LIMITATION ON INVESTMENTS, LOANS AND ADVANCES. The Borrower will not, and will not permit any of its Subsidiaries to, make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in (any of the foregoing, an "Investment"), any Person, except for: (a) investments in marketable securities, liquid investments and other financial instruments that are acquired for investment purposes and may be readily sold or otherwise liquidated, that have a value which may be readily established and which are investment grade; (b) operating deposit accounts with banks; (c) investments by the Borrower and its Subsidiaries in the Borrower and its Subsidiaries; (d) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; and (e) that certain loan to R. Luke Stefanko (the "Employee Loan") in the principal amount outstanding on the Restatement Date of $900,000, as such amount may be reduced (but not increased) from time to time. 6.8 TRANSACTIONS WITH AFFILIATES. The Borrower shall not, and shall not permit any of its Subsidiaries to, enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property, employee compensation arrangements, or the rendering of any service, with any Affiliate or any Subsidiary not a Wholly Owned Subsidiary unless such transaction is in the ordinary course of the Borrower's or such Subsidiary's business and is upon terms no less favorable to the Borrower or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person not an Affiliate; provided that, if any such transaction has a value in excess of $100,000 the Majority Lenders shall have consented thereto; and provided, further, that none of (i) the Employee Loan, (ii) the Borrower's employment arrangements with its senior officers or (iii) the Borrower's arrangements with Holthouse Carlin & Van Trigt (with which Greg Hutchins, a director of the Borrower, is associated) regarding preparation of the Borrower's taxes shall be prohibited by this Section 6.8. 6.9 FISCAL YEAR. Borrower shall not permit its fiscal year or the fiscal year of any of its Subsidiaries to end on a day other than December 31. 6.10 SALE-LEASEBACK TRANSACTIONS. The Borrower shall not, and shall not permit any of its Subsidiaries to, sell, assign or otherwise transfer any of its Properties, rights or assets (whether now owned or hereafter acquired) to any Person and thereafter directly or indirectly lease back the same or similar property. 6.11 LINES OF BUSINESS. The Borrower will not, nor will it permit any of its Subsidiaries to, engage to any substantial extent in any line or lines of business activity other than the business of video duplication, post-production, audio sweetening, the distribution of national television spot advertising, trailers and electronic press kits for the motion picture and television industries, and the ownership and rental of limited amounts of niche programming and media buying. 6.12 CERTAIN ACCOUNTING CHANGES. The Borrower shall not change any accounting methodology or policy with respect to the calculation of the value of its Operating Machinery and Equipment without the prior written consent of the Majority Lenders. SECTION 7. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall default in the payment when due (whether at stated maturity or upon mandatory or optional prepayment or otherwise) of any principal of or interest on any Loan, any fee or any other amount payable by it hereunder or under any other Loan Document; or (b) Any representation or warranty made or deemed made by any Obligor herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect when made or deemed made; or (c) The Borrower shall default in the observance or performance of any agreement contained in Section 4.2, 5.4(ii), 5.9, 5.10(a), 5.11, 5.12, 5.13, 5.14 or 5.15, or any provision of Section 6; or (d) Any Obligor shall default in the observance or performance of any other agreement or obligation contained in this Agreement or the other Loan Documents (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days after notice thereof from the Agent to the Borrower; or (e) Any Guarantee shall cease, for any reason, to be in full force and effect; or (f) The Borrower or any other Obligor shall default in the payment when due of principal of or interest on any Indebtedness (other than the Notes) issued under the same indenture or other agreement, if the original principal amount of Indebtedness covered by such indenture or agreement is $100,000 or more; or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Indebtedness shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, such Indebtedness to become due, or to be prepaid in full (whether by redemption, purchase, offer to purchase or otherwise), prior to its stated maturity; or (g) (i) The Borrower or any other Obligor shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Borrower or any other Obligor shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any other Obligor any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged, unstayed or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower or any other Obligor any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower or any other Obligor shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower or any other Obligor shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due or there shall be a general assignment for the benefit of creditors; or (h) (i) The Borrower or any Commonly Controlled Entity shall engage in any non-exempt "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee would reasonably be expected to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA (other than a standard termination) or (v) the Borrower or any Commonly Controlled Entity would reasonably be expected to incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan; and in each case regarding clauses (i) through (v) above, such event or condition, together with all other such events or conditions, if any, would reasonably be expected to result in a Material Adverse Effect; or (i) One or more judgments or decrees shall be entered against the Borrower or any Subsidiary involving in the aggregate a liability (not paid or fully covered by insurance where the insurer has admitted liability in respect of such judgment) of $250,000 or more, or involving in the aggregate a liability (regardless of insurance coverage) of $500,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof or in any event five days before the date of any sale pursuant to such judgment or decree; or (j) The Liens created by the Collateral Documents and/or the Guarantor Collateral Documents shall at any time not constitute valid and perfected Liens on the collateral intended to be covered thereby in favor of the Agent, free and clear of all other Liens (other than Liens permitted under Section 6.3), or, except for expiration in accordance with its terms, any of the Collateral Documents and/or the Guarantor Collateral Documents shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by any Obligor; or (k) (i) R. Luke Stefanko, or another officer of the Borrower as of the Restatement Date, shall cease to be the Chief Executive Officer of the Borrower, (ii) R. Luke Stefanko shall cease to beneficially own Capital Stock representing at least 14% of the votes that may be cast in an election of directors of the Borrower, or (iii) individuals who constituted the Borrower's Board of Directors as of the Restatement Date shall cease for any reason to constitute a majority of the directors then in office; then, and in any such event, (A) if such event is an Event of Default specified in paragraph (g) above, automatically the Loans made to the Borrower hereunder (with accrued interest thereon) and all other Obligations shall immediately become due and payable, and (B) if such event is any other Event of Default, with the consent of the Majority Lenders, the Agent may, or upon the request of the Majority Lenders, the Agent shall, by notice of default to the Borrower, declare the Loans (with accrued interest thereon) and all other Obligations under this Agreement and the Notes to be due and payable forthwith, whereupon the same shall immediately become due and payable. In all cases, with the consent of the Majority Lenders, the Agent may enforce any or all of the Liens and security interests and other rights and remedies created pursuant to any Loan Document or available at law or in equity. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived by the Borrower. SECTION 8. THE AGENT 8.1 APPOINTMENT. Each Lender hereby irrevocably designates and appoints Union Bank of California, N.A., as Agent for such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes Union Bank of California, N.A., as the Agent for such Lender, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Agent shall have no duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. 8.2 DELEGATION OF DUTIES. The Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 8.3 EXCULPATORY PROVISIONS. Neither the Agent, nor any of the Agent's officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower, any Subsidiary or any other Obligor or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the Notes or any other Loan Document or for any failure of the Borrower, any Subsidiary or any other Obligor to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower, any Subsidiary or any other Obligor. 8.4 RELIANCE BY THE AGENT. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), the Accountants and independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Majority Lenders or all Lenders, as it deems appropriate, or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense (except those incurred solely as a result of the Agent's gross negligence or willful misconduct) which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the Notes and the other Loan Documents in accordance with a request of the Majority Lenders or all Lenders, as may be required, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes. 8.5 NOTICE OF DEFAULT. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default hereunder unless the Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give notice thereof to the Lenders. The Agent shall take such action with respect to such Default as shall be reasonably directed by the Majority Lenders or all Lenders as appropriate; provided that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interests of the Lenders or as the Agent shall believe necessary to protect the Lenders' interests in the Collateral or the Guarantor Collateral. 8.6 NON-RELIANCE ON THE AGENT AND OTHER LENDERS. Each Lender expressly acknowledges that neither the Agent, nor any of the Agent's officers, directors, partners, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agent hereafter taken, including any review of the affairs of the Borrower, any Subsidiary or any other Obligor, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower, any Subsidiary and the other Obligors and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower, its Subsidiaries and the other Obligors. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall have no duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower, any Subsidiary or any other Obligor which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 8.7 INDEMNIFICATION. The Lenders agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by the Borrower, its Subsidiaries or the other Obligors and without limiting the obligation of such Persons to do so), ratably according to the respective amounts of their Loan Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs (including, without limitation, the allocated cost of internal counsel), expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Agent, in its capacity as Agent, but not as a Lender hereunder, in any way relating to or arising out of this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. The agreements in this Section shall survive the payment of the Notes and all other amounts payable hereunder. 8.8 THE AGENT IN ITS INDIVIDUAL CAPACITY. The Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower, any Subsidiary and the other Obligors as though the Agent were not the Agent hereunder and under the other Loan Documents. The Loans made or renewed by the Agent, and any Note issued to the Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and the Agent may exercise the same as though it were not the Agent, and the terms "Lender" and "Lenders" shall include the Agent in its individual capacity. 8.9 SUCCESSOR AGENT. The Agent may resign as Agent upon 30 days' notice to the Lenders. If the Agent shall resign as Agent under this Agreement and the other Loan Documents, then the Majority Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent (so long as no Default has occurred and is continuing) shall be approved by the Borrower (which consent shall not be unreasonably withheld), whereupon such successor agent shall succeed to the rights, powers and duties of the Agent and the term "Agent" shall mean such successor agent, effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Notes. After any retiring Agent's resignation as Agent, the provisions of this Section shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Loan Documents. Further, if the Agent no longer has any Loans hereunder, the Agent shall immediately resign and shall be replaced, and have the benefits, as set forth in this Section 8.9. 8.10 COLLATERAL DOCUMENTS. Anything contained in any of the Loan Documents to the contrary notwithstanding, the Borrower, the Agent and each Lender hereby agree that (a) no Lender shall have any right individually to realize upon any of the Collateral or Guarantor Collateral under any Loan Document or to enforce any Guarantee, it being understood and agreed that all powers, rights and remedies under the Collateral Documents and Guarantor Collateral Documents and the Guarantees may be exercised solely by the Agent for the benefit of the Lenders in accordance with the terms thereof, and (b) in the event of a foreclosure by the Agent on any of the Collateral or Guarantor Collateral pursuant to a public or private sale, the Agent or any Lender may be the purchaser of any or all of such Collateral or Guarantor Collateral at any such sale and the Agent, as agent for and representative of the Lenders (but not any Lender or Lenders in its or their respective individual capacities unless the Majority Lenders shall otherwise agree in writing) shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral or Guarantor Collateral sold at any such public sale, to use and apply any of the Obligations as a credit on account of the purchase price for any such collateral payable by the Agent at such sale. SECTION 9. MISCELLANEOUS 9.1 AMENDMENTS AND WAIVERS. Except as otherwise expressly provided in this Agreement, any provision of the Loan Documents may be modified or supplemented only by an instrument in writing signed by the Borrower, the Agent and the Majority Lenders, or by the Borrower and the Agent acting with the consent of the Majority Lenders, and any provision of any Loan Document may be waived by the Majority Lenders or by the Agent acting with the consent of the Majority Lenders; provided, however, that no such waiver and no such amendment, supplement or modification shall (i) (a) reduce the amount or extend the maturity of any Note or any installment due thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce the amount or extend the time of payment of any fee, indemnity or reimbursement payable to any Lender hereunder, or amend, modify or waive any provision of Section 2.5, without the written consent of the Lender affected thereby; or (b) amend, modify or waive any provision of this Section 9.1 or reduce the percentage specified in or otherwise modify the definition of Majority Lenders, or consent to the assignment or transfer by any Obligor of any of its rights and obligations under this Agreement and the other Loan Documents (except as permitted under Section 6.4); or (c) release any Obligor from any liability under its respective Loan Documents; or (d) release any material portion of the Collateral or any material portion of the Guarantor Collateral, except for any Asset Disposition or release of Lien permitted by this Agreement or any other Loan Document; or (e) amend, modify or waive, directly or indirectly, any of the provisions of Section 2.6; or (f) amend, modify or waive any provision of this Agreement requiring the consent or approval of all Lenders, in each case set forth in clauses (i)(b) through (i)(f) above without the written consent of all the Lenders; or (ii) amend, modify or waive any provision of Section 8 without the written consent of the Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Borrower, the other Obligors, the Lenders, the Agent and all future holders of the Notes. In the case of any waiver, the Borrower, the other Obligors, the Lenders, and the Agent shall be restored to their former position and rights hereunder and under the outstanding Notes and any other Loan Documents, and any Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default, or impair any right consequent thereon. 9.2 NOTICES. All notices, requests and demands or other communications to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or 3 days after being deposited in the United States mail, certified and postage prepaid and return receipt requested, or, in the case of telecopy notice, when received, in each case addressed as follows in the case of the Borrower and the Agent, and as set forth on the signature pages hereto, or in the Assignment and Acceptance pursuant to which a Person becomes a party hereto, in the case of the Lenders, or to such other address as may be hereafter notified by the respective parties hereto and any future holders of the Notes: The Borrower: Point.360 7083 Hollywood Boulevard Hollywood, California 90028 Attention: Alan Steel Telecopy: (323) 957-2297 The Agent: Union Bank of California, N.A 445 South Figueroa Street, 4th Floor Los Angeles, California 90071-1100 Attention: Christopher Zumberge Telecopy: (213) 236-7406 provided that any notice, request or demand to or upon the Agent or the Lenders pursuant to Section 2.3 or 2.4 shall not be effective until received. 9.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay in exercising, on the part of the Agent or any Lender, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 9.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Notes. 9.5 PAYMENT OF EXPENSES AND TAXES. The Borrower agrees (a) to pay or reimburse the Agent and each Lender for all its reasonable costs and out-of-pocket expenses (including travel and other expenses incurred by it or its agents in connection with performing due diligence with regard hereto) incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, syndication efforts (whether completed before or after the Restatement Date) in connection with this Agreement and the reasonable fees and disbursements of counsel to the Agent, (b) after the occurrence and during the continuance of a Default, to pay or reimburse the Agent and each Lender for all its reasonable costs and out-of-pocket expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the Notes, the other Loan Documents and any such other documents or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or of any insolvency or bankruptcy proceeding, including, without limitation, reasonable legal fees and disbursements of counsel to the Agent and each Lender (including the allocated costs of internal counsel to the Agent and the Lenders which costs are not in duplication of any costs of outside counsel to the Agent and each Lender), (c) to pay, and indemnify and hold harmless each Lender and the Agent from any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the Notes, the other Loan Documents and any such other documents and (d) to pay, and indemnify and hold harmless each Lender and the Agent and the officers, partners, directors, employees, agents and affiliates of the Agent or any Lender (collectively "Indemnitees") from and against, any and all Indemnified Liabilities, provided that the Borrower shall have no obligation hereunder to the Agent or any Lender with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of the Agent or any Lender. As used herein, "Indemnified Liabilities" means, collectively, any and all liabilities, obligations, losses, damages (including natural resource damages), penalties, actions, judgments, suits, claims (including environmental claims), costs (including the costs of any investigation, study, sampling, testing, abatement, cleanup, removal, remediation or other response action necessary to remove, remediate, clean up or abate any activities relating to Hazardous Materials), expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto, and any fees or expenses incurred by Indemnitees in enforcing this indemnity), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including securities and commercial laws, statutes, rules or regulations and environmental laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in any manner relating to or arising out of this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby (including Lenders' making of the Loans under the Existing Credit Agreement, agreement to maintain the Loans hereunder, or the use of the proceeds thereof, or any enforcement of any of the Loan Documents (including any sale of, collection from, or other realization upon any of the Collateral or the Guarantor Collateral or the enforcement of the Guarantees)). (To the extent that the undertakings to defend, indemnify, pay and hold harmless set forth in this Section 9.5 may be unenforceable in whole or in part because they are violative of any law or public policy, the Borrower shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Indemnitees or any of them.) The agreements in this Section shall survive repayment of the Notes and all other amounts payable hereunder. 9.6 SUCCESSORS AND ASSIGNS; PARTICIPATIONS; PURCHASING LENDERS. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Agent, all future holders of the Notes and their respective successors and assigns, except that the Borrower may not assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, in the ordinary course of its commercial banking or finance business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, or any other interest of such Lender hereunder and under the other Loan Documents; provided that the holder of any such participation, other than an Affiliate of such Lender, shall not be entitled to require such Lender to take or omit to take any action hereunder except action directly affecting the extension of the maturity of any portion of the principal amount of a Loan, or any portion of interest or fees related thereto allocated to such participation or a reduction of the principal amount or principal payment amount of or the rate of interest payable on the Loans or any fees related thereto, or a release of any Obligor or any substantial portion of the Collateral or the Guarantor Collateral or any increase in participation amounts. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Note for all purposes under this Agreement and the other Loan Documents, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. The Borrower agrees that if amounts outstanding under this Agreement and the Notes are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement and any Note to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement or any Note, provided that such Participant shall only be entitled to such right of setoff if it shall have agreed in the agreement pursuant to which it shall have acquired its participating interest to share with the Lenders the proceeds thereof as provided in Section 9.7. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 2.8 and 2.9 with respect to its participation in the Loans outstanding from time to time; provided that no Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to any of its Affiliates or to any Lender, any Affiliate thereof or to one or more additional banks or other entities, which additional banks or other entities shall be subject to the consent of the Agent (which consent will not be unreasonably withheld) ("Purchasing Lenders") all or any part of its rights and obligations under this Agreement, the Notes and the other Loan Documents pursuant to an Assignment and Acceptance executed by such Purchasing Lender and such transferor Lender and delivered to the Agent for its acceptance and recording in the Register (as defined in (d) below), provided that any such sale must result in the Purchasing Lender having at least $5,000,000 in aggregate amount of obligations under this Agreement, the Notes and the other Loan Documents. Upon such execution, delivery, acceptance and recording, from and after the transfer effective date determined pursuant to such Assignment and Acceptance, (x) the Purchasing Lender thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder having outstanding Loans as set forth therein, and (y) the transferor Lender thereunder shall, to the extent of such assigned portion and as provided in such Assignment and Acceptance, be released from its obligations under this Agreement and the other Loan Documents (and, in the case of an Assignment and Acceptance covering all or the remaining portion of a transferor Lender's rights and obligations under this Agreement, such transferor Lender shall cease to be a party hereto). Such Assignment and Acceptance shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender and the resulting adjustment of Loan Percentages arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender under this Agreement, the Notes and the other Loan Documents. On or prior to the transfer effective date determined pursuant to such Assignment and Acceptance, the Borrower, at its own expense, shall execute and deliver to the Agent in exchange for the surrendered Note a new Note to the order of such Purchasing Lender in an amount equal to the Loans assumed by it pursuant to such Assignment and Acceptance, and if the transferor Lender has retained Loans hereunder, a new Note to the order of the transferor Lender in an amount equal to the Loans retained by it hereunder. Such new Notes shall be dated the Restatement Date and shall otherwise be in the form of the Notes replaced thereby. The Note surrendered by the transferor Lender shall be returned by the Agent to the Borrower marked "canceled." (d) The Agent shall maintain at its address referred to in Section 9.2 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the principal amount of the Loans owing to each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as the owner of the Loans recorded therein for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed in accordance with the terms hereof, together with payment to the Agent by the Purchasing Lender of a registration and processing fee of $3,500, the Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register. (f) The Borrower authorizes each Lender to disclose to any Participant or Purchasing Lender (each, a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the Borrower, its Subsidiaries, and their Affiliates which has been delivered to such Lender by or on behalf of the Borrower pursuant to this Agreement or any other Loan Document or which has been delivered to such Lender by or on behalf of the Borrower in connection with such Lender's credit evaluation of the Borrower, its Subsidiaries, and their Affiliates prior to becoming a party to this Agreement. (g) Nothing herein shall prohibit any Lender from pledging or assigning any of its rights under its Note to any Federal Reserve Bank in accordance with applicable law. 9.7 ADJUSTMENTS; SET-OFF. (a) If any Lender (a "Benefitted Lender") shall at any time receive any payment of all or part of its Loans, or interest thereon, or fees, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 7(g), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans, or interest thereon, or fees, such Benefitted Lender shall purchase for cash from the other Lenders such portion of each such other Lender's Loans, or fees, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Borrower agrees that each Lender so purchasing a portion of another Lender's Loan may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender were the direct holder of such portion. (b) In addition to any rights and remedies of the Lenders provided by law, with the prior consent of the Majority Lenders, each Lender shall have the right, exercisable upon the occurrence and during the continuance of an Event of Default and acceleration of the Obligations pursuant to Section 7, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, to set-off and appropriate and apply against any such Obligations any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof or bank controlling such Lender to or for the credit or the account of the Borrower. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. 9.8 COUNTERPARTS. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery by telecopier of an executed counterpart of a signature page to this Agreement shall be effective as delivery of an originally executed counterpart of this Agreement. 9.9 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.10 INTEGRATION. This Agreement represents the entire agreement of the Borrower, the Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Agent or any Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 9.11 GOVERNING LAW. THIS AGREEMENT AND THE NOTES AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 9.12 ACKNOWLEDGEMENTS. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the Notes and the other Loan Documents; (b) neither the Agent nor any Lender has any fiduciary relationship to the Borrower solely by virtue of any of the Loan Documents, and the relationship pursuant to the Loan Documents between the Agent and the Lenders, on one hand, and the Borrower on the other hand, is solely that of creditor and debtor; and (c) no joint venture exists among the Lenders or among the Borrower, on one hand and the Lenders, on the other hand. 9.13 HEADINGS. Section headings herein are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 9.14 COPIES OF CERTIFICATES, ETC. Whenever the Borrower is required to deliver notices, certificates, opinions, statements or other information hereunder to the Agent for delivery to any Lender, it shall do so in such number of copies as the Agent shall reasonably specify. 9.15 TREATMENT OF CERTAIN INFORMATION; CONFIDENTIALITY. (a) The Borrower acknowledges that from time to time financial advisory, investment banking and other services may be offered or provided to the Borrower or one or more of its Subsidiaries (in connection with this Agreement or otherwise) by any Lender, or by one or more Subsidiaries or affiliates of such Lender and the Borrower hereby authorizes each Lender to share any information delivered to such Lender by the Borrower and its Subsidiaries pursuant to this Agreement, or in connection with the decision of such Lender to enter into this Agreement, to any such Subsidiary or affiliate, it being understood that any such Subsidiary or affiliate receiving such information shall be bound by the provisions of clause (b) below as if it were a Lender hereunder. Such authorization shall survive the repayment of the Loans and the termination of this Agreement. (b) Each Lender and the Agent agrees (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with their customary procedures for handling confidential information of the same nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Borrower pursuant to this Agreement that is identified by the Borrower as being confidential at the time the same is delivered to the Lenders or the Agent, provided that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for any of the Lenders or the Agent, (iii) to bank examiners or other regulatory authorities, auditors or accountants, (iv) to the Agent or any other Lender, (v) in connection with any litigation to which any one or more of the Lenders or the Agent is a party, (vi) to a Subsidiary or affiliate of such Lender as provided in clause (a) above or (vii) to any assignee or participant (or prospective assignee or participant), and provided further that in no event shall any Lender or the Agent be obligated or required to return any materials furnished by the Borrower. 9.16 CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL. (a) Each party hereto hereby irrevocably and unconditionally (i) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of California, the courts of the United States of America for the Central District of California, and appellate courts from any thereof; (ii) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient forum and agrees not to plead or claim the same; (iii) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to any party at its address set forth in Section 9.2; (iv) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (v) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this subsection any punitive damages. (b) WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND THE LENDERS HEREBY EXPRESSLY, INTENTIONALLY AND DELIBERATELY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING, WHETHER BROUGHT IN STATE OR FEDERAL COURT, RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY OTHER DOCUMENT EXECUTED IN CONNECTION HEREWITH AND FOR ANY COUNTERCLAIM THEREIN SUCH WAIVER SHALL BE IRREVOCABLE AND UNCONDITIONAL. 9.17 WAIVERS. The Borrower acknowledges that the following Events of Default (as defined in the Existing Agreement) have occurred and are continuing under the Existing Agreement and, but for the waiver contemplated by this Section 9.17, would constitute Events of Default hereunder: (a) Section 2.1(a) of the Existing Agreement provides that the aggregate principal amount of Loans outstanding shall not exceed the lesser of the Aggregate Commitment or the Borrowing Base at any time (as such capitalized terms are defined in the Existing Agreement). Section 2.5(d) of the Credit Agreement provides that the Borrower shall prepay all Loans that exceed the Aggregate Commitment or the Borrowing Base (as such capitalized terms are defined in the Existing Agreement. At all times from May 2001 through the Closing Date, the aggregate principal amount of Loans (as defined in the Existing Agreement) outstanding exceeded the Borrowing Base (as defined in the Existing Agreement), and the Borrower failed to repay such overadvance in full. Such failure to repay constituted an Event of Default under Section 7(a) of the Existing Agreement. (b) Section 6.1(c) of the Existing Agreement required the Borrower to maintain a Net Worth (as defined in the Existing Agreement) of at least $32,400,000 as of May 31, 2001. As of such date, the Borrower's Net Worth (as defined therein) was $32,274,060. The Borrower's failure to maintain the required Net Worth (as defined therein) as of May 31, 2001 is an Event of Default under Section 7(c) of the Existing Agreement. At the Borrower's request, the Lenders agree to waive the foregoing Events of Default (as defined in the Existing Agreement), as well as any other Default (as defined in the Existing Agreement) which has occurred and is continuing under the Existing Agreement, in each case through the Restatement Date and subject to the terms and conditions set forth herein. The foregoing waivers are given in this instance only. The foregoing waivers shall not be construed as waivers of or consents to any violation of, or deviation from, any term or condition of this Agreement or any other Loan Document, nor shall such waivers be construed to evidence the willingness of the Agent or the Lenders to give any other or additional waiver, whether in similar or different circumstances. 9.18 EFFECT OF AMENDMENT AND RESTATEMENT. This Agreement is intended to completely amend, restate and replace the Existing Agreement, without novation. The Borrower hereby acknowledges, certifies and agrees that the Borrower's obligations to repay the Loans are not subject to any defense, counterclaim, set-off, right of recoupment, abatement or other claim or determination. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. BORROWER POINT.360 By: /s/ Alan R. Steel -------------------------------------- Name: Alan R. Steel ------------------------------------ Title: Executive Vice President ----------------------------------- AGENT UNION BANK OF CALIFORNIA, N.A., as Agent By: /s/ Christopher D. Zumberge -------------------------------------- Name: Christopher D. Zumberge ------------------------------------ Title: Vice President ----------------------------------- LENDERS UNION BANK OF CALIFORNIA, N.A., as a Lender By: /s/ Christopher D. Zumberge --------------------------------------- Name: Christopher D. Zumberge ------------------------------------- Title: Vice President ------------------------------------ Address for Notices 445 South Figueroa Street, 4th Floor Los Angeles, California 90071-1100 Attention: Christopher Zumberge Telephone: (213) 236-6406 Facsimile: (213) 236-6293 Applicable Lending Office 445 South Figueroa Street Los Angeles, California 90071-1100 UNITED CALIFORNIA BANK, as a Lender By: /s/ D. Tom Herrman --------------------------------------- Name: D. Tom Herrman ------------------------------------- Title: ------------------------------------ Address for Notices 601 South Figueroa Street, W9-2 Los Angeles, California 90017 Attention: D. Tom Herrman Telephone: (213) 896-7308 Facsimile: (213) 896-7387 Approved Lending Office 601 South Figueroa Street, W9-2 Los Angeles, California 90017 U.S. BANK NATIONAL ASSOCIATION, as a Lender By: /s/ David C. Larsen --------------------------------------- Name: David C. Larsen ------------------------------------- Title: ------------------------------------ Address for Notices U.S. Bank Place -MPFP2516 601 Second Avenue South Minneapolis, Minnesota 55402 Attention: David C. Larsen Telephone: (612) 973-2129 Facsimile: (612) 973-2149 Approved Lending Office 601 Second Avenue South Minneapolis, Minnesota 55402 SCHEDULE 2.1 PART 1 LOAN AMOUNTS Lender Loan Amount - ------ ----------- Union Bank of California, N.A. $16,110,824.44 United California Bank $ 6,444,329.78 U.S. Bank National Association $ 6,444,329.78 -------------- Total $28,999,484 PART 2 LENDERS' PRO RATA SHARES OF EXISTING LETTER OF CREDIT Lender Pro Rata Share - ------ -------------- Union Bank of California, N.A. $ 51,244.00 United California Bank $ 20,497.60 U.S. Bank National Association $ 20,497.60 ------------- Total $ 92,239.20 -----END PRIVACY-ENHANCED MESSAGE-----